Last updated 05:12, Friday, 24 October 2008

In recent articles I’ve written about the advantages of pension plans in saving for retirement; the tax relief available, how you should ensure that the investments within your pension plan match your attitude to risk and that they are regularly reviewed to make sure they continue to match your objectives.

The rest of your life: Make the most of it – don’t accept the first annuity you are offered. Shopping around could mean thousands more

But what happens when you decide that the time is right to reap the rewards of all that planning?

Although there are other options available, the most common route to providing pension income is to buy an annuity – this is the conversion of a lump sum into an income for life.

But how do you know that the pension company you’ve saved with for years will offer value for money when buying your annuity?

The simple answer is to take advantage of the Open Market Option.

The Open Market Option is the right to shop around with your pension fund to see if any other annuity provider can better the rate offered by your existing pension provider.

One important point to bear in mind is that your pension provider cannot penalise you for exercising the option.

Although the Open Market Option has been around since 1978, it was not widely publicised by the pensions industry and in fact was not mentioned at all by most companies until they were forced to do so by the Financial Services Authority in 2002.

Annuities come in all shapes and sizes from a basic plan, paying only for the life of the owner, to plans including benefits for a spouse, index-linking to protect against inflation or guarantees on how long they pay if you die in the early years.

There are also enhanced annuities for smokers, those in less than perfect health or linked to previous occupation.

The offer from your existing provider is likely to be based upon a single life annuity and could be as much as 30 per cent less than the best rate available on the open market should enhancements be available, according to Dr Ros Altmann, an independent policy and investment issues adviser.

Because of the wide range of annuities now available this area, perhaps more than any other, is one where specialist independent advice is needed.

A good independent financial adviser (IFA) will discuss your requirements and help to make sure that the most appropriate type of annuity is selected. Comparisons can then be done to find the best rate for that annuity. If a better alternative is available the IFA will make all the necessary arrangements.

Despite the clear advantages offered by the Open Market Option and taking advice to select the most suitable annuity, only around half of people take up the option and shop around for their annuity to get the best deal, according to the December 2006 report into the annuities market by the Treasury.

The decisions made when you select your annuity are final and cannot be changed later. The wrong choice could end up costing you thousands in lost income.

The Open Market Option is very valuable – make sure you make the most of it!

For advice on Open Market Options call freephone 0800 195 2161 or email moneymatters@armstrongwatson.co.uk