The case for with-profit annuities

In spite of the recent recovery in the UK stock markets annuity rates remain low. Pension annuity rates have fallen by 45 per cent over the past 15 years. There are two key factors that have caused annuity rates to slump these are falling yields and increased life expectancy. Annuity providers fund their annuities by investing in long-term bonds, which are currently yielding their lowest returns for 30 years because demand from big institutional pension funds has soared. This has driven up prices and caused yields to fall.

Some financial advisers argue that conventional annuities now offer such low returns that choosing an annuity linked to fund performance is likely to make you better off over the long term - even if the fund suffers periods of poor performance.

Non-profit annuities provide a guaranteed income for life and unless an escalation option has been selected the income from the annuity will remain static. With many pensioners now facing longer life expectancy many are worried that this static income will not keep pace with inflation over what could be as much as 20 years in retirement.

People can do little about increased life expectancy or the demand for bonds from pension funds - but they can choose what sort of investments their annuity is linked to.

With Profits Annuity

A with profits annuity gives the pensioner a choice of starting income with the potential for growth as well. Linking their income to a With-Profits Fund gives it the potential to go up unlike a level conventional annuity income, but with less risk than a unit-linked annuity.

Key Benefits of With Profits Annuities

Choice of starting income ' At the outset of the annuity policy the pensioner can choose the starting level of the income within certain parameters.
Ability to change the income if their needs change ' with profit annuity providers allow policyholders to change the payments on certain anniversaries.
Benefit from the performance of the with profit fund.
A secure level of income ' some with profit annuity providers have a 'secure level' which is a guaranteed amount they will pay no matter what the performance of the with profits fund.
Switch to a guaranteed annuity ' most providers allow you to switch out of the with profits fund into a conventional non profit annuity. Certain conditions may apply.

Disadvantages

Although your income has the potential to increase it could also go down.

Past performance is not a guide to future performance. Increases to income are not guaranteed.

How it works in more detail

The income is linked to the With-Profit Fund to give it the chance to grow over time. At least once a year, the annuity provider look at how the With-Profits Fund has performed If it's done well, they may be able to use profits to help increase your income. They don't share all of the profits each year In good years, they hold back some of the profits to use in years when the Fund doesn't perform well. This is called the 'Smoothed Return'. Each year, they announce your share of the overall profit from our Fund.