Open Market Option

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    Open market option

    Those with a pension fund from a money purchase scheme, be it a personal pension or an occupations defined contribution scheme, will need to use their accumulated personal fund to buy an annuity. But you cannot change an annuity once you have purchased it, so it is vital that you make the right decision for your circumstances.

    But to do this you need your options and learn a bit about annuities so you can compare annuities. It is worth knowing that if you are about to retire you can increase your pension income by shopping around for the best annuity, rather than simply accepting the one offered by their pension provider. This is known as exercising the open market option (OMO).

    Exercising the open market option should increase your pension income by enabling you to get a more competitive annuity rates (the rate used to convert you pot of money into regular income for life). Annuities vary significantly between providers. The one offered by your pension provider or company pension scheme may not be the right one for you.

    A recent Government study found that 60% of annuity claimants do not use their open market option because they simply don’t know about it or couldn’t be bothered to shop around. But by using the OMO and shopping around you could increase your pension income by at least 20% (and perhaps by as much as 40%) so it will be well worth the effort.

    How the open market option works

    About six months before you retire your pension provider should write to you telling you the open market option. This will probably also include an offer of an annuity. Although it is easiest to simple accept this offer, you may be cheating yourself out of valuable pension income.

    Remember, you do not have to accept the annuity offer from your pension provider or company scheme. To see if it is a good deal check what your provider is offering you for an annuity and then compare this with the annuity rates and options on offer elsewhere.

    How to shop around

    To shop around for an annuity you need to know how much you have and what you want from your annuity, so you’ll need to make a few decisions before you can begin. Here is a quick list of the steps you’ll need to take.

    Get an estimate of the value of your pension fund from your provider.

    Decide if you want to take tax-free lump sum and how much you want. You can have up to 25% of your pension fund as cash on retirement. If you opt to take some of your pension benefits as cash you’ll need to deduct this amount from your fund to workout how much money you’ll have to buy an annuity.

    Make up your mind on whether you want a single or joint life annuity and if you want your income to increase each year or stay the same month after month.

    Would you like your annuity to be paid for five or ten years, even if you should die soon after you bought it? This is known as a guaranteed period.

    Your fund may need to be a certain size to get the better rates. If you only have a smallish pension fund your option may be limited, as some annuity providers only cater to those with an ample pension savings.
    Depending on your health and lifestyle (such as being a smoker) you may be able to benefit from and enhanced annuity, which makes larger payment to reflect a shorter life expectancy.

    Do you even want to buy an annuity? Would you prefer to keep the money invest for a few years with an income drawdown agreement.

    Once you’ve made your decisions, you should be able to request written quotes from several annuity providers. There several online sources for annuity comparison making it easier to find out what is available. Shopping around may take a lot of time and involve a lot of paperwork, but your future depends on making the right decision, so be sure to do your research.

    When it come to preparing for retirement and buying an annuity it is vital to get it right, as you cannot change it afterwards. Given that buying an annuity is such a significant financial decision you may benefit from some professional advice and guidance.