With Profit Annuity
Overview
A with profit annuity is similar to a lifetime annuity in
that it is simply a series of payments made at selected
intervals in return for a pension fund. The level of payment
is also dependent upon age, sex, annuity rate, size of fund
and options selected. The main difference is that the
initial pension level and future income levels are also
dependent on the performance of the underlying with profits
fund.
An assumed future bonus rate (ABR) is selected at outset by
the investor. The higher the ABR the greater the initial
income, however if the actual bonus rate of the with profit
fund does not equal the ABR then the amount of pension
payable will decrease. Most with profit annuities offer a
minimum guaranteed level of pension.
Tax Free Cash
Tax free cash must be withdrawn at outset then the residual
fund is exchanged for a series of payments. Once an annuity
has been purchased there is no further entitlement to
tax-free cash.
Income
Annuity payments are taxed in the same way as described
under ‘Lifetime Annuity’. Income will increase or decrease
in payment depending on fund performance relative to the
ABR.
Death Benefits
The option of what type of death benefits to include must be
made at outset. The options available are the same as under
the Lifetime Annuity.
Advantages
● You will receive an income for
life, and you can elect for your spouse/partner to receive
an income or lump sum less tax upon your death.
● Tax-free cash is available at
outset.
● Charges are taken at outset
and are reflected in the annuity rate offered. The with
profit fund deducts charges before bonuses are declared.
● The contract is simple to
understand and there is minimal paperwork needed to start
the payment of benefits.
Disadvantages
● The selected income level is
not guaranteed and is subject to future investment returns.
● Any options to provide
benefits on death must be selected at outset and will result
in a lower initial pension payment. These selected benefits
cannot be altered in the future.
Suitability
With Profit annuities are most likely to suit individuals
who want some guarantee on their pension payments but also
want the potential to benefit from future investment return.
They therefore suit individuals with low to medium attitudes
to risk and security. They also suit individuals who have
relatively small pension funds and who will be heavily
reliant on their pension income.