Brian is 69 and lived through the double-digit inflation of the 70s. He would like to inflation link his pension, but was shocked at how much it reduced his initial income if he bought a conventional annuity that increased each year.
This left him in a quandary. He wanted to mitigate the risk of inflation, but was reluctant to see his starting income reduce so much.
He considered income drawdown but, although he was prepared to take some investment risk he didn’t like being completely exposed.
He and his adviser started to look at the Flexible Income Annuity as a solution to Brian’s concerns. This would allow him to take a much higher income than a conventional annuity, but he also has the potential to grow his income if his investments perform as expected. What’s more, there is a special bonus payable each year. This arises because people who die earlier than expected may not have used up their fund (even after any death benefits are paid out). This excess money is effectively distributed each year by a special Lifetime Bonus.
This means Brian doesn’t have to take as much investment risk with his money to achieve a particular level of growth.
And that’s not all. If Brian’s investments perform poorly, he will always be entitled to a minimum income for the rest of his life. In this case, Brian’s income would not grow each year, but compared with the alternatives of a low starting income from a conventional annuity or taking investment risk without any guarantees on income whatsoever, this feels like a great result.