With Profits Annuity
A With Profits Annuity entails putting together the payment of an income for life but with a scope for future growth in additional to having limited protection from inflation. Recent changes in the law now also allow “Protected Rights funds” to be used to buy a With profits Annuity, but with some stipulated restrictions.
Advantages
By using the Anticipated Bonus Rate (ABR) a With Profits Annuity offers you a much greater level of flexibility compared to a Inflation Proof Annuity or even a Conventional Annuity. You will get higher increases in income in the future when the ABR is lower.
You will know that with a With Profits Annuity your income will never fall below a certain amount.
In the long run your income could even grow faster than inflation, although this would entirely depend upon the relevant funds’ performance, inflation levels and the ABR rate each year. And at certain times throughout your retirement you have the ability to switch to a conventional annuity if you wish to.
Disadvantages
With a With profits annuity your income could indeed increase but there is also the danger that it could decrease to a level lower than what you had in the beginning. (although this doesn’t apply to Protected Rights benefits – these cannot fall to a lower level than at the start) Of course with this type of pension annuity there is no guarantee in a rising level of income. There is also little point looking at what has been in the past or what is on the horizon as circumstances can change quickly. If you have other sources of income at retirement and can take the relative risk then this maybe the option to maximise your potential retirement income.
How does a With Profits Annuity Work?
Your money you have saved up for your pension will be invested in the with profits fund of a life insurance company. Your level of income depends upon the performance of the fund, and the declared annual bonuses. The performance of an individual fund depends on several factors including the level of investment in the fund itself and also the longevity of the planholders. Most plans do offer a minimum level of income however.
You are able to choose your initial income by selecting an Anticipated Bonus Rate (ABR) within a stipulated range. By choosing a greater ABR initially your income will in the first instance be higher, although yearly increases will be lower. In addition to this you increase the risk of your income decreasing.
If you have a protected rights fund the ABR must be zero percent (0%) at the start. If you do want a greater income you need to choose a a higher ABR with funds from non-protected rights.