Every so often we review someone’s pensions and find something they had no idea was there. Not extra money exactly, something better. A promise, written into an old policy decades ago, to convert their fund into an income at a rate far more generous than anything available on the market today.
It is called a guaranteed annuity rate, and it is one of the few genuinely valuable things that can be sitting quietly in a policy document nobody has read since it was issued. It is also, in the wrong circumstances, given away by accident.
What a guaranteed annuity rate is
Some pension policies sold from roughly the 1970s through to the early 1990s included a contractual promise: whatever happens to interest rates, when you retire we will convert your fund into an annuity at no worse than this specified rate.
At the time, that felt like a modest commitment. Interest rates were high and the guaranteed rates being written looked unremarkable against what the market was already paying. Then rates fell for the best part of thirty years, and those old promises became extremely valuable, sometimes offering meaningfully more income than an equivalent pot would buy on the open market.
Providers cannot withdraw them. They are a contractual term. But you can lose one very easily, because a guaranteed annuity rate almost always disappears the moment you transfer the pension somewhere else.
Why this catches people out
The difficulty is that these guarantees are largely invisible. They rarely appear on an annual statement. They are not usually mentioned when you log into an online account. Often the only place they exist in writing is the original policy schedule, a document issued in the 1980s, probably filed away, quite possibly lost.
Meanwhile, the instinct to tidy up is entirely reasonable. Somebody reaches their sixties with five scattered pots, decides sensibly to bring them together, and consolidates. Four of those pots may be perfectly ordinary. The fifth might contain a guarantee they never knew about, which vanishes the day the transfer completes and cannot be recovered.
How to check
The good news is that finding out is straightforward and free. Contact each older pension provider directly and ask them, in these words: “Does this policy include any guaranteed annuity rates, guaranteed minimum pension, protected tax-free cash, or any other safeguarded benefits?”
Ask for the answer in writing. Also ask whether any conditions attach to the guarantee, which is important, and often overlooked. A guaranteed rate may only apply if you take the benefits at one specific age, or in one specific form, such as single life with no inflation protection. Those conditions can matter a great deal.
Broadly, the pensions worth checking are personal pensions, retirement annuity contracts and section 32 buyout policies taken out before the mid-1990s. If you cannot find the paperwork, the provider still holds the record.
The legal protection that exists
Guaranteed annuity rates are classed as safeguarded benefits. Where the value of those benefits exceeds £30,000, you are legally required to take regulated financial advice before giving them up. That rule exists precisely because these guarantees have been given away too cheaply in the past.
It is worth understanding that this is a protection rather than an obstacle. The adviser’s job is to establish whether the guarantee is genuinely better for you than the alternatives, not to wave it through.
A guarantee is not automatically the right answer
We should be even-handed here, because “old guarantee equals keep it” is too simple. There are legitimate circumstances where a guaranteed rate is not the best outcome. If the guarantee only pays on a single life basis and you need to provide for a partner, it may not suit. If your health is poor, an enhanced annuity on the open market could potentially offer more. If you need flexibility rather than guaranteed income, or the conditions attached simply do not fit your plans, the picture changes again.
The point is not that these guarantees should always be kept. It is that the decision should be made deliberately, with the guarantee properly valued and understood, not lost silently as a side effect of tidying up.
Before you move anything
If you are thinking about consolidating pensions, our pension advice service reviews each policy individually and identifies any guarantees or protections before anything is transferred. Sometimes the recommendation is to bring things together. Sometimes it is to leave a particular pension exactly where it is, and that is a perfectly good outcome.
Free impartial guidance on your retirement options is also available from MoneyHelper, including Pension Wise appointments for the over-50s.
This article is for general information only and does not constitute advice. Not all older pensions contain guaranteed annuity rates, and where they exist the terms, value and conditions vary by policy. A guaranteed rate is not automatically better than the alternatives for every individual. Regulated advice is required by law before giving up safeguarded benefits valued above £30,000. Transferring a pension is not right for everyone and valuable guarantees may be lost. The value of investments can go down as well as up. Tax treatment depends on your individual circumstances and may change. Our advised services are provided on a fully advised basis by FCA-regulated advisers. Free impartial guidance is available from MoneyHelper. Retirement Professionals Ltd is an appointed representative of pi financial ltd, authorised and regulated by the Financial Conduct Authority. FCA number 622943.