pension guidance service

What is a Guaranteed Annuity Rate?



Posted on: 2nd January 2019

If you have a pension with a guaranteed annuity rate, you may receive a higher income when you retire. But what is a guaranteed annuity rate and how does it work?

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 10per 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.

Tip: 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.

How do I know if I have a Guaranteed Annuity Rate?

Finding out if you have a guaranteed annuity rate is not always easy. It is unlikely that you will find the phrase “guaranteed annuity rate” in the paperwork. Reading through that may not be of any help. The best thing for you to do may be to contact your pension provider and ask whether your pension has a guaranteed annuity rate or not. If you feel like you won’t get anywhere or do not understand the information you receive, you could also get in touch with the Pensions Advisory Service. They will also be able to assist.

Taking your Guaranteed Annuity Rate

If you would like to buy an annuity with a guaranteed annuity rate, there is one major restriction. The restriction is that you may only be able to buy it on a specific date. It may be the date in which you chose to retire when you set up the pension, which is called your selected retirement date. This would typically be on your 60th or 65th birthday. Or it may be anytime from your selected retirement date. However, it is extremely important that you don’t miss this date. If you do, you won’t have the option of taking advantage of the guaranteed annuity rate.

You can only receive the guaranteed annuity rate if you take your pension with the pension company you saved with. If you shop around for a pension income or take your money out using pension freedoms, then you will not receive the guaranteed annuity rate.

Tip: 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.

Talk to Haven IFA

Let’s be honest, all this pension talk can be rather overwhelming! What helps is having the right people by your side to talk you through your options. By talking to an independent advisor at Haven IFA, you are guaranteed to find yourself headed down the right path to the best retirement plan possible. To find more about our services, get in touch and see how we can help.