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The open market option available for pension annuities when a person reaches retirement is still not being fully utilised. Despite the fact that many consumers approaching retirement generally seem to understand pensions, a large number are not shopping around…..therefore not properly understanding annuities.
What is the Open Market Option?
When you reach the retirement age specified under your pension plan, the pension provider will write to you offering various ‘annuity’ options. One of the options that will be referred to in the pension provider’s letter is the ‘open market option’. This is simply your right to purchase an annuity with a different pension provider to the one you have used to build up your pension fund. Using the open market option may potentially lead to an increase in your annuity.
In the past it has been easy to overlook this option as some pensions companies have, understandably, been reticent to promote it too clearly. However, it is now a legal requirement for pension companies to draw your attention to the availability of the open market option.
You might wish to refer to the FSA Guide to Pensions: Annuities and Other Retirement Options. This booklet provides useful information about pension annuities and highlights the nature of the options available to you (please contact us if you would like a free copy).
You usually have the option to take up to 25% of the fund tax free and a pension paid for life, or alternatively you can take all of the pension fund as income.
An annuity is a pension company’s promise to pay an income from your pension fund. The income is normally paid monthly for the rest of your life, however long that may be.
After your death, payments could continue to a dependant, such as a spouse, (possibly at a lower level). An annuity can be for a fixed amount, or can increase each year, for example in line with the RPI (Retail Price Index).
If you decide to take a tax-free lump sum, this may be reinvested to generate additional income in retirement. You may choose to purchase an annuity with this money as well. This is called a ‘purchased life annuity’. Part of the income generated by the purchased life annuity will be paid tax-free.
There are many options available at retirement that are outside the scope of these notes. We suggest that you contact us to discuss the best options for you at retirement.
The Annuity Process
The following is a brief overview of the process which may apply to you as you approach retirement:
Stage 1
Four to six months before your expected retirement date, you will receive a “wake-up letter” from your pension company, together with general information, and a deferral form which allows you to postpone buying your annuity.
At this stage you don't need to do anything unless you decide to postpone buying your annuity. However, you may wish to seek advice about your options.
Stage 2
Six to eight weeks before your expected retirement date your pension company will send you annuity quotations, along with an explanation of your options, and a form to indicate your preferred option(s).
At this stage you are asked to indicate your preferred annuity option(s) to your current pension provider.
Stage 3
Two to three weeks before your expected retirement date you will receive a guaranteed quotation from your pension company.
At this stage you are asked to make a decision and return the form to your pension company. However, you should only do this after deciding the type of annuity you want, and after finding out whether you can get a better deal elsewhere. It is possible that your current pension company will not offer you the best annuity. The Open Market Option gives you the right to shop around to find the best annuity to suit your personal circumstances.
This is best done utilising the services of a specialist annuity adviser, such as ourselves, as we have access to systems that provide league tables of the best annuity providers and will discuss with you your personal needs and provide a full explanation of your options. Failure to seek independent financial advice in relation to your retirement options may affect your retirement income.
What is the Enhanced or Impaired Life Annuity?
Not all annuities are the same. These annuity rates are based on life expectancy and if your life expectancy is lower than normal, you may receive improved annuity rates. As this is guaranteed for life, it can often make a significant difference to your retirement.
If you can answer 'yes' to one or more of the following three medical questions, you could be eligible for an enhanced annuity:
1. Do you smoke?
2. Do you, or have you ever, taken prescription medicine?
3. Have you ever been hospitalised for a medical condition?
If you do have any pension plans, I would urge you to contact us as we can help explain all your options at retirement; and if you decide that an annuity is right for you we will find you the best provider.
Please contact us should you need further information or explanation or to see if we can improve on the annuity offered to you by your current Pension provider.