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The Open Market Option and Your Rights


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As the countdown begins to your pension date, your pension fund provider will contact you to offer you a range of options on what to do with your fund. Different pension annuities will be made available, with the aim being to provide you with a reliable income through the later years of your life. Although it can be tempting, going with the deal put in front of you by your fund administrator cannot always be the best value. Some people wrongly believe that they have to go with the company which has held the fund for them, but this is not the case. What is known in the business as the open market option means you have the right to transfer your funds to any annuity provider you like.

Brought into being by the Finance Act 1978, the open market option has to be activated before anyone gets any benefits from their fund provider via a lump sum or regular income. The option means different insurance firms are effectively in competition with each other for your custom, meaning there are different annuity rates and deals. Some of them may well provide you with considerably more cash in the long-term compared to the deal offered by your fund provider.

Financial Services Authority regulations mean that pension fund providers must admit to the fact that you could get a better deal somewhere else. A provider is also obliged to explain the open market option in detail. The rules are very clear, even stating that someone should not be under the impression there is one all encompassing annuity which is the best deal for anyone regardless of their circumstances.

Even if you choose to select this right, doing it with professional help may help maximise your income in the long run. Independent financial advisers can take a look at what your fund provider has laid on the table, and help you if you want a look around elsewhere. It is important you get it right as many deals cannot be changed once they have been put into practice, and you will not normally be able to switch providers a few years down the line if what you have chosen does not suit you.

Going down this route does not need to be overly confusing, even though there are what may seem a baffling number of annuities available. In simple terms there are fixed or conventional annuities, supplying payments right the way through your retirement. In many cases they will continue to pay out regardless of how long you live. However, some deals are attached to investments, and some of them can set you up with a potentially lucrative income. But they have an element of chance, and stocks and shares can go down as well as up.

You may also want to consider an enhanced or impaired life annuity. You may qualify for this if you have certain types of medical condition, including a history of diabetes, heart disease, or if you suffer from certain forms of cancer. Even smokers may be entitled to this type of product, which normally provides a better income than a conventional annuity.

The open market option is the way in which many people manage to maximise their pension fund. Remember that what is provided by your fund administrator may not always be the best option. The key to making use of what you have saved up over the years is tailoring something to fit your individual circumstances and plans for the future.

Steve Wright is Managing Director of an independent financial adviser specialising in retirement income advice and retirement annuity


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