What is a Guaranteed Annuity Rate?
If you use your pension fund to buy an annuity, you are guaranteed the rate that you will be paid. There was a time where if you had a pension that was not a final salary, then you would have to use it to purchase an annuity. An annuity provides a fixed income for the rest of your life. It is almost like the reverse equivalent of a fixed rate mortgage. Of course, instead of paying a monthly amount to a mortgage lender to borrow a lump sum, you hand over a lump sum and receive a monthly income.
With a mortgage, the higher the rate, the more money you have to repay each month. With an annuity, the higher the annuity rate, the more you receive from your annuity provider each month. Annuity rates are lower than they were in the 1990s. An annuity rate of over 15 per cent was common back then, but you’re likely to receive only a fraction of that these days.
If you have a pension with a guaranteed annuity rate, the pension company must pay you an income at the rate which has been set in the guarantee. And this will occur throughout the rest of your life. If the guaranteed annuity rate is 10 per cent, that is more than twice the current annuity rate for a healthy person.
Who offers Guaranteed Annuity Rates?
Pension Providers stopped offering guaranteed annuity rates some time ago. However, if you took out a pension any time between the 70s and 90s, your pension plan may include one.
The pensions that came with guaranteed annuity rates were typically sold before 1988. These pensions targeted those who were self-employed and workers who were unable to join their employer’s pension scheme. These were known as retirement annuity contracts, Sections 226 pensions or self-employed retirement annuities.
Please Note:
If you have an illness or a medical condition, you may be able to receive a better annuity rate than under your guarantee. It is something that is always worth looking into. However, do not give up your guaranteed annuity rate until you are absolutely sure.
