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With Profits
These link your income directly to the performance of the insurance company's With Profits fund. Typically, your income is made up of two parts
A minimum starting income - this is usually set at a low level. Unless investment conditions are very bad, you will usually get at least this much income. Some With Profits Annuities guarantee this.
Bonuses - The insurance company usually announces bonuses each year. Bonuses can be 'reversionary' (usually announced once a year and guaranteed to pay out for the duration of your annuity) and 'special' with new bonus rates being announced each year. The amount of any bonus depends on many factors, the most important of which is stock market performance. Some insurance company's may guarantee a bonus rate, for example 3% a year. Sometimes you can choose the guaranteed rate, but the higher the guarantee, the lower your starting income.
The starting income is based on an “assumed (or anticipated) bonus rate” (ABR) which you choose at the outset from a range set by the insurance company e.g. between 0% (which assumes no bonuses at all) and 5%. If the bonuses announced by the company are higher than the ABR your income increases, if it is lower your income falls. If you were to choose a 0% ABR your starting income will be the minimum and therefore will rise providing a bonus is declared. Your income is unlikely to fall, although it could if the stock market performance was very poor over the long term, unless the minimum income was guaranteed. An element of security is added however, due to the way with profits funds “smooth” returns to reflect the ups and downs of investment markets.
