5 min read
The open market option plays a crucial role in ensuring that you make the most of your pension pot and don’t miss out on the best possible income. It’s your right to get the most from your pension pot.
In this article, we’ll explain what the open market option is, why it matters, and how you can use it to potentially secure a better annuity deal.
Understanding the open market option
An annuity is a way to convert your pension pot into a guaranteed income from the age of 55 (age 57 from April 2028). The open market option is your legal right to shop around for an annuity. It means you don’t have to accept the default annuity offered by your existing pension provider.
If you’re in a defined contribution pension scheme, whether personal or workplace-based, your provider will typically contact you as you near retirement age. They’ll inform you of your pension value and may include a quote for an annuity. However, this quote often comes from just one provider and may not offer the best terms available in the wider market.
The open market option allows you to compare annuity rates and products across multiple providers before making a final decision. In other words, you’re not tied to your current scheme’s offer, and you’re free to explore potentially better options.
Why the open market option is so important
Taking advantage of the open market option can make a significant difference to your annuity income. Annuity rates determine how much income you will get, and rates vary between providers. They also change frequently due to market conditions and company pricing strategies.
By getting quotes from a variety of providers, you increase the chance of finding an annuity with a higher rate, meaning more money each year for potentially decades ahead.
This difference can add up to thousands of pounds over the course of your retirement. The Financial Conduct Authority (FCA) and other consumer protection bodies have long warned that many retirees lose out simply by not comparing offers.
Enhanced annuities: an opportunity for more income
Another major reason to explore the open market option is the possibility of qualifying for an enhanced annuity. These annuities offer higher income payouts for individuals with certain medical conditions or lifestyle factors that may reduce life expectancy.
You might qualify for an enhanced rate if you:
Have been diagnosed with conditions such as diabetes, cancer, heart disease or high blood pressure.
Take regular prescription medication.
Have a high BMI.
Drink alcohol above recommended limits.
Are a smoker or used to smoke.
To ensure your eligibility is accurately assessed, it’s important to complete a detailed health and lifestyle questionnaire. You should always be given the chance to do this. But annuity brokers will actually guide you through this process to ensure no relevant detail is missed, potentially increasing your chances of securing the best possible rate.
Choosing the right type of annuity
Exercising the open market option isn’t just about getting a higher income. It’s also about finding the annuity type that best fits your circumstances and goals.
Some key options include:
Lifetime annuities: These provide income for the rest of your life, offering certainty and peace of mind.
Fixed-term annuities: These run for a set number of years, offering income now while keeping future options open.
Escalating annuities: Your income increases over time, helping to combat inflation.
Joint-life annuities: These continue paying out to a spouse or partner after your death.
It’s important to understand that once you’ve bought an annuity, especially a lifetime annuity, you typically can’t change it later. That’s why getting help to understand your options and comparing annuities is critical.
What if my current pension provider offers a good deal?
You might find that your pension scheme offers a competitive annuity, especially if it includes a Guaranteed Annuity Rate (GAR). This is a special rate set many years ago that may well be higher than current market levels.
However, even in this case, it’s still worth exploring the market. Using the open market option doesn’t mean you have to reject your provider’s offer. It simply gives you the freedom to compare and make sure it truly is the best deal for you.
Make sure you exercise your open market option
Your pension pot is likely one of your largest financial assets, and how you convert it into retirement income is one of the most important decisions you’ll make. The open market option gives you the freedom to shop around, ensuring you don’t accept a poor deal out of convenience or lack of awareness.
Whether you’re seeking a higher income, a flexible product, or better protection for loved ones, exercising your right to explore the market can help you find the annuity that best suits your needs.
Getting help comparing annuities
At Compare More we bring you quotes from the UK’s leading annuity providers, including Aviva, Canada Life and Scottish Widows. Going a step further, our selected annuity specialists offer personalised information and guidance to help you choose the best deal and the right annuity for you.
If you’d like help comparing annuity options or understanding which type of annuity is most suitable for you, please call 0800 063 9770 or request a call back.