If your pension pot contains a guaranteed annuity rate, the amount of income you receive could be much higher if you stay with your current provider rather than shopping around.
What is a guaranteed annuity rate?
An annuity is a regular income paid to you for life and the annuity rate is the factor that determines how much annual income you get.
This rate depends on a range of things, including your age, state of health and even where you live. But most of all, it’s based on current market rates.
Today, annuity rates 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 took the policy out. This means the rate offered will be higher than rates available today.
Find out about more about annuities in our guide Guaranteed retirement income (annuities) explained
Why is it good to have a guaranteed annuity rate?
These guaranteed rates mean that you can buy an annuity at a particular percentage rate. Common rates offered are around 9 to 11% (occasionally higher) – which is roughly double the best rate that most people can achieve now.
What that means is that for every £100 of pension pot you have, you would get £9 or £11 as income a year compared with, say, £5 for every £100 of pension pot that you might get based on today’s rates.
Most policies that offer a guaranteed annuity rate were marketed in the 1980s and 1990s, when annuity rates at the time were higher.
It is, however, important that you check the terms and conditions attached to the guaranteed annuity rate. And check that the annuity provided is suitable for your circumstances.
How can I find out if I have a guaranteed annuity rate?
If you have a guaranteed annuity rate, your pension provider must make you aware of this as you approach retirement and before you begin taking money from your pension or request to move your pension elsewhere.
They’ll usually send you a retirement pack at various points from the age of 50 onwards. This should provide information about any guaranteed annuity rate that might be available to you.
You could also check the terms and conditions by looking at the information you were given when you joined the pension.
It's not always easy to find out if you have a guaranteed annuity rate. Check your paperwork carefully, look for language like ‘retirement annuity contract’, ‘Section 226 policy’ ‘with-profits’, ‘benefits’, ‘preferential’ or ‘guarantee’. It’s also a good idea to ask your pension provider directly.
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Make sure you don’t miss out
If you do have a guaranteed annuity rate, there might be restrictions on when you can take it. Some policies only offer the rate at your selected retirement date, not if you want to begin taking money before or after this.
Other policies might have a more generous window of several months, or just a minimum age. But whatever the restriction, make sure you know about it beforehand.
The terms and conditions could also restrict the type of annuity you can take. If you want to include a continuing income for a nominated dependant, such as a spouse, or an increasing income, the guarantee might not apply or the rate could be lower.
Make sure you shop around so you can compare annuity rates, especially if you qualify for an enhanced annuity if you have health conditions.
