Southwhitehavenlocal

Prepare for every annuity

By Derek Baty, financial planning consultant at Armstrong Watson

Last updated at 11:28, Monday, 14 June 2010

In my last article, I wrote about the options for saving towards your retirement.

So what do you do when you decide that the time is right to receive the benefits of all that planning?

There are a number of different options available such as pension fund withdrawal, temporary annuities, indexed linked annuities and so on, but unfortunately, there is insufficient space to explain them all here.

The most common route to providing pension income is to purchase an annuity – this is the conversion of a lump sum into an income for life.

But how do you know that the pension company you’ve saved with for years will offer value for money when buying your annuity?

The simple answer is to take advantage of the open market option.

The open market option is the right to shop around with your pension fund, to see if any other annuity provider can better the rate offered by your existing pension provider. Importantly, your existing pension provider cannot penalise you for exercising the option.

Although the open market option has been around since 1978, it was not widely publicised by the pensions industry, in fact it was not mentioned at all by most companies until they were forced to do so by the Financial Services Authority in 2002.

Annuities come in all shapes and sizes, from a basic plan paying only for the life of the owner, to those including a wider range of benefits, including for a spouse, index linking to protect against inflation, or guarantees should you die in the early years.

There are also enhanced annuities for smokers, those in less than perfect health, or even linked to a previous occupation.

The offer from your existing provider is often based upon a single life annuity and could possibly be improved upon by 20 per cent or more by use of the open market option, depending upon individual circumstances.

Because of the wide range of options and annuities now available, this area, perhaps more than any other, is one where specialist independent advice is essential.

A good independent financial adviser (IFA) will discuss your requirements and help to make sure that the most appropriate type of annuity is selected or indeed if another option may be more suitable for you.

Comparisons can then be done to find the best rate for that annuity. If a better alternative is available the IFA will make all the necessary arrangements.

According to Dr Ros Altmann, an independent expert on pensions policy, investment banking, savings and retirement, “without an adviser, people are unlikely to achieve the best value for their pension assets, but there is no requirement to ensure buyers have actually received any advice at all”.

Despite the clear advantages offered by the open market option and taking advice to select the most suitable route only 34 per cent of people took advantage of the open market option in the third quarter of 2009 according to the Association of British Insurers.

The decisions made when you select your annuity are final and cannot be changed later.

The wrong choice could end up costing you thousands in lost income. The open market option is very valuable – make sure you make the most of it.