Guaranteed Annuity Rates

What is a Guaranteed Annuity Rate (GAR)?

A guaranteed annuity rate (GAR) is a feature found in some older pension schemes that can influence the income you receive in retirement. Understanding how a GAR works and whether it applies to your pension can help you make informed decisions about your retirement income.

A GAR offers a fixed rate at which your pension provider will convert your pension savings into an annuity. In some cases, this rate may be higher than what is currently available from providers on the open market, making it a potentially valuable benefit. However, it is important to evaluate whether the GAR is the best option for your circumstances, as there may be more flexible or suitable alternatives.

How does a guaranteed annuity rate work?

An annuity is a product that turns defined contribution pension savings into a regular income, either for life or for a specific term. Most annuity rates today reflect prevailing interest rates and market conditions. However, some older pensions—particularly those set up before July 1988—include safeguarded benefits such as GARs.

A GAR locks in a predetermined conversion rate between your pension pot and the annuity income you receive. For example, a GAR of 9% would provide £9,000 per year from a pension pot of £100,000.

This rate is unaffected by current annuity rates and is based on the terms agreed when the pension was originally set up. Because GARs were typically offered during periods of higher interest rates, they can exceed today’s market rates.

However, the suitability of a GAR isn’t determined solely by the income figure. Factors such as the availability of additional features and whether an enhanced annuity might be available elsewhere should also be considered.

Who is likely to have a GAR?

GARs are not included in all pension schemes. They are most often found in personal or workplace pensions from the 1970s and 1980s. If your pension dates from that era and you are approaching retirement, it is advisable to check for the presence of a GAR.

How to find out if you have a GAR

Pension providers are required to inform members about any safeguarded benefits, including GARs, as they approach retirement. Typically, this information is included in a retirement pack sent out around six months before the scheme’s selected retirement age.

You can also refer to your original pension documentation or check online if your provider offers digital access. Look for terms such as “retirement annuity contract,” “Section 226 policy,” “with-profits,” or “guarantee,” which may indicate a GAR.

If in doubt, contact your provider directly. They can confirm whether your policy includes a GAR and explain any relevant conditions.

Are there any limitations with GARs?

While a GAR can be highly beneficial, there are scenarios where it may not offer the best outcome:

• Enhanced annuities: If you qualify for an enhanced annuity due to health or lifestyle reasons, another provider might offer a higher income than your GAR.

• Alternative products: If life expectancy is a concern, products like income drawdown or fixed-term annuities might be more suitable than a lifetime annuity with a GAR.

• Limited flexibility: Some GARs may not allow for features like inflation-linked income or death benefits for a spouse or partner without affecting the guaranteed rate. In such cases, opting for those features might result in the GAR being forfeited.

Because GARs often include specific terms and limitations, evaluating your priorities and comparing your GAR to other available options is a key part of the decision-making process.

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