Shopping Around For A Higher Income - What Makes The Open Market Option Attractive?...

Skip straight to enquiry

The Open Market Option allows retirees to shop around for different ways to convert their pension fund into an annuity, as opposed to just taking the rate offered by your pension provider.

You could get more income from a pension annuity than you think. The Financial Services Authority ( FSA) agree. They say "You may be able to get a better annuity rate by shopping around. You should check what your provider is offering you and then compare this with the annuities on offer through the open market."

A UK government research study showed that 60 per cent of annuity claimants do not use their Open Market Option and 40 per cent of information packs sent from pension firms did not advertise the option clearly.

Many still do not use their Open Market Option, not just because they are unaware of the benefits of doing so, but don't actually realise they have an option. It has been claimed that those at retirement who do not use their option, taking the default annuity offered by their pension provider, may be missing out on up to 40% more income.

According to the professional pensions publication, DC World, it is estimated that over £1 billion in pensions was lost by failure to get proper advice on the best-selling annuity.

To make the most of the Open Market Option it is important that you speak to an Independent Financial Adviser (IFA) who'll explain the different retirement options available.

Enhanced / Impaired Annuities

If you are in advanced years, a smoker or have impaired health you may be able to increase your pension annuity income.

You may be able to receive extra retirement income if you have a health problem, no matter how small or insignificant you think it is. It's essential that you tell our team of Pension Annuity Specialists about it. You will stand a better chance of a higher income for the rest of your life. This is also the case if you smoke ten or more manufactured cigarettes or use 85mg of rolling tobacco a day.

You may be in relatively good health - some people think they have to suffer from a serious medical condition such as cancer, heart disease or stroke to receive extra income in retirement - the reality is often surprisingly different. A seemingly unimportant condition or complaint may substantially increase your annual retirement income.

The reason why some pension annuities, called "Enhanced Annuities" or "Impaired Annuities", pay more than standard annuities is because those in better health tend to live longer than average. The annuity providers therefore have to pay out more over the healthier person's lifetime so their yearly income is usually lower. This is why it's extremely important to report any ailment, no matter how small you think it is to your provider. It may get you a higher rate of return.

In fact if you have one of nearly 1500 health conditions, such as asthma, being overweight, high blood pressure, heart problems etc., you must ensure you mention it to your adviser.

It is estimated that up to 40% of the UK population could boost their annuity income with an "enhanced annuity".

Annuities for Smokers?

If you are a smoker, pension annuity providers factor in that you're likely to pass away sooner than the average non-smoker, so they therefore will not be paying you your yearly income for as long. A presumed shorter lifespan means that being a smoker can increase the amount of annual income you receive from your annuity.

Additionally, higher annuity rates are sometimes offered to people who have retired from certain occupations or people who live in certain parts of the country.

As a smoker you may already be entitled to receive a higher income, but also, depending on your age, you may receive further enhanced rates of up to 30 percent above standard level annuity rates, i.e. if normally you would receive £1,000 a year as a non-smoker, you might receive as much as £1,300 per annum as an older smoker.

For the first time in your life it's likely to actually pay to be older and in "bad" health!

Annuities for Females?

Thousands of women retire every week in the UK, but did you know that when they buy a pension annuity, in general, they receive a lower income from their pension savings than men? They are being penalised when they buy their annuity simply because of their biological difference to men.

Insurers say that income from annuities for females are lower because of a longer life expectancy. Individual's annuity income is dependent on the insurer's estimation of how long they will live. The same pot of pension money has to last longer; it is therefore spread more thinly over more years.

This fact alone makes it even more important that women choose the right annuity and not just accept the one that they are offered by their existing pension fund holder.

But what actually is a Pension Annuity?

A pension annuity is an arrangement where you make a lump-sum investment. From this investment you receive a guaranteed level of income. Most annuities are bought using funds held in money purchase pension schemes.

Basically, an annuity converts a savings fund into income and that income will be paid to you for the rest of your life.

An annuity is payable for your lifetime, although it is possible to select a fixed period if purchasing an annuity with cash rather than pension funds.

Examples of these types of "Compulsory Purchase Annuity" are conventional annuities, with profit annuities and unit linked, or 3rd way annuities. Annuities that are purchased from savings, not from a pension scheme are referred to as Purchase Life Annuities and Immediate Vesting Annuities.

When your pension fund reaches maturity, your pension provider will advise you of the fund value, and general information about annuities and the level of annuity income you would receive. Pension annuities are usually provided by insurance companies.

You are then entitled to use your Open Market Option, which allows you to transfer the fund value to another pension annuity provider of your choice. This enables you to take advantage of a higher annuity income which may be available from a different provider.

This could be the biggest financial decision you'll ever make, so make sure that you maximise your income. Once you buy an annuity you cannot change your mind so you need to ensure you get it right first time.

Types of Pension Annuity

There are a wide range of options which can be selected when choosing an annuity scheme. The most widely used annuity options are listed below.

Minimum Term

The income is guaranteed to be paid until the death of the annuity holder (the annuitant), but it can also be modified to include any of the following options:

• 5-year guarantee - annuity ceases at death of annuitant, or after 5 years, whichever is the longer
• 10-year guarantee - annuity ceases at death of annuitant, or after 10 years, whichever is the longer
• Joint life annuity - annuity ceases on the death of the second of two named annuitants

If you choose a guaranteed payment period, then your starting level of income will be lower.

Escalation

Your annuity can either be paid at a fixed level or you can include an escalation at 3%, 5%, or at the % RPI (annual increase in retail price index). Thus you can choose to compensate for inflationary effects on your income. However the initial income level will be reduced if you choose escalation.

Converting Your "Savings" Into Income

A pension annuity is an arrangement where you make a lump sum investment and from this investment you receive a guaranteed level of income for the rest of your life. So basically an annuity converts a fund into income and that income will be paid to you until you die.

As stated, an annuity is designed to be payable for your lifetime, but it's possible to select a fixed period if purchasing an annuity with cash rather than pension funds.

Examples of these types of "Lifetime Annuity" are conventional annuities, with profit annuities and unit linked, or 3rd way annuities. Annuities that are purchased from savings, not from a pension scheme are referred to as Purchase Life Annuities and Immediate Vesting Annuities.

Spouse benefits

Your surviving spouse, registered civil partner or financial dependents can be protected after your death, by choosing one of the following options:

• Reduction to half benefit,
• reduction to two thirds benefit or
• full benefit

Thus the annuity is adjusted to the new level at the death of the annuitant or at the end of the guarantee period (if selected), and continues until the death of the spouse.

To reiterate, after death, the annual income paid to your spouse, partner or financial dependents will be a proportion of the annual income you were getting just before you died. The proportion has to be chosen at the time when you take out your pension annuity. It can be for example, 100%, 66% or 50% of your annuity at the time of your death. A higher proportion will have a higher cost, your annuity income will therefore be lower.

Annuity Payment Options

You can choose how and when you have your annuity income paid:

• monthly payments
• quarterly payments
• half yearly payments
• yearly payments

You can receive it in advance at the start of the payment period or in arrears at the end of that period.

What is a Purchased Life Annuity?

A purchased life annuity is an annuity purchased with your own funds, instead of from a money-purchase pension fund. It operates in the same way as a Compulsory Purchase Annuity, but it has tax advantages.

The entire pension which you receive from a Compulsory Purchase Annuity is treated as taxable income in the same way as income from normal employment would be. However when you buy a Purchased Life Annuity that part of the annuity income, which is calculated as capital repayment to you, is tax-free. Only that part of your annuity income which is interest paid on your investment is taxable.

With similar annuity rates, the effect of this tax treatment of a Purchased Life Annuity, for a basic rate tax-payer, would be to increase net income by approximately £200 per month, from a £200,000 investment.

Your consultant can assist you in making optimum decisions for such investments, and would be happy to provide comparative illustrations of such options.

Alternatives to an Immediate Annuity

You may be interested in alternatives to an immediate annuity purchase such as:

• Unsecured Pensions

• Variable Annuities

• Third Way Annuities

• With Profits Annuities

Visit the Alternatives to Standard Annuities page for more information.

Why use an FSA registered broker?

1. They may be able to get a better pension annuity deal than you may be able to.

2. They're more likely to have access to a wider range of pension annuity possibilities than you.

3. Due to their existing relationships with pension annuity providers, they may be better placed than you to overcome any problems that might surface with your application.

4. You will have an expert point of contact should anything go wrong.

5. They work to a set of guidelines laid down by the Financial Services Authority ( FSA) who regulate brokers' policies and working methods.

6. Pension Annuity Brokers have got an interest in recommending the right product for your particular circumstances. They'll not wish to fall foul of strict FSA rules.

7. If you decide not to get FSA qualified broker annuity advice, you may not be able to get compensation through the Financial Services Compensation Scheme if, in the future you have a complaint about their recommendation.

But do I have to pay a fee?

You do not pay a fee. There's no charge for the investigation of your policy and you're under no obligation whatsoever to follow the recommendations that are made. By using a pension annuity broker's service, you'll receive advice that's paid for by the annuity provider. You'll not have to pay them a fee as your broker will receive a commission direct from the recommended annuity company.

Your adviser's costs are already factored into the income that you are offered by the annuity provider. That means that although you pay nothing up front, that does not mean the service is free. You will still pay your broker indirectly through product charges. These charges pay for the product provider's own costs and any commission and reduce the amount left for investment. You could choose to buy direct, but the charges could be the same as when buying through a broker, or they could be higher or lower. Your broker will tell you how much the commission will be before you complete your investment, but you may ask for this information earlier.

How We Help You

We search the pension annuity providers' systems using specialist software and aim to make sure that we get you the highest annuity income possible.

Helping to Boost Your Income

The things your pension annuity broker will look at include:

• Your required annuity income
• Any spouse or dependants' benefits
• Your previous occupations
• The type of area where you live
• Your attitude to risk
• Security versus flexibility
• Other assets you may have

...and importantly...

• Your health

Have you ever been hospitalised for any medical condition? Your broker will also ask if you are currently taking any medication - did you know there are over 1,500 health conditions that could result in an increased pension annuity? You may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity).

Additionally, higher pension annuities are often offered to:

• Regular smokers

• People who have retired from certain occupations

• People who live in certain parts of the country

Due to the range of the pension annuity policies that financial advisers can offer, we cannot provide online quotations, only personalised comparisons.

An FSA registered financial adviser (not a call centre) will contact you to discuss your exact requirements and formulate a tailored pension annuity proposal for your circumstances. There is no charge for us investigating your policy and you are under no obligation to follow any recommendations that are made.

Get Free Comparisons...

Fund before tax free cash taken
Pension company
Pension annuity type required	Unsure Level Escalating
Do you smoke?	No Yes
If so, number per day?
Date of birth
Retirement date
When are you looking to buy a pension annuity?	Unsure Immediately Within 6 months 6-12 Months More than 12 months
Do you have or have you had a health problem, no matter how minor? (If so, you may receive higher income)
Title	Mr Mrs Miss Ms Dr Other
Name
Phone number
Work phone number
Mobile phone number
Email address
Single or joint pension annuity?	Unsure Single Life 50% Surviving Partner 66% 100%
Spouse/Partner
Date of birth of spouse/partner
Gender of spouse/partner	Male Female
Do they smoke?	No Yes
If so, number per day?
Spouse/partner health conditions?
Any comments, questions or feedback?
Get independent pension annuity comparisons directly from an FSA registered adviser now...

We value your privacy and we never sell or share your data...