Legal & General has added a with-profits annuity option to its conventional annuity product aimed at...
Legal & General has added a with-profits annuity option to its conventional annuity product aimed at giving customers more flexibility and allowing them to mix and match the components.
Under the with-profits option, customers choose an anticipated bonus rate. The level of income will fluctuate each year depending on the rate of bonus anticipated and the actual bonuses subsequently declared.
Andy Agar, pensions marketing director at Legal & General, said: "The rate of bonus is important as once it has been chosen it is set as long as the annuity payments continue - regardless of what happens to the actual investment returns in the future. If the anticipated rate chosen is higher than the actual bonus declared, income will reduce."
At each anniversary the income payment is worked out for the year, first by deducting any temporary bonus that was payable only for the previous year, then by reducing the resulting pension by the chosen anticipated bonus rate. Any new annual and temporary bonuses are then added. A lower anticipated bonus rate will likely give a lower income at the start but also mean the income is likely to increase over the years.
In one example Legal & General provides, based on an initial with-profits annuity of £10,000pa with a bonus anticipation rate of 3%, the customer could see a pension level on year two of £10,497.08pa. This is assuming an annual bonus of 6%, bringing the annuity level to £10,291.26, plus the temporary bonus of 2%pa adds an additional £205.82.
By year four, with an annual bonus of 4% and no temporary bonus declared the pension level payable from the third anniversary is £10,592.95pa.
A comparative example uses a bonus anticipation rate of 5%, which would lead to a pension level of £10,297.14pa for year two and £9,999.09pa on year four. Charges for the with-profits annuity option are included in the annuity rate declared and there is a fixed commission rate of 1% of the sale price.
By the end of this year, investment linked and with-profits linked annuities will have a 20% market share worth £1.5bn, according to the Annuity Bureau.
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