Guaranteed Annuity Rates are associated with many older style pension schemes. They offer a guaranteed minimum level of income, but often only on or after a certain age.
They were created in a time when no one could have forecast that annuity rates would continue to slide for decades. At the time, they were seen as more of a hedge, much like fixed rate mortgages, against lower future annuity rates.
The standard market annuity rates have continued to slide due to advances in medical care, resulting in us living ever longer as a nation. These increased mortality rates mean annuity providers have to pay the guaranteed lifetime income longer, therefore offering lower rates (income) at the outset.
GAR’s were created when the average life expectancy was about 10 years short than it is today.
The actual rate which is applied will depend on the individual policy terms, but can range from 3% to 15%, against a market average today of around 5% for a 65-year-old.
It’s more often than not, beneficial therefore to keep these policies if you are seeking a guaranteed lifetime income.
Transferring these benefits.
Under the new pension freedoms, where people can now have full access to their pension fund, more people are looking to use their pension more flexibly than locking into a lifetime income. Schemes with GAR’s can be transferred to products such as income drawdown to allow flexible access. It is however, a regulatory required to seek qualified financial advice if the scheme has a GAR and a transfer value above £30,000. Advice is required to mke sure all the benefits are fully explained and circumstances are taken into consideration before a transfer is made.