Guaranteed annuity rates (GARs)

“A locked in guarantee”

Guaranteed annuity rates

If your pension scheme provides you with a guaranteed annuity rate (GARs), the amount of income you receive could be much higher. This can be a significant benefit to you as the annuity rates offered under older pensions with GARS can be considerably higher than those currently available, thereby increasing your pension income.

It is, however, important that you check the terms and conditions attached to the guaranteed annuity rate, and that the annuity provided is suitable for your circumstances.

You can find out whether your scheme offers a guaranteed annuity rate and the terms and conditions that may apply by looking at the information you were given when you joined the scheme, or by asking your pension provider. Most schemes that offer a guaranteed annuity rate were marketed in the 1980s and 1990s, when market annuity rates were higher.

Some of the things you should look for when deciding whether to take up the guaranteed annuity rate are:

• When can the rate be taken? Some pension schemes only offer the rate at the scheme’s selected retirement date, not if you draw retirement benefits before or after this;

• If you want to include a continuing income for a nominated dependent, such as a spouse, does the GAR still apply?

• Does the GAR apply if you want to include escalation, so that your income increases each year to offset the effects of inflation?

It’s always a good idea to compare the income available if you take up a GAR with the income available if you shop around, especially if you may be eligible for an impaired life or enhanced annuity before you make up your mind.

Should you have a Guaranteed Annuity Rate applying to your pension it would be advisable to seek professional financial advice in order that you make the most of this important benefit.

RAC, SIPP and SSAS – what are they and what do you need to know?

Pensions can be a complex area for many. Outside of the “usual culprits” there are other less known pension types. Some of these pensions are no longer available as new pensions but some are still in existence, such as Retirement Annuity Contracts.

Here is an insight into three other types of money purchase pension schemes - retirement annuity contracts (RACs), self-invested personal pension schemes (SIPPs) and small self-administered schemes (SSASs).

• Retirement Annuity Contracts

  Retirement annuity contracts (RACs) were used by individuals who did not have access to an occupational scheme, or self-employed individuals.  RACs were effectively replaced by personal pensions on 1 July 1988. 

• Self-Invested Personal Pension 

  A self-invested personal pension scheme (SIPP) is a pension wrapper holding investments, which offers  greater investment flexibility than ordinary personal pensions. SIPPs became registered pension schemes on A-Day i.e. 6 April 2006.

• Small Self-Administered Schemes

  Small self-administered schemes (SSASs) are usually occupational money purchase schemes, typically used by small family businesses. SSASs are similar to SIPPs in that they have greater investment flexibility than ordinary personal pension but the trustees have more regulatory duties than SIPPs as they are scheme administrator.

If you retain or would be interested in setting up a SIPP or SSAS you will require financial advice in order to better understand the pros and cons of these schemes.  Please contact us and we’ll arrange a meeting with one of our Financial Advisers to discuss your requirements – we look forward to hearing from you.

Open markets option (OMO)

The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.

 The term OMO is now generally used to support a campaign, often led by the pensions industry and the media, to make sure people know the benefits of shopping around. The majority of people still don’t use the Open Market Option in large part because they don’t know they can or don’t realise the benefits of doing so. Retirees who don’t use the OMO and settle for the default deal offered by their pension provider, may be missing out on up to 20% more income from an annuity. This is especially important as retirees cannot change their annuity once it has been purchased.

 One of the main reasons that people can get more from an annuity if they shop around is that they may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity) which pays a higher income to people who suffer from a range of health conditions – anything from asthma to a serious heart condition. There are also other products available that may suit peoples retirement needs better than the default deal offered by a pension provider. One suggestion to make the most of the Open Market Option is to speak to an independent financial adviser who will explain the different options available at retirement.

 The Association of British Insurers has been working with the retirement industry to improve consumers' knowledge of the Open Market Option. This includes pensions providers making it much clearer to their customers that they can use the OMO and that they may get a better income by doing so. However, take up of the Open Market Option is still low and there are now calls from many to make it harder for a pension scheme to transfer into an annuity by default, thereby forcing people to consider their options.

Pension annuities

Pension Annuities - a guaranteed income

If you’ve saved into a pension during your working life, you need to think about how that money work can best for you in retirement. When you stop working, how will your pension provide you with the income you need?

One way is an annuity. This used to be the only option for most pensioners, but even now that more choices are available, annuities remain popular, even though annuity rates are at an all time low. So what are they, how do they work, and what are the pros and cons?

What are annuities?

An annuity is actually an insurance product. You pay a lump sum to a provider, who in turn agrees to pay you a regular income for the rest of your life. This income is guaranteed and does not depend on a limited pot of money, so if you live a long time you may get back more than you paid.

The big advantage of an annuity is its reliability: you will always have an income. The main disadvantage is that this income may be smaller than you could achieve by another method.

How much will my annuity pay me?

The size of the income paid to you by your annuity will depend on a number of things. The main factors are:

• How much you pay for it

• Your age

• The provider’s annuity rates at the time

• Your state of health

Other factors include whether or not you want the annuity to include guarantees or cover your spouse as well, or whether you want the income to increase with time. Even your postcode can be a factor. Annuity rates can also vary a lot between providers, meaning some may give you tens of thousands more than others over the course of your retirement.

An annuity that pays you more money due to health and/or lifestyle factors is called an enhanced annuity. 

It's hard to estimate how much you might receive each year without first speaking to an independent financial adviser. Your adviser can assess all your circumstances and search the whole of the market to find the best deal for you – as well as seeing if you qualify for an enhanced annuity or any guaranteed annuity rates.

Will my annuity cover my spouse?

A standard annuity will stop paying out as soon as you die. However, you can select a joint-life annuity, which means it covers both you and one other person (usually your spouse). This kind of annuity will continue paying out a smaller income (usually 50 per cent of the original amount) to your spouse until they die.

You can also choose an annuity with guarantees. A guarantee means the annuity will pay out for a minimum time period (e.g. five years), even if you die sooner.

What if I have a health condition?

If you’re considering an annuity, then for once it can be an advantage to have a health condition. There are a range of medical conditions that can qualify you for an enhanced annuity – meaning you’ll receive a higher annual income for the same money.

Qualifying conditions include cancer, high blood pressure, heart disease, diabetes and a long list of others. Lifestyle factors may also apply, such as being a long-term smoker. Even if you don’t think you’d qualify, ask your adviser to check for you – as many as 60 percent of annuity customers could be eligible.

Should I always shop around for the best annuity?

Usually, you can achieve better value from an annuity by looking beyond your existing pension provider. Finding a better product can often give you a significantly bigger income over the course of your retirement. However, always check with your adviser before switching to a new provider. Some pension pots come with a guaranteed annuity rate (GAR), which may entitle you to a very favourable annuity rate (some are worth many thousands more per year than standard annuities).

Often it isn’t easy to tell if your pension has a GAR – not every provider will draw your attention to this fact. Ask an adviser to find out whether you’re lucky enough to have one.

Is an annuity right for me?

There are many advantages to having an annuity, including predictability, security and simplicity. However, your income may not be as much as you hope for, and you won’t have the option of varying it if you suddenly find you need more money. You may want to ask your adviser to help you compare annuities with more flexible options.