Pension Annuities: The Open Market Option
The Open Market Option allows you to shop around for different options to convert your pension fund into an annuity. You do not have to accept the rate offered by your pension provider.You could achieve more income from a pension annuity than you might think. The Financial Services Authority (FSA) 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 sixty percent of pension annuity claimants do not use their Open Market Option and forty percent of information packs sent from pension companies did not advertise the option clearly.
Many still don't use their Open Market Option
This is not just because they are unaware of the benefits of doing so, but they do not actually realise they have this option. It has been claimed that retirees who do not use their option, taking the default annuity offered by their pension provider, may be missing out on up to forty percent more annual income.According to the professional pensions publication, DC World, it's estimated that over one billion pounds in pensions was lost by the failure to get proper advice on the best-selling pension annuity.
To make the most of the Open Market Option it's essential that you speak to an Independent Financial Adviser (IFA) who will explain the different retirement options available.
Enhanced / Impaired Annuities
Are you in advanced years, a smoker or have impaired health? If so, you may be able to increase your annuity income.If you've a health problem, no matter how small or insignificant you think it is, you may be able to receive extra annuity income. It's very importnat that you tell our team of annuity specialists about it. You'll stand a much better chance of a higher income for the rest of your life. This is also the case if you smoke 10 or more manufactured cigarettes or use 85mg of rolling tobacco a day.
You may be in relatively good health, but a seemingly unimportant condition or complaint may substantially increase your annual retirement income. Some think they have to suffer from a serious medical condition such as heart disease, cancer or stroke to receive extra annuity income - the reality is often surprisingly different.
The reason why some pension annuities, called "Enhanced Annuities" or "Impaired Annuities", pay more is because those in better health tend to live longer than average. Pension annuity providers therefore have to pay out more over the healthier person's remaining lifetime so their yearly income is usually lower. This is why it is crucial to report any ailment to your provider, no matter how small you think it is. It may get you a much higher rate of return.
In fact, if you've one of nearly 1500 health conditions, such as being overweight, asthma, high blood pressure, high cholesterol etc., you must ensure you mention it to your adviser.
It has been estimated that up to 40% of the UK population could increase their annuity income with an "enhanced annuity".
Annuities for Smokers?
If you're a smoker, annuity providers factor in that you are likely to pass away sooner than the average person who doesn't smoke. They therefore assume that they'll not be paying you your yearly income for as long. A presumed shorter lifespan means that being a smoker can increase the amount of income you receive from your annuity.Additionally, higher annuity rates are sometimes given to people who have retired from certain occupations or people who live in certain parts of the country, based on postcode.
As a smoker, you may already be entitled to receive a higher annuity income, but also, dependent on your age, you may receive further enhanced rates of up to 30 percent above standard level annuity rates. For instance, if you would normally receive £1,000 per annum as a non-smoker, you might receive as much as £1,300 a year as an older smoker.
Annuities for Females?
1000's of women retire every week, but did you know that when they buy a annuity, in general, they receive a lesser income from their pension savings than men? They are being penalised simply because of their biological difference to men.Insurers say that income from annuities for females are lower due to a longer life expectancy. Individual's annuity income depends on the insurer's estimation of how long they'll live. The same pension pot has to last longer - it's therefore spread more thinly over more years.
This fact alone makes it even more important that women choose the right pension annuity and not just accept the one that they are offered by their existing pension fund holder.
But What Actually is a Pension Annuity?
Converting pension "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. Mostly, annuities are bought using funds held in money purchase pension schemes and are usually provided by insurance companies.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.
An annuity is payable for the remainder of 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 third 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, general information about annuities and the level of annuity income you would receive.
You are then entitled to use your Open Market Option. This allows you to transfer the fund value to another annuity provider of your choice. This therefore enables you to take advantage of a higher annuity income which may be available from a different provider.
You are normally entitled to take up to 25% of your pension fund as tax-free cash. Your annuity will be treated as pension income under the "Pay-as-you-Earn" tax regime.
This could be the largest financial decision you will ever make, so ensure that you maximise your income. Once you buy an annuity, you can't change your mind. You need to make sure you get it right first time.
Types of Pension Annuity
There are a wide range of pension annuity options that can be selected when choosing an annuity scheme. The most widely used options are listed below.Minimum Term
Income is guaranteed to be paid until the death of the the annuitant, but it can also be modified to include any of the following options:
• 5 year guarantee - the annuity ceases at death of annuitant, or after 5 years, whichever is longer
• 10 year guarantee - the annuity ceases at death of annuitant, or after 10 years, whichever is longer
• Joint life annuity - the 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.
Annuity 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). Therefore, you can choose to compensate for inflationary effects on your pension income. However the initial income level will be reduced if you choose escalation.
Spouse benefits
Your surviving spouse, registered partner or financial dependents can be protected after you pass on, by choosing one of the following options:• Reduction to half benefit,
• reduction to two thirds benefit or
• full benefit
The annuity is thus adjusted to the new level at the demise of the annuity holder or, if selected, at the end of the guarantee period, and continues until the demise of the spouse.
To recap, 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.
Pension Annuity Payment Options
You can choose when and how you have your annuity income paid:• monthly
• quarterly
• half yearly
• yearly
You can receive it in advance at the start of the payment period or in arrears at the end of the payment period.
What is a Purchased Life Annuity?
A Purchased Life Annuity is an annuity purchased with your own funds, instead of a money purchase pension fund. It operates in the same way as a Compulsory Purchase Annuity, but it does have tax advantages.The entire pension which you receive from a Compulsory Purchase Annuity is treated as taxable income in the way 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, if you were a basic rate tax-payer, would be to increase your net income by approximately £200 per month, from a £200,000 investment.
Your annuity specialist 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 an alternative to an immediate annuity purchase such as:• Unsecured Pension
• Alternatively Secured Pension
• Variable Annuity
• Third Way Annuity
• With Profits Annuity
Please visit the Alternatives to Standard Annuities page for more information.
Why use a Financial Services Authority (FSA) registered broker?
1. They may be able to get a better annuity deal than you are able to achieve by yourself.2. They are more likely to have access to a wider range of annuity possibilities than you.
3. Due to their ongoing relationships with annuity providers, they may be better placed than you to overcome any problems that might arise with your application.
4. You will have an expert point of contact should anything go wrong or need addressing.
5. They work to a strict set of guidelines laid down by the FSA who regulate advisers' policies and working methods.
6. Annuity brokers have got an interest in recommending the right product for your particular circumstances. They will not wish to fall foul of stringent FSA rules.
7. If you choose not to get FSA qualified broker annuity advice, you may not be able to get compensation through the Financial Services Compensation Scheme if you have a complaint about their recommendation in the future.
Do I Have to Pay a Fee?
There's no charge for the investigation of your policy and you're under no obligation to follow any recommendations made. By using an 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 broker's costs are already factored into the income that you are offered by the annuity provider. That means that although you don't pay anything up front, that does not mean the service is free. You'll still pay your broker indirectly through product charges. These charges pay for the annuity 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 adviser will tell you how much the commission will be before you complete your investment.
Annuity advice is at hand
A professional adviser will compare annuity rates helping you to ensure that you maximise your pension annuity income. The'll explain what options are available to you, advise on transferring existing pensions and on investing your tax free pension cash.They'll of course also help with all the form filling which will help to make sure that your paperwork is processed quickly, smoothly and efficiently.
When seeking impartial advice on choosing the right annuity option that suits your risk profile and circumstances, ensure that the advice is not biased. Many providers, including some banks and building societies can not advise on the annuity products of their competitors.
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