How do these contracts work exactly? 1. With-profit endowment with a guaranteed annuity option. 2. Unit-linked pension funding for cash with no additional sum assured and variable expense charges. The question then asks about the Investment risks etc for these contracts. Any help on describing how these contracts work?
Hi Snowy Under an endowment you make regular payments to the endowment provider, who invests your payments. If you survive to a certain date you will receive a cash sum, the minimum level of which is guaranteed when you take out the contract. If you die before the date of the payout, your relatives may receive a death benefit. As this is a with-profits contract, the insurer may increase the cash sum you will receive if the company and your investments do well. So you could take out a contract that allows you to make payments until your intended retirement date, when will receive a payout. The guaranteed annuity option mentioned in the question would allow you, if you wanted, to convert your payout into an annuity on terms defined when you first took out the contract eg £20 of cash per £1 of pension. Under a unit-linked pension plan you make regular payments to the pension plan provider. They invest the money in unit-linked funds. The value of your units may go up or down. At retirement you receive a cash sum equal to the value of your units at that time. You may then need to buy an annuity with that cash sum. You won't know how much each £1 of pension will cost until you come to buy the annuity ie the terms are not guaranteed in advance. The contract in the question says there is no additional sum assured, so if you die before retirement your dependants will probably just receive the value of the units at that time. These contracts are covered in Subject CA1, so if you have taken this subject already it's probably worth having a look in there, but I hope this gives you the broad idea.
