Variable Rate Annuities, otherwise known as Investment Linked Annuities, gives the holder the potential of an increasing retirement income when compared to conventional annuities.  You do, however, need to be happy linking your retirement income to the volatility of investments which could include investments linked to the stock market.  This means that variable rate annuities have greater associated risk than standard annuities, due to the fact that the income levels received can vary each year as they are based on the performance of the underlying investment. Ultimately, the income levels can go down as well as up. 

Why choose a Variable Annuity?

Conventional annuity income has reduced considerably for some people in the UK, mainly due to historically low annuity rates, and lower than expected investment returns on pension funds. Consequently some people are approaching retirement with a lower income than they were expecting.  Also, due to difficult market conditions for some time the new retiree may well have a lower pension value than they could have had several years ago.

The variable annuity allows you to withdraw an income from your pension and leave the rest invested to hopefully grow with the markets.  Should the pension fund grow this will allow the facility to increase the income if required. It also allows individuals to continue their participation in the investment markets and not become disinvested merely because they reached retirement age. However, should markets fall their future income could also fall as there will be less money available.

Variable annuities generally favour those who have several sources of income and as such are not wholly reliant on this pension income and/or those who have an adventurous attitude towards investment risk.

If an individual does not fall into either of the two categories above it is likely that this sort of planning  would not suit their requirements and the may be served better by searching the market for the best rate conventional annuity.