In hundreds of thousands of homes across the country there are documents filed away, or in some cases just lying around, that could double people’s pensions. How? Because around a third of defined contribution pension contracts written mainly in the 1980s, promised policy holders a fixed annuity rate when they finally exchanged their pension pot for annual retirement income.
At the time, these rates were generous, ranging from around 8 per cent to 14 per cent. Back then this level of income wasn’t exactly remarkable. But annuity rates have shrivelled since, forcing today's retirees to survive on much measlier pensions - up to four times less generous than their counterparts in the 1980's enjoyed. Today, you’re doing well if you manage to get a 5 per cent annuity so it's well worth checking your old policy documents to see if you were given a guaranteed rate.
The cumulative effect of increased payouts over the course of the average retirement (25 years) could make you tens or even hundreds of thousands of pounds richer. Tom Green is 60 in October and has saved £85,801 into his Scottish Widows pension, which came with a guaranteed annuity rate of 8.77 per cent if he retires this year. Tom has shopped around for the best deal on the open market and found the best he could get for his circumstances is from Legal & General. If he chooses this option he’ll get annual income of £4,744 for the rest of his life, but if he sticks with the Scottish Widows guaranteed rate, he'll get £7,524 a year - an annual uplift of £2,780 - which would amount to £69,498 over the course of a 25-year retirement.
It’s a good job his financial planner, Carl Lamb at Almary Green, made sure he knew about the guaranteed rate, as he says Scottish Widows would have nullified the rate if he applied even one day after his selected policy retirement date.
If you don’t have a financial adviser you need to be extra vigilant and check your old pension policies yourself, because not all insurers make the fact these old contracts still exist very clear. And written into some of the contracts are strict deadlines, about which they offer zero flexibility.
Lee Hollingworth, partner at pensions consultant Hymans Robertson, says: "Insurers aren’t going to shout this from the roof tops - you have to go out looking for this kind of information yourself."
Investors Chronicle spoke to a number of major insurers known to have sold these policies in the 1970s and 80s that claimed over 90 per cent of customers had exercised the option to take their guaranteed rate, if their policy offered one. Scottish Widows and Clerical Medical said the take up rate has been more than 99 per cent so far.
But others were not so forthcoming with information. Aviva, for example, was unable to tell us when the policies were issued or what percentage of retirees have taken them up so far, despite knowing there are exactly 70455 policies in force. And when we spoke to financial planners and consultants we heard a very different story. Mr Hollingworth, who has acted as a consultant to hundreds of pension schemes operating these policies, said around half of retirees that have guaranteed annuity policies end up missing out on generous guaranteed rates.
Mr Lamb is even more pessimistic, saying in his experience the proportion of savers missing out is more like 60 per cent. He blames woeful communication and overly strict policies as the main reasons for this.
Adding to the problem, most annuity comparison websites designed to find you the best annuities don't ever mention guaranteed annuity rates, even though well over 100,000 retirees redeem the policies every year according to the Association of British Insurers, and there could be thousands more who have these policies.
Don't lose out: Your 3 step-plan of action
Step 1: Check all your old pension policies to see if they come with a guaranteed annuity rate. If you’ve got the old paperwork filed at home this should be straightforward, but be aware the policy documents can be long and complex, and the information regarding guaranteed rates might not be immediately obvious so make sure you read every page before ruling it out. If you've lost the paperwork or you’re confused by the policy documents, you can call your old employer or the insurance company directly and ask them clearly: "Does my policy come with a guaranteed annuity rate?" If it does, make sure you get all the important details such as what the rate is (this may vary depending on how old you are when you retire), when the policy expires and how flexible they are on that deadline.
Step 2: Shop around for the best annuity on the open market. Guaranteed annuity rates will normally be the most generous but don't just assume this, as it might not always be the case. Do your research anyway to rule out other options. You should also investigate whether you might be eligible for an enhanced annuity, which could increase the rate you receive by up to 60 per cent if you’ve got health conditions or a lifestyle that might affect your life expectancy.
Step 3:Choose your annuity. You'll be looking for the highest rate but don't overlook other aspects of annuities, such as guarantee periods, index linking, and the option for your spouse to inherit the pension if you die first. Most annuities with guaranteed rates don't come with a guarantee period, which obliges your insurer to pay a lump sum to your spouse or your children if you were to die before an agreed age. Billy Burrows, head of business development at Annuity Line, says it could be a good move to take the guaranteed annuity and take out a separate life assurance policy which would pay a lump sum on death. How much this will cost depends on your individual circumstances and increases the older you get. He says a man aged 60 in good health could arrange £50,000 life cover for about £500 a year. This premium would increase to £850 a year for a 65 year old man and £1,200 a year at age 70.
What are major insurers' rules around guaranteed annuities?
| Insurance Provider | Policies offered |
| Aviva | Unable to give any specific information on the policies issued, apart from the fact that there are around 70455 policies still in force. |
| Scottish Widows (Now Lloyds Banking Group) | It offered a number of different guaranteed annuity rate (GAR) policies from 1972 until 2000. The range of rates for GARs is between 6.6 per cent and 15.3 per cent. The cut-off period on the deadline is six weeks. |
| Standard Life | Contracts were sold in the 1970s and early 1980s. They were stopped in 1984 for Executive Pension Plans (EPP) and 1985 for Retirement Annuity Contract (S226.) They varied by customer age and between product, but an example would be that Standard Life would pay a 65 year old male an income of £102.84 per year per £1,000 of purchase price. |
| NPI (Now Phoenix Life) Pearl (Now Phoenix Life) London Life (Now Phoenix Life) | The vast majority of GARs were set in the 1970s and early 1980s and are broadly consistent across Phoenix (eg a lump sum of £9 secures a pension of £1 a year for a male at age 65, giving an annuity rate of 11.1 per cent, broadly double that available in the open market today). Some later generations of product offered much less attractive GARs, although these are the exception rather than the rule. All GARs will continue to be honoured until each customer retires. |
| NFU Mutual | Policies that started between 1 January 1983 and 30 June 1988, have guaranteed annuity rates. They use either your policy’s guaranteed annuity rate or the current rate offered by NFU Mutual, whichever gives the most income. If a pension policy started before 1983, the benefit is already shown as an ‘Annual pension’. This is the minimum amount of income you will receive if you take your pension benefits at the ‘Pension age’ shown. |
| Friends Provident (now Friends Life) | Ceased selling products containing GARs at the end of the 1980s. |
| Prudential | Sold 'OB Personal Pension Retirement Plans' between 1956 and 1972. As long as you vest with Prudential – there is no time window for taking advantage of the guarantee as it's a standard policy feature, aside from the age 55 to 75 years industry standard. |
| Clerical Medical (now Lloyds Banking Group) | The range of rates for GARS for Clerical Medical is between 6.41 per cent and 13.92 per cent. Cut-off periods for the deadline range from 30 days to six weeks, depending on your policy. |
Source: Investors Chronicle based on information provided by insurers
How much life assurance would cost you
| Age | Sum assured | Cost per month | Cost per year |
| 60 | £50,000 | £33 | £396.00 |
| 65 | £50,000 | £68 | £672 |
| 70 | £50,000 | £108 | £1,296 |
Source: Annuity Line
| Guaranteed annuity rates caused the near-collapse of Equitable Life. It became locked into paying out high rates promised at a time of high inflation during the 1970s. Some 800,000 pensioners lost money because of it. |
