Guide to Investment-Linked Annuities

With all the hoopla surrounding the new pension freedom reform and the way it has changed in which a retiree can utilise their pension pot, the dilemma has only increased.

Should one utilise the new flexible income drawdown option or should one continue down the trodden road and buy an annuity?

The only reason why annuities are so popular is that people prefer the long-term stability that a fixed monthly income can provide them with.

To add to this, there is a guarantee that the income will be paid for the rest of the lifetime even if the annuitant lives to be a centenarian.

The catch is that annuity rates are not the best and there is a lot of shopping around to do. To add to this, inflation will keep eroding the value of your fixed monthly income.

In such a circumstance, one must consider investment-linked annuities which offer the best of both worlds.

What is an investment-linked annuity? 

An investment-linked annuity provides you with a guaranteed fixed monthly income (lower than a basic lifetime annuity). The upside is that this income can increase depending on the value of investments like stocks and shares, but will never decrease below the guaranteed amount. This will be paid until your death.

So, essentially, you will receive a fixed monthly amount which will either be more than the minimum guaranteed amount or equal to it for the rest of your lifetime.

There are two types of Investment-Linked Annuities:

  1. With-Profits Annuity: Your pension pot will be invested in the With-profits fund by the annuity provider. The with-profits fund is an investment pool that is usually invested in a broad range of options like shares, cash, bonds and property.
  2. Unit-Linked Annuity: While it is very similar to a with-profits annuity, a unit-linked annuity gives you more control over your investments. You can choose your investment assets, and your income will be dependent on the performance of these units.

Features you can choose

Similar to Lifetime Annuities, you can choose from varied features in an Investment Linked Annuity. These should be according to your current financial circumstance and your future cash-flow requirement.

  • Opt for a Joint-life annuity if you have a dependent spouse or partner (Also called Widow’s Pension)
  • Choose a guarantee period (five or ten) years which may increase the minimum guaranteed payment
  • Select Value Protection wherein any person nominated by you will receive the unused value of your pension pot in the event of your death
  • Opt for enhanced annuity if you are in poor health or have a shorter life expectancy

To get the best rates and features, it is recommended that you shop around for your annuity.

Pros and cons

Retiree’s usually shy away from investment-linked annuities due to the perceived fear of risk. A unit-linked annuity, for example, invests mainly in equities which are usually considered a risky proposition, especially if you are nearing retirement.

On the other hand, a lifetime annuity offers a sense of safety by providing a fixed lifetime income without revealing the fact that the value of this income will reduce with time.

What are the pros and cons of an investment-linked annuity?

Should you opt for it?


  • The With-Profits annuity depends on the provider’s fund value. If this increases, your monthly income can increase significantly.
  • You can customise the initial income to suit your current circumstances by anticipating the rate of return on the investments.
  • If you are planning to continue working or have other income sources, you can opt for a lower monthly income initially which can potentially increase your income in the later stages of retirement depending on how your investments perform.


  • The value of your annuity provider’s funds may fall at any time. This will reflect directly on your monthly income.
  • Specialized Investment-linked annuities have higher charges as compared to basic lifetime annuities. The higher fees can reduce your monthly income during retirement.

Irrespective of what type of annuity you decide to buy, recommends that you seek independent professional advice.

You can also use the free guidance provided by the government-backed Pension Wise service.