If you have an old pension plan which contains Guaranteed Annuity Rates then this section is for you. You have a potentially valuable option. Whether it is in fact of value to you will depend on your circumstances.
Guaranteed Annuity Rates
Some pension product providers in the 1980s and 1990s’ offered Guaranteed Annuity Rates (GARs) on their policies. The Guaranteed Annuity Rates were well below the then current annuity rates available. However, interest rates and inflation were much higher than they are today.
The Guaranteed Annuity Rates were used as an extra benefit, at no cost. This was because the view at the time is that they would never come into play.
But rather like a sunken ship that has been hidden for decades they have started to appear. Now that the water level (i.e. inflation, interest rates and investment returns) has continued to recede.
What if your pension scheme provides a Guaranteed Annuity Rate? Well this could provide you with a higher level of annuity income than you may be offered on the open market. You would just need to purchase your annuity from your existing pension provider.
It is, however, important that you check the terms and conditions attached to the Guaranteed Annuity Rate. Furthermore you need to establish that the annuity provided is suitable for your circumstances.
A standard annuity provides a guaranteed income for the rest of your life. A number of Guaranteed Annuity Rates are only available for annuities on a single life basis. This means that the annuity ends on your death. Wheras you could arrange a joint life annuity on the open market. This would then provide a continuing income to your spouse or civil partner).
A number of Guaranteed Annuity Rates are also only payable annually in arrears. That is, your annuity is paid just once a year, 12 months in arrears.
If you are in poor health you lose out by accepting a Guaranteed Annuity Rate. This is because you may be able to obtain a higher annuity rate elsewhere. A number of pensions companies provide enhanced annuities if you suffer from certain conditions.
What you should check
- When can the Guaranteed Annuity Rate be taken? Some pension schemes only offer the Guaranteed Annuity Rate at the scheme’s selected retirement date. It will not be available if you draw your retirement benefits before or after this date.
- Is there a schedule of different rates? Some pension schemes offer a schedule of different Guaranteed Annuity Rates. These vary depending on the age at which you take your retirement benefits.
- Is a joint life annuity available? You may want to include a continuing income for a nominated dependant, such as your spouse. If a joint life annuity is available, does the Guaranteed Annuity Rate still apply?
- Is an escalating annuity available? Does the Guaranteed Annuity Rate apply if you want to include escalation. This is an option whereby your annuity income increases each year to offset the effects of inflation.
- Do you have any health conditions? For example do you smoke cigarettes or have other lifestyle issues such as being very much overweight? An enhanced annuity quote might provide you with a better annuity rate than the Guaranteed Annuity Rate.
Links to more information on old pension contracts
- Retirement Annuity Contracts
- Section 32 Buy out Plans
- Guaranteed Investment Rates
- Pension Term Insurance
- Protected Tax Free Cash
- Hybrid Pension Schemes (or Underpins)
- With Profits Funds
- MoneyHelper notes on Guaranteed Annuity Rates
- If you need personal financial advice on Guaranteed Annuity Rates then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK
This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.
If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.