The Open Market Option

Last updated: 23/03/2012

What Is The Open Market Option?

For people who have pension funds in a private pension plan, there are several methods by which an income can be taken at retirement. By far the most commonly used of these is buying a financial product called a Lifetime Annuity. The term, ‘Open Market Option’ is a fancy way of saying that you have a right to buy a Lifetime Annuity from any annuity provider who will offer you one.



It is important for an annuity buyer to use their Open Market Option because, unlike many other financial products, annuities are usually ‘one off’ purchases that cannot be changed once they have been bought. As such, is it very important that you buy one that offers you the best options and income for your personal needs and circumstances.

It is crucial that you understand that your existing pension provider will not necessarily be the best company to buy your annuity from.

All annuity providers offer different rates of income and just like with car insurance, some offer better deals than others in order to attract your business.

The difference in income that you would receive from the provider offering the best annuity rate compared to the one offering the worst can literally add up to thousands of pounds over the course of your retirement.

So, that’s why using your Open Market Option right to shop around for your annuity is important.

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‘Shop around for your annuity and you could get more retirement income.’

What’s hard to understand about that? It sounds like a proverbial ‘no-brainer’ doesn’t it?

If so, why do more than 50% of annuity buyers still buy an annuity from their existing pension provider?

Throughout the years, many different professional bodies and financial regulators have asked the same question. It is thought that some of most common reasons why people do not use the Open Market Option are as follows:

1. Complete And Utter Apathy!

It has to be said that shopping around for the best annuity deal isn’t easy. To do it yourself will involve making lots of phone calls to insurance company call centres, probably writing a few letters, the completion of application forms containing confusing jargon etc., etc., etc. As for getting advice, well that just sounds expensive and who needs advice anyway?

In comparison, it is so much easier to just accept the annuity offer made to you by your existing pension provider. They know who you are and already have all your details. All you have to do is tick a few boxes and the job’s done. What could be simpler?

You’ve probably been happy with their service all those years that you have been saving for retirement and so why not buy your annuity from them. After all, they wouldn’t offer you a bad annuity deal, would they?

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2. Fear Or Lack Of Knowledge

Most people only ever buy one annuity in their entire life, so it’s no surprise that they are practically clueless when it comes to finding the best annuity deal on the market.
They may have seen some ‘best buy’ annuity tables on a comparison website or in a newspaper but they don’t take any further action.

Even if they wanted to take further action, how would they apply for an annuity with another provider? What does all the jargon mean?

Their lack of knowledge leads to uncertainty and doubt and so they decide to take the easy option and stick with their existing pension provider.

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3. Put Off By The Thought Of Getting Annuity Advice

Even though using the services of a professional annuity provider can help make the whole process fairly painless, many people are put off by the thought of getting annuity advice.

They are either unhappy divulging their personal details to a stranger or are not willing to pay for advice (either by fees or commission).

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4. Pension Transfer Charges

Some pension providers charge penalties if a retiree transfers their pension funds to another pension provider before their pension plan’s normal or selected retirement date.

These transfer penalties can be as high as 25% or more.

Property and With Profit investment funds are particularly prone to these charges, especially if the economy is performing poorly.

A retiree is unlikely to shop around for a better annuity rate under these circumstances.

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Annuity rates have fallen significantly over the past few years as life expectancies have increased and gilt yields have reduced (especially since quantitative easing was introduced).

As the debt laden ‘baby boomer’ generation reaches retirement age, a greater focus is currently being placed on how retirees can extract the maximum value from their pension funds.

Encouraging retirees to shop around for the best annuity rates is clearly one way of achieving this aim.

The Association of British Insurers (ABI) announced last year that it was seeking ways to encourage consumers to take up their Open Market Option right to shop around for the best annuity rates at retirement and that it intended to amend its Code of Conduct for its members in ways that would engender this outcome.

In December 2011, the ABI published its consultation on Consumers in the Retirement Income Market and has since received 36 responses from its members, consumer organisations, professional and other representative bodies, financial advisers and advisory services.

Following input from a project group of its members; and the DWP’s Open Market Option Review Group, the ABI released details of their new Code of Conduct in March 2011.

The new ABI Code of Conduct will require the ABI’s members to:

Provide clear and consistent communications to ensure customers are able to make informed and proactive decisions about retirement income products, and are able to shop around for the most appropriate product.

Prominently highlight Enhanced Annuities, and the much higher income they can potentially offer, and inform customers whether they offer these products, and how to find out who does.

Clearly signpost customers to advice and support, both from regulated advisers and government-backed advice organisations.

Establish transparency in the annuity market so that customers have a clear picture of how individual providers’ product offerings fit in with the wider market.

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One annuity provider has estimated that around 70% of those buying an annuity at retirement could qualify for Enhanced Annuity Rates because of their lifestyle choices (e.g. heavy smoker/drinker) and/or because they suffer from certain medical conditions.

An Enhanced Annuity can pay an annuity income that is up to 40% higher than a standard rate annuity that takes no account of any factors that have a negative impact on a retiree’s lifespan.

As a consequence of not shopping around for the best annuity rates at retirement, many retirees are missing out on a higher annuity income (potentially adding up to thousands of pounds) that would have been paid to them throughout their retirement years.

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