How to get a guaranteed rate of up to 16% on your savings

Low interest rates, with even the best instant access accounts only giving around 3%, have left many retired people struggling to make ends meet.

After income tax, the best net rate for a 20% taxpayer is around 2.4% and for a 40% taxpayer, only 1.8%. Even the best ISA rate is only 2.8%.

And, there is no sign of an early improvement, with some economists predicting that the Bank of England Base Rate will stay at 0.5% until 2014.

But there is a way to generate a much higher retirement income - the immediate vesting personal pension.

Everyone under the age of 75, even those with no current income, is entitled to pay at least £3,600 into a personal pension each year. Those with incomes of more than £3,600 can pay in up to 100% of their earnings.

By investing £3,600 in a personal pension and taking immediate income, it is possible to get high rates of return on your savings.

Here's how it works:

1 Invest £2,880 in an immediate vesting personal pension (IVPP)

2 Her Majesty's Revenue and Customs add £720 in tax relief, you now have a pension pot of £3,600

3 Take the maximum tax-free lump sum of £900

4 Take an income from the remaining fund (£2,700) payable annually in advance

5 Use the £900 tax-free lump sum and first year's income instalment to reduce the initial outlay of £2,880

6 40% taxpayers can reclaim another £720 in tax relief, further reducing the initial outlay

A 65-year-old man would get an income of £124.79 a year, meaning that the net initial outlay would be £1,855.21 (£2,880 minus £900 minus £124.79) for a basic rate taxpayer and just £1,135.21 (as for basic rate taxpayer minus another £720 higher rate tax relief) for a 40% taxpayer.

In return for this net outlay, they would receive an income of £124.79 at the end of each year for the rest of their life. This equates to a pre-tax rate of return of 6.7% for a basic rate taxpayer and 11% for a 40% taxpayer.  

Plus points

High rate of income compared to current bank deposit interest rates.

The initial outlay is low, after taking account of tax relief, tax-free cash and the first annuity instalment.

You (and your spouse) can invest £3,600 each every year until your 75th birthday.

Rate of income guaranteed for life, even if interest rates stay low.

Possible to add further features such as a guarantee period of up to 10 years or a joint life for those whose initial gross payment is £5,000 (£4,000 net) or more.

Downsides

You lose access to your savings and, once you've bought the immediate-vesting personal pension, it can't be changed.

Income from the annuity is taxable.

If you die, your income stops - those in poor health should consider carefully whether to invest in an IVPP. Alternatively, consider a joint-life annuity or add a guarantee period.

You can't buy one unless you are 55 years old

John Lawson, Head of Pensions Policy at Standard Life said, "An immediate vesting personal pension could be just the thing for you if you are looking to get a higher guaranteed rate on your savings. However, those who need access to their savings and those in poor health should think twice."

For more information, visit standardlife.com.