With Profits & Unit Linked Annuities
Traditional annuities provide a guaranteed income; however, there are other types now available, namely with profits & unit linked annuities. They differ from traditional types in as much as the guaranteed element is either reduced or taken away altogether in exchange for the possibility of increased income in the long term.
In respect to a with-profits annuity, a low guaranteed income level is initially secured and then an annual bonus is payable from the (linked) with-profits fund. The level of income therefore fluctuates from year to year and is dependent upon the success or otherwise of the With Profits fund.
Under a unit linked annuity, typically no guarantees are provided. The income received is dependent upon the underlying performance of the linked fund/s, which will undoubtedly fluctuate over time. With favourable market conditions, a unit linked annuity may, in the long term, produce income that exceeds that of a traditional level or escalating annuity. The problem is that the reverse is also true; adverse conditions may seriously affect the value of a pension income.