With profits annuity

lolly5648

Could somebody tell me what a 'with profits' annuity is? I was reading an article and it mentioned that you get a higher starting rate than with a conventional annuity.

Thanks

EdInvestor

With a conventional annuity you give your lump sum to an insurance company which then guarantees to pay you an income for life.You lose the capital (subject to various bells and whistles attaching to different types of ordinary annuities).

With a With profits annuity, your money is instead invested in the insurer's With profits fund in the hope that it will generate more income over the years because it is exposed at least partly to risk based assets like shares and property, unlike a conventional annuity where the money is invested in gilts.

Thus the starting rate is higher and it is hoped that the income will be higher over the years as well. However this has not worked out in many cases and lots of WP annuitants have found their income going down.That is the risk.

IMHO the only WP fund that is worth considering is the one at the Prudential.But a basic problem with WP annuities is that even though you are taking a risk, you still lose the capital.By comparison, if you use income drawdown, you still keep and control the capital, so can minimise risk.I would always choose drawdwon rather than a WP annuity for anyone who wants an alternative to an ordinary annuity.

lolly5648

Thanks EdInvestor for explaining so well. I am seeing my IFA early December and I like to be well prepared before I see him so that I can decide which route to go down. I will probably go for income drawdown but read something about a WP fund and it sounded interesting.