A with profits annuity is an annuity that guarantees to pay you income for the rest of your life. You buy it with money from your pension fund.

These annuities pay a variable income linked to a with profits fund. Rather than basing your income only on annuity rates, your income is based, among other factors, on bonuses added to the plan throughout retirement. In turn the bonuses depend upon the profits and losses of the with profit fund.

By selecting a with profits annuity your income has the potential to increase over time, but it could also reduce if the investments don’t perform as well as expected. One year the investments may do very well, but the next could see them do badly. A with profits annuity aims to even out some of these fluctuations in the way it declares bonus rates. This is known as smoothing.

Pros

• Your income has the potential to increase over time.
• With profits annuities may provide some protection against inflation, depending on the anticipated bonus rate you choose.
• Smoothing could help reduce the risk of your income going up and down significantly each year.
• Most have guarantees, so your income may never fall below a certain amount.
• If you change your mind, you can normally swap it for a conventional annuity. There may be some penalties in doing this. 
• With profits annuities promise to pay you a regular income for life.
• You can customise your annuity to suit you:
  • You can arrange for your dependant to receive an income after you die. 
  • You can choose for some of the money you invested to be paid back to your estate, if you die within a set period of time.

Cons

• The amount of income you receive has the potential to decrease.
• Your income may be lower than from a conventional annuity. 
• Your income could go down if bonuses are lower than expected.
• Your annuity is for life. Once you’ve bought it, you can’t cash it in! 
• You may die before the income you have received reaches the full amount of the purchase price for your annuity.
• Unless you choose the option, your dependants will not receive a continued income after you die.

If you are nearing 50 and considering retirement, have a pension and you want the potential for your income to grow, this could be right for you. However, if you prefer to know what your income is each month and don't want to take the risk that it will go down then this may not be for you as there is the potential for it to rise and fall.

You can buy an annuity directly from an insurance company or through a financial adviser. Before you decide, carefully consider the options available on an annuity. Make your choice based on what you need now, as well as what you’re likely to need in the future. 

If you need more help choosing your annuity you could speak to your pension provider or an insurance company who may refer you to their advisers. You need to remember they may only be able to give information on their own products. If you want advice about the whole of the market, you’ll need to speak to an independent financial adviser.

Do your research - decide whether an annuity is right for you by looking at all the available options for funding your retirement and considering the pros and cons of each.

Shop around - you could get more from your income by shopping around for the best deal on the annuity market.

Start early - take your time to consider the options available on an annuity, choosing one that best suits your immediate and long-term needs. Annuity rates can change, if you buy now you may get a better rate than if you waited. However this could work the other way around as well, you may get a better rate by waiting. Remember, once you buy an annuity your money is locked in.

Don’t forget - you can normally take up to a quarter of your pension fund tax-free. Taking a tax-free lump sum will reduce the amount available to provide an income in retirement.

Check out and compare - the range of annuities and options. Whatever your circumstances or your health, you can find the one which best suits you.

Remember you’re in control - you have the final decision on all the choices you make.

Consider your attitude to risk - you can get more income by risking more, but you need to decide if this is for you.

Don’t be afraid to ask - if you have any questions about annuities generally, or about a specific product, make sure you get advice before making any decisions.