Open Market Option
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Because of recent poor investment returns your pension fund may or may not be as much as you might have hoped. You might be thinking of taking your pension at this time or you might just need to see if it's even viable right now. Either way, that decision can be answered with the right information. The good news is that however much you have accumulated, is more than if you hadn't of bothered!
Two important things that you control are the right to exercise your open market option and which annuity option you select. The first one is simple and ensures that you get the best value return on your pension savings. I urge you to eke out every last penny from your pension that you can. It's a paper pushing exercise for the most part done by your adviser.
By exercising your open market option, no matter how large or small your pension fund seems, you can make the best of the situation and be satisfied that you got the best possible deal available. That's what the open market option is. It's your right to convert your pension into your income for life at the best possible rate.
The second thing you control is which annuity you select and this is even more important.
Which annuity option suits you best?
This is the trickiest part of your retirement planning. Over the years of discussing the different options I've noticed that once you've confidently answered this question you're on the home run. To do this, firstly you must have all of the options because they alone show you the impact on your yearly income. If you're unfamiliar with what these are then you will find this of help to cover the basics. Annuities what are they? If you're still not sure and want help then you can call me.
Assuming you have got the gist of what the options are then you must have at least those that are relevant personally illustrated so you can compare and discuss them in detail.
As always, talking through the different options can be very helpful. It's unlikely that you've considered all of the implications over the long term and yet it could influence your decision. For example, suppose you want to ensure that you get a rising income each year of say 3% to offset the effect of inflation over the years to come.
Whether this was really suitable would depend.
You realise that your pension will be lower to start with if you do. But you'd have to consider how many years it will take before you break even, so you can decide whether or not you're happy with waiting that long.
Your health may be a factor in this or whether you want a joint or single life annuity. But let me bring this down to basics and show you the real difference it makes.
For this example you're a 62-year-old non-smoking male in good health. You're married but your wife has her own pension so you've agreed that you're taking your pension on a single life basis. You've got £50,000 to buy your annuity with after taking your tax-free cash.
Your level pension will pay you £3,343 per year.
Your (escalating by 3%) pension will start paying you £2,379 and rise by 3% each year. Now if you did the sums you would see that it will take until the end of the 24th year before you break even. By then this £2,379 would have risen to £4,695, while the level pension is still £3,343. By then are example male would be be 86.
So there are implications that you may need to consider and why I feel discussing these things is so very important. It might seem bewildering at first if you are not familiar with all this but when you're receiving personalised advice it should become clear.
Answering the question as to which option suits you best is the trickiest part of retirement planning. You are trying to to decide now yet take into account sapects of the future that yet again are outside of your control.
Getting the best value
Best standard annuity: £6,477 per year
Worst standard annuity: £5,037 per year
Impaired life annuity: £7,488 per year
Figures based on a male aged 60, single life, level pension payable monthly in advance from a fund of £100,000. (As of June 2009)
Assuming this man lived until he was 83, the extra income between the best and worst standard annuities would mean he would be £1,440 per year better off (about an extra 28%) by shopping around. This gives additional income by the time he was 83 years old of £33,120, Or if you prefer, more than an 6 years worth extra pension payment over thie time period.
The situation as you would guess is much the same for women as well. In fact if you are a woman then the penaion that you will receive starts slightly lower because you are expected to live longer. Example below:
Figures based on a female aged 60, single life, level pension payable monthly in advance from a fund of £100,000. (As of June 2009).
Best standard annuity: £6,239 per year
Worst standard annuity: £4,696 per year
Impaired life annuity: £7,134 per year
Once your annuity starts, it cannot be changed. No matter who you have your pension plan with, I recommend that you always compare what your current company can offer you to the rest of the market before you commit.
Which plan(s) typically offers an open market option?
A personal pension
A stakeholder pension from April 2001
A group personal pension plan arranged through your employer
A retirement annuity contract which is similar to a personal pension but commenced before July 1988. See note below.
An additional voluntary contribution (AVC) schemes, if you build up your own investment fund
A free standing additional voluntary contribution (FSAVC) scheme
The major factors which affect the annuity rate:
- Your age & (for a joint annuity) the age of your partner/spouse
- The size of your pension fund
- Your health both past & present (& partner/spouse if joint)
- If you smoke
- Do you want your annuity to be fixed and guaranteed?
- Your employment prior to retirement
- Your post code. Yes this really can affect the annuity rate.
- Do you have a guaranteed annuity rate (GAR)? (Available on some retirement annuity contracts).
- And of course the actual annuity rates at the time you purchase your annuity.
What to look out for:
Check whether or not you have guaranteed annuity rates if you have a retirement annuity contract. If you are not sure we can find this out for you but we would need your authority. If you have a number of small pension plans, consider combining them together when you purchase your annuity as companies offer higher annuity rates for larger funds.
Check whether or not you have guaranteed annuity rates if you have a retirement annuity contract. If you are not sure we can find this out for you but we would need your authority. If you have a number of small pension plans, consider combining them together when you purchase your annuity as companies offer higher annuity rates for larger funds.
You can liken your pension plan as the vehicle that you use to build the retirement pot or fund. The annuity or guaranteed income for life, is what you must purchase with the fund when you have arrived at your destination, your retirement.
The bigger the fund, the more you can buy with it, for example, you may be able to afford an escalating pension in payment, or a higher income to your spouse if you die and so on. But it is worth remembering that by the time you are ready to retire, the size of the pot is what it is, for better or worse, so to speak.
Obviously, there is a lot to take into account, but if you learn only one thing from reading this, I hope it is this. That you know that you can buy your annuity from the company that has the highest rate at the time that you retire.
Your pension provider will usually write to you shortly before your pension maturity date to offer you a range of typical annuity options, based on their own annuity rates, for you to consider. If you have already received these or you would like us to help you narrow down the most suitable options before you request them, to compare them to the rest of the market, you can
contact us for a quotation.
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