What are annuity rates and guaranteed annuity rates?

An annuity is an income you can purchase for the rest of your life and is primarily dependent on the interest rates set at the time of the money purchase.

The annuity rate offered is also determined by your sex, age, state of health and even where you live. 

For example, an annuity income purchased in Glasgow rather than Westminster is likely to be higher since you are less likely to live longer in Glasgow City.  Life expectancy in Glasgow is a mere 76 versus 86 in the London Borough of Westminster.

However, the biggest reason to determine the annuity rate is current market rates.

Today, annuity rates (although they have risen recently) are lower than they were in the 1980s and 1990s. 

A guaranteed annuity rate is one that was set in the terms and conditions of your pension policy when you started it.

This means the rate offered may be higher than the rates available today.

Why is it good to have a guaranteed annuity rate?

Guaranteed annuity rates are typically set at a higher percentage in the terms and conditions of your pension policy, often around 9 to 11%, so they are significantly higher than most people can achieve on the open market.

To put it in perspective, if you have a guaranteed annuity rate of, let's say, 11%, for every £100 of your pension pot, you would receive £11 as income annually. 

In contrast, with today's rates, you might only get around £7 for the same £100 pension pot.

Most policies offering guaranteed annuity rates were marketed in the 1980s and 1990s, when annuity rates were generally higher, which is what makes those old guaranteed annuity rates so good.

However, it's crucial to carefully review the terms and conditions associated with the guaranteed annuity rate. 

Ensure that the annuity provided aligns with your current financial circumstances and goals. 

How can I find out if I have a guaranteed annuity rate?

It’s a good idea to speak with your pension provider directly, as it’s not always easy to find out if you have a guaranteed annuity rate. 

Typically, the provider will send you a retirement pack at various points from the age of 50 onward, which includes information about any guaranteed annuity rate available to the policyholder.

Check your paperwork carefully, look for language like ‘Section 226 Policy,’ ‘retirement annuity contract’, ‘benefits’, ‘with-profits’, ‘preferential’, or ‘guarantee’. Alternatively, you can speak with a financial advisor who can check on your behalf.

You should be aware that some pension providers may not proactively remind individuals about their guaranteed annuity rates, since honouring these rates can be costly for the providers. For instance, some schemes make it a condition that you must buy the annuity on your 60th birthday – no other day will do.

In some cases, they might even encourage policyholders to switch to newer pension schemes that appear more attractive on the surface but do not include guaranteed rates.

Maintaining a healthy scepticism in such situations is indeed wise. 

If you have any concerns or if there's a need for further clarification on your pension options, it's recommended that you seek independent financial advice. 

The Pensions Freedom Act and guaranteed annuity rates?

The introduction of pension freedom has provided individuals with more flexibility, allowing them to cash in their pension pot or reinvest it instead of being obligated to purchase an annuity. 

However, the presence of a guaranteed annuity rate means you could forego a life-changing amount of money by cashing it rather than taking a guaranteed annuity.

This emphasises the importance of seeking independent financial advice when approaching retirement.

Get Expert Advice

Considering all of this, it's very important to seek financial advice before making any decisions. Let Regulated Advice match you with a financial advisor for expert advice.