Since increased pensions freedoms were established in April 2015, the Financial Conduct Authority (FCA) says that £3 billion worth of annuities have been rejected by over 55s. Now, nearly three in five over 55s are refusing the guaranteed annuity rate (GAR) offered to them by their pension provider. Of these, nine out of ten are taking the cash instead.
A GAR means that if you use your pension to buy an annuity, you are guaranteed the rate that you get paid until you die.
Nowadays, a worrying proportion of pensions with large GARs are being cashed in, indicating that people might not be thinking through their decision because some GARs can provide a very generous income for retirements. Hargreaves Lansdown report that GARs are being rejected on 35% of applicable pensions worth more than £30,000.
If you have a GAR, you might be losing out over the course of your retirement if you decide to cash it in or transfer to another pension plan. Any withdrawal taken from your pension fund is taxable (after your Tax Free Cash) which affects the rate of tax you pay. This will be based on your individual circumstances and regulation which are subject to change in the future.”
GARs were a common feature of pensions that date from the 80s and 90s. The rates on these are typically much higher than the best rates on the open market today, because they were set at a time when annuity rates were greater. In the 1980s and 1990s you could buy an annuity with a considerably higher rate than you could find today.
When making a decision to cash in your pension, doing the following will make you less likely to lose out:
- Check your paperwork. Although you probably feel like you have an unfeasible amount of pensions paperwork, take the time to sift through it to find out if you have a GAR. If you aren’t sure, call your provider to check. Remember that if you’re still unsure, you can get in touch with the Pensions Advisory Service for free help.
- Have a look at the terms. Even though a GAR could boost your retirement income, their terms can be a little rigid. Some GARs apply to your dependant’s pension, others don’t. Often, GARs are very inflexible about when you are able to take your income and the shape you must take.
- Take an integrated approach. It’s unwise to consider all of your pensions in isolation. Instead, it’s best to consider them as individual building blocks that contribute to your overall retirement income. A holistic approach will help you consider in which order to draw on your different pension pots. Usually, it’s best to use a pension that doesn’t have any guarantees if you plan on retiring early.
- Get a requote. If you don’t think that the terms of the offer suit your circumstances, talk to your provider to try to find an alternative option. Chances are your provider won’t volunteer this option so it’s always best to ask.
- Speak to a financial adviser A financial adviser will conduct research into the plan and can advise you whether it is in your interests to retain the benefits offered with the GAR or transfer the plan if your circumstances and objectives determine if it is appropriate.