Open Market Option

Open Market Option Annuity Rates

The annuity market is very competitive and rates differ between annuity providers. You can substantially increase your pension income by purchasing your annuity from the company which pays the most income. This is called "exercising the Open Market Option." It costs nothing to take advantage of this option and new rules introduced recently by the FSA mean that insurance companies must tell you about this option.

Annuity options

Annuities have a number of important and valuable options that allow you to tailor the income to meet your personal circumstances. The most important options are listed below.

Single or joint

A single life annuity pays a high level of income, but stops when you die. If you are married, it is usual to have a joint life annuity. This means that annuity payments will continue to your partner if you die first. You can choose how much income your partner will receive after you have died. For example, a 50per cent joint life annuity means that when you die your partner will receive 50per cent of your pension until he or she dies.

Guarantee periods

Most annuities are guaranteed to be paid for a certain period of time. This means that if you die soon after purchasing an annuity, your estate will continue to receive income payments. If you bought an annuity without a guarantee period, and died the day after, your income would stop, and your family would get nothing (or a reduced amount it was a joint life annuity) and the insurance company would make a huge profit. To protect against this unlikely event, you can guarantee that your annuity payments will continue to be paid for period of time. If you select a 5 year guarantee (this is the norm), and died after two years, your estate would continue to receive an income for the next three years. If you had chosen a 10 year guarantee, the payments would continue for another 8 years.

Annuity Protection - Money Back Annuities

There is now a new option called Annuity Protection. If you die before reaching age 75 and you have not received a certain amount of annuity payments by that time, the balance will be paid as a lump sum. This lump sum is called an annuity protection lump sum death benefit and is taxable at 35 per cent. These annuities are also known as "value protected" or "money back" annuities. For example, if you purchased an annuity for £100,000 that paid an income of £7,000 per annum and you died after 5 years, the difference between the capital invested and the total of annuity payments received would be £65,000. Therefore, after deducting tax of 35 per cent, a lump sum of £42,250 would be paid to your family. At present the Annuity Protection option is only offered by a small number of annuity providers, mainly those which offer enhanced annuity rates.


A level annuity pays the highest income at the start and does not increase in the future, whereas an escalating annuity starts at a lower level, but increases each year. The increases can be constant, for instance, increasing by 3 per cent each year, or the increases can be linked to changes in the retail price index, more commonly known as index linking. It is only natural to want the highest income, but you shouldn't forget the effects of inflation. An increasing annuity may start lower, but it will pay out more income in the future.