This annuity is invested in Prudential’s with-profits fund and consequently
annuitants share in the future investment gains or losses of the fund. Investors
can choose the starting level of income between a maximum and minimum amount.
Every year the annuity income is recalculated to take account of the actual
bonuses paid and this means that in future years income can increase or
The Income Choice Annuity has a guaranteed secure level of income below which the
annuity will never fall. This is initially equal to the lowest starting income
available for the option selected.
The keys to understanding the mechanics of the Income Choice Annuity are the
following two terms:
The required smoothed return (RSR) is a rate of return used to calculate the
level of starting income. The higher the RSR, the higher the starting income.
The declared smoothed return (DSR) is the actual bonus added to the annuity at
the end of each year. If the DSR bonus is higher than the RSR, the annuity
income will increase, whereas if it is lower the annuity income will reduce.
In practice, the RSR required to give an income that matches a level annuity is
about 4.5%. This means that the Declared Smooth Return must be higher than this
if future income payments are to increase.
Potential for income growth
Future annuity payments will fall in value if future DSR’s are lower than the
Increases in future life expectancy can be passed on to the policyholder through
changes to survivor bonuses
Past investment performance provides no guide to future performance
If too much income is taken in the early years it may result in lower income in
Joint life options
Smoothed investments returns
With-profit funds are not as transparent as unit linkd funds
This website is run by William Burrows, is for information only and does not provide specific financial advice.