Variable Annuity
A Variable Rate Annuity or one that is linked to the performance of investments and is attractive to retirees as it can mean an increase in income each year, as the performance of their investment improves. This means your income can grow year on year and help nullify the effects of inflation.
You will still receive some guarantees for your income, but far less than with conventional annuities for example. However to ensure you have guarantees with a variable rate annuity, you will have to pay for them, and the amount you pay will depend on the level of guarantee.. This will be reflected in the rate of income. So if you wanted to be protected from inflation and have your annuity linked to the RPI, your starting income may be substantially reduced to allow for this guarantee.
A variable rate annuity will also mean that you will be able to keep your options open, as there could in the future be changes in your needs or those of your partner, children or grand children. If at an early stage in your retirement you need to protect your income level because you have financial dependents, this would mean a lower income than if you were using a conventional annuity. However if circumstances then change, you could then purchase an annuity without insurance, thus increasing your income.
With a variable rate annuity, you also have the opportunity to benefit from the future performance on investments linked to your annuity. Contrast this with a conventional or fixed rate annuity, which results in you being locked-in to the gilt prices at the time you take out the product.
During the recession of the early 1990’s the gilt values fell, which fueled an increase in people looking for alternatives to conventional annuities. In modern times there are have been a number of “hybrid” type annuties appearing on the market. Although they are still varibale rate annuities, they seek to have secure elements offering a half-way house between fixed rate and varibale rate.