With Profit Annuities

With Profit Annuity Overview

With profits annuities are a fairly new concept in the financial services market. A conventional annuity can be seen by some to be a very inflexible product, one which cannot be altered once started and unless indexation is incorporated from outset, your annuity income will remain level throughout your lifetime, thereby eroded by the effects of inflation.

 

In response to this, the concept of with profits annuities has been developed. With a conventional annuity, the insurance company assumes all of the investment risk – you purchase your annuity with a lump sum and it is up the insurance company to invest this money in order to provide your guaranteed income. You will still receive your annuity income irrespective of whether the insurance company has invested your lump sum wisely.

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To get over the perceived lack of flexibility and the potential erosion of your income due to inflation, with profits annuities work by investing your lump sum in the with profits fund of your chosen insurance company. By doing this, you bear the investment risk, not the insurance company. At outset, rather than opting for a level annuity or one which increases each year, you assume a bonus rate.

 

This will be the bonus rate applying to your with profits fund and if the fund achieves the bonus rate that you have assumed, your with profits annuity will remain level. If the bonus rate applied to the with profits fund is higher than that which you have assumed, your annuity for that year will rise and conversely, if the bonus rate falls, then your annuity will also fall for that year, or until bonus rates rise again above the level of bonus rate that you assumed at outset.

 

So, if you assume a bonus rate of 3%, and that is what is achieved, your annuity remains level. If after three years, the bonus rate increases to 5% (because of favourable equity markets) then your annuity income will rise too.

 

Thinking of buying a With Profits Annuity from your pension fund or from private capital? Our Annuity Service provides:-

  • Depending on your pension provider up to 40% More Annuity Income
  • Information on different types of annuity arrnagement including investment annuities
  • Assessment of your circumstances to find the most suitable type of annuity for you or whether there are any other options more suited to you.
  • Information on lifestyle annuities - including  smoker annuities and impaired health annuities you may get even more annuity income.
  • Comparing annuity rates to ensure that you maximise your annuity income.
  • Explaining the annuity options available to you.
  • Helping you with the relevant paperwork to ensure that you annuity is processed smoothly.

 

The level of with profits annuities that you receive will depend upon the following:

  • Your age at outset and sex
  • The purchase price
  • Annuity rates at the time of purchase
  • Type of annuity required, ie, single life or whether you want to include a widow/widower’s pension
  • Bonus rate assumed

 

The higher the bonus rate that you assume at outset (ie, the more optimistic you are) the higher the level of your initial with profits annuity income. Essentially, you are banking on high bonus rates just to achieve a level pension. If you assume a zero bonus rate, your initial with profit annuity income is likely to be relatively low (compared to assuming a 5% per annum bonus rate for example) because this means that any bonus rate (even 0.5%) will result in a rising income. So that, the more cautious you are, the more chance you will have of receiving an income that rises on a regular basis, but conversely, the initial income is likely to be lower.

 

With profits annuities can overcome the problem of your annuity income being eroded due to the effects of inflation and this is especially true in a market where share prices are rising and with the effect that bonus rates are strong. In a time of turbulent share markets, however, and falling or low bonus rates, this could result in reducing annuity incomes, particularly if high with profits bonus rates have been assumed.

 

With profits annuities aren’t for everyone but they are an option which should be explored. The concept is quite a complex one and it is imperative that when looking at your options on retirement, you do this in conjunction with an annuities specialist who is able to help you at this important but potentially confusing time.

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