A with-profits annuity works in much the same way a normal annuity - by investing a sum of money, the borrower receives a regular income back over the course of some years, often until they die. However, a with-profits annuity differs in that it is linked with an investment fund. The performance of this fund therefore dictates fluctuations in the income you receive from the annuity.
In a with-profits annuity, the insurer gives bonuses to the customer as a way of adding their share of the investment fund profits. There are two types of bonuses in a with-profit annuity: annual and final. Annual bonuses are added once a year, although not all insurers give annual bonuses. Final bonuses are added when your policy matures, although it may be less if you decide to cash your policy in early. If the investment fund performs poorly, the insurer may not give customers bonuses, or 'smooth' the bonuses by giving smaller amounts in years when the fund performs well, in order to top up bonuses in less successful years.
The investment fund may be invested in a range of different things. Depending on your insurer, these investments can be in property, equity, government bonds or company shares. How the money is invested does vary between companies which means that those looking to purchase a with-profit annuity should look carefully at the lender's investment fund beforehand.
There are a range of reasons why with-profit annuities are considered a viable alternative to a normal annuity. Users can agree an Anticipated Bonus Rate with most of the main lenders - if the investment fund performs at or above this rate, the borrower could end up with more money than they would with a normal, non-profit annuity.
There can, as with any other investment, be a risk of financial loss. If the customer chooses to set their Anticipated Bonus Rate quite high, while they could potentially increase income, they also increase the chance of the investment fund underperforming this level and therefore possibly losing out. Due to the fact that the investment fund relies on the stock market and economy, with-profit annuity rates and bonuses are subject to more fluctuation than traditional annuities and unless otherwise specified they offer no income to spouses after the death of the borrower.
More Information:
Seeking expert advice and a whole market overview is the only way to be completely certain that you're getting the best
annuity rates, whatever the type of annuity.
Categories
