A GAR or Guaranteed Annuity Rate is essentially a fixed annuity rate which is stipulated in your pension contract. You can convert your pension fund into an annuity at this guaranteed rate, regardless of what level rates are on the open market at the time. GAR’s are usually only included in older pension contracts, typically one’s written from the 1960′s through to the mid 1980′s. The advantage for the individual is that they can receive an annuity rate which is much higher than those who do not have this written in their pension contracts. Before 1990 annuity rates were around the 15% mark, whereas in 2011 they are around half that level, which means anyone retiring nowadays with a GAR is likely to get a rate significantly higher than on the open market.
There are some restrictions on Guaranteed Annuity Rates, one of which is the fact that you cannot access them until you are aged 65. Another thing to note is that they are only offered on a single-life basis, so you should you pass away prematurely your annuity payments will not transfer to your partner or spouse. Finally it is worth noting that guaranteed annuity rates pay a level amount every year until death, which means they do not mitigate against increases in prices and inflation. This means you cannot build in any escalations in your income, so your spending power will gradually decrease throughout your retirement.
You do not have to accept your guaranteed rate of course as you have the right to shop around for the best deal, in the unlikely event that you can find a higher rate on the open market. However, the likelihood is that your guaranteed rate will be much higher than other rates around as they are typically over 10%, with current open market level rates being closer to 6%.
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