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Guaranteed Annuity Rates
If you are or have been a member of a money purchase arrangement (i.e. an occupational money purchase scheme, a personal pension plan or a stakeholder pension scheme) you will build a fund which can be used to provide an income in retirement. One option for securing your retirement income is to buy an annuity.
An annuity is a contract between an insurance company and a pension scheme member under which the member hands over all or part of their pension fund to the insurance company which agrees to pay out an income to the scheme member for the remainder of that person's life. The annuity would normally be paid monthly, quarterly, half-yearly or annually.
The value of the annuity is dependent on two factors – the size of your fund and the annuity rate offered by the insurance company selling the annuity.
Annuity rates are calculated by actuaries using various factors – mortality, interest rates, age, gender and sometimes health. In general terms, annuity rates are higher the older a person is because future life expectancy is less. In the same way men get higher annuity rates than women of the same age due to men having lower-life expectancy.
A guaranteed annuity rate is a fixed rate, written into your pension contract, at which you can convert your fund into an annuity, irrespective of what open market rates are doing at that time. There are normally some conditions written into the application of the guaranteed annuity rate such as the age or ages when the rate is available and it normally will only provide an annuity on your own life and often will not provide for post retirement increases.
The attraction and value of the guaranteed annuity rate is that it can produce a pension for life that is higher than anything you can get by applying your fund to buy an annuity from any other insurance company at the time you retire.
The downside is the restrictions which may apply and highlighted above.
If you wish to discuss the above further or require information on any of our services, then please contact us.
Any reference to legislation and tax is based on FPP’s understanding of UK law and HMRC practice. These may be subject to change in the future. Tax rates and reliefs will also change and their value to you will depend on your individual circumstances. No guarantees are given regarding the effectiveness of any of the above strategies.