Some people who have pension funds may not even realise what this phrase means, but understanding it can mean the difference between a good value pension and a poor one. In essence ‘open market option’ refers to the right of retirees to move their cash to a different firm so they can get a superior life income compared to their pension fund holder. According to law, an annuitant does not need to purchase an annuity from a firm which organises their pension fund.
The open market option exists thanks to the Finance Act 1978, and the holder of the pension fund has to use this option before they get any benefits from their current provider either via a regular income or lump sum.
Many people exercise their right to the option because insurance companies compete with one another to offer different annuity rates, meaning someone can choose from a number of different offers. People have been known to get 25 per cent more cash than would have been provided by the company which handles their pension fund.
Pension providers are obliged to admit that customers might get better annuity deals by looking around at what is on offer elsewhere. This is according to rules laid down by the Financial Services Authority. Providers must also properly explain the open market option, and also have to make it clear that there is no such thing as a perfect product which is the best for everyone in any situation.
Independent financial advice is advisable when seeking out a pension annuity, and companies who supply these products must also make sure getting advice from these professionals is a good idea. Selecting your annuity is not to be taken lightly, as the nature of the product means they cannot be swapped or changed after you have taken one. It is not possible to simply change your mind and go for a new annuity if you do not like what you have after a few years.
If you select the open market route it does not necessarily mean that you have to choose a particular type of annuity. Many people go for a conventional annuity, or fixed annuity, providing a consistent and predictable income right the way through their retirement. It does not matter if they die before the policy period. But the open market also contains annuities which involve investment risks, which potentially supply people with a handsome income. Because of the unpredictable nature of investments, these types of annuity can also not go quite so well in some circumstances and leave someone with less money than they would have liked.
There are also annuity deals links to your medical circumstances. These are known as enhanced or impaired life annuities and are designed to pay better rates to someone who is not expected to live as long as a retiree in perfect health. Common conditions which might qualify for this includes diabetes, types of cancer, and certain medical histories like prior heart conditions.
The open market option is therefore a possible route to your best possible retirement income. What is put on the table before you by your pension fund provider is not necessarily the best that is out there. Independent financial advice can help someone make the best decision. Annuities are normally for life, meaning the right deal is crucial if you are to make your pension fund go as far as it possibly can.
Steve Wright is Managing Director of YourPensionAnnuity.com an independent financial adviser specialising in retirement advice and open market option