What are variable annuities?
Facts about Variable Annuities
What exactly is a variable Annuity?
Can I have a guaranteed Income?
What other guarantees are available?
What do the guarantees cost?
Can you give me an example of a Variable Annuity?
How long does a variable Annuity last?
What happens if I die?
What are the advantages and disadvantages of Variable Annuities
What exactly is a variable Annuity?
A recent innovation in the Pension planning arena has been the arrival of Variable Annuities. It is important to note this new US-style variable annuity bears little resemblance to the traditional annuity recognised in the UK. It is best described as a conventional unit-linked investment product, underpinned by one of four basis types of guarantee.
Can I have a guaranteed Income?
Yes! Is the short answer, this is usually approximately 5% of the fund value, although it does vary with age. The income can be guaranteed for as little as 5 years or for life if preferred.
What other guarantees are available?
There are 4 different types of guaranteed benefit or variations thereof;
- Minimum accumulation benefit, where funds are guaranteed to accumulate to a certain amount over a certain time - a guaranteed growth option if you will
- Minimum withdrawal benefit. Where from a fixed point in the future, it is guaranteed that regular withdrawals can be made at a specific level, even if the fund itself subsequently runs out of money.
- Minimum level of income, where it is guaranteed that a certain level of income can be purchased using the fund at a particular point in time.
- Minimum death benefit, where a named beneficiary is provided with a specified sum in the event of the insured person dying, regardless of the underlying fund value.
By combining and tweaking these four building blocks, a Pension can be designed that meets your individual needs - and they give you the flexibility to modify your choices in the future as your circumstances change.
What do the guarantees cost?
You insure your house and your car. Why not insure your Pension fund agasinst loss?
The cost varies dependent upon the nature of the guarantee, your age and fund size, if you think of it like an Insurance premium it is normally added to the annual management charge on your underlying fund and as a rough guide will add between 1% and 1.5% to the Annual Management charge, so for a fund of £100,000 you will be paying at least an additional £1,000 each and every year for the guarantee - such is the price of certainty!
Can you give me an example of a Variable Annuity?
The first of this type of Annuity in the UK (and perhaps one of the simplest!) was the Annuity Growth Account from Canada Life. An Annuity Growth Account is a combination of a 5 year immediate Annuity contract and a unit linked investment element. The Annuity payable is the same as if you had purchased a conventional Annuity but, because it only has to be paid for 5 years, the cost is much less, meaning that the remaining portion of your pension fund can be invested in any combination of Canada Life funds for 5 years until the next review date, at which time you will have the option to purchase a Lifetime Annuity or repeat the process for another 5 years, and each subsequent 5 year period thereafter until your 85th birthday, at which time you must take a Canada Life Lifetime Annuity.
Within an Annuity Growth Account you will always have a level of investment risk, the amount of which will be determined by the choice of funds invested. Whilst you may be drawn to more cautious funds, it is important that you invest in funds with the potential to outperform the hurdle rate (the growth rate) so that you have a realistic chance of having a larger income in the longer term than if you had purchased a conventional Annuity at outset.
How long does a variable Annuity last?
The shortest guarantee period we are aware of is the 4 year capital Guarantee from Met Life, but the vast majority run from 5 years to life depending upon your requirements.
What happens if I die?
The variations of death benefits are massive and it will depend upon the nature of the guarantee you are seeking, you can for example, guarantee return of your capital less any withdrawals, or guarantee a spouse"s pension at different levels. As a minimum you would expect death benefits to abe at least equal to those available under a conventional Annuity. This is a hugely important factor and one that requires very careful consideration before entering into any fixed term commitment which is very often the case with Variable Annuities.
What are the advantages and disadvantages of Variable Annuities
Advantages of Variable Annuities
- The guarantee of a fixed level of income/death benefit/lump sum provides certainty
- The guarantee of locking in investment growth without the risk of your fund falling in value should markets fall
- Potential for increasing income by sharing in investment growth
- Flexibility to change your requirements in the future
- Avoids "once in a lifetime" commitment of conventional Annuity purchase
Disadvantages of Variable Annuities
- All Guarantees come at a cost and have to be paid for explicitly
- There may also be the "opportunity cost" of not enjoying the full value of any investment growth
- Charges and early surrender values can be prohibitive
- Variable annuities are a new and for some designs a relatively complex proposition.
- Any required hurdle rates may not be achieved and your income may reduce in the future
