A unit linked annuity is an annuity that pays you an income for the rest of your life. It is bought from your pension fund, however rather than swapping your money for a guaranteed sum each month, the income you receive from a unit linked annuity is directly linked to the investment performance of the funds you choose when you buy your annuity.

By keeping your money invested, your income has the potential to increase over time, but it could also reduce if the investments don’t perform very well. Additionally, as the performance of the funds will fluctuate over time, so will the income that you receive. Unit linked annuities are similar to With-profit annuities but are generally viewed as the more risky option.

Pros

• You can choose the funds you wish to invest in depending on the level of risk you are comfortable with.
• Your income has the potential to increase over time. 
• It provides some protection against inflation.
• You can usually switch your investment between different funds, so you can change it as and when it suits you. There may be a limit on how may times you can switch depending on your provider. 
• If you change your mind, you can normally exchange it for a conventional annuity, usually for a charge depending on your provider.
• Unit linked annuities promise to pay you a regular income for life.
• You can customise your annuity to suit you:
• You can arrange for your dependant to receive an income after you die.
• You can choose for some of the money you invested to be paid back to your estate, if you die within a set period of time.

Cons

• Your income will vary each time it’s paid.
• Your income could go down if investments don’t perform well.
• Your annuity is for life. Once you’ve bought it - you can’t cash it in! 
• You may die before the income you have received reaches the full amount of the purchase price for your annuity.
• Unless you choose otherwise, your dependants won’t be automatically protected.

If you are nearing retirement, have a pension fund and you want the potential for your income to grow this could be right for you. In normal circumstances you need to be at least 50 to take benefits. Remember, your income can rise and fall depending on the performance of your investment, this means that if you prefer to know what your income is each month, this option may not be for you.

You can buy an annuity from an insurance company or through a financial adviser. Before you decide, carefully consider the options available on an annuity. Make your choice based on what you need now, as well as what you’re likely to need in the future.

If you need more help choosing your annuity you could speak to your pension provider or an insurance company who may refer you to their advisers. You need to remember that not all providers offer advice and if they do, they will only be able to give information on their own products. If you want advice about the whole of the market, you’ll need to speak to an independent financial adviser.

Do your research - decide whether an annuity is right for you by looking at all the available options for funding your retirement and considering the pros and cons of each.

Shop around - you could get more from your income by shopping around for the best deal on the annuity market.

Start early - take your time to consider the options available on an annuity, choosing one that best suits your immediate and long-term needs. Annuity rates can change, if you buy now you may get a better rate than if you waited. However this could work the other way around as well, you may get a better rate by waiting. Remember, once you buy an annuity your money is locked in.

Don’t forget - you can normally take up to a quarter of your pension fund tax-free. Taking a tax-free lump sump will reduce the amount available to provide an income in retirement.

Check out and compare - there are a range of annuities and options. Whatever your circumstances or your health, you can find the one which best suits you.

Remember you’re in control - you have the final decision on all the choices you make.

Consider your attitude to risk - you could get more income if you’re prepared to risk more, but this is not for everyone.

Don’t be afraid to ask - remember if you have any questions about annuities generally or about a specific product, make sure you get advice before making a decision.