Unit Linked Pension Annuity

What is it? 

A  policy purchased from an Insurance Company or which pays a level of income, linked to the performance of the Provider’s underlying investment fund(s), until the death of the insured life/lives.

Who is it for?

The unit linked option may be beneficial where an individual is comfortable taking an investment risk in order to potentially boost their pension income.

How does it work?

A ‘unit linked’ annuity allows the pension to share in the performance of the chosen provider’s investment fund(s).  The pension income may alter each year depending on the level of growth achieved by this fund.  In return for the prospect of rising income the initial level of income is reduced.  The pension income may go down as well as up.

A more balanced position can be achieved by assuming a certain level of investment return each year.  If the return on the chosen fund is ahead of the level selected at the outset, the annuity will increase.  However, if the return is lower than the level selected at outset, the annuity will fall.  By selecting, at outset, a realistic assumed return, a reasonable balance is likely to be achieved between the initial level of pension and the prospect for increments.

Unit linked annuities are provided on both single life or on an annuitant plus surviving  spouses basis.

The accumulated pension funds less any tax-free cash are spent with the purchase of an annuity.  The income provided depends on annuity rates and selected options at the time of purchase.  These rates are based on interest rates and longevity.  Purchase of an annuity is a once in a lifetime choice – once purchased control of the pension fund is lost.  However there is a continued involvement in the performance of the pension Provider’s ‘unit linked’ investment fund(s) throughout the lifetime of the annuity payments.  Benefits once selected cannot be changed.

It may be possible for those with impaired health or who smoke to obtain better annuity rates.

What is the tax position?

Any pension income paid through the annuity will be treated as earned income and therefore subject to income tax at the individual’s marginal tax rate.