Guaranteed annuity rates: what a GAR pays, with and without tax-free cash

Some older pensions, often policies taken out in the 1970s to 1990s, include a guaranteed annuity rate. It promises that each £1,000 of the fund buys a set income for life, whatever annuity rates are when you retire. The calculator models one, including what happens if you take tax-free cash first or draw it down instead.

Worked example: a with-profits policy with a 9% guaranteed rate from 65, worth about £125,969 by then in today's money. Your money lasts to 95, with £52,784 left.

What the guarantee pays

At 9%, the full guaranteed annuity pays £11,337 a year in today's money from 65 (£12,827 in cash at the time). It is usually a level income: it stays the same in pounds, so it buys less each year as prices rise. It is taxed as income.

How tax-free cash changes it

Taking 25% of the policy as tax-free cash first leaves less to turn into guaranteed income. In this example that's £31,492 of cash in today's money, in exchange for £2,834 a year of guaranteed income for life. The income adds up to the cash after about 11 years, so the break-even age is 76. In the calculator this plan lasts to 95.

Drawing it down instead

Drawing the policy down like an ordinary pension gives up the guaranteed rate completely. In this example the plan then falls short from 88. With the full guaranteed annuity it lasts to 95.

Conditions that often apply

Guaranteed rates often come with conditions set out in the policy:

• a set retirement age or date, with a different rate if you take it earlier or later;
• a single-life, level annuity, so adding a spouse's pension or yearly increases usually means a lower rate;
• the guarantee covering only part of the fund, such as payments made before a certain date.

Your policy documents or the provider can say which apply to you.

Transfers and the guarantee

A guaranteed annuity rate is a "safeguarded benefit". Transferring the policy or cashing it in usually gives the guarantee up for good, and the provider has to give you a personalised risk warning first. Above £30,000, the rules can also require regulated financial advice before a transfer of safeguarded benefits goes ahead.