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  With Profit Annuities   "Higher income is possible with
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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   Annuity rates   Anticipated bonus rate
  How they work   Risk and reward   Future annuity transfer
  Cost of delay   Financial strength   With profit assets

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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
to live
Time Period of Delay
1 Year 3 Years 5 Years
55 28 14 yrs 13 yrs 12 yrs
60 24 12 yrs 11 yrs 11 yrs
65 20 11 yrs 9 yrs 9 yrs
FEMALE - years to breakeven
Age Years
to live
Time Period of Delay
1 Year 3 Years 5 Years
55 32 14 yrs 13 yrs 13 yrs
60 28 13 yrs 12 yrs 12 yrs
65 23 12 yrs 11 yrs 10 yrs
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 annuity quote.

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 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:

£10,000 x 1.04 = £10,097

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:

£10,000 x 1.02 = £9,902

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;

standard single rates smoker single rates
standard joint rates smoker joint rates
impaired life rates diabetes annuity rates
purchased life rates immediate needs rates
   With profit rate examples

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
ABR 2.5% ABR Max
Male 55 £4,895 £6,701
Male 60 £5,498 £7,024
Male 65 £6,334 £7,613
Male 70 £7,576 £8,463
FEMALE - level annuity, single life
ABR 2.5% ABR Max
Female 55 £4,866 £6,497
Female 60 £5,465 £6,806
Female 65 £6,297 £7,272
Female 70 £7,532 £7,971
JOINT LIFE - level annuity, 50% spouse
ABR 2.5% ABR Max
Joint 55 £4,600 £6,419
Joint 60 £5,102 £6,300
Joint 65 £5,796 £7,121
Joint 70 £6,808 £7,430
The above are examples of the rates available. Click the following for the full with profit tables and other annuity options.
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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.

Financial strength
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
Life company S & P TA (£bn) FAR FA (£m)
Legal & General AAA £120.0 7.1% £2,757
Prudential AA+ £163.0 7.3% £5,672
Norwich Union AA £200.0 8.9% £2,866
Scottish Widows AA £76.4 6.6% £1,521
Liverpool Victoria BBB £6.5 13.6% £541
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 annuity quote.

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
Life company Equity Bonds Property Other
Legal & General 50% 29% 21% 0%
Prudential 53% 26% 14% 7%
Norwich Union 53% 20% 21% 6%
Scottish Widows 51% 30% 11% 8%
Liverpool Victoria 62% 18% 15% 5%
Notes - Equity: stocks and shares; Property: commercial property;
Fix Int: fixed interest and gilts; Other: usually cash free annuity quote.

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.

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