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 decrease.
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 and the guaranteed secure level of income will increase each year by 50 per cent of any increase in the Income Choice Annuity.
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 chosen RSR
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
Income flexibility
If too much income is taken in the early years it may result in lower income in the future
Joint life options
Smoothed investments returns
With-profit funds are not as transparent as unit linkd funds