Conventional annuities are based on fixed interest investments, which provide a fixed income. So once the conventional annuity is purchased, there is no potential for growth from the underlying investments. However, as a with-profits annuity is invested in a with-profits fund, there is potential for additional income to be added in the form of bonuses.
There is however, a greater degree of risk, since the income level is dependant on the bonuses declared. The level of risk depends on the Anticipated Bonus Rate (ABR) you select.
When you take out a with-profits annuity you select the ABR, which is ususally somewhere between 0%-5%. The higher the ABR, the higher the initial income. If the insurance company declared bonuses higher than your selected ABR, your income will increase. But, if they declare a bonus rate lower than your ABR, your income will reduce.
If you choose a high ABR, it is likely that your initial income would be higher than a conventional annuity. So, even if declared bonus rates were marginally lower than the selected ABR, it would take some years until the with-profits annuity would have reduced to the level of a conventional annuity.
It is possible to select an ABR which provides the same starting income as a conventional annuity. Typically, you would need an ABR of 3%-4%. If subsequent bonus rates exceed this ABR, then the income would increase. This method can provide a means of protecting your income against the effects of inflation, but still provide a relatively high starting income.
Some companies allow you to alter the ABR, so if you don't need all the income now, you can select a 0% ABR, which would provide around 50%-60% of the income of a conventional annuity. At a later date, you could either increase the ABR or convert the annuity to a conventional annuity.
There is, of course, an element of risk with a with-profits annuity. However, over the long term, the performance of this type of fund, with the right company, is likely to perform at a rate greater than a fund consisting purely of fixed interest stocks, such as gilts, as you would have with a conventional annuity.
If you want to know more about with-profits annuities and see illustrations and past performance data from a number of companies, or if you have any questions or queries contact us online or call us on 0800 011 2713 without obligation, or request a annuity quote. online.
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