Gars provide a retirement income up to 40% higher than a standard annuity, but many people do not even realise their policy comes with a guarantee.
Clive Scott-Hopkins of Towry Law, an adviser, said: “Most people coming up to retirement age have at least one Gar pension policy. Some insurers do not make this clear. Even when they do, it is often difficult to understand what you are being offered.”
Gars can in some cases be more than 10% a year. They were sold mainly in the 1970s and 1980s, usually alongside with-profits retirement annuity contracts, the forerunners of personal pensions.
Annuity rates have slumped as interest rates have fallen and life expectancy has improved. If you have a policy with a Gar, it will usually pay a higher income than a standard annuity.
A man with Scottish Amicable’s Flexipension 1 policy, for example, can lock into a fixed annuity rate of 9.3% at the age of 60, compared with the best current annuity paying 6.6%. He would receive £9,300 a year for a fund of £100,000 if he used the Gar, compared with £6,600 from a standard level annuity — £2,700 more.
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Many customers are not using their Gars. About 20% of policyholders with Gars at Scottish Widows do not take advantage of the higher income.
Norwich Union admitted last week that a high percentage of customers do not take up Gars on a variety of its policies.
Experts believe a lack of clear information is to blame. Details about Gars are often buried or written in jargon that is easily misunderstood.
Allied Dunbar, for example, recently sent out the following information: “This plan does not have guaranteed annuity rates however, it does have guaranteed mortality rates (sic). This means that although the maximum tax-free cash sum payable is lower than 25%, the annual pension payable is usually higher than the equivalent pension under a personal pension plan. Please note, guaranteed mortality rates is sometimes referred to as guaranteed annuity rates (sic).”
It is not in the interests of insurers to clarify information about Gars because they are expensive to honour. But the lack of clarity means investors might make the wrong choice.
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Alan Steel of Alan Steel Asset Management, an adviser, said: “Insurers are obliged to make people aware of the open-market option for annuities — you can buy your annuity from any company, not just your pension firm. You can often get a better deal if you exercise the option, but it is unlikely to be as good as the Gar rate.”
Savers can also be caught out by tight deadlines. Some policies, including those offered by Scottish Widows and Norwich Union, will only pay the Gar if you take your pension at a stated retirement date. If you retire earlier or later, you have to take a standard annuity.
But guidelines from the Association of British Insurers (ABI) say firms need to highlight the value of a Gar in a letter sent just six weeks before a selected retirement date.
Stuart Bayliss of Annuity Direct, an adviser, said: “People should be warned at least four months before retirement. Gar benefits ought to be pointed out at the earliest opportunity.”
The examples insurers provide often create confusion. Many imply that you can only take a Gar on a single life and with a level payment that does not rise in line with inflation.
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If you have a spouse you will probably prefer a joint life annuity, or one that will pay an income to your family if you die within a specified period.
The drawback of a level annuity is that the value of the income will be eroded by inflation. If prices rise by just 2.5% a year, an annual income of £10,000 would be worth £7,763 in real terms after 10 years.
But some insurers will provide joint-life annuities or annuities that protect your income from rising prices in return for a small cut in the Gar rate. You will usually have to ask for a quote on a flexible basis because most insurers do not provide this information automatically.
There may be circumstances when it is impossible to take the Gar. If you want to delay buying your annuity, for example, you may have to give up a Gar.
The ABI is drawing up new guidelines on the information firms send out before your retirement date. But you should always seek specialist advice before you make any decision. Once you have bought an annuity you are locked into the scheme for the rest of your life.