With Profit Pension Annuity
What is it?
A policy purchased from Insurance Company or mutual, which pays a level of income, linked to the performance of the Insurance companies With Profit Pension Fund.
Who is it for?
This option may be applicable where an individual wants to relinquish investment control of their pension fund and prepared to take some risk in exchange for a possible increase in income.
How does it work?
A ‘with profit’ annuity allows the pension to share in the performance if the chosen provider’s with profit pension fund. The pension income may alter each year depending on the level of growth achieved by this fund.
The level of pension income may therefore go down as well as up.
If the return on the with profit fund is ahead of the level selected at the outset, the annuity will increase. However, if the return is lower than the level selected at outset, the annuity will fall. By selecting a realistic assumed investment return, a reasonable balance is likely to be achieved between the initial kevel of income and the possibility of future increases.
There are certain income combinations which are selected at outset, but the inclusion of these benefits will affect the level of pension at outset.
Options include:
- Single life pension
- Pension with a provision for a surviving spouse
- Guaranteed Pension is to be paid for at least a minimum term of years (generally 5 or 10) even in the event of the annuitant’s death.
Purchase of an annuity is a once in a lifetime choice- once purchased control of the pension fund is lost. However there is a continued involvement in the performance of the pension Provider’s ‘with profit’ pension fund and therefore the level of income received can fall as well as rise. Benefits once selected cannot be changed.
It may be possible for those with impaired health or who smoke to obtain better annuity rates.
What is the tax position?
Any pension income paid through the annuity will be treated as earned income and therefore subject to income tax at the individual’s margin
