With-profits investment

Annuity

An annuity is a product that you buy from a life insurance company. You usually buy it with your pension fund, but some can be bought with other money that you may have from savings or elsewhere. The annuity will pay you a regular income throughout your retirement. Whilst you might think that you could be better off just living off the money as savings, annuities are specifically designed to guarantee you an income for the rest of your life. An annuity is a lifetime commitment, and once taken out they cannot usually be cancelled, or any alterations made to the plan.

Assets

An asset is a type of investment. Different types of assets include equities (company shares), gilts (loans to the government), corporate bonds (loans to companies), property or cash and cash alternatives. These assets have different levels of risk, which means some have the potential to provide greater returns than others, but with the increased risk that the value of your investment may decrease and you may get back less than the amount you invested. In a With-Profit Fund, we invest your money into a broad range of assets called the asset mix.

Asset mix

In simple terms, we invest your money into a broad range of assets called the asset mix. The value of your investment depends on the mix of assets in the fund and how each performs. The fund will always hold a mixture of higher and lower risk assets to achieve its objectives. The value of your investment can go down as well as up and is not guaranteed and you may get back less than the amount you invested.

Basic sum assured

The basic sum assured attracts regular (also known as reversionary or annual) bonuses which are used to distribute profits to the policy. Once a regular bonus is added it cannot be removed from the policy. For policies with a maturity date the required premiums must have been maintained to receive payment of the basic sum assured and bonuses. If the premiums have not been maintained a reduced amount will be paid.

Conventional with-profits

Conventional with-profits contracts have a basic sum assured to which bonuses are added. The basic sum assured is the minimum amount of life assurance payable on death; for endowment contracts it is also the minimum lump sum payable at maturity.

Endowment

The specific features of an endowment can vary depending on the type of policy bought. As an example though, a ‘low-cost endowment’ was a product that combined life insurance and investment in one package, with the aim of providing a lump-sum to pay off a mortgage at the end of the term. The intention was that the endowment policy should grow to produce a lump sum large enough to repay the loan in full at the end of the pre-agreed period, normally 25 years.

Sales of low-cost endowment policies have been discontinued with Aviva and many other providers.

Investment bond

An investment bond is a product that allows to you invest a lump-sum of money. On average, you will need a minimum of £5,000 and unlike other products you may not be able to top it up. It should be considered a medium to long-term investment (at least 5 to 10 years), and there can be penalties for withdrawing money in the first 5 years. The value of your investment can also go down as well as up, and is not guaranteed and you may get back less than the amount you invested.

You can choose to spread your lump-sum across a range of different funds. Funds allow investors to pool their money together, to take advantage of buying in bulk, spreading the money across lots of different investments and gaining access to an expert who would normally be too expensive to ask advice from on your own. All funds have different investment objectives and levels of risk.

Natural income/Fixed income

Under the With-Profit Income Fund option (previously available through Portfolio, our investment bond) the regular bonus is paid out as an income, either natural or fixed. Natural income aims to maintain the initial amount allocated to your investment in the fund. Under this option, your income will vary with the bonus rates. The fixed income option allows you to choose the level of income you receive but depending on the amount you choose, you may be taking out more money than your bond is making. This could reduce the value of your investment and you may get back less than the amount you invested.

Pensions

Most pensions that are not based on final salary are quite simply long-term investments that help you plan for retirement. The money is collected together in a fund and the pension provider will invest this fund on your behalf in order to help it grow. You get tax relief on the payments you make, and once you retire you can use your fund to buy an income for life (usually called an annuity) from a life insurance company. This income will be paid to you on a regular basis. Tax rules may change in the future.

Pensions are designed for you to make any or all of the following payments:

• Regular payments throughout your working life
• One or more single payments
• One or more transfer payments from another pension plan.

If you are employed, your employer can also make regular or single payments and you can choose to have some of your National Insurance contributions invested in your pension instead of being used towards your State Second Pension, this is known as contracting out. Please be aware however that from April 2012 you will no longer be able to use contracting out as the government has announced certain tax changes. Payments have to remain invested, without access, until you at least reach the minimum retirement age, which is normally 55. Please remember, the value of your pension fund can go down as well as up and is not guaranteed and may be worth less than the amount paid in.

Unitised with-profits

For unitised with-profits policies the policy value is represented by the bid value of units. Regular bonus is added to an investment by increasing the price of the units whilst the number of units held remains the same, subject to any additional investments being made.

WC02157 01/2012