What is a “with profits” annuity?

14th February 2012

When it comes to investing for retirement many people like to take a little additional risk with their portfolio with the hope of   increasing their retirement income. Traditional annuities are invested in relatively safe portfolios with the aim of ensuring that the annuitant receives a reasonable income amount, which is guaranteed for the remainder of their life. For some people however this amount may not seem like enough and they might choose a “with profits” annuity with the aim of potentially increasing their final income.

How does this work?

This type of annuity carries an investment risk but   offers the   potential of a   higher annuity income. In general you will be asked to choose an “anticipated bonus rate”, usually somewhere between 0-5% and if this bonus rate is higher than the declared bonus rate you will receive a larger income, if it is lower the income will be lower accordingly.

This type of annuity can be quite risky as it is entirely dependent on the market rate to provide you with the additional bonuses which you may be hoping to achieve from opting for this type of investment. If your investment reaches the pre-determined level of growth then you will receive a good return, the problems occur when that growth isn’t reached and your annuity income starts to decrease.

What benefits could I receive?

As with any market investment this type of annuity has the ability to provide you with an income that is greater than that of a traditional annuity. It is a much higher risk and therefore if your money is successfully invested the returns can be higher than that of traditional annuities which are usually invested in low risk investments such as gilts or investment bonds.

What disadvantages could it have?

Unfortunately the market is an unstable area of investment and this means that with the ups you can also have the downs. This type of annuity tracks the market and therefore if your investments were to decrease so would your annuity income, in fact the amount has the potential to decrease so much that it could end up significantly lower than a standard annuity income level. There is however usually a built in minimum income guarantee, below which your income would never fall but this amount would be significantly lower than the income available with a traditional annuity.

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