Find the highest with profits
annuity for your pension.
With profit annuities
"Higher income is possible with
a higher risk from with profits"
A with profits annuity offers a variable future income that could be higher than a standard pension annuity. It is suitable if you have other pension income as the underlying rate is based on the with profit fund performance. The annuitant can select the anticipated bonus rate that determines the initial annuity income.
Introduction 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 standard
annuities, 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 pension annuities 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
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 standard annuities.
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 choosing 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 volatility,
there is plenty of time for the annuitant to plan and change
the ABR in the future.
At retirement the individual can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity and this includes a with profits annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.
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 readily available
so it is possible to gauge 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 annuity, 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:
MALE - years to breakeven
Time Period of Delay
FEMALE - years to breakeven
Time Period of Delay
Example - For a male aged 60 that
defers buying an annuity for 1 year, it will then
take him 12 years to recover the lost income due
to the cost of delay, or half of the annuitant's
life that remains free
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
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 pension 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.
When comparing the ABR to standard
level or standard escalating annuities, a different ABR should
be used. This is because the starting income for level pension annuities is much higher whereas an escalating annuity starts low and
rises in the future. Therefore, in the annuity rates table an
ABR of 2.5% and 3.5% is used
and 0.5% and 1.0% is used against the escalating annuity.
Annuity rates table - with profits
These rates tables are for with profit annuitants. For other
rates that are guaranteed try;
The following annuity rate examples compares the highest income
for an open
market option With Profits annuity for bonus rates at 2.5% and maximum (Max) on a single and joint basis.
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 and is on a level basis. The joint
life annuity and there is a survivors
pension of 50% for a female spouse. It assumes the annuitant purchases the annuity
for the ages from 55 to 70. There is no enhancement for medical conditions
as this is not possible for a with profits annuity.
MALE - level annuity, single life
FEMALE - level annuity, single life
JOINT LIFE - level annuity, 50% spouse
The above are examples of the rates available. Click the following for the full with profit tables and other annuity options.
By selecting an ABR of between 1.0% and 3.0% and assuming this
is lower than the declared bonus, the starting income is likely
to be higher than standard escalating pension annuities and have the
potential to increase in the future.
Case Study - with profits annuity
Mr. Jones is retiring aged
60 and is prepared to accept some risk as he has
other pension income. He has £100,000 in a
personal pension and could receive an income from
a standard annuity of £2,796 per annum with
RPI escalation. By selecting a With Profits annuity
with an ABR of 2.5%, the starting income would be
over 96% greater at £5,498 per annum.
If the bonuses declared average 3.5% per annum,
this figure will rise at about 1.0% per annum. Assuming inflation averages 4.0%, the RPI option will match the With Profits option for income after 24 years and total cumulative income received after 40 years, however, Mr. Jones is only expected to live for a further 24 years.
There are a number of ways of determining the financial strength
of providers. The simplest is the rates these providers are
given by independent credit rating agencies such as Standard
& Poor's or Moody's.
This is a measure of the capacity to meet policyholder obligations
under a variety of economic and underwriting conditions.
In addition information is available regarding the providers
total assets under management (TA), free assets (FA) and free
asset ratio as follows:
Life company financial strength
S & P
Legal & General
Abbreviations - S & P: Standard
& Poor's rating; FAR: free asset ratio; TA: total assets under management in £ billions;
FA: free assets (assets over liabilities of the
With Profit fund) in £ millions free
The total assets under management relate to policyholders investments.
The free assets relate to the assets of the life company and
the free asset ratio shows the percentage of the assets of the
company over the liabilities. The above are With Profit annuity
providers, but With
Profit strength applies to many more life companies relating
to their with profit fund.
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 leading life companies:
With profit asset allocation
Legal & General
Notes - Equity: stocks and shares;
Property: commercial property;
Fix Int: fixed interest and gilts; Other: usually
In general the financially stronger life companies with greater assets over liabilities can take greater risks and invest a larger proportion of funds in equities. Over the long term this should produce a higher return on investments and therefore place them in a position where higher bonus rates can be allocated to policyholders.
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 standard annuities 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 standard annuities.
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.