An Explanation Of With-profits Annuities

Working in much the same way as a normal annuity

, a with-profits annuity provides customers with a regular stream of income over the remainder of their life or agreed amount of time after they invest a lump sum of money. However, with-profits annuities link their returns to an investment fund which therefore affects the rate of income the borrower receives.

The insurer can choose to give with-profits annuity customers a bonus as a way of giving them their share of the profits made by the investment fund. There are two types of bonuses that the insurer may choose to add: final, or annual. Calculated once a year, as the name suggests, annual bonuses are not given by every insurer. Final bonuses are added when a policy matures although may be considerably less if taken before this date. If the fund linked to the annuity performs badly, bonuses may not be given; in other cases, insurers keep a share of the profits for years where the investment fund performs badly to 'top up' the bonuses of customers.

There are a number of different ways in which your money is used in the investment fund. Some of the most common investments are equities, property, cash, government bonds and company shares. These investments vary between lenders which means that those looking to purchase a with-profit annuity should look into what a range of different companies are investing in and how they are performing before they purchase.

There are several benefits to having a with-profit annuity instead of the traditional non-profit type. One of these reasons is that they can, in fact, be more profitable than normal annuities; if the investment fund performs at or above the Anticipated Bonus Rate that most of the main annuity providers allow borrowers to set, bonuses received could mean more money than a non-profit annuity.

As with any investment, there can be a risk of financial loss. As the customers are often allowed to set their own Anticipated Bonus rate as high as they wish, having a high rate heightens the chance of the investment falling short of this rate and therefore potentially giving the customer less money than they had expected. Bonuses and rates of with-profit annuities are subject to fluctuation which means an unreliable income and in the event of the death of the policy holder, the annuities offer no income for a spouse unless previously specified.

by: Elizabeth Bebbington

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