Who can benefit? If you want the highest income possible in retirement, you have other sources of pension income and are prepared to accept a higher risk than a standard annuity, consider a With Profits annuity. The annuity rates table is a guide only as rates change frequently. Please request a free annuity quote for an accurate income for you. For many people conventional annuities from their existing provider offer "poor value for money". At the other extreme pure equity retirement options are too risky. With Profit annuities can provide a high regular income today, with the opportunity for an increasing income in the future and should be considered if the annuitant wants their annuity to retain exposure to future equity gains without significant volatility. The income from a With Profit annuity results from the bonuses added each year and these are based on the underlying investments of the With Profits fund. Although this means there is an element of risk, over time the equity portion of a With Profits fund has outperformed gilts and fixed interest and this means there is significant potential for receiving more income from With Profits than a conventional (standard) guaranteed annuity. Before asking us for an open market option by completing our free annuity quote, find out more about the important aspects of a With Profit annuity (below). A With Profit annuity allows you to take a tax free lump sum and are flexible enough so that you can transfer to the with profits annuity provider's standard annuity in the future at a policy yearly anniversary.   • how they work • annuity rates table     • risk and reward • anticipated bonus rate     • cost of delay • future annuity transfer     • financial strength • with profit assets

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How they work
A With Profits annuity is designed as a long term retirement option running for 10 years or more. It is over this period of time that the full benefits of smoothed income and bonuses added due to equity performance can mean the annuitant will receive more income than a standard annuity.

A With Profits annuity as the name suggests is invested in the life company's With Profits fund. This means that the income received by the annuitant will move up or down in line with the growth rate of the fund and due to this risk, a With Profits annuity is not suitable for people that require a guaranteed income at retirement. However, most life companies set a minimum level of income below which the income cannot fall, even if there are no bonuses added.

This gives the annuitant the security that a minimum income will always be paid, yet still have the opportunity for an increasing income in the future. The annuitant selects the level of income by chosing the Anticipated Bonus Rate (ABR). This is the expectation of future bonuses paid and can be between 0% and 5%.

If the bonuses added for that year are greater than the ABR, the income will increase and if they are less, the income will fall. As With Profits smoothes out the effect of volatitity, there is plenty of time for the annuitant to plan and change the ABR in the future.


Risk and reward
A With Profits annuity with have some element of risk associated with the income paid, and therefore the annuitant must be willing to accept a level of risk, even if this can to a certain extent be chosen by the annuitant themselves.

With Profits annuities do not guarantee the level of income the annuitant originally selects using the ABR of up to 5%, unless they choose 0% below which the minimum income will not fall. As long as the bonuses declared by the provider do not fall below the ABR selected, the income will not fall. Therefore, the higher the ABR selected at the outset, the higher the risk of the initial income reducing.

To reduce the risk of a fall in the initial income, the annuitant should select an ABR that is less than the previous years bonus declaration. This information is readilly available so it is possible to gague the risk being taken when setting the ABR for that year. Of course, it is possible to change the ABR every year and this gives the annuitant some control of the risk being taken.

Cost of delay
Currently many people believe that standard annuities from their existing provider offer "poor value for money". Given that many of them already receive incomes from a final salary or public service schemes, they may not need the income from other pension arrangements they have accumulated such AVC, FSAVC, retirement annuity or personal pensions and therefore decide to delay purchasing a standard annuity.

At an individuals retirement date, by delaying the purchase of a standard annuity by a year, the annuitant will have lost one years income and this cost of delay is far greater than any possible increase in rates in a years time. The annuitant must also consider the benefit of enjoying the income now and for longer when they are healthy, as there is a greater likelihood of ill health the older the annuitant becomes.

For example, take a male or female with £100,000 in a pension choosing a level anuity, no guaranteed period paid monthly in advance, assuming that the existing fund continues to grow at 5.0% per annum (after charges) and retiring at ages 55, 60 and 65. By delaying either 1, 3 or 5 years it will take a number of years before a deferred higher annuity income will 'catch-up' with the income already paid, or number of years to break even. This time could be longer than the individuals life expectancy (years to live), or mortality as follows:

The above tables assume the fund is based on equities, it grows at 5.0% per annum (after charges) and that there is no improvement in the annuity rates in the future. If the fund does not increase during the delayed period, all of the above examples will not break even during the annuitants lifetime. The tables clearly show the effect of mortality drag by the annuitant not participating in the benefits of an annuity.

If the annuitant is not dependant on the income from their other pension arrangements and willing to accept a slightly higher risk, a With Profits annuity would allow them to receive an income now and therefore avoid the cost of delay. By selecting an ABR of 0.0%, the income will not fall in the future but is very likely to rise due to the fact bonus rates declared by life companies is between 2.0% and 4.0%.

Although the annuitant should always consider a With Profits annuity as a 10-year investment to maximise the return, the annuitant will still have the flexibility to transfer to that provider's standard annuity in the future, usually at the policy anniversary.


Anticipated bonus rate
The income from a With Profits annuity is dependent on the underlying assets in the fund so the income can go down as well as up. However, some providers have introduced a guaranteed minimum income below which the income from the annuity cannot fall to add more security for the annuitant, and this assumes the Anticipated Bonus Rate (ABR) is set at 0%.

Initially the annuitant can select the level of income based on the anticipated future bonus rate of between 0% and 5% of the pension fund. The higher the ABR, the higher the initial income paid. However, if the bonuses actually declared are less than the ABR, then the annuity income in the future will fall. It follows that if the bonuses are higher than the ABR, then the future income will increase.

For example, if the annual income is £10,000.00 and the annuitant selects an ABR of 3.0% and the actual bonus rate declared is 4.0%, the increase in the next years income is calculated as follows:

If on the other hand if the ABR is 3.0% and the actual bonus rate declared is only 2.0%, the decrease in the next years income is as follows:

The bonuses paid by the life company can be made up of reversionary bonuses and terminal bonuses. Some providers use the reversionary bonuses as the core allocation for pension income and enhance these each year by adding a terminal bonus, and this sets the bonus rate for that year. The bonus rates declared by the largest life companies in the UK for 2001 and 2002 are as follows:

annuity rates table
These rates tables are for with profit annuitants. For other rates try;
standard rates
smoker rates
diabetes rates
impaired rates
immediate needs rates
purchased life rates


SINGLE LIFE - with profits

The following annuity rates table compares the highest income for an open market option With Profits annuity and standard annuity. A pension fund of £100,000, after the tax free lump sum has been taken is used with the annuity paid monthly in arrears with no guaranteed period. It assumes the annuitant purchases the annuity for the ages from 55 to 70. No enhancement for medical conditions is possible for a with profits annuity.

With Profit assets
Over the long term higher risk equities have outperformed fixed interest securities. This means that to maximise the return for the policyholder in terms of higher declared bonuses and life company's profits, a With Profit fund must have a high percentage of equities. The following table shows the position of life companies in April 2000:

In the difficult period from mid 2000 to the beginning of 2003 the above position changed drastically with equities being reduced to between 30% to 40% of With Profit funds as a defensive measure against falling equity markets.

Future annuity transfer
Although it is possible to transfer to a standard annuity in the future offered by the same provider (not as an open market option) the With Profits annuity has not been designed with this intention. Therefore there is a higher risk that the transfer to a standard annuity would not generate a higher income for the annuitant in the future.

The reason for this is the way a transfer is calculated. It takes the original invested consideration, less all annuity payments made, less expenses and adding any investment returns over the life of the With Profits annuity.

When the returns on the With Profits fund are negative, such as with poor equity performance, this can have the effect of reducing the invested consideration. Coupled with a fall in gilt yields that typically occur when equity markets are falling, the effect can significantly reduce the income when transferring to a standard annuity.

Conversely, if equities are rising and there is less demand for gilts the investment returns on a With Profits fund will be higher and this would mean a much higher income if the annuitant decided to transfer to a standard annuity. Clearly timing would be important when considering this option.   Bookmark with: What are these?       resources   annuity pages   annuities   --------- select from --------- our services quotes & enquiries annuity directory your options open market option quote standard quote smoker quote diabetes quote impaired quote immediate needs quote with profits quote purchased life tax free lump sum with profits annuity smoker annuities diabetes annuities impaired annuity long term care immediate needs purchased life annuity annuity rates phased retirement income drawdown other annuity options annuity questions decision tree   --------- select from --------- advance or arrears annuity annuity quotes annuity rates annuity taxation anticipated bonus rate capital and interest capital protection complusory purchase deferred annuity enhanced annuity fixed rate escalation guaranteed period immediate needs impaired life level annuity medical conditions mortality mortality drag mortality profit open annuity open market option pension drawdown phased retirement purchased life RPI escalation single or joint life specialist advice staggered vesting survivors pension temporary annuity unit linked annuity with overlap with profits annuity with proportion   private pensions   pensions in retirement   --------- select from --------- appropriate pension buyout policy carry back relief carry forward relief FSAVC fund value insured pension money purchase pension fund pension term assurance personal pension private managed funds private pension scheme retirement annuity section 226 policy section 32 policy segmentation SIPP scheme stackholder pension   --------- select from --------- annuity annuity interest rate commutation compulsory purchase defined benefits defined contribution early retirement lump sum open market option pension drawdown pension withdrawal pension income phased retirement purchased life annuity retirement benefits staggered vesting tax free lump sum   employer pensions   pension terms   --------- select from --------- accural rate added years AVC approved scheme armed forces pension associated employers bulk transfer continuous service contracted in contracted out defined benefit scheme defined contribution dynamisation early retirement eligibility employer pension equalisation rules executive pension exempt approval final salary pension FURB scheme group pension headroom check hybrid scheme indexation limited price indexation MFR occupational pension public service scheme qualifying service reckonable service refund contributions relevant benefits revaluation salary sacriface SDC scheme SSAS temporary absence UURB scheme Winding up   --------- select from --------- concurrent membership contributions contributory scheme critical yield gross net contributions members pension rights non contributory normal pension age pension audit pension arrangement pensionable service pensions pensions review polarisation reduction in yield regular contributions retail price index retirement age scheme member state pension age tied agent