Pension Annuity Advice–Utilising the Open Market Option to Increase your Pension Income
Tue 17th Jan 2012
Pension Annuity Advice – Utilising the Open Market Option to Increase your Pension Income in Retirement
You wouldn’t purchase a car without shopping around for the best offers so why do it with your retirement funds?
It is a common misconception that you can only purchase your annuity from your pension provider. You don’t have to and you are free to take your pension pot to shop around the market and get the best annuity for your needs.This is commonly known as taking the Open Market Option.
Open Market Option
Included in the retirement pack you receive from your provider at retirement will be the opportunity to use the Open Market Option (OMO).
The OMO gives you the option to transfer your fund and get an annuity from another provider. This allows you to shop around the annuity market for a better deal. It may be possible to increase your income by up to 30% by using the OMO or more if you are eligible for an Enhanced or Impaired Life Annuity.
Financial Advice is Important in Your Retirement Income Decision
There are a number of annuity providers and many online comparison sites which can give you quotes for your annuity. However, given the importance of the decisions you need to make, and the need to look at a number of providers to get the most competitive rate, it is important to get expert financial advice from a Financial Adviser.
A Financial Adviser can advise on the most suitable method of providing retirement income as an Annuity may not be the right choice for you.
Can I take a tax-free sum from my pension before buying an annuity?
Yes. The good news is that when you retire, you can normally take up to 25% of your total pension fund as a lump sum. The lump sum is tax free – whereas income received from a pension is taxable. You can spend this money however you wish.
Please remember though, that if you take a lump sum from your pension fund it will reduce the amount of money left to provide you with your income in retirement. If you do decide to take a tax free lump sum from your pension, you should consider carefully how you will use the money, including whether or not to invest some or all of it to supplement your annuity income.
Pensions are tax-efficient, so will my annuity income be tax-free?
No. The income from your pension annuity will be taxed as earned income under the PAYE scheme. Tax is deducted by the annuity provider before you receive your income. There is no liability to pay national insurance.
On retirement, it’s important to send in your original P45 to the insurance company. If not, your provider will set up the annuity on a temporary tax code until they receive the correct tax code from HM Revenue & Customs.
Can an annuity be altered at a later date?
Once you have bought a conventional or enhanced annuity you can’t change it in any way. If you buy a fixed term annuity, you can change your benefits at the end of the plan term by reinvesting in another pension product. It is therefore important to consider your options carefully before buying an annuity.
It is estimated that more than 150,000 people each year fail to benefit from the most competitive annuity rates and this can mean missing out on potentially thousands of pounds in lost income. Exercising your right to use the Open Market Option means you don't have to accept what your pension provider offers.
What happens if I have more than one pension plan?
If you have more than one pension fund you can treat them independently for the provision of your retirement income. For example, you could take benefits from one pension whilst leaving another invested. However, it pays to check whether better annuity rates are available for bigger funds. If so, it may be in your best interests to combine your pensions.
Can I get a better annuity rate if I'm a smoker?
If you smoke cigarettes, cigars or tobacco regularly, you need to disclose this when requesting a quotation as this may qualify you for an enhanced annuity. Because your life expectancy may be reduced when compared to the average, some specialist providers may offer more income than is available from a standard annuity.
What is an enhanced annuity?
This is a type of conventional annuity that pays an increased level of income if your health or lifestyle reduces your life expectancy – for example if you are overweight, smoke or have suffered from an illness that affects your life expectancy. Annuity providers can effectively pay you more each year as they expect you to receive the income for fewer years than a healthy individual. It may also be called impaired or impaired life annuity.
If you have ticked one or more of the above boxes, you could be eligible for an Enhanced Annuity. For more information please contact us.