Since increased pensions freedoms were established in April 2015, the 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 high 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. If you have a GAR, you might be losing out over the course of your retirement if you decide to cash it in.
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 are not sure, call your provider to check.
- 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 do not. Often, GARs are very inflexible about when you are able to take your income.
- Take an integrated approach. It is unwise to consider all of your pensions in isolation. Instead, it is 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.
- Get a requote. If you do not 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 wil not volunteer this option so it is always best to ask.
- Think about a partial transfer. If you have a larger pension with a GAR, transferring out a portion of the money could be an option while buying a fixed rate annuity with the rest. This would mean that you maintain the benefit of higher annuity rates whilst getting a cash lump sum.
10 October 2018
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