Guaranteed annuity rates: retirees rejecting £3 billion in pension guarantees

Published by Rachel Lacey on 10 September 2018.
Last updated on 14 September 2018

10 steps to buying the right annuity

Over 55s are shunning valuable guarantees on pensions in their scramble to cash them in for lump sums.

Nearly three in five over 55s are not accepting the guaranteed annuity rate (GAR) offered to them by their pension provider, with nine out of 10 of those taking the cash instead, according to the latest data from the financial watchdog the Financial Conduct Authority (FCA).

Since pension freedoms were introduced in April 2015, the regulator says some £3 billion of guaranteed income has been rejected.

Guaranteed annuity rates were a common feature of personal pensions sold in the 1980s and 1990s. The deals offer retirees a guaranteed rate on their annuity irrespective of market conditions when they retire.

As the rates were set at a time when annuity rates were far higher, guaranteed rates are typically better than the best available rates in the open market. At age 65 a GAR will typically pay between 8-10% compared to today’s market rates which are around 5.5% on a single life, level annuity.

Nathan Long, senior analyst at Hargreaves Lansdown says: “Older style pensions often have valuable guarantees built in, in fact more than 1 in 10 pensions being accessed have them. It’s easy to miss out as you try and wade through the pension paperwork when it comes to retirement.

“Today’s annuity rates of around 5.5% at age 65 are dwarfed by guaranteed rates which often are in the region of 8 or 10%. To get that kind of rate you need to be in your 80s or in very poor health.”

Of those pensions that are being cashed in, the vast majority (85%) are small pots (less than £10,000).  However, Hargreaves Lansdown points out that a worrying number of larger pensions with a GAR are also being cashed in, with guarantees rejected on 35% of pensions worth more than £30,000.

Mr Long adds: “Think of any pension as part of your overall income and never in isolation. It may be tempting to opt for the convenience of cashing in your Guaranteed Annuity rate, especially if it’s small, but it’s rarely the best option.”

Guaranteed annuity rates: what do you need to do?

1. Look at your paperwork: you might feel like you are drowning in pensions admin, nonetheless it is essential to check whether you have a GAR to ensure you make an informed choice. If in doubt call your provider to check.

2. Check the terms: although a GAR can give your pension income a boost the terms can be rigid. Will it pay for your whole life and would it apply to a dependent’s pension too? There may also not be much flexibility around when you are able to take the GAR.

3. Think holistically: don’t consider each of your pensions in isolation and instead think of them as individual building blocks that contribute to your overall retirement income. This will help you consider which pensions to use first – if you want to retire early or need cash for example it may make sense to use a pension that doesn’t have any guarantees.

4. Get a re-quote: if the terms of the offer don’t suit you talk to your provider and it may come up with an alternative option on reduced terms. Your provider is unlikely to volunteer this information so always ask the question.

5. Consider a partial transfer: if you have a large pension with a GAR you may be able to transfer some money out and maintain the benefit of higher annuity rates on the remainder.

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Mad ! I have a pension of

Mad ! I have a pension of £99 pa from one provider because I wasn't going to give up a 10-11% GAR !
People really do not understand - when I got to consolidating my pensions they had to point out the GAR when I got the information on this one and so I took it !