Updated: May 30, 2019

With-Profit Annuity

In this guide, we’ll be providing clear information to help you make an informed decision about whether purchasing with profit annuities is right for you.

Get Started
Ask A Quick Question

Ask A Quick Question

We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

FCA Logo
1 of 2
2 of 2 Send!

No impact on your credit score

Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: May 30, 2019

If, like many, you want to know how you can make the most out of your hard-earned cash but feel nervous about the potential risks associated with investments and pensions, then this article is for you.

In this guide, we’ll be providing clear and concise information to help you make an informed decision about whether or not to purchase with-profit annuities.

We’ll be covering the following areas:

What is a with-profits annuity?

A with-profits annuity is a type of annuity that pays out an amount of yearly income based on the investment growth of a connected with-profits fund, as well as the bonus rate anticipated when the policy was taken out.

Most with-profits annuity schemes reduce each year at a steady rate,

With-profits annuities explained

A with-profits annuity allows you to invest your pension (or part of it) into a pot (usually an insurance company that has a with-profits fund).

The company you have invested in will either perform well and make you money, or perform badly and lose you money.

A benefit of with-profits annuities is that, even if the investment underperforms and you lose money, you are usually guaranteed a minimum income for the rest of your life.

What is the minimum income you could receive?

The minimum income you receive is set at the beginning of your contract.

When you buy your with-profits annuities, you will be offered an assumed bonus rate (assumed bonus rate) based on your circumstances and preferences.

The scale is one to five. The higher the number, the higher the minimum payout. However, opting for a higher ABR could also mean a greater risk for loss in the future.

The lower the number chosen on the scale, the lower the minimum payout. Some people opt for a lower ABR and a minimum payout because there is a perceived lower risk.

Speak to a expert today

Get Started

What are the risks of purchasing?

There is an uncertainty that comes with buying with-profits annuities. If the investment underperforms, you may receive less money one month compared to the next.

Having a fluctuating income paid to you each month can also affect how much tax you pay. The payments are made regularly and, once you agree to purchase a with-profits annuity, there is no backing out.

For people who are looking for a predictable income, other types of annuities may be more suitable.

Make an enquiry for more information.

How does it work?

After agreeing to and signing a contract for a with-profits annuity plan, your pension, along with the pensions of others who are in the plan, will be invested into the plan.

The costs of running the insurance company’s business is deducted from the overall fund.

Any money left over is profit and this is shared out and paid to the with-profits investors.

The amount of income you receive each year is called the total gross annual annuity and this is reflective of:

  • The investment growth the fund has achieved
  • The bonus rate that you anticipated/agreed to when you started the policy

How is total gross annual annuity calculated?

You should receive regular statements which display and breakdown your monthly payment.

The total gross annuity can be made up of three parts:

  • The basic annuity guaranteed under the policy
  • The declared bonus annuity
  • The final bonus annuity

Although the amount you receive is dictated by a combination of the above three, you will receive your monthly payment as one sum.

If the company’s investment strategy doesn’t perform well, you will still receive your basic annuity.

When searching for the best with-profits annuity plans, be sure to compare the basic amount you will be guaranteed with each potential plan.

The pensions experts that we work with have access to hundreds of annuity plans across the UK.

They can take the time to compare each plan on your behalf and can recommend the best solution based on your circumstances.

How long does a with-profits annuity plan last?

There are some agreements that have a fixed period on them, which means that after that period has passed, say for example, 10 years, the agreement stops.

The amount of money you have in your fund at the end of the agreement period is known as your  maturity amount. Then it is up to you whether you purchase another retirement product or take the money as a cash sum.

If you join a plan that has no fixed term, then the annuity plan will pay out a retirement income until the end of your life (if you have a single annuity) or until your beneficiary dies (if you have a joint annuity agreement).

Should I get single or joint with-profits annuity?

A with-profit annuities plan allows the investor to decide at the start of the agreement, whether it will be a single or joint plan.

If you decide to opt for a single with-profits annuity plan with no added features, then when you die your beneficiaries will not receive any payments.

However, if you opt for a joint plan with value protected annuity, a lump sum will be paid to your beneficiary tax free, until they die.

The only exception to this is that if you die aged 75 or over, income from a joint plan will be added to your beneficiary’s other income sources and taxed as normal.

Can I get a with-profits annuity with any type of pension?

No.  With-profit annuity and any annuity in general, cannot be purchased with the below pension scheme:

Defined benefit

defined benefit pension is also referred to as a final salary pension scheme. The amount you receive from this type of pension is linked to the amount of years you worked for the company, although other factors such as your job role and the age you drawdown from your pension can affect this too.

If you have a defined benefit pension, the only way you could purchase a with-profits annuity is to transfer your fund to a defined contribution scheme.

However, a final salary pension scheme often comes with great benefits that could be lost if you were to transfer out of it.

With a defined benefit scheme, the financial risk also lies with your employer who agrees to pay you a guaranteed income. Therefore any losses or gains made by the company do not affect the amount you are paid throughout your pension.

Are there alternative retirement products?

Yes there are products or alternative routes for your pension plan. The level of income you receive from a type of annuity will depend on the provider that you use and the options that you select.

Alternative options with varying terms include:

Income drawdown plans

This route would allow you to use your pension pot as a source for retirement income, however, once your funds run out, your income stops.

At the beginning of the plan, the funds in your pension remain invested and managed which of course, comes with a risk.

Because investments can go up or down, the income you receive will vary depending on the fund’s performance, making it hard to predict how much you could make overall.

This could mean that potentially, if an investment goes terribly wrong or performs badly, you could lose your money.

Enhanced annuity

Some insurance companies/annuity providers provide enhanced annuity products to pension holders with a reduced lifetime expectancy.

These types of plans may offer a higher income which can appeal to someone who perhaps has a health condition or expects to pass away in the near future.

To be offered an enhanced annuity product you may be asked whether you:

  • Have been or are currently a smoker
  • Are overweight or significantly underweight
  • Have spent a significant part of your life in a hazardous environment
    i.e. around toxic chemicals or asbestos.

Purchased lifetime annuity

Purchased lifetime annuities (PLAs) can be bought with money that is not in your pension pot.

Some people choose this option as it allows them to invest money that was once in a non-eligible pension pot to invest.

Once a pension is taken and has left the pot, the money can be invested as you see fit but at your own risk.

Similarly to a lifetime or with-profits annuity, a PLA can provide income for the rest of your life.

There are some companies that also offer temporary PLAs for a fixed number of years or until your death if earlier.

The amount you receive as your retirement income through a PLA depends on your age when you purchased it.

Should I buy with-profits annuities?

If you are considering investing into a with-profits annuity scheme, it’s important that you understand the financial implications of your decision if the worst should happen and the investment decreases.

Whether this type of retirement product is suitable for you, largely depends on your own needs, personal circumstances and your preferences.

To feel confident about your decision and to get a comparison of the best available plans, always speak to a pension advisor.

They can discuss your options and using information provided by you, recommend the most financially viable or most suited route for you and connect you to the right provider.

Speak to a with-profits annuities expert

If you need more information or would like to talk to a professional who can explain more about with-profits annuity plans, please contact us.

A pension specialist will be happy to help with whatever questions you have and our advice is always confidential.
Call on 0808 189 0463. Alternatively, make an enquiry and a member of the team will be in touch.

Ask A Quick Question

We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

FCA Logo
1 of 2
2 of 2 Send!
Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

Get Started