What is a guaranteed annuity rate?

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If you have a pension with a guaranteed annuity rate, it can give you a higher income in retirement. Find out what a guaranteed annuity rate is and how it works.

What is a guaranteed annuity rate?

A guaranteed annuity rate means that if you use your pension fund to buy an annuity, you are guaranteed the rate that you’ll be paid. In the old days, if you had a pension that wasn’t a final salary one, you generally had to use it to buy an annuity. An annuity provides a fixed income for the rest of your life. It’s a bit like a fixed rate mortgage in reverse – instead of paying a mortgage lender a monthly amount to borrow a lump sum – you hand over the lump sum and get a monthly income.

With a mortgage, the higher the mortgage rate, the more you have to pay to the mortgage lender each month. With an annuity, the higher the annuity rate, the more you are paid by the annuity provider each month.

Over recent years, annuity rates have fallen, but in the 1980s and 1990s, they were much higher. An annuity rate of over 15% wasn’t unusual in 1990, but today it’s a fraction of that.

If you have a pension with a guaranteed annuity rate, the pension company has to pay you an income at the rate set in the guarantee – for the rest of your life. If the guaranteed annuity rate is 10%, that’s 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, but if you took out a pension in the 1970s, 80s or 90s, your pension plan may have one.

SAVVY TIP: The pensions that came with guaranteed annuity rates were typically sold before 1988. These pensions were aimed at people who were self employed and workers who couldn’t join their employer’s pension scheme. They were called retirement annuity contracts, Section 226 pensions or self-employed retirement annuities.

How do I know if I have a guaranteed annuity rate?

It’s not always easy to find out if you have a guaranteed annuity rate. You’re unlikely to find the phrase ‘guaranteed annuity rate’ in the paperwork, so reading that mahy not help you.

The best thing to do is probably to contact your pension company and ask if your pension has a guaranteed annuity rate. If you don’t feel you’re getting anywhere or you don’t understand the information you’re given, another option is to get in touch with the free to use Pensions Advisory Service as they’ll be able to help you.

Taking your guaranteed annuity rate

If you want to buy an annuity with a guaranteed annuity rate, there is one major restriction. And that’s that you may only be able to buy it on a specific date. It may be the date you chose to retire when you set up the pension – called your selected retirement date. Typically this would be your 60th or 65th birthday. Or it may be anytime from your selected retirement date. It is important to check because if you miss that date, you don’t have the option of taking advantage of the guaranteed annuity rate.

You can only get the guaranteed annuity rate if you take your pension with the pension company you’ve saved with. You won’t get it if you shop around for a pension income or if you take money out of your pension using pension freedoms.

SAVVY TIP: If you have an illness or medical condition, you may be able to get a better annuity rate than you can under your guarantee. It’s always worth checking – but don’t give up your guaranteed annuity rate until you know for sure.

Related articles: 

Retiring early due to ill health — what are the rules?

How an ill health or enhanced annuity could pay you a higher income for life

What is an annuity and how does it pay an income in retirement?

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