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With Profits Annuity – A valuable alternative

These are no longer being offered by any provider but we have left the following description for information

How a with profits annuity works

Put Simply, With profits pension annuities combine the payment of an income for life with the potential for growth as well as some protection from inflation.

  • Your fund will be invested in the insurance company’s With Profits fund
  • You will be asked to set the Assumed Bonus Rate/Bonus Anticipation Rate (ABR/BAR) level for a With Profits annuity. Effectively, you are being asked what bonus you expect to be declared from the With Profit fund at the end of the year. The normal parameters are between 0% and 6%
  • When setting your ABR, the company will pay you this bonus in advance, throughout the course of the first year. If, at the end of the year, the bonus rate declared is the same as your assumption, then for the second year your income will be broadly the same
  • If the bonus rate declared at the end of the year is lower, then the company need to recover the additional amount they have paid out and will reduce your second year’s income. The opposite is that if the bonus is higher than expected then your second year’s income will increase
  • The higher your ABR, the higher your first year’s income. Conversely, the lower the ABR, the lower the initial income. However, a lower ABR creates a bigger potential for increases in future years. For example, on a bonus anticipation rate (BAR) of 5% it would give you a high annuity now
  • Your income will be linked to the performance and subsequent bonuses declared by the With Profits fund

You can choose to have a Single Life or a Joint Life annuity. Joint Life Annuities will furnish your partner or spouse with the income should you die before them. Guaranteed period is also one of the options – you can select the annuity to be paid to you and/or your spouse for five or 10 years – irrelevant of what happens to you.

Where will your money be invested in a With Profits fund?

With Profits Annuities are written in the With Profits section of the insurance company’s With Profits fund. They are typically considered a ‘cautious’ investment. A typical asset split is:

This diagram shows the asset mix of the Aviva Life & Pensions UK Ltd With-Profits Sub-Fund as at December 2017.

The finer details

  • One big advantage of the With Profits Annuity is that it can be converted to a conventional annuity in the future (once the annuity has been in payment for 12 months with the same provider). One would convert if, for example, annuity rates in general rise or to consolidate a period of high bonus payouts
  • A positive return can been achieved on a With Profits annuity even during some of the worst periods of UK investment history. This is partly because all With Profits funds maintain a ‘surplus’ that can be used to subsidise lean times. (The company can dip into a reserve pot to maintain bonuses in periods of poor growth, which is known as the ‘smoothing effect’)
  • The life expectancy assumptions for With Profits annuities are lower than for conventional guaranteed annuities, which result in a higher income for the same investment return. In other words the rates used for With Profits annuities tend to be better than those used for conventional guaranteed annuities
  • One of the main advantages of a With Profits annuity is that it provides the potential to combat the effects of inflation without the associated costs of a conventional inflation linked annuity. This means that to buy guaranteed increases from a conventional annuity reduces your starting income significantly, and can take a long time before you ‘break even’ when compared to a ‘level – non increasing’ income. The With Profits annuity can provide the same as a level annuity now, with the potential for increases
  • Another way of looking at a With Profits annuity is that on retirement it may be reasonable for you to expect to live for another 20 or 30 years. If you were investing money over such a long term would you normally want some equity (stocks and shares) exposure in your portfolio? The With Profits annuity provides this
  • The risk is that if the Assumed Bonus Rate you set is not declared in a particular year then you could expect to see your income fall for the next year. However, you set the Assumed Bonus Rate and can be conservative with your assumption, thus reducing the risk

Minimum pension fund: £5,000 (after taking any tax-free cash)


  • A guaranteed income at a certain minimum level
  • Growth potential with Anticipated Bonus Rate (ABR) and inflation (The lower the ABR, the greater the potential for higher increases in the future)
  • Annual review allows you to convert into a different type of annuity after 12 months
  • Over the longer term, the potential for growth could keep your income ahead of inflation (depending on fund performance, inflation and the ABR chosen)


  • Although your income has the potential to increase, it could also go down or even fall below the amount you started with
  • Past performance is no guide to the future so increases to income are not guaranteed

Contact us for more With Profits annuity advice.


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    Why take Drawdown advice?

    The Financial Conduct Authority (FCA) produced a report called the Retirement Outcomes Review (MS16/1.3) in June 2018 which commented on how benefits were being taken since the Pension Freedom and Choice legislation was introduced in April 2015.

    Final Salary Pension Schemes

    This will effect you if you have a deferred Final Salary Pension plan or Defined Benefit Pension. If you are a deferred member, i.e., you have left your employer but the pension is not due for payment until your normal retirement date (65?), your right to a Cash Equivalent Transfer Value (CETV) may be affected.

    Budget 2014 – The key changes for annuities

    Using a Fixed Term Annuity or Drawdown will allow you to access 25% of your fund as a tax free lump sum and leaves the remainder of your benefits to be accessed under the further changes proposed from 2015. Therefore, in the interim, this leaves the door open for your options.