Guaranteed Annuity Rates (GAR)

A guaranteed annuity rate does exactly what it says. Irrespective of current market annuity rates it is guaranteed to pay you a predetermined rate. Guaranteed annuity rates (GAR) came as an additional add-on to pensions a number of years ago. They offered to lock into a rate which was reflective of the rates at the time, with the promise that if rates wentdown, this rate could still be exercised. If the rate had gone up you could forego the guarantee and take a market rate, therefore they were pretty much a win win.

Annuity rates were certainly more favorable some years ago and in fact have been in constant steady decline since. Guaranteed annuity rates attached to most policies are therefore extremely valuable when compared to the open market rates of today. It’s not uncommon to find GAR’s at 10%, this means a pension of £100,000 would provide £10,000 of guaranteed annual income for life. The current rates for a 65 year old are around 5.3% or £5,300 per year.

Giving up these guarantees isn’t usually therefore recommended.

In more recent times, there have been more requests to transfer out of these benefits. The main reason being the new pension freedom rules. Pension monies used to purchase an annuity are usually lost from the estate. This means that on death of the annuitant, the insurance company keeps any remaining money and it’s not passed back to the estate (unlike income drawdown where remaining assets can be passed on). Annuities also don’t provide any flexibility to take ad-hoc lump sums. They’re designed to provide a regular lifetime income and not be used as an investment.

The pension freedom rules have essentially given retirees back control of their savings, as long as they’re not used to buy an annuity. A GAR is therefore suited to someone who wants a guaranteed lifetime income but isn’t concerned with having flexibility over their pension. Given that GAR’s are usually extremely favorable, transferring away from such schemes might not be the best long term option.