Four Different Types of Guaranteed Annuity Rate

Published / Last Updated on 18/04/2024

An annuity is usually a guaranteed income for life.  If you want a lower risk secure income, usually you buy a guaranteed annuity with 75% of your remaining pension fund (if you have already taken the 25% lump) or 100% of the pension fund if no lump sum is taken.  There are many other types of annuity such as a fixed term annuity, a purchased life annuity, a care fees annuity and an investment linked annuity but this video concentrates on Guaranteed Annuity Rates for pension funds i.e., a guaranteed income for life.

Defined Benefit Pensions

Civil service, central and local government, armed forces, emergency services and bigger private organisations have (or many used to have) defined benefit pensions.  This is a guaranteed income in retirement based upon a fraction of the number of years service that you have and your pensionable salary.  E.g.  20 years service in a 1/60th scheme with a final salary or career average salary of £30,000 pa.   20/60ths X £30,000 = £10,000 pa guaranteed pension annuity.

Guaranteed Minimum Pension (GMP)

On 06/04/2026 the NEW State Pension replaced the BASIC State Pension and SECOND State Pension (S2P). 

  • Your state pension entitlement is based upon the number of years of national insurance credits you have built up. 
  • You cannot ‘contract out’ of the new state pension or the old basic state pension.
  • You or your employer could ‘contract out’ of the old 2nd state pension formerly known as the State Earnings Related Pension Scheme (SERPS) – you may have heard the term ‘contract out of SERPS’ or ‘contracted out’.
  • By contracting out, part of yours/your employers national insurance contributions were then directed into your company pension scheme (sometimes into a private pension).
  • To allow contracting out, your company pension scheme then had to promise to give you a Guaranteed Minimum Pension (GMP) that was equivalent to what you would have got if you had remained in SERPS or S2P.
  • This is therefore effectively another guaranteed annuity.

Open Market Option (OMO) Pension Annuity

This is a when you have an investment linked pension such as a personal pension, SIPP or workplace pension. 

  • Whilst saving, your money is invested and can down or up in value depending upon when and where invested. 
  • When you come to retirement, you usually have the option to take up to 25% as a lump sum and then the 75% balance can either be moved into non-guaranteed flexible drawdown or used under OMO rules to shop around buy a guaranteed annuity income for life.
  • Your pension only becomes a Guaranteed Annuity Rate at the point of buying your annuity and is not guaranteed until that point as annuity rates change everyday.

Guaranteed Annuity Rates (GARs)

This is the 4th type of GAR and perhaps the original and real guaranteed annuity rate as we know then today.

  • If you cast your mind back to the 1970s, 80s and 90’s, originally there were s226/s620 Retirement Annuity Contracts RACs (for employees without a company pension and the self employed) and then from 1989 the Personal Pension Plan (PPP) also started.
  • To compete, many pension providers and famously, Equitable Life, offered GARs to attract new clients for their RACs and PPPs.
  • Originally, some pension providers offered GARs to savers from say 8% to 14% pa and then pensions started in the 1990s, these GARs reduced to around 5% to 7% pa.
  • Equitable Life collapsed in December 2000 unable to meet is GAR promises of offered a guaranteed income for life at rates of say 8% to 14% pa, when interest rates and investment returns were much lower.
  • GARs are still around for older schemes today such as ex CIS pensions, now with Royal London and many others such as Sun Life Financial of Canada, so you may have GARs of 5-10% still ‘kicking around’.
  • Today, these original GARs are known as ‘safeguarded rights’ and specialist pension advice is required if your pension fund is worth £30,000 or more and you wish to give up your guaranteed annuity rate e.g.  to move to non-guaranteed flexible drawdown.

Our Fees to Give Up/Transfer Out of Safeguarded Rights1 X Safeguarded Rights Scheme

Other useful links:

Contact  Call Back  Calculators  Our Fees

Related Videos

Videos Channels

Explore our Site

Money MOT
T and C