The issue of open market options or OMOs has been discussed at length of late. David Greenall describes what it is all about
The open market option literally describes the fact that a client, (annuitant) can decide what type of annuity product they wish to use as well as the product provider they wish to supply it.
This means that even though they may have used a particular provider(s) to save with by way of various pension schemes, they are not compelled to use the same provider(s) to provide the annuity and can select others.
Each provider must allow a client this option at retirement and processes and rules are in place for the pension provider or ceding scheme to discharge and pay funds to the annuity provider. The client is able to select an OMO via the documentation sent by the pension provider(s) at retirement and this option should be highlighted and explained in the accompanying literature following the Association of British Insurers (ABI) guidelines.
There are many reasons for the client deciding to use the OMO. The primary reason is usually to maximise income by obtaining a better annuity rate. Rates will vary due to a number of reasons and just as clients shop around for the likes of car insurance, annuities should be no different. As an example, preparing quotes for this article using a portal provider, there was a variance of 13% for a single life and up to 17% on a joint life basis, for £100,000 annuity, the spouse option being 66.67% and a guarantee of five years.
Income can also vary depending on the type of annuity selected. For example, if a client has a particular medical condition or is a smoker, they can obtain advantageous rates by looking at impaired annuities. These are annuities that offer increased income based on the assumption that the client will have a shorter life expectancy than that assumed under a conventional annuity. Again rates will vary depending on the actuarial assumptions used by each provider. Generally it is seen that rates are 40% higher on an impaired basis.
Increasingly, more complex annuity products are becoming available that also allow the client options in terms of how and when income is taken. These products may be suited to clients who want to delay taking income at retirement due to other income sources or take a higher income initially while waiting for other funds or income to become available. This type of product generally tends to use temporary or flexible annuities on a rolling basis, investing the remaining funds to be used potentially each time a temporary or flexible annuity or the final lifetime annuity is purchased in the future.
At retirement, most clients are keen to secure their income and will often simply select the option(s) offered by their provider. The perception is that there is little to be gained and this lack of awareness needs to be addressed. The problem is having made a decision to select a certain provider there is often no going back, unlike car insurance! HM Treasury estimates only 50% of annuitants chose an open market option. With the market growing and 300,000 contracts being issued to the value of £8bn in 2005, that means 150,000 annuitants, with £4bn of assets are not maximising their income potentially.
The process to take an annuity from an existing pension provider is seen as very simple. The alternative, to shop around is seen as time consuming, particularly as mentioned when there is seen to be little value in doing so.
For an adviser who has built a relationship with a client, the 'retirement point' is a superb occasion to demonstrate the value of previous planning decisions and arrangements and ensure the best possible outcome to suit the client's retired circumstances. However, this process can be complex and offer little value in isolation hence unless there is an existing relationship, often there is little incentive for an IFA to be involved at this time alone.
Providers do need to make the process smoother. While documentation and requirements are becoming more 'user friendly' these are still seen as onerous and adding to the delays that are often experienced in dealing with the ceding scheme/provider.
The more the OMO is publicised the better for all concerned. The client will benefit, the industry is seen to be living by the principles of Treating Customers Fairly and more individuals will experience the benefit of the advice process and of good financial planning at a crucial time in their lives.
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