Variable Annuities | Money Saving Advisors
Understand variable annuities whose payouts can change based on investment performance, offering flexibility and risk.
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What is a variable annuity?
A variable annuity is an investment product that can give you an income in retirement. The value of your annuity - and the income it pays - varies based on how your investments perform. In other words, it's linked to market performance - you could have higher returns, but there's risk too.
Variable annuities are more common in the US, but they're becoming increasingly popular in the UK, particularly among those who've built up their pension pot and are looking for options beyond traditional annuities.
Flexible retirement income
Variable annuities let you shape your income to suit your life, rather than locking you into a fixed amount. Here are a couple of areas they can make a real difference:
- Income that adjusts: Your periodic payments can increase if your investments perform well, giving you a chance to keep up with inflation.
- Optional guarantees: Some providers offer guarantees (at a cost), which means your income won't fall below a certain level - even if the market does.
- Tax-deferred growth: Like ISAs and pensions, your investments can grow without immediate tax. You only pay tax when you start taking lump sum payments.
Investment control with security
Unlike traditional annuities, you're not handing over full control of your money. Instead you can:
- Pick your funds: Choose from a range of funds - shares, bonds, or a mix - to match your risk level.
- Adjust as you go: Most variable annuities let you switch between funds over time, giving you more flexibility than with a standard annuity.
- Add benefits: You can often add death benefits so your loved ones inherit some or all of the remaining value.
Summing up
Variable annuities offer a middle ground between guaranteed annuities and pure investments. They're more complex, but also more flexible. If you want some income certainty with the chance to benefit from market growth, they could be worth exploring - especially if you're thinking long-term.
Frequently Asked Questions
Do variable annuities provide guaranteed income?
Not automatically. Variable annuities can offer guaranteed retirement income through features like a "guaranteed lifetime withdrawal benefit", but without these, the size and stability of your payments depends on how your investments perform. Talk to your insurance company about other "optional living benefits" that guarantee and protect your income stream.
Are variable annuities risky?
They do involve risk because your returns depend on market performance. If your investments fall in value, so can your annuity income or balance. That's the trade-off for growth potential. Some variable annuities offer optional features - like income guarantees - that can protect you from extreme losses and give you more stability in tough markets. These usually come with extra fees.
How do taxes work with variable annuities?
Variable annuities are typically classed as deferred annuities, meaning you won't pay tax on investment gains until you withdraw money - then it's usually subject to income tax. Holding your annuity in a pension or tax-efficient wrapper can help you manage your tax more effectively. The process can be complex, especially when dealing with large sums or multiple products, so it's wise to seek tax advice before you start.
Who are variable annuities best suited for?
They can work well for people who want long-term growth with some income flexibility and are comfortable with the risk. They're also a good fit if you're working with financial advisors or exploring more personalised options. If you're looking for more of a guaranteed lifetime income, it could be best to explore fixed annuities, which offer predictable payments without exposure to market risk.
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