With profits annuities – an attractive retirement income solution

With improvement in longevity, Legal & General believes that with profits annuities will increasingly be of more interest to advisers as an alternative option to conventional annuities, for those customers who are prepared to accept an element of risk.

A with profits annuity offers customers security, in the form of a guaranteed minimum level of income but also provides the opportunity for income growth. So as life expectancy improves, the investment potential offered by a with profits annuity may help to counter the impact of inflation on pension income over the longer years of retirement.

To help advisers, Legal & General has produced a new guide for them to use with their customers which outlines how with profits annuities work. In addition, there is a supportive questions & answers booklet that helps to address some of the main concerns and issues that customers often raise when considering a with profits annuity. There is also further information available for advisers at the Legal & General Adviser Centre. This includes a calculator which enables an adviser to get an idea of the possible effects inflation may have on different estimated levels of income.

Tim Gosden, head of annuity product development for Legal & General's individual annuities business said; "People do not appreciate how long they are likely to live in retirement. They may have to rely on their pension for 20 years or more. This is a long time to live on a fixed level of income provided by a conventional annuity for example, particularly given the likely impact of economic changes over that period. Exposed to the ravages of inflation, a customer's pension income could soon become insufficient to cover increases in the cost of living.

Even during a period of low investment returns, the income from a with profits annuity would still not fall below the minimum guaranteed level set at the outset."

With profits investment returns are not guaranteed so there is an element of risk for the customer. However the with profits concept of smoothing investment returns means that in turbulent market conditions the income stream is less susceptible to dramatic fluctuations in value.

Tim Gosden continued: "With profits annuities may appear more complicated than conventional annuities but the underlying concept is straight forward. We hope the new literature and website will help advisers to clarify and explain the benefits of with profits annuities so dispelling some of the myths and negativity.

Given recent economic reports we believe that with profits annuities will become a more attractive option to customers in the future. For those customers who are perhaps not totally convinced that a with profits annuity is right for them, Legal & General also offers the option for customers to spilt their investment so their annuity income is a mix of with profits and a conventional annuity."