In simple terms a unit-linked guarantee is a unit-linked investment that has a guaranteed benefit attached to it. There are two primary components to a unit-linked guarantee: an investment in a mixture of equities, bonds, cash and other assets, and an insurance policy overlaying this which protects the client’s retirement income or capital value from any falls in the financial markets.
The guarantee can be for income, the capital value or a combination of both. In addition, all policies offer a guaranteed death benefit.
The unit-linked investment can be inside or outside of a pension wrapper but the vast majority are pension policies (sometimes called ‘guaranteed drawdown’ policies) which have a guaranteed income option.
In the UK there are three types of unit-linked guarantees:
- income guarantees
- capital guarantees
- guaranteed death benefits.
The table below summarises the different guarantees offered by the three main providers on their pension policies:
The advantages of unit-linked guarantees
The most obvious benefits include:
- A balance between certainty and flexibility of income
- A range of capital and or income guarantees with the potential to benefit from any future investment growth
- Potential for income to increase if a client delays taking income
- Allowing investment gains to be locked-in via the income or capital guarantee
- Paying a guaranteed income for life whilst maintaining flexibility and control
- Guaranteed lump sum death benefits
Other benefits include:
- The confidence to remain invested in equities in the knowledge that if there is a stock market crash the capital and/or income is protected
- The ability to plan ahead with the knowledge that a certain level of income is guaranteed
- The flexibility to change future retirement plans if circumstances change