What is a guaranteed annuity rate?

This content was reviewed and approved by Marc Perry.

Read on to learn about guaranteed annuity rates along with the benefits and the downsides in the UK.

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

What is a guaranteed annuity rate?

The rate of an annuity is what determines how much you get annually. A guaranteed annuity rate (GAR) is a rate promised by your pension provider that determines how much retirement income you could receive if you use your pension to buy an annuity.

The rate is usually written into the terms of older pension policies and may be higher than annuity rates available on the open market. If your pension has a GAR, it’s important to understand its value and any conditions attached to it before transferring your pension or choosing how to take your retirement income.

How do guaranteed annuity rates work?

A guaranteed annuity rate sets the rate your pension provider must use if you choose to convert your pension into an annuity, provided you meet the terms attached to the guarantee.

The rate is applied to the value of your pension pot to determine how much guaranteed income you could receive each year.

Let’s take a look at this example:

If you have a £100,000 pension pot and a guaranteed annuity rate of 10%, you could receive:

• £10,000 a year
• Around £833 a month

If comparable annuities available elsewhere offered a rate of 6%, the same £100,000 pension pot would provide around £6,000 a year.

In this example, the guaranteed annuity rate would provide £4,000 more in annual income.

A guaranteed annuity rate would fix the rate you receive, regardless of current annuity rates. However, it’s worth bearing in mind that the terms attached to guaranteed annuity rates can vary between pension policies. Be sure to check exactly when the guarantee applies and whether any conditions need to be met.

Is a guaranteed annuity rate worth keeping?

A guaranteed annuity rate can be valuable when it offers a higher level of retirement income than you could obtain from an annuity on the open market.

However, the highest guaranteed rate will not necessarily be the best option for everyone.

Factors to consider include:

• The guaranteed rate offered by your existing pension.
• Current annuity rates available elsewhere.
• Whether health or lifestyle factors could qualify you for an enhanced annuity.
• Whether the GAR comes with restrictions or specific retirement dates.
• Whether you need flexibility over how and when you access your pension.
• Any benefits you would lose by transferring or changing the policy.

Before giving up a guaranteed annuity rate, it can be worth comparing the value of the guarantee against your wider retirement options.

How do I know if my pension has a guaranteed annuity rate?

Guaranteed annuity rates are generally associated with older pension policies and may not always be clearly labelled as a “guaranteed annuity rate” in your paperwork.

Check your pension policy documents for references to:

• Guaranteed annuity rates or GARs.
• Guaranteed pension rates.
• Retirement annuity contracts.
• Section 226 policies.
• Guaranteed retirement benefits.
• Special guarantees or safeguarded benefits.

You can also contact your pension provider and ask whether your policy includes any guaranteed benefits and what conditions apply.

It’s worth checking before transferring, consolidating or accessing an older pension, as making changes to the policy could mean giving up valuable guarantees.

What are the benefits of a guaranteed annuity rate?

The main benefit of a guaranteed annuity rate is that it may provide a higher level of retirement income than the annuity rates currently available on the open market.

Because the rate was agreed when the pension was taken out, some older policies can offer particularly valuable guarantees. This could mean receiving more income from the same pension pot than you would by purchasing a new annuity elsewhere.

However, the value of a GAR depends on the terms attached to your policy and the options available to you at retirement, so it’s important to compare these before making a decision.

What are the downsides to a guaranteed annuity rate?

A guaranteed annuity rate can sometimes provide a lower rate than is currently available on the open market. Open market annuity rates are affected by market conditions at the point you buy, so you may be able to get a better deal depending on market circumstances.

As well, if you have medical conditions that make you eligible for an enhanced annuity, then you may be better off choosing this. Enhanced annuities can offer better rates for those with certain illnesses, those who are smokers or are overweight. If you think you might benefit from an enhanced annuity, then you may want to speak to a retirement advice specialist. They can help you to understand which options you have available, and which would be best for you to consider, based on the factors currently known.

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Do you have a guaranteed annuity rate?

Knowing whether you have a guaranteed annuity rate from one of your pension providers may not be as simple as just looking. It can often be hidden in the terms and conditions and not necessarily named “guaranteed annuity rate” but instead under a different term such as the Section 226 policy.

Using a retirement advice specialist may be able to uncover any guaranteed annuity rates associated with your pension and provide you with the best options.

Should you transfer into a guaranteed annuity rate pension?

Deciding whether to take a guaranteed annuity rate on your pension all depends on the best financial option for you. If you have a guaranteed annuity rate with one pension provider, but you have found that you’re now eligible for an enhanced annuity, then it may not be worth it.

Similarly, it may be that there’s a better rate available on the open market, or you’ve got a guaranteed annuity rate you didn’t know about with another provider.

Our retirement advice specialist service can help

If you need to identify where your pensions are, and whether you may have a guaranteed annuity rate, our retirement advice service can help. Learn more today and see how we can help you.

Guaranteed annuity rate FAQs

Need more information about guaranteed annuity rates? See the answers to some of the most commonly asked questions below.

Are guaranteed annuity rates still available?

Guaranteed annuity rates are much less common today and are generally associated with older pension policies, particularly those taken out several decades ago.

If you have an older pension, it’s worth checking the policy documents or contacting your provider to see whether any guaranteed benefits are attached.

Can I lose my guaranteed annuity rate (GAR)?

Yes, in some circumstances. You could lose a guaranteed annuity rate if you transfer your pension to another provider or take your retirement benefits in a way that does not meet the terms of the guarantee.

Some GARs may also only apply at a particular retirement age or within a specified timeframe, so it’s important to check the conditions before making changes to your pension.

What happens to my guaranteed annuity rate if I transfer my pension?

Transferring a pension that has a guaranteed annuity rate will usually mean giving up that guarantee.

Before transferring, you should compare the value of the guaranteed income you could receive with the benefits and retirement options available through the new pension. Depending on the type and value of the guarantee, you may also need to take regulated financial advice before transferring.

Is a guaranteed annuity rate worth keeping?

It can be, particularly if the guaranteed rate provides a higher retirement income than the annuity rates currently available elsewhere.

However, this will depend on your individual circumstances. You may also need to consider factors such as your health, whether you could qualify for an enhanced annuity, the conditions attached to the GAR and how much flexibility you want when accessing your pension.

Is a guaranteed annuity rate the same as an annuity guarantee period?

No. A guaranteed annuity rate determines the rate used to calculate the income you receive from an annuity.

An annuity guarantee period relates to how long payments are guaranteed to continue after the annuity begins, including what may happen if you die during that period.

Although the terms sound similar, they refer to two different features.