What is a Guaranteed Annuity Rate?
By Joseph Spiers
Learn how Guaranteed Annuity Rates (GARs) work, why they matter and what to check before transferring or taking your pension.
If you have an older pension, you may have come across the term Guaranteed Annuity Rate (GAR). It can be an important feature of a pension policy, particularly when you are approaching retirement and considering how to turn your pension savings into a regular income.
But what exactly is a Guaranteed Annuity Rate, how does it work, and why could it be important when deciding what to do with your pension?
Understanding your pension's benefits before making a decision can help you avoid accidentally giving up valuable guarantees.
What is a Guaranteed Annuity Rate?
A GAR is a feature found in some pension policies that guarantees the rate at which your pension fund can be converted into an annuity.
An annuity is a financial product that can provide you with a guaranteed income, usually for the rest of your life, in exchange for some or all of your pension savings.
Normally, the annuity rate available to you is determined by factors such as your age, health and prevailing market conditions at the time you buy the annuity.
With a Guaranteed Annuity Rate, however, the rate is set out in the terms of your pension policy. This means that, provided you meet the relevant conditions, you may be entitled to use the guaranteed rate even if the rates available on the wider market are different.
For example, imagine you have a pension worth £100,000 and your policy contains a Guaranteed Annuity Rate of 8%.
If the policy allows you to use that rate on the relevant terms, an annuity based on £100,000 could provide an income of £8,000 a year.
This is a simplified example. The actual income available will depend on the specific terms of your pension and the type of annuity you are entitled to purchase. If you don’t know whether you have a Guaranteed Annuity Rate, speaking with a financial adviser can help you understand what your guarantee means and how it could affect your retirement income.
Why could a Guaranteed Annuity Rate be valuable?
The key benefit of a GAR is that the rate is agreed when the pension policy is established rather than being determined solely by the annuity market when you retire. These rates can be higher than rates currently available on the open market.
This means an older pension policy could potentially contain a valuable benefit that isn't immediately obvious from the current value of the pension fund.
For example, two people could each have pension savings of £100,000.
One of them has a pension policy established 5 years ago and receives a GAR of 4%. As a result they receive an income of £4,000 per year.
The other has a pension policy established 13 years ago and received a GAR of 8%. This historic and favourable guaranteed rate allows them to receive an income of 8% a year.
This is why it can be important to check your pension paperwork before transferring an older pension or deciding where to buy an annuity.…