A with profit annuity links your income to the performance of the insurance company’s with profit fund. Instead of providing a known guaranteed lifetime income your actual income is linked to the annual bonus rate declared by the insurance company for the with profit fund.

Potential increasing income Flexibility to change your ABR year on year Option to convert to a traditional pension annuity

Anticipated bonus rate
At the outset you choose a rate of growth you think the insurance company will achieve year on year for the with profit fund. This is called the anticipated annual bonus rate (ABR) and you can choose a rate between 0% and 5%.

Your choice of ABR dictates your initial income and the risk you are willing to take on this income increasing or reducing in the future.

Selecting a high ABR provides a higher starting income than selecting a low ABR. However a high ABR also carries a greater risk that this income may be reduced in the future if the actual bonus rate declared is lower than the anticipated bonus rate you selected.

If the actual bonus rate declared is the same as your anticipated bonus rate your income remains the same, if it is higher then your income increases and if it is lower your income reduces.

Example of 0% ABR
If you choose an initial ABR of 0% (i.e. you assume no bonuses will be paid) your starting income will be set at the minimum level. Your annual income will then increase each year by the actual annual bonus rate declared. If the with profit annuity provider guarantees not to declare a negative bonus and operates a minimum income guarantee there is no risk to your future income in selecting an initial ABR of 0% and your income should always increase.

Example of 5% ABR
If you choose an ABR of 5% (i.e. you assume a 5% bonus will be paid each year) then your starting income will be set at the highest initial level. Your annual income is then recalculated each year based against the actual bonus rate declared. If the actual annual bonus rate declared was 5% your income would remain level. If the actual annual bonus rate was 7% your income would increase by 2%. If the actual annual bonus rate was 1% your income would fall by 4% in that year.

Changing the ABR
As your income is recalculated each year in line with your chosen anticipated annual bonus rate it is important to select an initial ABR in line with your income requirements and attitude to risk. Some with profit annuity providers offer you the option to select a revised ABR each year. This allows you to adjust the level of risk you are willing to take or adjust the level of income you require to suit your needs.

With profit fund smoothing
With profits funds invest in a mix of shares, fixed interest securities, property and cash. This wide investment mix gives potential for investment growth but it is the way with profit funds allocate the investment returns to policyholders that is the distinguishing feature of a with profit annuity. The insurance company smooth returns by keeping back some of the profits earned during periods of strong growth to bolster returns when stock markets perform poorly. It is these smoothed returns that are paid out to you in the form of annual declared bonuses.

Minimum income guarantee
Some with profit annuity providers offer a minimum income guarantee. This means that regardless of future bonus declarations and the initial ABR your selected they guarantee an absolute underlying minimum income you will always receive. This is normally set at the same level of income that would have been paid if you had chosen an ABR of 0% at the outset of the plan.

Unit Linked Annuity
A unit linked annuity works in a similar way to a with profit annuity except your income is linked to the actual value of the underlying fund. Unit linked funds do not offer the benefits of smoothing and do not normally provide a minimum income guarantee associated with a with profit annuity. As unit linked funds are normally equity based they carry a greater risk of volatility and your income may fluctuate significantly year on year.

Alternative options
Phased retirement and income drawdown plans allow you structure your income in a different way. These pension plans can provide favourable income tax and inheritance tax benefits and provide the opportunity to defer purchasing a pension annuity but still provide an income.

A traditional pension annuity provides the security of a guaranteed lifetime income and removes the investment risk associated with a with profit annuity.

You should also review our impaired life annuity page to check if you qualify for an impaired or enhanced pension annuity. A with profit annuity can be combined with an impared life annuity to provide a higher starting income.

To request a quote
Complete our online pension annuity quote form or call one of our specialist annuity advisers to request your free with profit annuity quote. As an internet based firm of independent financial advisers we provide advice over the telephone, via email and through the post. Dealing with you in this way allows us to discount our commission to provide you with the very best with profit annuity. We aim to provide all with profit annuity quotes within 24 hours.

Help & advice
There are many different options to consider when choosing an appropriate with profit annuity plan and it makes sense to take advice from a qualified pension specialist who is independent and can offer you products and services from the whole of the market place. Please call one of our independent advisers or contact us to discuss the different options available to you and to request a quote for your with profit annuity.