Guaranteed annuity rates on older policies

A guaranteed annuity rate is a promise written into some older pension policies: when you retire, your provider will convert your pot into an income at a rate fixed years ago, even if the rates available on the open market today are far lower. These guarantees were common in pensions sold in the 1980s and 1990s, when interest rates and gilt yields were much higher than they are now.

The value can be substantial. If you stay with your original provider and choose their annuity, you could secure a rate of between 7% and 11%¹. The guarantee is also easy to destroy by accident: transferring the pension, taking it all as a lump sum, or simply not buying an annuity can wipe it out.

This page explains what a guaranteed annuity rate is, how to find out whether you have one, the choices you have to make when you use it, and what you lose if you do not.

What a guaranteed annuity rate is

An annuity pays a regular guaranteed income for a set period or for life⁶. You buy it with your pension pot from an insurance company, and the income it pays is fixed at the point of purchase⁷. A guaranteed annuity rate, usually shortened to GAR, is a term in some older policies that offers defined benefits and a guaranteed minimum rate annuity when you retire⁸. In effect, the insurer agreed a minimum conversion rate in advance, and that rate still applies however the market has moved since.

The guarantee sits inside the policy, not on top of it. It is one of a group of features known as safeguarded benefits, and it only has value if you use it in the way the policy allows. Some pension policies might let you convert your pension into a higher guaranteed income than you can get elsewhere, with guaranteed annuity rates⁹. Where the market rate is lower than the guaranteed rate on your policy, the guarantee could give you a higher level of income from an annuity¹⁰.

It is worth separating a GAR from two things it is often confused with. The first is a guaranteed minimum pension, a different feature of some contracted-out salary-related schemes, which has its own rules on revaluation and indexation¹¹. The second is a plain annuity bought on the open market today, where the rate depends on your age and gender, the size of your pension pot, interest rates and sometimes your health⁶. A GAR is a rate fixed by the past; a market annuity is priced by the present.

GAR rates: often between 7% and 11% of your pot

The headline reason these policies matter is the gap between the guaranteed rate and what the same pot would buy today. If you stay with your original provider and choose their annuity, you could secure a rate of between 7% and 11%¹. That range reflects the different guarantees written into different policies from the 1980s and 1990s, not a rate you can shop for.

To see the contrast, Which? annuity figures are based on rates of between £5,000 and £7,500 per £100,000 of pension savings². For a pot where the guarantee is at the higher end, the gap is wider still.

Two cautions sit alongside the headline. First, a level annuity is vulnerable to inflation, which might make your annuity income worth less over time¹². A guarantee that looks generous at 65 can look much less so at 85 if prices have risen substantially. Second, the guarantee is only as good as the insurer behind it, and these are old policies held with providers that in some cases no longer take new customers.

How you can lose a guaranteed annuity rate

The guarantee is conditional, and the conditions are strict. If you decide not to buy an annuity, you will lose this benefit as there is no equivalent lump sum payment³. The same applies if you transfer your pension to another company or take all of your pension as a lump sum³. Taking money out flexibly carries the same risk: you could lose any guarantees in your policy, like a Guaranteed Annuity Rate, and providers advise checking with them if you are unsure whether you have one¹³.

Transfers are the most common way people lose a GAR, and the regulator treats them as a known problem area. The Financial Ombudsman Service lists loss of guarantees such as guaranteed annuity rates in the former personal pension plan among the common issues in transfer complaints it sees¹⁴. It has published a case study of an unhappy consumer because of advice to change pension type, where each of the original policies included a guaranteed annuity rate option, which meant he would get a guaranteed rate when he eventually retired¹⁵.

There is a second, quieter risk. If you are means-tested for benefits, losing a premium that causes an award to reduce to £0 could end entitlement, for example if you stop qualifying for a carer premium¹⁸. Pension income and lump sums can interact with benefit entitlement in ways that are not obvious at the point of decision.

Using your GAR: the choices you must make at the start

A GAR does not remove the decisions, it changes their terms. The rate is based on your age when you start taking your Guaranteed Income¹⁹, so the age at which you exercise the guarantee matters. One provider states the rate is guaranteed as long as you access your pension between the ages of 60 and 70³. Outside that window the guarantee may not apply at all, so the timing of your retirement is part of the decision, not separate from it.

You then choose the shape of the income. Your annuity income can begin at a lower level and increase each year at an agreed fixed rate or in line with inflation²⁰. You can decide to increase your income by a set amount every year, or have it vary in line with the Retail Price Index²¹. Both choices reduce the starting income in exchange for protection later, and both are usually fixed at the point of purchase.

The final set of choices concerns what happens when you die, and they are covered below. The practical point is that a GAR is not a single decision but a series of them, made once, at the start, with no ability to revisit them afterwards.

Keeping the GAR or shopping around: how to compare

The central comparison is between using the guarantee and giving it up to buy elsewhere. Different annuity providers offer different rates and options, and shopping around can help you find the annuity that is best suited to your circumstances, or the one that pays the highest income²³. That is the normal route for a pension without guarantees. Where a GAR applies, the guaranteed rate is the benchmark the open market has to beat, and in many cases it will not.

The alternative to an annuity altogether is drawdown, which keeps the pot invested and lets you decide how much to take and when. But unlike an annuity, which pays a fixed income for the rest of your life, there are no guarantees with drawdown²⁴. Choosing drawdown means giving up the guarantee, and the income is not secure for life.

If you want to test the market without losing the guarantee, the process is to ask your provider for the guaranteed rate in writing, then ask an annuity broker or provider for a market quote on the same pot and the same options, and compare like with like. Some providers will run a whole-of-market comparison for you: if Legal & General do not offer the best annuity rate, they will offer the option to run a whole-of-market comparison²⁵. The usual starting point is to check what your pension provider is offering, because they may still offer a higher payment, then shop around using the open market option¹².

Advice is not free, and the cost matters when the sums are large. You can expect to be charged an initial fee, usually ranging between 1% and 4%, and an ongoing, annual charge between 0.5% and 1.5%²⁶. Free, impartial guidance on your options is available from Pension Wise, and MoneyHelper explains how personal pensions work²⁷.

Tax and your 25% tax-free cash

Taking tax-free cash does not, by itself, cost you the guarantee, provided you still buy the annuity with the rest. You can usually take up to 25% tax-free cash at the start, and your income is taxable²⁹. The same rule appears across the market: you can take up to 25% of your pension as tax-free cash then use the rest to buy a guaranteed income for the rest of your life⁴, and when you buy an annuity, you can take up to 25% of your pension pot as tax-free cash³⁰. MoneyHelper puts it as taking up to 25% as tax-free cash²⁸.

The income itself is taxed differently. The regular payments from your annuity are taxed as income³¹, which means they are added to your other taxable income for the year and taxed at your marginal rate. The guarantee changes the size of the income, not the way it is taxed.

Will my family get anything when I die if you use your GAR?

This depends entirely on the options chosen at the start, and the choice is usually irreversible. A joint-life annuity, a guaranteed annuity that continues paying for a set period, or a value protected annuity can provide benefits on death, but buying these options lowers your own income²². A guaranteed annuity will continue to pay out to your dependants if you die within a pre-set number of years³², typically 5 or 10 years²².

A single-life annuity with no guarantee period usually stops when you die, and nothing is paid to anyone. That is the trade-off: the highest income for you alone, or a lower income that protects a spouse or dependants. Because the decision is made once, at the point of purchase, it is worth thinking about who depends on the income before the annuity is bought rather than after.

Where the protection stops

The rules that protect you here are mostly about being told what you are giving up. The Financial Conduct Authority sets out the position on transferring a defined contribution pension, including the circumstances in which advice is required⁹. The Financial Ombudsman Service can look at complaints about pension transfers and about advice to change pension type, and it has published case studies on both¹⁴. If a provider or adviser failed to tell you that a transfer would lose a guaranteed annuity rate, that is the kind of complaint the ombudsman handles.

What protection does not do is undo the decision. You cannot usually change your mind once you have bought an annuity⁷, and a transfer that has completed is difficult to reverse. The protection is strongest before the event: the requirement to be told about guarantees, the advice rules on transfers, and the free guidance available from Pension Wise²⁷. After the event, the remedy is a complaint, and the ombudsman can order redress, but the guarantee itself is generally gone.

If you are not sure whether you have one

Start with the paperwork. Your annual statement and the original policy documents should say whether the plan carries a guaranteed annuity rate, and if they do not, the provider can confirm it. Some providers offer a find, check and transfer service that will tell you whether guarantees apply³³. If you cannot trace the scheme at all, the Pension Tracing Service can help you find old plans.

Two practical points follow. First, a pension with a GAR usually cannot be moved online: one provider states that for these types of pensions, it cannot accept a transfer online⁸, and another says you cannot transfer a pension with guarantees such as a Guaranteed Annuity Rate, Section 9(2B) rights or a Guaranteed Conversion Option online³⁴. Expect a slower, paper-based process. Second, if you are considering giving up a guarantee, the sums are large enough that regulated advice is worth the cost, and the free guidance from Pension Wise is available first²⁷.