What is a Guaranteed Annuity Rate?

What is a Guaranteed Annuity Rate? by Georgina Stocker

What is an annuity

Using your pension funds to purchase an annuity will lock an income for the rest of your life. Typically the income you will receive is dependent on three things, pension pot size, gilt yields and any “additional features” you select at the outset – which can impact on the income you receive. Annuities are effectively the opposite equivalent to a mortgage with a fixed interest rate. Rather than paying the monthly premium to a mortgage lender to repay a lump sum, you are using the lump sum (your pension) in exchange for an income paid to you each month. The difference being that the annuity will be paid for your lifetime.

What is a guaranteed annuity rate?

Before the pension freedoms, pension plans that weren’t final salary had to be used at retirement to purchase an annuity.  Some older pension plans, typically those set up between the 1980s and 1990’s were set up with a Guaranteed Annuity Rate promising a set level of income to be paid at retirement. During the time these plans were created, annuity rates were much higher than those available on the annuity market today – making the rates on these plans very competitive and for some people, very valuable.

Having a pension with a guaranteed annuity rate means the provider promises to pay you an income set by this guaranteed rate, for the rest of your life. In comparison to an annuity purchase on the open market based on today’s rates – could mean your income for the guaranteed annuity rate is two or even three times higher.

How do i know if my plan has a guaranteed annuity rate?

As mentioned these plans are no longer available, however if you have an existing pension that was set up in the 80s or 90s – there is a chance it could have a guaranteed annuity rate attached. These types of plans were typically set up for self-employed individuals who were not able to become a member of an employer’s own pension scheme. On paper, these plans are rarely referred to as “personal pensions” and generally fall under guises such as “Section 226”, “Section 32” or “Retirement Annuity Contracts” (RAC’s).

The alternative is to contact the provider and ask this question or alternatively the Pensions Advisory Service, who will be able to provide clarification. 

What about the fine print?

It is worth bearing in mind that there is often a “fine print” attached to these types of plans, which can be a restriction for some. These plans in most cases will have been set up with a selected “retirement age” (normally from age 60 – 65) which will have been secured at the outset. In some cases providers will only allow this guaranteed rate to be paid at the set age on the plan, however some are more flexible, allowing retirement “from” the set age without having to for-go the guaranteed rate.

As some providers will only allow the guaranteed rate at the selected age, if you think you may have a plan with a guaranteed annuity rate, you should always seek the advice of an Independent Financial Adviser.

What do I need to think about?

The suitability of taking an annuity as a means of providing a set level of retirement income – should be taken into account as a part of your overall “retirement plan”. This consideration is similar to when assessing whether or not you should take the income on offer from your guaranteed annuity rate.

  • Guaranteed annuity rates are typically much higher than rates available from an open market annuity purchase. In effect, you are paying significantly less for a higher level of income to be paid for the rest of your life.
  • The guaranteed rate may only be available at a set age, with no flexibility to take this at an age of your choice (if this differs).
  • The income from this annuity will be guaranteed for the rest of your life.
  • Your pension will be paid for your lifetime and will not be determined by investment returns. Although this may not be suitable for everyone.
  • The guaranteed rate may only be available on a set basis – for example this income may be level or increasing each year, with or without an income payable to a spouse or dependant on your death. Similarly, depending on the provider you may be able to change these additional benefits without having to for-go the guaranteed rate.
  • Dependent on your state of health, you may be able to secure a higher level of annuity on the open market. Some annuity providers take into account illnesses and shortened life expectancy – which could give a higher rate.

This list is not exhaustive and taking a guaranteed annuity rate should be considered thoroughly as part of your retirement planning. To arrange a free, no obligation initial meeting with one of our advisers, email [email protected] or call us on 01482 219 325.