Let’s consider the benefits of a with profits annuity over a conventional annuity. With a conventional annuity you get a secure guaranteed level of income payable throughout your retirement. With a with profits annuity you can combine the advantages of an income for life with the potential advantages of investing in a fund that itself invests in a range of fixed interest, property and shares. Income from a with-profits annuity can vary and is not guaranteed, but policyholders will benefit from any future profits in the fund, or share in any of the losses in the fund. This means that your annuity income may fall as well as rise, so they are only suitable for people who can afford to take some form of risk. With-profits annuities have the usual annuity options, namely single or joint life, with the choice of guaranteed periods and annuity payment frequencies.

A with profits annuity combines the advantages of an income for life with the potential advantages of investing in the stockmarket. The with-profit funds smooth ongoing investment returns, ironing out peaks and troughs, and they provide the potential of a growing income, with the security and peace of mind normally associated with annuities. Looking at the longer term, with-profits annuities should actually help to hedge against inflation. Mind, there are disadvantages; first, future annuity payments will fall if accrued bonuses are lower than expected. Increases in future life expectancy can be also passed on to the planholder through reductions in future bonuses. And, with-profits annuities are more complex arrangements, but provide investors with the potential for income growth if they are prepared to accept and run with the additional risks.

Pension annuities; get more, and higher UK annuity rates as a possible result. Some tips on getting a better outcome with your pension annuity. First, you could retire later, and this will give your pension fund the opportunity to increase in value over time and potentially yield more annuity income. Plus, annuity rates are usually higher the older you get which will improve your annuity income too. Of course, you could take your tax-free cash entitlement, and take up to 25% of your pension fund as tax-free cash. Tax-free equals more cash in your pocket.

Then again, you could consider taking tax-free cash but deferring your pension, If you can afford it, leaving the remaining 75% of your pension fund invested. It could grow in value and provide a larger pension annuity income in the future. Of course, if it’s invested in the stockmarket, it could potentially fall in value as well. Don’t forget to recover any lost pension plans; a forgotten plan can really help to increase your income. You could start your search using the Pension Tracing Service. In addition, you could look at transferring old pensions; if there are still a few years remaining before you retire, think about transferring pension plans which aren’t doing well. The value may recover with better fund management.

Of course, when it comes to buying your annuity, there is a golden rule, use the Open Market Option (OMO) to shop around for the best UK annuity rates and don’t necessarily take the annuity rate offered by your current pension provider. It is possible that your pension plan has Guaranteed Annuity Rates (GAR) built into it; some older-style pension plans come with GAR’s which could be far higher than current UK annuity rates. If that’s not enough to consider, there is your health. You could use your health to boost your income, for example, if you smoke or you’re overweight, or of you suffer from ill health. If so, you could qualify for higher annuity rates from an enhanced annuity. Even more so if you suffer from a serious medical condition.

You might want to think about a with-profits annuity. These are invested in an insurance companies with-profits fund and have the potential to provide a rising annuity income if the fund performs well. You’ll also be guaranteed a minimum income. But they can be risky, and your income could drop. To cap it all off, you could simply defer your annuity purchase. Older people generally get higher pension annuity rates so the longer you leave it the better off you might be; but watch out for the annuity income you’ve missed in the meantime. 

New research reveals that around 5m investors hold with-profits policies that are, it is being suggested, ”doomed to fail”. Apparently, over £150bn is invested in these troubled funds according to Matthew Morris, who claims to be a specialist with-profits adviser. He suggests that prospects for those with pensions, endowment, or with-profits investment bonds in these funds is “bleak”. We suggest that you might wish to act because if you are in a poor pension fund the best annuity rates at retirement won’t really help you.

This research, undertaken by exitwith-profits.co.uk attempts to identify the good, the bad and the downright ugly with profits funds within that particular sector. Mr Morris states that there are 35 different insurance companies in the UK offering with-profits funds. Some are actually closed funds, some are open, some offer conventional with-profits investment plans, others have some unit-linked options, some are funds which are 100% invested in gilts, others offer a much more balanced portfolio, some have guarantees built in and others do not. Further, he suggests that some funds are really pretty good, some quite toxic: the only problem is individual investors don’t realy know much about which is which.

This research undertaken analysed detailed information from Morning Star, the leading actuaries AKG, annual returns published by the regulators (FSA) as well as the life insurers own information that they have published detailing the strength and holdings of each with profits fund. From this exitwith-profits.co.uk has compiled a list of funds they consider most at risk. These include Axa Sun Life, Pearl Assurance, Scottish Widows, and Equitable Life.

Mr. Morris adds that it’s true not all companies’ funds are actually doomed, but enough of the market has bombed out to cause immense great concern for millions of policyholders. However, the with-profits actuary at Scottish Equitable has disputed the findings made by this report, stating that they would strongly deny that theirs is a fund that is doomed to failure. The bonus rates paid on this fund had increased in value over the past five year period, and should continue to rise in future, and, many of the investors in this fund hold valuable guarantees which give them a fixed growth rate of 5.5% a year, or a guaranteed annuity rate.

If you do hold a with profits pension fund it might be worth checking out it’s viability. You might be better off moving it.

We are all being told that independent financial advisers (IFA’s) want to sell more pension annuities. Good news, but can they handle it? Are they up to speed with all of the complex products in the market? There are many technical issues to understand and not all IFA’s do, even though they might claim that they do.

IFA’s need to know a great deal to be effective and give best advice in the retirement planning market, and the complexities of legacy pension accumulation old-style products are quite vast and wide ranging but to be able to give best device all these technical issues need to be known and understood. Do they all really know their annuity from their elbow?

Do they know which type of conventional annuity is appropriate? Should it be single life, Joint life, level or escalating (and at what rate? 3% fixed, 5% fixed, RPI). Should they include a guarantee in the annuity quotes they prepare for you? Then of course we have the enhanced annuity (or impaired life annuity) to consider. We now have 13 providers of these type of products; do IFA’s know who they all are and the type of information they need?

And then we have with-profits annuities? Are they really any good? How do they work? What anticipated bonus rate (ABR) should be applied? What precisely is an ABR? How does the recently launched  Prudential Income Choice Annuity work compared to a straightforward with-profits annuity?

Yes, there is a lot to consider; both for the IFA and for the client. It is not just about getting annuity quotes to find the best annuity rates. Thought has to be given to the type of annuity and the options available to ensure the correct solution is selected.

A guaranteed pension annuity can mean taking risks, and there are pitfalls with some of the flexible annuity products on the market. So, should you opt for safety or take a risk to increase your retirement income?

American life insurance company, The Hartford, pulled out of the UK pensions and annuity market recently, and whilst you could be forgiven for missing this news, it did sent ripples through the financial world. One of their most popular products, a variable annuity, crumbled in the face of huge market volatility and poor longer term interest rates. Fears were raised about the future of this flexible style of retirement income product, which is designed for those people who want to play their chances in the investment market, but still need the important reassurance of some guaranteed annuity income.

Variable annuities are essentially something of a middle ground between the absolute security of a fixed pension annuity and the risk of an income drawdown arrangement, which is very much dependent on stockmarket movements but is very flexible. Unlike fixed annuities, the annual income that is provided by variable annuities can be increased if the invested pension fund grows well. But if the fund does rather badly, the guaranteed income will not drop.

It sounds good, but there are some pitfalls. For starters, the guaranteed fixed income you get will initially be as much as 30% lower than a traditional pension annuity, on standard annuity rates. Should the fund grow, this income will rise, but that growth will depend on wider market scenarios, and the pension fund requires much more management. Typical fees for this come to between 0.5-1.5% a year, but they can total as much as 3% annually.

There is also the cost of the guarantee (insurance policy) that assures that the fixed income element of the plan is maintained. However, the economic crisis we have witnessed put underwriters on their guard and these guarantees now cost more. When you get massive stockmarket volatility the price of the guarantee increases quite significantly, and once this price gets too high, the product just doesn’t really work.

Indeed, the combination of rising costs and the fiendish complexity of the make up of these products is causing the providers of them problems. IFAs are reluctant to promote them because they are difficult to explain, and even then, until the cost of the income guarantees fall, they remain too expensive for most people. It’s just not as simple as getting annuity quotes and looking for the best annuity rates.

However, some UK providers are still selling variable annuities, with a correctly positioned and correctly priced product still having a place in the market. It is not really a shrinking market; it’s viable and growing, especially in the current economic climate. People are searching for alternatives to falling pension annuity rates but are still looking for some security.

For those who are looking for an alternative at retirement, a with-profits fund such as the Prudential’s with-profits annuity is an option. Like a conventional pension annuity, these pay a guaranteed annual income and, like a variable annuity plan, they will pay out more if your pension fund does especially well. However, any extra payment you get will be in the form of a bonus, and these bonuses have been subject to dramatic cuts lately.

A riskier option that you might consider could be to split your pension fund between a fixed pension annuity and an unsecured pension (previously income drawdown). If you want some equity exposure you can get it through an income drawdown plan, and if you want some security you can get it through a conventional pension annuity. You can buy a bit of both, and it could be more efficient.