It really doesn't have to be difficult
Shopping Around For A Higher Income - The Open Market OptionYou can get more from a pension annuity if you shop around.
The Open Market Option was introduced as part of the 1975 UK Finance Act and allows those approaching retirement to shop around for a number of options to convert their pension pot into an annuity, rather than simply taking the default annuity rate offered by their existing pension provider.
To make the most of the Open Market Option it's important to speak to us first. We will explain the different annuity options available.
But what actually is a Pension Annuity?An annuity is an arrangement where you make a lump-sum investment. From this investment you receive a guaranteed level of income. Most pension annuities are bought using funds held in money purchase pension schemes.
In other words, an annuity converts a savings fund into income and that income will be paid to you for the rest of your life.
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 Purchased Life Annuities and Immediate Vesting Annuities.
When your pension fund reaches maturity, your pension provider will advise you of the fund value, and general information about annuities including the level of annuity income you would receive.
You're then entitled to use your Open Market Option. This allows you to transfer the fund value to another annuity provider of your choice, thus enabling 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.
Types of AnnuityThere are a wide range of options which can be selected when choosing an annuity scheme. Widely used pension annuity options include the following.
The income is guaranteed to be paid until the death of the annuity holder, but it can also be modified to include any of the following options:
• 5-year guarantee - annuity ceases at death of annuity holder, or after 5 years, whichever is the longer
• 10-year guarantee - annuity ceases at death of annuity holder, or after 10 years, whichever is the longer
• Joint life annuity - annuity ceases on the death of the second of two named annuity holders
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). Thus you can choose to compensate for inflationary effects on your annuity income. However, your initial income level will be reduced if you choose escalation. Spouse benefits
Your spouse, partner or financial dependants can be protected after your death by choosing one of the following options:
• Reduction to half benefit,
• reduction to two thirds benefit or
• full benefit
Thus your annuity is adjusted to the new level at the death of the annuity holder or at the end of the guarantee period (if selected), and continues until the death of your spouse, partner or financial dependants.
In other words, after your die, the annual income paid to your spouse, partner or financial dependants will be a proportion of the annual income you were getting just before your death. The proportion has to be chosen at the time when you take out your annuity. It can be, for example, 100%, 66% or 50% of your annuity at your time of death. A higher proportion will have a higher cost, therefore your annuity income will be lower.
Here is a selection of your possible annuity providers...
Income Drawdown/Pension ReleaseAs an alternative to an immediate annuity purchase, you can choose to release your pension funds using income drawdown .
Income drawdown lets you control your own income instead of getting a regular, set sum from an annuity provider. You are able to access your full retirement savings and invest and withdraw money as you wish, instead of being tied to an annuity. With income drawdown you also retain ownership of your pension fund and can therefore pass remaining funds on when you die. Using income drawdown as a first option can give you time to make a final decision on how to fund your retirement - for instance you might eventually choose to purchase an annuity at a later date.