■ Investors should have other sources of income or capital to fall back on if the future income from an investment-linked option falls in value;
■ All the relevant risks must have been explained and the client must understand them;
■ All the relevant options must have been considered.
The point about having other sources of income or capital is something I have been talking about for nearly 20 years and shows that although capacity for loss may have recently gained prominence, it has been at the heart of my annuity advice for a long time.
In practice, it means that if someone has a small DC pension pot to invest but has other pensions such as a final-salary pension, they may be in the position to consider an investment-linked annuity if they are prepared to take the associated risks.
Options
Those with above-average-sized pension funds have more choice, but realistically the alternatives to guaranteed annuities are not viable unless the pension fund is more than £50,000 and the investor has other sources of income or pensions.
One of the advantages that this group has is that they can consider investing in more than one type of annuity or drawdown policy.
In addition to the options mentioned earlier, those with above-average-sized pensions may consider the options in table 2.
| Advantage | Disadvantage | Comment | |
| Fixed term | Income fixed for a set period and guaranteed maturity fund value at end of term. | If annuity rates are lower at the end of the term, investors will get a lower income. | Fixed term has become more popular and if your health has deteriorated you may qualify for a higher annuity. However, they are risky. |
| Investment linked | Annuity with potential for income growth and flexibility. | If investment returns are lower than expected, the income will fall. | Three popular options: Prudential, LV=’s with profit annuity and MGM’s investment-linked annuity. |
| Pension drawdown | No need to buy annuity as income taken direct from fund. On death there is an option of a lump-sum death benefit less 55 per cent tax. | If investment returns are lower than expected the income may fall and fund values reduce. The charges are higher than for annuities. | Mostly suitable for larger funds but may be suitable for smaller funds especially if low cost Sipp involved. |
| Phased retirement | Tax-efficient way to pay pension income. Each year part of pension fund converted into tax free cash and income. | Can be complicated and only suitable for large funds. | For those who can afford to do it, phased retirement is one of the best ways to take your pension when there is so much uncertainty. |
| Annuity portfolio | This is a combination of guaranteed annuities and investment-linked flexible pensions. | If investment returns are lower than expected, the income may fall and fund values reduce. | This can be done with medium-sized funds and enables you to have a combination of guaranteed and flexible annuities. |
