This is a type of personal pension where contributions are invested in a with profits fund. This fund shares in the profits of the insurance company offering the pension. Each year bonuses are added to the investment, either by an increase in the price of units, or by allocation of extra units. In years where the insurer doesn't make profits, a bonus may not be paid.
Once declared these bonuses cannot be removed and are seen as one of the attractions of with profits investments.
This annual declaration of bonuses is known as 'smoothing', and protects the pension investor, to some extent, from the ups and downs normally associated with stock market investments.
Contributions are used to buy units in an insurance company's with profits fund. The value of these units will increase annually, by an amount that depends on the investment performance and profits of the insurance company.
On maturity a terminal bonus may also be awarded. Unitised with profits plans are seen as a halfway house, mixing together the safety of a traditional with profits fund with the potential of unit-linked investment achieved with some risk, while not subjecting the investor to the full risk of stock market investments.
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