An annuity is essentially a regular income for the rest of your life, and is usually purchased with your pension fund when you retire. The income you receive from an annuity depends on factors such as, for example, your age, how much you invest, your state of health, whether you buy a single or a joint life annuity, whether you want your income to remain level or increase over time, and so on. You don’t have to accept the annuity offered by your pension provider, and are free to shop around to find an annuity that best suits your circumstances.

Annuity Rate

This is the rate or factor which an insurer uses to calculate your income when you purchase an annuity. It is usually expressed as a percentage or a ratio.

For example: Mr X has a pension fund of £50,000 which he now wishes to use to purchase an annuity. His insurer is offering an ‘annuity rate’ of 5%. This means they will offer him an income for life of £2,500 per annum (calculated as £50,000 x 5% = £2,500).

If an alternative insurer were to offer an ‘annuity rate’ of 6%, Mr X would receive £3,000 per annum if he bought his annuity through them (£50,000 x 6% = £3,000).

Insurance companies/annuity providers sometimes express the annuity rate as a ratio. A rate of 9:1, for example, means that for every £9 of your pension fund you will receive £1 of income. Therefore, if Mrs X has a fund of £45,000 and is offered an annuity rate of 9:1, she will receive £5,000 per annum (calculated as £45,000 ÷ 9 = £5,000).

Guaranteed Annuity Rate

Some insurers may offer a ‘Guaranteed Annuity Rate’ which they will apply to your pension fund when you buy an annuity. This will usually be conditional on you buying an annuity from them at a specified age and/or on a specified basis. The ‘guaranteed annuity rate’ may or may not represent good value, as this will depend on 1. the guaranteed rate when compared to rates generally available in the marketplace, 2. the conditions/basis attaching to the guaranteed rate, and 3. your individual circumstances, objectives and plans for the future.

Guaranteed Minimum Fund Value

Some pension plans, when they were set up, offered a guarantee that your fund value would be at least a certain minimum amount at a certain point in the future (usually at your stated retirement age). Such guarantees are usually dependant on a number of conditions that have to be met in return for the guarantee, and these would typically entail you paying in a set amount, at a set frequency and for a set period. If all the conditions are not met then the guarantees may no longer apply.

Guaranteed Growth Rate

Some pension plans, when they were set up, offered a guarantee that the growth in the value of your pension fund would be at a certain minimum rate. Such guarantees are usually dependant on a number of conditions that have to be met in return for the guarantee, and these would typically entail you paying in a set amount, at a set frequency and for a set period.

If all the conditions are not met then the guarantees may no longer apply.

Waiver of Premium/Contribution Protection

This is an insurance policy which aims to pay your regular pension contributions for you if you can’t pay them due to being unable to work as a result of illness or disability. After a specified period, which is often six months, the insurance company will pay your pension contributions for you until you are able to return to work, or even until you retire if you never work again.

Life Assurance

An insurance policy which, in return for the payment of a regular premium, pays a lump sum (or sometimes a regular income) on death within a specified term.

With-Profits funds

An investment fund run and managed by an insurance company, and which typically invests your money in a broad spread of assets in both the UK and around the world, including shares, property, fixed interest securities and cash.

‘With Profit’ funds have for many years been available to pension investors (as well as certain other savings/investment plans). The performance of your investment in a With Profits fund is determined by the returns the insurer achieves and the ‘bonuses’ they add to your plan as a result.

With Profit funds attempt to ‘smooth out’ the ups and downs of the stock markets by holding back money earned on investments in good years to support lower returns, or even losses, made in poor years.

Reversionary and/or Annual Bonuses

Depending on investment returns achieved, With Profits providers announce a ‘bonus’ which is then added to your plan. This is normally expressed as a percentage amount, and bonuses are usually declared annually. There is no obligation on the insurer to pay a bonus, but once added these bonuses cannot be taken away.

Some plans offer ‘guaranteed bonus rates’. As the name suggests, the bonuses are guaranteed to be at a certain minimum level, and are usually dependent on you meeting a number of conditions as set out in the terms of the plan. If the conditions are not met the insurer may reserve the right not to pay bonuses at the stated minimum level, or indeed any bonuses at all.

Terminal Bonus

This is an additional bonus which is paid, as the name suggests, at the end of a With Profits plan. This normally means when you take your retirement benefits, but could also be when you switch out of a With Profits plan for any other reason.

This is normally expressed in monetary terms, and represents a ‘final’ bonus which is due to you as a result of the overall performance of the With Profits fund over the period for which you have been an investor. It is effectively a payment of bonuses which your investment has earned but which have not yet been added to your plan.

There is no obligation on an insurer to pay a ‘Terminal Bonus’, and they can be removed by an insurer at any point before you end your plan.

Market Value Adjustment (MVA) or Market Value Reduction (MVR)

An MVA or MVR is a charge levied on investors who withdraw some, or all, of their money from a With Profits plan. The amount of that charge is determined by the insurer, and can be applied at any time at their discretion. Equally, the insurer can decide to remove an MVA/MVR at any time at their discretion.

MVAs and MVRs are usually levied during and following sustained periods of uncertain or poor investment returns, and are in fact designed to protect those investors who are staying in a With Profits fund from those who are leaving taking more than their fair share of the fund’s value with them.

That said, many insurers guarantee not to apply an MVA/MVR on maturity, and that usually means the retirement date stated in your plan.

MVAs and MVRs are generally applied as a percentage of the amount the investor withdraws. So, for example, if an insurer decides to apply a 10% MVA/MVR, then when an investor cashes in an investment worth £10,000 the investor will receive £9,000.

Death Benefits

These are the benefits that will be paid out to your nominated beneficiaries, dependants or your estate if you die before taking your pension benefits yourself.

Benefits can vary from one plan to another, and could for example be either or even both of the following:

  • Return of the fund value in full
  • Return of the premiums only (i.e. you will only get back what you have paid in, with or without interest).

The terms and conditions of your pension plan will set out the benefits payable on death.

If you have a ‘Life Assurance’ policy taken out in conjunction with your pension plan then the benefits from this should also be paid out on death, of course.