With Profits Annuity
Anyone looking for the highest possible retirement income will need to go for something other than a conventional annuity. A with profit annuity provides a regular income plus the potential of an increasing income as the rest of your pension fund will be connected to investments.
A with profit annuity generates an income through bonuses paid each year accumulated via the investments made with the with profits fund. There is an element of risk, of course, as investments can go down as well as up.
A with profits annuity is invested in the pension company’s with profits fund. This means that the income connected to the fund will go up or down according to how the companies fund performs.
This type of product is not normally considered suitable for someone who needs a solid guaranteed income when they retire, and is generally thought to be better suited to people who have a considerable pension fund, who have the financial resources on which to rely if their annuity does not pay off, or who simply understand the risks and value of the investment approach.
Life companies will attach a minimum income level to a with profits annuity, meaning there is a bottom below which someone’s income cannot fall even if no bonuses connected to the with profits annuity materialise.
The annuitant will of course have to accept a level of risk, as any kind of investment typically can go up as well as down. Getting independent financial advice can help someone identify what is right for them, particularly if they are unsure whether or not something like a with profits annuity is appropriate for them.
Although with profit annuities are quite similar to unit linked annuities there is a major difference. A unit linked annuity holder will not benefit from what is known as the smoothing effect, which refers to a reserve pot of cash the annuity provider can dip into to maintain someone’s bonuses when growth is slow or particularly poor.
With profits annuities can be reviewed, allowing you to convert to a different type of annuity in the future.
