Choosing a With Profits Fund for Your PensionVictoria Cochrane
June 16, 2009 — 1,374 views
Saving or investing for the future primarily to ensure a pension income can be achieved in many ways. Some people choose to pin their future income hopes on just one method, whilst others like to spread the risk and choose several different investment options.
For example, someone may choose to invest solely in buying property hoping to benefit from gains in the value of the purchased property or properties over a number of years, while using rents to cover the cost of the mortgage until it is paid off. Other people may opt to build an amount of savings in a bank or building society from which they can withdraw the interest as income, or alternatively may prefer to speculate on the value of stocks and shares.
However, a mixture of risk is the best approach and therefore using more than one method may or can be the most prudent way to ensure that some form of income is forthcoming during retirement years.
A With-Profits pension annuity is a product that is designed to provide a retirement income. It is an alternative to a level annuity, the latter of which traditionally had offered no protection against inflation. In exchange for a lump sum the product provider guarantees to pay an income for life. The income of a With-Profits annuity depends on the performance of the With-Profits fund, so has the potential to provide a higher income than a level annuity.
The amount paid each year depends upon the bonuses declared. However, bonus amounts cannot be guaranteed as they will depend primarily upon the performance of the fund, but to protect against poor performance many investment companies offer a guarantee that income will not fall below a specified amount.
The primary reason that the With-Profits annuity may be a better alternative than a level annuity comes from the potential protection against the effects of inflation. Dependent upon how long the policyholder remains alive, and the rate of inflation during that time, the value of their income could drop in real terms with a level annuity, whereas a With-Profits annuity could provide an increasing income over a number of years. However, this is not guaranteed and income could fall, unlike a level annuity.
Additionally, With-Profit funds ensure that when the stock market is performing well some of the profits made that year are held back in order to support the fund when the stock market is under-performing. As a result, this makes changes in income less volatile than an annuity direct invested in the stock market. Most With-Profits funds do not invest entirely in the stock markets but hold a diverse range of assets. Income may also drop, however, only to a guaranteed minimum level.
If you are in the process of planning for your impending retirement future then a With-Profits annuity policy could be an option, but you should seek professional advice before buying such a product.
This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.
About the Author
Victoria Cochrane writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.