What is a guaranteed annuity rate (GAR)?

Written by Tom Handley, Senior Annuity Specialist

If your pension scheme offers a guaranteed annuity rate (GAR) then it is important to understand what this means for you and your retirement income options. 

The main attraction of having a GAR available from your pension scheme provider is that it may provide more income when compared to what’s available from other annuity providers on the open market. 

This makes a GAR a potentially valuable benefit. However, there are times when your GAR may not be the best option for you, which makes it essential to compare deals from other providers before making a decision.

To help you, in this guide we will be discussing:

• What is a guaranteed annuity rate?

• Who is eligible for a guaranteed annuity rate?

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

• The value of guaranteed annuity rates today

• When can I use my guaranteed annuity rate?

• Are there any drawbacks to a guaranteed annuity rate?

• Next steps

What is a guaranteed annuity rate (GAR)?

An annuity lets you turn savings in a defined contribution personal or company pension into a regular income, either for life or for a fixed term. Annuity providers pay you this income in return for the money you have saved into your pension.

Some older style pension schemes come with ‘safeguarded benefits’ in the form of a built-in guaranteed annuity rate or GAR. These are typically personal pensions set up before July of 1988. 

A GAR works by locking in a predetermined rate at which your pension provider will convert your pension savings (your ‘pot’) into an annuity. So, if your pension scheme says that you are eligible for a GAR, it means that you can turn your pension savings into lifetime income with an annuity at that rate, with your existing provider.

For example, if your GAR is 9%, for every £100,000 in your pension pot, you would receive £9,000 annually for life.

Although annuity rates elsewhere fluctuate based on factors like current interest rates, if you have a GAR, you are guaranteed an income based on the rate set out when your pension plan was started. 

The main thing to note is that GARs were written into pension contracts decades ago, when interest rates were generally higher. As a result, some guaranteed rates can be better than what is available today. 

However, here in Retirement Line’s Annuity Guidance Team, we often find that we can source higher annuity rates than some of the GARs our customers come to us with. In any case, choosing an annuity provider isn’t just about securing the best rate. You may find that you can access a more suitable annuity with extra features and benefits by shopping around other providers. 

As you can see, it’s crucial to explore all of your alternative annuity options to see if there’s a more competitive deal available, or a more suitable product for your needs. 

Watch our video explaining annuity rates and GARs

Who is eligible for a guaranteed annuity rate?

Not all pension plans come with a GAR. Typically, GARs are found in older pension policies, especially those from the 1970s and 1980s. 

If you have a personal pension or workplace pension from that time and are coming up to retirement, it is essential that you check to see if you have a GAR.

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

If your pension includes a GAR, your provider is required to inform you about it as you approach retirement. This typically happens before you are able to access your pension savings.

Pension schemes tend to send a retirement pack to their members around six months before their chosen retirement age, or before the earliest age at which you can access your pension fund. This pack should detail any safeguarded benefits you are entitled to, including a GAR.

You can also check the terms and conditions of your pension plan by referring to the original documents you received when you first joined the scheme. Some schemes also have an online facility where you can view the necessary documentation.

Finding out if you have a GAR isn’t always straightforward, so carefully review your pension paperwork. Look out for specific terms such as ‘retirement annuity contract’, ‘Section 226 policy’, ‘with-profits’, or ‘guarantee’, which may indicate that a GAR is part of your pension. 

If you're still unsure, contacting your pension provider directly is a good step—they can clarify whether you have a GAR and explain the specifics of your pension plan.

As part of ourannuity service, we will check your pension scheme documents to ensure you won’t miss out on any valuable benefits by choosing an annuity with a different provider. This includes checking your entitlement to a guaranteed annuity rate.

The value of guaranteed annuity rates today

The value of a GAR depends on current annuity rates and the guaranteed rate in your pension. In some cases, a GAR can be as high as 12%, which is almost double what you might achieve on the open market at today’s rate. 

As a result, having a GAR can be highly valuable. Say the current open market annuity rate you can achieve is 6% but your GAR offers 9%, choosing to exercise your GAR would effectively increase your annual income by 50%. The difference can substantially impact your financial well-being in retirement.

That said, it is important to remember that GARs vary between pension scheme providers. As we know from experience here in our Annuity Guidance Team, GARs can sometimes fall below what our customers are able to achieve by searching the open market for a more competitive deal. 

As we reported in our annuity rates analysis for the first half of 2024, the rate for a healthy married male aged 65 taking a single-life annuity rose from 7.16% to 7.53% between January and June 2024. This rate may increase further for those living with certain health conditions, or who have other qualifying factors including a high BMI or a history of smoking.

With rates currently higher than they were a few years ago, it’s so important you check you are getting the best deal before committing to anything. 

When can I use my guaranteed annuity rate?

Sometimes restrictions apply regarding when you can take your GAR. For example, some policies may only allow you to use the GAR at your selected retirement date, and not before or after it. Other schemes might be more flexible, letting you take the GAR during a window of several months either side of the selected retirement date. 

If you are lucky enough to have a guaranteed annuity rate, do check with your provider or adviser to make sure you understand any restrictions on when you can use it.

Are there any drawbacks to a guaranteed annuity rate?

While a GAR can be a highly valuable benefit and will often beat other annuity rates, it’s important to gather quotes and weigh up your options, just in case taking it isn’t the best option for you.

For instance, a GAR may not always be the best guaranteed annuity rate you can achieve, especially  if your poor health or lifestyle qualifies you for an enhanced lifetime annuity. In this situation, you might be offered a more competitive annuity rate from a different provider.

Also, if you have health issues that might significantly shorten your life expectancy, you may want to look into other options such as income drawdown or a fixed-term annuity. You may find one of these more suitable for maximising your income than a lifetime annuity with a GAR.

It is also worth checking if the terms and conditions of your guaranteed annuity rate might limit your annuity options. For instance, you may want an annuity where the income is inflation-linked, or one where income is paid to your spouse or other beneficiary after you die. Some schemes may let you choose these options, but may not apply the GAR if you do.

You may be unsure whether sticking with your pension scheme for your annuity to benefit from your GAR is the right decision. In that case, it may be wise to speak with an annuity specialist or financial adviser who can help you understand all the issues. 

Retirement Line offers this via our annuity service. Our Annuity Specialists can look at the terms of your GAR and explain how they compare to taking an annuity elsewhere. This includes comparing annuity rates and quotes from leading annuity providers. And as the UK's largest pension annuity broker*, we can secure preferential annuity rates thanks to the volume of business we introduce to the UK’s leading annuity providers.

Although GARs do tend to be higher than the best guaranteed annuity rates currently available on the open market, that may not be the case. You have nothing to lose from asking Retirement Line to compare your options for you.

Next steps

If you have a guaranteed annuity rate and want to explore your options before committing, our Annuity Specialists are here to help. They can help you check the details of your pension scheme and: 

• Discuss any restrictions on when or how you can access your GAR.

• Compare your GAR to current annuity rates to check if there’s a more competitive deal currently available, including enhanced annuities if you are eligible.

• Provide you with all the annuity information and guidance you need to make an informed decision that aligns with your retirement goals.

For this support and no-obligation annuity quotes, you can call us on 0800 652 1316, request a call back or email us at info@retirementline.co.uk.