Indexed Annuities | Money Saving Advisors
See how indexed annuities tie returns to market indexes, offering growth potential with some protection.
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A steady hand in unpredictable times
If you're looking for a way to grow your money without the rollercoaster ride of shares, indexed annuities could be for you. Compared to a fixed annuity, which offers a guaranteed rate and predictable income, and variable annuities, which come with higher risk and the potential for growth, indexed annuities strike a balance. They offer guaranteed income but give your savings the chance to do a bit more.
What is an indexed annuity?
An indexed annuity is a long-term savings product that gives you returns based on the performance of a stock market index. It offers growth potential and protection from market downturns. They're designed to give a future income - up to a cap, and never below a guaranteed minimum.
As a type of deferred annuity, your investment can grow tax deferred during the accumulation phase, meaning the interest credited to your account isn't taxed until you make withdrawals. So your money can grow tax efficiently over time.
Retirement income without market risk
Balancing growth with protection
Indexed annuities can be attractive if you're risk-averse but still want more than a fixed interest rate. Here's what makes them stand out:
- Protected value: Fixed indexed annuities offer principal protection and shield your original investment, so your retirement savings aren't directly impacted. Even in a bad year for the stock market, your value won’t drop below a certain floor (often 0%).
- Growth potential: If the index does well, your return is typically better than a traditional savings account, even though it's capped. Adjusted values are used to reflect gains or losses at specific times, so your account value matches the market.
Remember: Your investment is not a deposit - it's backed up by the financial strength of the issuing insurance company.
Income for the long haul
Fixed indexed annuities can provide a guaranteed stream of periodic payments or lifetime income, depending on what you choose. Here's how you can access money:
- Guaranteed income: Some plans offer the option to turn your pot into a reliable income stream later in life.
- Flexible access: Others let you keep control of the lump sum, drawing income as needed while it keeps growing.
- Death benefits: These may come at an additional cost, to protect beneficiaries if the annuity owner passes away.
Tip: If you withdraw funds before the end of the surrender period, you may face a withdrawal charge or a market value adjustment.
Summing up
Indexed annuities offer growth without the worrying dips of the stock market. They're not a magic solution, and they're not for short-term goals, but they do strike a smart balance between opportunity and security.
Frequently Asked Questions
Are indexed annuities available in the UK?
Indexed annuities are much more common in the US, but similar products are slowly making their way into the UK market. They're sometimes called "structured deposit plans" or "unit-linked savings" with guaranteed features. The idea is the same: your money grows based on the performance of a market, but with some protection against losses. Talk to a financial professional to find the best UK options.
Can I lose money with an indexed annuity?
Generally, indexed annuities are designed to protect your investment against market losses, which means you're unlikely to lose it if you stick to the terms. But early withdrawals could face surrender charges or lost earnings, and may also be subject to income tax. Also, fees or inflation could reduce the real value of your returns over time. That's why it's important to take legal or tax advice before you buy.
How long should I keep my money in an indexed annuity?
Indexed annuities aren't a quick win - they're meant for long-term financial planning. Most indexed annuity contracts come with a set term, typically 5 to 10 years, during which your money is tied up. This is known as the surrender period, and withdrawing money before it ends can result in charges or fees, or cause you to lose access to guaranteed benefits.
What's the catch with the capped returns?
The key trade-off with indexed annuities is that your upside is limited — returns are often capped around 4% to 7%, depending on interest rates and market conditions. This cap, along with participation rates, helps fund the downside protection. It suits those who value stability and are willing to give up some growth for reduced risk.
What are registered index-linked annuities?
Registered index linked annuities (RILAs) are a U.S. product, not currently available in the UK. In the UK, annuities tend to be more straightforward - such as lifetime annuities or investment-linked annuities. These offer returns or an income for life without the structured "buffer" or "floor" approach used in RILAs.
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