If you are nearing retirement age then you are likely thinking about purchasing an annuity to provide you with an income after you finish work.  An annuity converts the pension fund that you have built up during your working life into a regular income that will be paid until you die.  There are several different types of annuity policies available to UK consumers.  One such option is a Unit Linked Annuity.

In a standard life annuity you convert your pension fund into a guaranteed income.  Unit linked annuities differ in that the amount of income isn’t guaranteed but is instead dependent on the performance of an underlying unit linked fund.  This type of policy is similar to a with profits annuity in that it has all the same options but the pension fund is invested in a unit linked rather than a with profits fund.

Unit linked annuities can work in one of two ways.  When purchasing the annuity you have the choice of taking out the policy based on an assumed growth rate.  You determine the amount you require the fund to grow at for you to receive the level of income you want.  If the fund exceeds expectations then the annuity income will be increased, however if it underperforms then income will be reduced.  The other alternative is to purchase an annuity with no assumed growth rate.  Instead the income you receive will depend on the performance of the fund in which you invest.

One disadvantage of this type of annuity is that there is often a higher initial charge on setting up the policy.  In addition to the other overall charges this may reduce the amount of income you receive from the policy.  Unit linked annuities are inherently more risky than standard pension annuities and so if you are risk averse and would prefer a guaranteed income then you are probably better off considering other options.