Open Market Option
The Open Market Option is the method to describe your right to shop around between annuity providers for the best deal possible. Using the Open Market Option means you can get highest annuity on the market and ensure the maximum income for you and your family in retirement. Those who have been paying into a defined contributions pension scheme throughout their career have the option to convert their pension fund into an annuity when they retire. Unless you have some other form of income, this is what the vast majority of retirees do.
Unfortunately most people do not compare providers and end up taking the first offer from their existing pension provider – the one who they have been saving their pension with throughout their career. This can mean losing out on a potentially higher retirement income as once you buy an annuity you cannot then switch it between providers.
One type of annuity you may opt for when you use the Open Market Option is a joint-life annuity. These ensure that should you die before your partner, an income will continue to be paid after your death. Many people are unaware that annuity providers keep your remaining pension fund when you die. Consider this, you buy an annuity with a £100,000 pension fund and then pass away the next week. Your partner and spouse will not receive any of this money if you just opt for a standard single-life annuity.
The amount of income you can pass on to your partner or spouse can be set to half or all of your annual annuity income. Different providers offer varying annuity rates for joint-life annuities, so shop around to see who has the best deal.
Some providers offer what is known as annuity protection whereby if the annuitant passes away before they reach 75, some of their remaining annuity income can be paid out. Not all providers offer this so it is important to shop around.
If you want to help mitigate against the rise in inflation then you can opt for an RPI annuity, also known as an index linked annuity. You annuity income will keep up with rises (and falls) in inflation. If inflation rises by 5%, then your annuity income will also increase by this amount. Bare in mind your starting income will be lower as a consequence. If inflation flatlines or decreases then your income will go down.
If you would rather fix the amount by which your annuity increases each year then you can opt for an escalating annuity where you select the percentage amount of increase. Your starting income is lower in this instance, but your annuity income will rise each year. This will help you deal with the rising cost of living.