Guaranteed annuity rates (GARs)

“A locked in guarantee”

Guaranteed annuity rates

If your pension scheme provides you with a guaranteed annuity rate (GARs), the amount of income you receive could be much higher. This can be a significant benefit to you as the annuity rates offered under older pensions with GARS can be considerably higher than those currently available, thereby increasing your pension income.

It is, however, important that you check the terms and conditions attached to the guaranteed annuity rate, and that the annuity provided is suitable for your circumstances.

You can find out whether your scheme offers a guaranteed annuity rate and the terms and conditions that may apply by looking at the information you were given when you joined the scheme, or by asking your pension provider. Most schemes that offer a guaranteed annuity rate were marketed in the 1980s and 1990s, when market annuity rates were higher.

Some of the things you should look for when deciding whether to take up the guaranteed annuity rate are:

• When can the rate be taken? Some pension schemes only offer the rate at the scheme’s selected retirement date, not if you draw retirement benefits before or after this;

• If you want to include a continuing income for a nominated dependent, such as a spouse, does the GAR still apply?

• Does the GAR apply if you want to include escalation, so that your income increases each year to offset the effects of inflation?

It’s always a good idea to compare the income available if you take up a GAR with the income available if you shop around, especially if you may be eligible for an impaired life or enhanced annuity before you make up your mind.

Should you have a Guaranteed Annuity Rate applying to your pension it would be advisable to seek professional financial advice in order that you make the most of this important benefit.

The Financial Conduct Authority (FCA)

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RAC, SIPP and SSAS – what are they and what do you need to know?

Pensions can be a complex area for many. Outside of the “usual culprits” there are other less known pension types. Some of these pensions are no longer available as new pensions but some are still in existence, such as Retirement Annuity Contracts.

Here is an insight into three other types of money purchase pension schemes - retirement annuity contracts (RACs), self-invested personal pension schemes (SIPPs) and small self-administered schemes (SSASs).

• Retirement Annuity Contracts

  Retirement annuity contracts (RACs) were used by individuals who did not have access to an occupational scheme, or self-employed individuals.  RACs were effectively replaced by personal pensions on 1 July 1988. 

• Self-Invested Personal Pension 

  A self-invested personal pension scheme (SIPP) is a pension wrapper holding investments, which offers  greater investment flexibility than ordinary personal pensions. SIPPs became registered pension schemes on A-Day i.e. 6 April 2006.

• Small Self-Administered Schemes

  Small self-administered schemes (SSASs) are usually occupational money purchase schemes, typically used by small family businesses. SSASs are similar to SIPPs in that they have greater investment flexibility than ordinary personal pension but the trustees have more regulatory duties than SIPPs as they are scheme administrator.

If you retain or would be interested in setting up a SIPP or SSAS you will require financial advice in order to better understand the pros and cons of these schemes.  Please contact us and we’ll arrange a meeting with one of our Financial Advisers to discuss your requirements – we look forward to hearing from you.

Tax relief on pensions explained

Tax relief on pension contributions explained 

Find out how the government tops up your pension savings in the form of pension tax relief, and use our pension tax relief calculator to see how much you'll get. 

What is pension tax relief? 

When you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief. 

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. 

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. 

So:

● Basic-rate taxpayers get 20% pension tax relief 

● Higher-rate taxpayers can claim 40% pension tax relief 

● Additional-rate taxpayers can claim 45% pension tax relief 

In Scotland, income tax is banded differently and pension tax relief is applied in a slightly alternative way.

● Starter rate taxpayers pay 19% income tax but get 20% pension tax relief 

● Basic rate taxpayers pay 20% income tax and get 20% pension tax relief 

● Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief

• Higher-rate taxpayers pay 41% income tax and can claim 41% pension tax relief 

● Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief 

How pension tax relief works 

If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80. The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary. 

Higher-rate (40%) and additional-rate (45%) taxpayers only need to pay £60 and £55 respectively to achieve the same £100 of pension savings. 

How do I claim pension tax relief? 

The way tax relief is claimed depends on the type of pension you are saving into, and it’s worth checking with your scheme to see what method it uses, as you might need to do some extra legwork to get the full tax relief you’re entitled to. There are two main ways: 

Pension tax relief from ‘net pay’ 

A ‘net pay’ arrangement is used by some workplace pensions, and don’t require you to do anything to get your full tax relief. 

Your pension contributions are deducted from your salary before income tax is paid on them, and your pension scheme automatically claims back tax relief at your highest rate of income tax. 

Pension tax relief at source 

‘Relief at source’ applies to all personal pensions and some workplace pensions. So, if you have a private pension with an insurance company, or a self-invested personal pension (Sipp), this will apply to you. 

If you’re paying into a pension through your employer, your employer will take 80% of your pension contribution from your salary (technically known as ‘net of basic rate tax relief’). 

Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension. 

Under this system, higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them. 

How much pension tax relief can I earn in 2019/20? 

The government puts a limit on the amount of pension contributions on which you can earn tax relief. This is called the pensions annual allowance. 

It has been set at £40,000 for the tax year 2019-20. Any pension payments you make over the £40,000 limit will be subject to income tax at the highest rate you pay. 

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years. 

Pension tax relief for non-taxpayers and low earners 

Non-taxpayers, including spouses who aren’t in employment and children, are eligible for tax relief of 20%, even though they don’t pay tax. 

Remember, you can save 100% of your income into a pension to earn tax relief, so long as it doesn't exceed £40,000 in a year. So, if you earned £5,000 a year, you could save £5,000 into a pension. 

But if you earn £3,600 or less, including people that don't earn any money, the maximum you can contribute is £3,600. This includes the government top-up, so your personal contribution can be no higher than £2,880

Open markets option (OMO)

The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.

 The term OMO is now generally used to support a campaign, often led by the pensions industry and the media, to make sure people know the benefits of shopping around. The majority of people still don’t use the Open Market Option in large part because they don’t know they can or don’t realise the benefits of doing so. Retirees who don’t use the OMO and settle for the default deal offered by their pension provider, may be missing out on up to 20% more income from an annuity. This is especially important as retirees cannot change their annuity once it has been purchased.

 One of the main reasons that people can get more from an annuity if they shop around is that they may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity) which pays a higher income to people who suffer from a range of health conditions – anything from asthma to a serious heart condition. There are also other products available that may suit peoples retirement needs better than the default deal offered by a pension provider. One suggestion to make the most of the Open Market Option is to speak to an independent financial adviser who will explain the different options available at retirement.

 The Association of British Insurers has been working with the retirement industry to improve consumers' knowledge of the Open Market Option. This includes pensions providers making it much clearer to their customers that they can use the OMO and that they may get a better income by doing so. However, take up of the Open Market Option is still low and there are now calls from many to make it harder for a pension scheme to transfer into an annuity by default, thereby forcing people to consider their options.