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Reasons to leave existing pensions where they are: guaranteed annuity rates

The idea of pension money is to generate an income. This book exists partly because the traditional way to get income from a pension pot – an annuity – now pays pitiful rates of return.

But if you are offered an annuity that delivers an attractive income, it makes sense to take it. The investment ideas we offer later in the book are, we believe, among the safest ways to get income from pensions. But they are not guaranteed, whereas annuity payments are guaranteed.

Some old pension policies offer a guaranteed annuity rate (GAR). Ask the providers of all your defined contribution pensions whether any of them offers a GAR and, if so, request full details of the rate and any conditions attached to it.

Deciding whether a particular rate is worth taking is not straightforward and you may be better off seeking help from a financial adviser who specialises in pensions. As with any final salary pensions you may have, think very carefully before exiting this kind of arrangement and giving up a GAR.

As a rule of thumb, you should at least seek an annuity quote on the open market, which will require you to give your age and details of any medical conditions that could affect your longevity. Then compare these quotes with the GAR to see if the GAR is a significantly better deal.

Check also whether a GAR deal can offer options such as payments for a surviving spouse, or payments that rise each year; sometimes such enhancements are not available in conjunction with GARs. Finally, some GARs are available only on certain dates, such as the retirement date specified on your policy, so check for any such conditions.

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