Although there are numerous retirement options available, the most commonly chosen route to providing pension income is to buy an annuity, which is the conversion of the accrued pension fund (usually after the tax free cash has been deducted) into an income for life.
The amount you receive as an annuity will depend on a number of factors, but will largely be based on how long the annuity provider expects you to live – and therefore, how long they will have to pay you an income.
But how do you know that the pension company you have saved with for all those years will offer you value for money when buying your annuity?
A simple answer is to take advantage of the Open Market Option (OMO). The OMO provides the option to ‘shop around’ with your pension fund, to see if any other annuity provider can better the rate offered by your existing pension provider. Importantly, your existing pension provider will not usually penalise you for exercising the option.
Although the Open Market Option has been around since 1978, it was not widely publicised by the pensions industry, and in fact, was not actively mentioned at all by many companies until they were forced to do so by the Financial Services Authority in 2002.
Annuities come with numerous options; from the basic single life version, through to joint life, escalating, guaranteed and versions for those in less than perfect health, smokers, or even linked to a previous occupation. Unlike in the case of life insurance, where health problems often increase premiums, for enhanced annuities this can mean more (perhaps a great deal more) income in retirement. This is because the companies providing enhanced annuities make judgements about your life expectancy based on your health and lifestyle, which they factor into their calculations - specialist provider Just Retirement estimates that 60% of people could qualify for enhanced rates.
The offer from the existing provider is frequently based upon an annuity type which may not necessarily be the most appropriate for the individual and it is quite common for the difference between the best and worst rates to be 30% or more, according to commentary by Dr Ros Altmann, an independent policy, pensions and investment issues adviser. But, people who do not exercise the OMO often end up taking these poorer rates without realising how much better they could do.
Because of the wide range of alternatives available, this important area is one where specialist advice is essential. An independent financial adviser (IFA) will discuss and establish your requirements, helping to make sure that the most appropriate type of annuity is considered. Comparisons can then be performed to find the best rate for that annuity. The IFA can then make the necessary arrangements to ensure that the best available option is selected.
It is important to remember that once you’ve made your decisions and have selected your preferred annuity, they cannot be changed later. Making the wrong choice could result in a significantly reduced retirement income. The Open Market Option is extremely valuable – make sure you make the most of it!
Financial Planning Consultant
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