What are Third Way Annuities?
Third Way annuities are quite a recent addition to the UK annuity market although they have been popular in the US for a considerable number of years. Although they are called an annuity they really are a form of Unsecured Pension that comes with a number of guarantees. They provide a so-called ‘Third-Way’ between the restrictions of conventional annuities and the risks associated with income drawdown. A Third Way annuity offers a guaranteed income for a specific number of years from part of your pension fund. The rest of your fund is invested meaning the income level you will receive from that part of your fund could go up as well as down. Also consider investments have to be managed which incurs charges of up to 3%. However if you don’t fancy hedging your entire fund using drawdown but are also wary of committing 100% of your pension fund to a life annuity then a Third-Way annuity maybe suitable.
Third Way Annuities – Pro’s
- You can benefit from a receiving a certain level of guaranteed income whilst also potentially benefitting from the part of your fund which is invested
- Death benefits from this type of annuity are often more generous compared to standard life annuities
Third Way Annuities – Cons
- The guaranteed income level varies from provider to provider
- They are still more risky than a life annuity, as part of your income could fall as it is investment-linked
- They can be rather complex, you need to fully understand how these products operate
- Annuity rates could fall in the future