Open Market Options (OMO) let you shop around

Open Market Options (OMO) let you shop around 
If you’re coming to the end of your working life, you’ve some big decisions to make, not least concerning your retirement finances. When it comes to your pension, you need to ensure you get the best deal. If you don’t, you could regret it for years.
When you retire, if you have a money purchase (defined contribution) rather than a final salary (defined benefit) pension, you may have the option of a drawdown from the pension pot.  You may also take up to 25 per cent of your fund as a tax-free cash lump sum. From the remaining accumulated pension pot you can generate future income by buying an annuity, which is guaranteed to give you income until you die.

Many people, not unreasonably, assume that they need to buy such an annuity from the same insurance company that has managed their pension investment over the years. But this isn’t the case. The Open Market Option (OMO) exists precisely to allow people to shop around at retirement (or the point at which they wish to take income) to find the best annuity.

In the past, insurance companies have kept pretty quiet about the OMO because they wanted to keep hold of the business. A common tactic was to send an annuity application form to people approaching retirement age in the hope they would simply roll their pension savings into an annuity with the same firm.

But the industry’s trade body, the Association of British Insurers, is introducing a code of conduct that will prevent its members sending the application form and oblige them to tell their customers about their right to shop around.

It is at this point that you need to get independent advice. Different insurance companies offer different annuity rates, which can make a substantial difference to your income. What’s more, there are different types of annuity on offer, so you need help to ensure you get the best one for your circumstances and preferences.

Expert advice is crucial because the annuity rates currently on offer are at an all-time low. In 1990, a 65-year-old man could expect to get an annuity rate of 15 per cent, meaning every £10,000 of pension pot would generate £1,500 of income each year. Now the annuity rate is nearer 6 per cent. There is a possibility to obtain better returns than this through impaired life annuities, which factor in a shorter life expectancy for people with known illnesses, or those with unhealthy lifestyles due to excessive smoking or drinking habits.

Various factors account for this fall. For a start, we’re enjoying increased life expectancy, which means the annuity providers have to pay out for longer. The providers are also suffering reduced income on the investments they have to put in place to underpin their annuity business, so there is less money available.

If you look at today’s dismal annuity rates, due to the current record low interest rates and UK gilt yields, you might be tempted to hold fire and wait for things to improve – and you can indeed defer your annuity purchase. But this is a very delicate decision. After all, rates could fall even further and what will you do for income in the interim? Again, you need to talk to your adviser to identify the best option.

Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Open the door to a better pension

Approaching retirement? If you’ve spent your working life investing into your pension fund, you need to make sure you get the best possible deal when you retire. Make the wrong decision at this crucial point and you could spend years regretting it.

When you retire, if you have a money purchase (defined contribution) rather than a final salary (defined benefit) pension, you generate income by using your accumulated pension fund to buy an annuity, which is guaranteed to last until you die. If you wish, you can take up to 25 per cent of your fund as a tax-free cash lump sum, but the rest must eventually be used to provide an income in this way.

Many people, not unreasonably, assume that they need to buy their annuity from the same insurance company that has managed their pension investment over the years. But this isn’t the case. The Open Market Option (OMO) exists precisely to allow people to shop around at retirement to find the best annuity.

In the past, insurance companies have kept quiet about the OMO because they wanted to keep hold of the business. A common tactic was to send an annuity application form to people approaching retirement age in the hope they would simply roll their pension savings into an annuity with the same firm. But the industry’s trade body, the Association of British Insurers, is introducing a code of conduct that will prevent its members sending the application form and oblige them to tell clients about their right to shop around.

Time to get independent advice

It is at this point that you need to get independent advice. Different insurance companies offer different annuity rates, which can make a substantial difference to your income. What’s more, there are different types of annuity on offer, so you need help to ensure you get the best one for your circumstances and preferences.

Expert advice is crucial because the annuity rates currently on offer are at an all-time low. In 1990, a 65-year-old man could expect to get an annuity rate of 15 per cent, meaning every £10,000 of pension pot would generate £1,500 of income each year. Now the annuity rate is nearer 6 per cent which produces just £600 for every £10,000 of pension pot.

Various factors account for this fall: we’re enjoying increased life expectancy, which means the annuity providers have to pay out for longer, and providers are also suffering reduced income on the investments they have to put in place to underpin their annuity business, so there is less money available.
If you look at today’s annuity rates you might be tempted to hold fire and wait for things to improve – and you can indeed defer your annuity purchase. But this is a very delicate decision. After all, rates could fall even further. And what will you do for income in the interim?

It is not compulsory to purchase an annuity with accumulated pension plan savings at any age.
 
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.

Insurers Told to Clarify Annuity Options

Insurers told to clarify annuity options

What a difference a decade makes. Ten years ago, interest rates were substantially higher than now and this was reflected in the income available on the purchase of a retirement annuity. Pensioners were, in general, content with the annuity rates offered by the insurance company in charge of their fund. Shopping around seemed to be the exception rather than the rule.

Even back then, it would have made sense to review the market. Some employers that retained pensions consultants or other financial advisers to oversee pension plans did enable defined contribution members to find better rates. However, people without guidance available often took the straightforward option and stuck with the same insurer.

Since annuity rates slumped three years ago, affected by increased life expectancy as well as interest rates, finding the best terms has been perceived as much more important. Financial journalists and advisers have been educating the public about their ‘open market option’. So, the bad news of rates plummeting is tempered by better news of a clear right to choice.

ABI ‘shop around’ code for insurers

Earlier this month, the process of ensuring breadth of choice was strengthened by the announcement from the Association of British Insurers (ABI) that a new ‘annuity sales code’ would be adopted by its members no later than March 2013. ABI insurers will be required to advise customers on shopping around and point them to the external advice and support also available.

There is a lot to think about when choosing an annuity, quite apart from which provider appears to offer the best rate. This is why professional advice can be so useful. An annuity may be payable for the life of the main annuitant, or there may also be an income for the remaining life of a surviving spouse or partner. A rising income may also be available, to help counteract future inflation.

Inevitably, annuities with added benefits such as surviving spouse income or rising payments provide a lower initial income than a flat-rate, single-life annuity purchased with a similar pension ‘pot’. The pros and cons need weighing up, given individual circumstances. Another possibility for those whose life expectancy is impaired by a medical condition: an enhanced annuity offering a better rate than normal.

There are wider pension choices than a decade ago in other respects, too. Another method called income drawdown is the main alternative to a lifetime annuity. It commits someone to more active monitoring and decision-making in retirement, but has potential advantages for those with a relatively generous pension ‘pot’. It’s an option worth exploring but it isn’t ideal for everyone.
Under ‘capped drawdown’, there is a ceiling on the income level that may be taken. ‘Flexible drawdown’, introduced last year, is very similar but more versatile because the pension income drawn is unlimited, so long as other retirement income meets a £20,000 ‘minimum income requirement’. So, there are plenty of annuity and drawdown options to discuss with your professional adviser. Why wait for that ABI insurer’s letter?
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.
  
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