What is Guaranteed Annuity Rate (GAR)?

Full Definition

A guaranteed annuity rate is a contractual right, attached to certain older pension policies (typically sold from the 1970s through to the 1990s), promising to convert the policyholder's pension pot into an annuity income at a specific, pre-agreed conversion rate, regardless of prevailing annuity rates in the wider market at the time the pension is actually taken. Because annuity rates were generally much higher decades ago than they became during the long period of low interest rates that followed the 2008 financial crisis, many guaranteed annuity rates turned out to be significantly more generous than any annuity a saver could buy on the open market -- in some cases offering an income 30-50% or more higher than a comparable market-rate annuity for the same pot size, making them extremely valuable, often the single most valuable feature of the policy. Because a guaranteed annuity rate is only realised by actually using the pension pot to buy an annuity from that specific provider, on their specific terms, giving up a valuable GAR by instead transferring the pension elsewhere or moving into flexible drawdown can mean permanently losing a right worth many years' worth of extra retirement income; this is one of the main reasons UK regulation requires anyone seeking to transfer a defined contribution pension worth £30,000 or more, where valuable guarantees like a GAR might be given up, to take regulated financial advice before the transfer can proceed. Anyone holding an older pension policy, particularly one from before the 2000s, is generally advised to check its terms carefully for a guaranteed annuity rate, since providers do not always make its value obvious, and the guarantee can sometimes apply only if the annuity is taken at a specific age or in a specific form.

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