Just before you reach retirement, you will receive two pieces of information from your pension provider:
An annuity is a financial product you can buy when you retire. It is designed to provide a guaranteed income for the rest of your life, but is not the only way of taking an income from your pension pot.
However, if you decide to purchase an annuity, you don't have to go with the quote you are given by your pension provider. Instead, you can shop around and compare different annuity rates: this is what the "Open Market Option" means.
There are two reasons why you should shop around for your annuity:
Always try to get quotes that take into account your health, lifestyle and medical history. If you suffer from bad health or you smoke, for instance, you may be able to get a higher income in retirement.
See our guide What are Enhanced Annuities? for more information.
Even though it's important to shop around, this doesn't necessarily mean that what your pension provider offers will be uncompetitive, so it's important not to discount this quote straight away. For example, if you have an older pension, you may be offered a Guaranteed Annuity Rate (GAR). Annuity rates have fallen over time, so a GAR may be a lot higher than the best annuity rates currently on offer in the open market (your GAR will have been set when you took out the pension).
If you are in any way unsure of which annuity is best, you should seek professional advice.
Guide updated: 02/06/15
Please note that buying an annuity is just one option available at retirement. New rules that came into effect in April 2015 give you much more flexibility around how you take your pension income.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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