In the UK annuity rates market the open market option is provided by legislation, allowing retirees to purchase their annuity from any provider. There is no obligation to stick with the provider who managed the pension fund. It is believed that in some cases being able to switch providers can yield up to 40 per cent more income during retirement. Many people do not use the option allowing them to shop around, and research suggests that very many are not even aware of the possibility.
One reason which has been suggested for retirees reluctance to compare annuity rates, is that many are confused by the market, and simply accept the first deal which they get offered. This is very unfortunate. Switching providers may provide substantially more income during retirement.
There are various ways which are allowed to disburse the money from a person's pension savings. According to the current UK legislation, decisions about this must be taken between the ages of 55 and 75.
It is possible to take up to 25% of the pension as a lump sum. This lump sum is free from all tax. [There is an exception allowing very small pension funds to be taken completely as a lump sum] The remainder of the pension fund can be either withdrawn slowly, or used for an annuity purchase.
The first of these options is called an Unsecured Pension, or USP. It is also sometimes called income drawdown. With a USP a person simply withdraws money from the fund on a regular basis. There are rules laid down about how much can be taken in any year. The obvious problem with a USP is that is a person chose to withdraw (say) 5 per cent of the fund every year, and he survived for a long time after retirement, then he would run out of money in 20 years.
So, although income drawdown/USP is allowed, and can be appropriate for some people, it is always recommended that financial advice is taken regularly during the drawdown phase. For most people the annuity rates purchase is likely to become the most advisable option at some point, and according to current rules, annuity rates purchase is compulsory for everyone reaching the age of 75.
For most people annuity rates purchase is the better option on retirement, and most will receive an offer of an annuity from their pension fund manager. An annuity is a kind of insurance policy, called longevity insurance. It gives a guaranteed income, for the rest of a person's life, in exchange for their pension savings. The annuity's advantage over the unsecured pension/income drawdown scheme, is that the annuity cannot ever run out of money, no matter how long a person lives for.
Annuities are sold by insurance companies (life assurance companies), and they assume the risk that the retiree may live a long time after retirement. In this case they will end out paying more in income than they sold the annuity for in the first place. Of course they don't worry about this, because they have made other sales to retirees who live less than the average life time, so their losses and gains are balanced.
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