Investment Annuities

While annuities are usually taken out for retirement purposes, they can also be a good form of investment. Usually, an Equity Index Annuity or a type of Variable Annuity is ideal for this purpose. Keep in mind that these types of annuities carry some amount of risk. For instance, an annuity linked to an interest rate could drop below a desirable level. Your annuity contract can normally be negotiated to include a “floor” to make sure that no matter how poorly the associated interest rate is performing it will never go below a specific figure.

A floor can apply to the lump sum as well, which means you won’t have to worry about losing more than 10% (or even 0%) of your initial investment. Also, your chosen interest rate may be doing well and your money is increasing in terms of pounds and pence, but inflation can mean that your income is actually decreasing in real terms.

As the table illustrates, any standard annuity is vulnerable to money loss in real terms as years go by. One good measure to protect your investment against this is to use a device commonly seen in retirement annuities called escalation.
For instance, the RPI (Retail Price Index) Escalation device ensures that your capital’s purchasing power will keep in pace with inflation. This results in less income for your investment but it’s something to consider during periods of high inflation, especially for a long term or life annuity buyer.