Forgive the use of a technical term, but 'Open Market Options' are really important and something you will be hearing much more about over the next few years. It relates to the decisions you will make when it comes to stop putting money into your pension fund and start taking money out.

The reason that this is so important is simple; the insurance companies which help you build up your retirement fund are almost never those which offer the best income in retirement. There are a number of reasons for this, which relate to the way insurance companies manage their investments (and to a certain extent, how keen they are to keep, or attract, lump sums against which they will offer an income for life – or annuity).

According to data issued by the Financial Services Authority, the difference between the top and tenth annuity provider for a couple of 65 with a lump sum of £100,000 is almost 20%. That means buying an annuity from the tenth office would provide just £463 a month, while the best offers £554 a month. If you survive 10 years the difference is £10,920; over 20 years – which is by no means unrealistic – the difference is a whopping £21,840.

It is therefore important to be aware that you have the choice of where you buy your retirement income from, when the time comes. Unless you are in a defined benefit occupational pension scheme (often called ‘final salary’ schemes) where the income you receive relates to your pre-retirement income rather than the size of your pension pot, you would be wise to seek quotations from a number of annuity providers.

There are, however, additional considerations.
First, you do not have to use your entire pension fund to purchase an income; you can normally take up to 25% of your total fund (in some exceptional cases even more) as a pension commencement lump sum. This is currently free of tax, so it is traditionally called the ‘tax free cash’.

Secondly, you do not have to buy an annuity. If your fund is large enough, or you have alternative sources of retirement income, you may decide to draw an income directly from your pension fund using income drawdown. The amount you can take depends on your age and can be anything from nothing at all (you simply leave your money to grow in a tax-favoured environment) up to 120% of the annuity that a person of the same sex could purchase in the open market. (The government Actuary publishes the figures.)

The benefit of this is that your income can be highly flexible and, should you die, the remaining fund can be used to provide a dependant’s income or repaid to your estate (less a 35% tax charge).

From your 75th birthday the rules change; you can no longer take any tax free cash and while you can still convert to an annuity at any time, if you do not do so, you must draw between 55% and 90% of the annuity available to a 75-year-old of the same sex. On death, any monies not used to provide a dependant’s income are taxed at anything up to 82%.

There are lots of options available and taking professional and independent financial advice is, as ever, essential so please contact us.

The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.