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This website contains information which may or may not be applicableto your own situation and circumstances.

Any information or advice on this site does not constitute a personal recommendation. If you have any doubts as to whether a product or service is suitable for you, please seek independent advice.

Variable Annuities

Variable Annuities (also known as ‘third way products’) are unit linked products that have the additional option to buy a guarantee(s).

These are a relatively new product and a currently only offered by a small number of companies but it is likely that they will become more popular and that they will be offered by more companies in time.

The aim is to combine the best aspects of the traditional annuity and traditional drawdown products including –

1. The certainty of a guaranteed income for life.
2. The potential to ‘lock in’ increases to the guaranteed income in cases where good investment returns are achieved.
3. The knowledge that any increases in the fund will not be capped if the fund performs well.
4. The safety net that the guaranteed income will never fall, even if the fund value does, unless a specified event(s) occurs (e.g. a pension sharing order is made or if part of the plan is surrendered or used to buy a conventional annuity or is transferred to another plan).
5. The opportunity to leave an inheritance to dependants from the pension fund.
6. A choice of investment funds suitable for most risk profiles.
7. The ability to carry on a guaranteed income after age 75 using an Income for Life Annuity or Income for Life (ASP).

There are a range of guarantees available with variable annuities, which are generally separate from the underlying funds.

Usually a guarantee will be described as GMB (Guaranteed Minimum Benefit) and the most common types of guarantees currently available in the market are as follows

 
The provider will pay an annual income based on a percentage of the fund value depending on the age of the recipient and the guaranteed given.
The guaranteed minimum income rises in line with the plans highest ever cash in value which is recalculated every year.  If the fund has performed well the income will increase but it will never fall below its guaranteed minimum level (provided it meets HMRC rules on maximum withdrawals).

A member can switch to a conventional annuity at any time and has the option of taking a pension commencement lump sum of up to 25% of the pension fund.

Comparing a Third Way Annuity with a Conventional Annuity and USP

A variable annuity may be expensive and cost more than a conventional annuity or an unsecured pension.  In addition to set up fees there will be an annual charge to the provider to cover the cost of the guarantee (perhaps up to 1.6% of the value of the fund).