Guaranteed Annuity Rates (GAR) - Can I Guarantee Income?

Guaranteed Annuity Rates (GAR) – Can I Guarantee Income In Retirement?Written on May 23, 2018 by Kirk Rice LLP

Financial Services Questions

The Question:

I have a pension plan with a guaranteed annuity rate (GAR), and the company wants me to give this up in return for a larger pension fund. What should I do?

Kirk Rice LLP answers:

In the 1990s, many pension providers offered pensions with Guaranteed Annuity Rates (GAR). These rates will vary but can be as high as 12%. Despite the recent improved annuity rates, a comparable rate for someone now might be a little over half that, as interest rates are still lower now than back in the 1990s.

The current income at age 65 for a pension fund of £100,000 pension might typically be £7,000 today, whereas a plan with a guaranteed rate might offer as much as £12,000. In a little more than eight years, the full value of the plan has been paid out. The income will continue for life and must be met by the insurer. If the insurer becomes insolvent, the Financial Services Compensation Scheme will maintain the payments of income. The payment of annuity income for life is possibly the only place in financial services where the word guarantee can be used confidently to mean what most people understand it to mean.

This means that at the retirement age on the plan, the pension provider must pay an income for life set at that contractual rate. Given the current lower market rate for annuities, the pension provider must add its own cash to secure the annuity, which is an expensive drain on the business they would rather not have.

Several insurers have now proposed they make offers to their GAR clients to ‘buyout’ these contracts, ending the long-term liability. The offer will be paid as a cash addition to the existing plan. An actuary must be consulted to confirm that the cash offer the company makes represents ‘fair value’; however, every client will have different circumstances, and it may not be appropriate to give up the guarantee.

The pension providers cannot force anyone to take the cash alternative as the GARs are contracted benefits. They must seek approval in the High Court to offer an alternative cash payment.

To answer your question, though, I would start from the point that you have a valuable contract, and very few people should give it up. Put simply, I do not know of any other investment that provides a guaranteed income at any rate for life.

The GAR is often on a ‘single life’ basis, and if you have a spouse or dependant, you should contact the pension provider, giving them their details, so they can make a revised offer which retains your guarantee but uses market rates for the portion for your dependant.

Another alternative is an enhanced version where the lifestyle, history, illnesses and medication are considered for a personalised annuity rate. This might provide a better guarantee in some circumstances.

If you would like to discuss Guaranteed Annuity Rates (GAR) or require any other financial planning assistance, please email info@kirkrice.co.uk to arrange a call with one of our Financial Planners. Kirk Rice offers a free no, obligation first meeting and fees and costs of work involved would be discussed. We do not carry out any work without your consent and agreement to fees.

This article was updated on 21 September 2023.

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Please note: our articles are for general guidance on the date of publication only and, specific advice should be taken before acting on any of the suggestions made.

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