The Open Market Option: Shopping Around for Your Annuity

When a defined contribution pension saver reaches retirement and decides to purchase a lifetime annuity, the most financially significant action they can take is not which investment to annuitise, or even when — it is where they buy the annuity. The difference in annuity rates between providers on the same day, for the same individual and the same premium, can be ten to fifteen per cent or more. For a £200,000 pension pot, that is the difference between £10,000 and £11,500 per year — a gap that, over a 20-year retirement, amounts to £30,000 or more in cumulative income.

The legal mechanism that protects every pension saver's right to access this market is the Open Market Option (OMO). Every FCA-regulated pension provider is legally obligated to make their members aware of the OMO. Yet FCA data consistently shows that the majority of retirees still purchase annuities from their existing pension provider — leaving substantial lifetime income on the table.

What the Open Market Option Is

The Open Market Option is the legal right of a defined contribution pension holder to purchase an annuity from any FCA-authorised insurance company, not merely from the company that holds their pension savings. It is not a product or a service — it is a right, enshrined in the Financial Services and Markets Act 2000 framework and the associated FCA regulations on retirement planning.

The OMO applies when:

• You have built up defined contribution pension savings (in a personal pension, SIPP, stakeholder pension, or workplace DC pension).
• You wish to convert all or part of those savings into a lifetime annuity.
• You are at or approaching your selected retirement date.

It does not apply to defined benefit (final salary or career average) pensions in the same way, because DB members take the scheme's own defined pension rather than using the pot to purchase an annuity on the open market. However, defined benefit members who transfer to a defined contribution arrangement before retirement do then benefit from the OMO when they purchase an annuity.

How Pension Providers Must Facilitate the OMO

FCA regulations and the FCA's Retirement Outcomes Review requirements oblige pension providers to:

1. Inform members about the OMO well before retirement — typically at least six months before the selected retirement date.
2. Provide a cash equivalent transfer value (CETV) — the pot value available for transfer to another provider for annuity purchase.
3. Not create barriers to transferring the pot to a third-party insurer for annuity purchase.
4. Signpost to the Pension Wise guidance service (via MoneyHelper) before any annuity decision.

Many pension providers also offer access to internal annuity comparison tools or external comparison panel quotes, to assist members in exercising the OMO. However, these internal comparison tools may not cover the entire market — particularly enhanced or specialist annuity providers that may offer materially better rates for certain health profiles.

The Scale of the Problem: FCA Data

The FCA has tracked OMO usage extensively and the findings are discouraging. Key data points from FCA retirement income reviews:

• Approximately 40 to 50 per cent of retirees purchasing annuities have consistently done so with their existing pension provider, without obtaining open market quotes.
• Non-advised purchasers (those buying without taking regulated financial advice) are significantly less likely to use the OMO than advised purchasers.
• The FCA estimates that non-advised purchasers who do not exercise the OMO miss out on an average income increase of approximately 10 to 20 per cent.
• For individuals who would qualify for enhanced annuity rates (due to health conditions), the OMO uplift is substantially higher — in many cases 30 to 40 per cent above the existing provider's standard rate.

The FCA's 2020 Retirement Outcomes Review and subsequent remedies required pension providers to implement "wake-up" packs (sent at age 50 and 55 and at later intervals) specifically flagging the OMO and comparing the provider's own annuity rate against the market. Despite these interventions, take-up of the OMO remains below what the evidence suggests is optimal.

Enhanced Annuity Screening and the OMO

The most powerful application of the OMO is in conjunction with enhanced annuity screening. Standard annuity rates are based on average mortality assumptions. Enhanced annuities — available from specialist providers — offer higher income to individuals whose life expectancy is reduced below average due to health conditions.

Qualifying conditions typically include:

• Cardiovascular disease (heart attack history, heart failure, angina)
• Cancers (with full or partial remission)
• Diabetes (both Type 1 and Type 2)
• Neurological conditions (multiple sclerosis, Parkinson's disease)
• Kidney disease
• Respiratory conditions (COPD, severe asthma)
• Stroke history
• Obesity (high BMI)
• Smoking history

The income uplift from an enhanced annuity for qualifying conditions can be substantial: 15 to 40 per cent above a standard rate for common conditions such as Type 2 diabetes or heart disease. For severe multi-system conditions, the uplift can exceed 50 per cent.

Critically, the existing pension provider may not offer enhanced annuities at all, or may offer a limited range with less competitive pricing than specialist providers such as Just Group, Canada Life's enhanced range, or Pure Retirement. Without exercising the OMO and screening the full market, a significant potential income uplift will simply be missed.

The Role of Pension Wise (MoneyHelper)

The Pension Wise guidance service — now part of MoneyHelper — offers free, impartial appointments for anyone aged 50 or over with a defined contribution pension who is considering their options. These appointments are not financial advice — they provide information about annuity options, drawdown, OMO rights, and enhanced annuity availability.

Pension Wise is required to be offered to all DC pension members approaching retirement. The appointment can be conducted by phone, video, or face to face. While the guidance service cannot make a recommendation as to which specific annuity to purchase, it consistently emphasises the OMO and the potential income gains from shopping around.

Following the FCA's retirement remedies, some pension providers are now required to include standardised information about the OMO and market comparison in their pre-retirement communications, in a format designed to make the income difference clearly visible to the member.

Specialist Comparison Services and Advisers

For those who want to exercise the OMO effectively, several routes exist:

Online comparison tools: Services such as Hargreaves Lansdown's Annuity Ready service, iPipeline, and similar platforms provide annuity quotes from multiple providers based on a member's pot value, age, and basic health information. These can give a useful initial indication of market pricing but may not cover all providers or all enhanced annuity options.

Specialist annuity brokers: Independent firms specialising in annuity placement — including those with access to enhanced and impaired life annuity underwriting — can typically access a broader range of providers and conduct more thorough health screening. They operate on a fee or commission basis; FCA rules require full transparency about remuneration.

Independent financial advisers: An FCA-authorised independent adviser has a duty of care to recommend the most suitable annuity from the whole market, having assessed the client's full circumstances. The cost of regulated advice is typically offset many times over by the income uplift achievable through comprehensive market access and enhanced annuity screening.

Direct application: Any individual can approach annuity providers directly. However, without access to comparative data, it is difficult to know whether the quote received is competitive.

Joint Life Annuities and the OMO

The OMO applies equally to joint life annuities — those that continue to pay a specified proportion of the income to a surviving spouse or partner after the main annuitant's death. Joint life annuities are priced based on both lives: the main annuitant's age and health, and the spouse/partner's age and health.

When exercising the OMO for a joint life annuity, both lives must be disclosed to providers for accurate pricing. Health information about both the main annuitant and the spouse/partner may affect the rate offered — where one or both have health conditions reducing life expectancy, enhanced joint life annuities may be available.

ABI Code of Conduct for Annuity Sales

The Association of British Insurers (ABI) maintains a Code of Conduct on retirement choices that member firms are expected to observe. Key requirements include:

• Clear signposting to the OMO and enhanced annuity options.
• Requirement for a Pension Wise appointment (or evidence of decline) before annuity purchase.
• Clear disclosure of annuity terms, charges, and any guarantees.

The Code of Conduct supplements FCA rules and provides an additional framework for member conduct. Complaints about OMO failures — where a member was not adequately informed of their OMO rights and purchased an annuity at a suboptimal rate — can be made to the Financial Ombudsman Service.

The CETV Transfer Mechanics

To exercise the OMO and buy an annuity from a different provider, the pension pot must be transferred to the annuity provider. The mechanics are straightforward:

1. Obtain a transfer value (CETV) from your existing provider.
2. Provide the CETV figure (or transfer quotation) to the annuity provider of your choice.
3. Complete the annuity application, including health disclosure for enhanced screening.
4. The annuity provider issues a guaranteed annuity quotation (typically guaranteed for 14 to 21 days).
5. Instruct the existing provider to transfer the CETV to the annuity provider.
6. The annuity commences on the effective date.

The transfer itself takes a few days to a few weeks in normal circumstances. Enhanced annuities requiring underwriting may take longer — typically two to four weeks — if a GP report or nurse screening is required.

Compliance Notes

The Open Market Option is protected by FCA regulations. Any failure by a pension provider to adequately inform a member of their OMO rights may constitute a breach of FCA conduct rules and gives grounds for a Financial Ombudsman Service complaint.

The Pension Wise guidance appointment (via MoneyHelper) should be completed before any annuity purchase decision. This is now a process requirement that pension providers must facilitate.

Annuity purchase is irreversible. Rates are guaranteed only for the period specified in the quotation (typically 14 to 21 days). Shopping around effectively requires obtaining and comparing multiple quotes within a comparable time window.

Nothing in this guide constitutes personal financial advice. Annuity rates change daily. Enhanced annuity eligibility depends on individual health circumstances. Please seek regulated advice before purchasing any annuity.

How Global Investments Can Help

Global Investments assists clients in accessing the full annuity market when considering retirement income conversion. We do not tie our clients to any single annuity provider — we assess the full market and conduct enhanced annuity screening as a matter of course for all clients considering annuitisation.

For internationally mobile clients, we additionally assess the double-taxation treaty implications of annuity income in the country of residence, to ensure the gross income from an annuity is not eroded by unexpected overseas tax obligations. In some jurisdictions, UK pension annuity income is taxable in the country of residence rather than the UK — this can significantly affect the net income position and must be modelled before purchase.

Please seek regulated advice from an FCA-authorised adviser before making any annuity decision. Annuity income, once commenced, is permanent and cannot be reversed.