Guaranteed Annuity Rates

miller

With-profits pensions often included a Guaranteed Annuity Rate (GAR) at retirement.

Would there be any advantage in one off top-up payments into these plans (my reasoning is if there was no effect on the GAR and the underlying plan was worth far less, any invitation to top-up would not be worthwhile) ?

(I know someone who made a £10k payment to a Prudential plan about 10 years ago, it is hard to see what impact it had as the documentation is pretty opaque).

As an aside, Prudential took over a month to action a tax code from HMRC and only after prompting.

dunstonh

With-profits pensions often included a Guaranteed Annuity Rate (GAR) at retirement.

Not quite. The pension itself carried the guaranteed annuity rate. Not the fund. There are plenty of unit linked pensions out there which have GARs. Some have both unit linked and WP as an option.

Would there be any advantage in one off top-up payments into these plans (my reasoning is if there was no effect on the GAR and the underlying plan was worth far less, any invitation to top-up would not be worthwhile) ?

If you happen to have a very rare beast that allows increments and still offers a GAR on that increment then yes it can be worthwhile.

(I know someone who made a £10k payment to a Prudential plan about 10 years ago, it is hard to see what impact it had as the documentation is pretty opaque

The last provider to offer GARs on new business ceased in 1995. so, that contribution is unlikely to have obtained GARs. Pru themselves didnt offer GARs on their personal pensions (just some S226 RACs).

miller

dunstonh wrote: »

The last provider to offer GARs on new business ceased in 1995. so, that contribution is unlikely to have obtained GARs.

Thanks for the detailed response.

So the £10k is likely just to have gone into the underlying with-profits fund with no impact on the final annuity achieved due to the GAR.

It seems to me there was no benefit in doing this as the GAR "trumped" the value of annuity the fund would buy (the transfer out value would have bought an annuity with a yearly payment around half that of the GAR).

I'm just trying to understand what value the £10k actually achieved. Would he have been better off just keeping the £10k ?

dunstonh

So the £10k is likely just to have gone into the underlying with-profits fund with no impact on the final annuity achieved due to the GAR.

I can't say 100% but most plans with GARs are closed for increments. A statistical probability.

I'm just trying to understand what value the £10k actually achieved. Would he have been better off just keeping the £10k ?

If £10k was the cheque, then £12,500 would have gone into the pension (assuming it was 20% tax relief - depending on year, it may have been higher). Its probably made around 4-6% p.a.