With Profits Annuities

With-profits annuities link your income directly to the performance of the insurance company's with-profits fund. Usually, your income is made up of two parts:

• A minimum starting income. This is set at a low level but, unless investment conditions are very bad, you'll usually get at least this much income. Some with-profits annuities guarantee that you'll always get at least this minimum starting amount.

• Bonuses. The insurance company usually announces bonus rates once a year. Bonuses can be both 'reversionary' (usually announced once a year and guaranteed to pay out for the duration of your annuity) and 'special' - these only pay out for one year. The amount of any bonuses depends on many factors, the most important of which is stockmarket performance.

With-profits annuities differ between one insurance company and the next. But this is how they work in general:-

Your starting income is based on an 'assumed (or anticipated) bonus rate' (ABR). You choose the ABR at the outset from a range set by the insurance company - for example 0% (which assumes no bonuses at all) to 5%. Once chosen, most insurance companies do not allow you to change the ABR.

The insurance company announces new bonus rates every year.

• If the rate equals your chosen ABR, your income does not change.
• If the declared bonus is higher than the ABR, your income increases.
• But if the bonus is lower than the ABR, your income falls.
  

If you choose a low ABR, your starting income is low. But you increase the likelihood that future bonuses will exceed the ABR and that your income will rise. You also reduce the risk that your income will fall. If you choose the lowest ABR of 0% - in other words, assuming no bonuses at all - your starting income will be just the minimum.

For Example

Chris is 60 and about to retire. He uses his £100,000 pension fund to buy a with-profits annuity.

The starting income depends on the ABR he chooses. His options are:

• The lowest ABR of 0%
  Chris' starting income would be £3,700 a year. But, provided the insurance company announces a bonus, his income next year will be higher (depending on the bonus declared) and will stay higher.
  
• The highest ABR of 5%
  Chris' starting income would be much higher at £7,000 a year. But the income will increase in future years only if the actual bonuses are more than 5%. Every time the insurer announces a bonus of less than 5% his income will fall.
  
• An ABR somewhere between 0 and 5%.
  This gives a starting income of more than £3,700 but less than £7,000 a year.

To find out if a With Profits Annuity is suitable for you, without obligation, please complete the short form here.