Liverpool Victoria Friendly Society has redesigned its with-profits pension annuity to allow annuity transfers under the open market option.
The open market option refers to annuitants being able to shop around for an annuity rather than staying with their existing pension provider. The previous version of Liverpool Victoria's with profits pension annuity did not support this and was only able to accept transfers from personal pensions. Now it can also take transfers from other types of pension, including occupational pension schemes and free standing additional voluntary contributions.
Pension funds that are transferred into the annuity are invested in Liverpool Victoria with-profits fund. Annuitants can choose to take income payments monthly, quarterly, half-yearly or annually. Investors choose an anticipated bonus rate and this level of income is guaranteed for the first two years. In addition, there is a guaranteed minimum income, so annuitants know their income will not drop below a certain level.
Annuitants who choose to base their income on the assumption that there will be no bonus rate get a lower level of income for the first two years, which will subsequently increase to reflect the actual bonus rate. For those who choose the highest anticipated bonus rate, the level of income may reduce after the first two years if the actual bonus rates are lower.
This with-profits annuity differs from conventional annuities in that it provides an extra safety net in the form of the guaranteed minimum income. This makes it suitable for more cautious annuitants, especially as some with-profits providers have been cutting their bonus rates after a poor investment year.
Unit-linked annuities may offer more potential for income to increase, but as they do not smooth out the movements in the stockmarket, they are more risky.