Investment-linked annuities

An investment-linked annuity is a type of lifetime annuity where your retirement income varies to reflect changes in the value of investments such as stocks and shares. So while you can benefit from stock market growth, there’s also a risk that your income could fall. However, all investment-linked annuities guarantee a minimum income.

Types of investment-linked annuity

Investment-linked annuities carry a risk. If you’re considering this option, make sure you could afford to see your retirement income go down.

Investment-linked annuities can either be:

  • With-profits annuity – this means your income is linked to the performance of the annuity provider’s with-profits fund
  • Unit-linked annuity – this means your income is linked to the funds you specifically invest in

If you opt for a unit-linked annuity, you will usually have to choose from a range of different funds containing different investment assets.

All investment-linked annuities have a guaranteed minimum income floor. This is the lowest level to which your income could fall in times of poor stock market performance. It’s a good idea to ensure that you would still have sufficient income to live on if your investment-linked annuity income fell to this level.

Income features you can opt for

With investment-linked annuities, as with basic lifetime annuities, you can choose:

  • To have the income paid to someone else after you die – called a joint-life annuity
  • Guarantees about how long your pension will pay out if you die sooner than expected – called a guarantee period
  • Value protection’ where your estate gets back any remaining unused value of your pension pot when you die
  • Higher rates if you have a short life expectancy due to poor health or lifestyle – called an enhanced annuity

Not all providers will offer these options. We recommend you get financial advice to help you compare what’s available – see the later section on getting advice.

Charges for investment-linked annuities

Some of the more complex investment-related annuities have higher charges than a basic lifetime annuity. These will effectively reduce your income in retirement.

Get specialist financial advice if you are considering buying an investment-linked annuity - see the later section on getting advice. An adviser will weigh up how any charges might affect your income.

Other things to think about

To understand what happens about tax and tax relief when buying a lifetime annuity (including investment-linked) or passing one on when you die see our guide ‘Using your pension pot to buy a lifetime annuity’.

Get advice before taking out an annuity

Once you take out an annuity you can’t change your mind – and it’s just one of several options you have for taking your pension. So it’s important to be sure it’s the right choice for you.

If you’re actively considering an investment-linked annuity we recommend you speak to a financial adviser.

You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directory.

Your other retirement income options

For an overview of all of your options and to find out where to get help and advice, including free government-backed guidance from Pension Wise, see our guides below.

Options for using your pension pot

Understanding what Pension Wise is and how to use it