Alternative Retirement Options
Although a basic annuity, in one form or other, will be suitable for most people, there are alternative options available for those with larger funds and a willingness to take higher risks. The main two options include Investment-Linked Annuities and an Unsecured Pension.
With normal annuities, your money will be invested in Gilts. These investments pay out a fixed level of interest and, because the government issues them, they are regarded as a very low risk investment.
Investment-linked annuities, also known as 'With-Profits' annuities, could pay you more if your investment fund performs well and exceeds the annual bonus rate on the policy. By investing in higher risk products, such as the stock market funds, your income may not be consistent. Your annuity could pay less if the fund under performs.
If security is important to you and you're depending on your pension as your sole source of income, you may find this just too big a risk to take.
Compared to conventional annuities, in theory you could potentially generate better returns with an unsecured pension. But they're unsecured for a reason – your investment could be susceptible to drops in the market. This option is for sophisticated investors who are comfortable taking risks and who could afford to lose some money.
With an unsecured pension, your income is not set for life. It remains, at least partly, invested and exposed to the stock market. There are three main types of unsecured pension:
Who would consider an unsecured pension?
There are three key reasons people choose unsecured pensions above conventional annuities:
- Those who only need a small amount of the income that would be available from an annuity may wish to leave most of the fund invested while drawing a limited income;
- When annuity rates are low you, may decide to delay buying one in the hope that annuity rates will increase. There are no guarantees that this will happen. In fact the trends show rates will decrease as general life expectancy increases, which looks set to continue in the future; or
- If you want to leave the fund to your partner and any dependents, an unsecured pension means your money is more easily accessible.
Things to watch for with unsecured pensions:
- The risks
With all unsecured pension options, you are relying on strong investment growth to maintain the amount of income available in later years. Even good investment growth might not lead to better value with an annuity if interest rates fall.
- Maintaining fund value
Not only do you need to outperform inflation with each unsecured pension option, you also need to replace enough of the fund value removed to maintain a reasonable fund value. When it reaches the stage of buying a lifetime annuity, the older you are, the more you'll need to compensate for the loss in fund value, which may lead you to invest in higher risk funds. This is not a route for the faint hearted.
- Ongoing costs
Unlike a lifetime annuity where once bought the job is done, unsecured pensions need regular reviews. The ongoing advice and investment performance monitoring is necessary, as you'll need this information to respond to any issues.
Need more help?
So much will influence what's right for your individual retirement needs. It is vital with products this complex to speak to a specialist adviser. If unsecured pensions are something you are considering, we can help. Call us today to set up an appointment with our specialist retirement adviser.