Understanding the Open Market Option

Making the Most of Your Pension Choices

As you approach retirement, one of the most important decisions you’ll make is how to turn your pension pot into a reliable income. If you’re part of a defined contribution pension scheme, you’re not limited to accepting the annuity offered by your provider. In fact, you have a legal right to look elsewhere—and that right is known as the Open Market Option.

This guide explains how the Open Market Option works, why it matters, and how making use of it could help you secure a higher income in retirement.

What Is the Open Market Option?

The Open Market Option gives you the freedom to buy an annuity—or another retirement income product—from any provider you choose, rather than being tied to the company that managed your pension savings.

When you reach retirement age, your pension scheme is required to inform you of the value of your pension pot and usually provides an annuity quote. That quote may seem like a natural next step, but it often only reflects the offer from one provider—and it’s unlikely to be the most competitive deal available.

The Open Market Option protects your right to shop around, compare rates and features, and choose the most suitable annuity for your circumstances. You are under no obligation to accept the default offer from your pension company, and in many cases, taking the time to explore the wider market could result in a better income for life.

Why Comparing Annuity Offers Is So Important

Annuity rates are not standardised across providers. Each company sets its own rates, which can vary widely depending on a range of factors, including market conditions, actuarial assumptions, and how they assess risk.

By comparing rates through the open market, many retirees have been able to significantly improve their retirement income. This is especially true if you’re eligible for an enhanced annuity, where your health or lifestyle could unlock higher payments.

To illustrate the point: George, aged 66, had mild angina and a long-standing smoking history. After using the Open Market Option and disclosing his full medical background, he received an enhanced annuity quote offering him 42% more income than his original pension provider’s standard rate.

That difference—earned simply by shopping around—can translate into many thousands of pounds over a typical retirement.

The Potential for Enhanced Annuity Terms

One of the key reasons to exercise your Open Market Option is the possibility of qualifying for an enhanced annuity.

If you’ve experienced certain medical conditions, or if your lifestyle includes risk factors such as smoking, high alcohol consumption, or a high BMI, you may qualify for an enhanced income. Even historical conditions—such as previous treatment for cancer or long-term medication—could make a difference.

Some providers specialise in assessing medical and lifestyle factors, while others do not. If your current provider doesn’t offer enhanced annuities, or doesn’t ask the right questions, you may be missing out on income you’re entitled to.

When comparing annuity options, be sure to ask whether a health and lifestyle assessment is available. It’s often a short questionnaire, and in most cases no medical examination is required.

Choosing the Right Annuity Type for You

While securing the best rate is important, so too is selecting the annuity type that fits your needs.

You may want a lifetime annuity, which guarantees an income for life, or a fixed-term annuity, which offers flexibility and the possibility of reassessing your options after a set period. Within these types, there are further options to consider:

• Death benefits, such as joint-life arrangements or guarantee periods
• Inflation protection, where income rises each year to keep pace with the cost of living
• Value protection, returning unused funds to your estate if you die early

Each option affects the level of income you’ll receive. For example, an escalating annuity may start with a lower income but increase annually, while a level annuity offers a higher starting amount but does not adjust for inflation.

Your annuity choice will typically be a one-off decision, particularly for lifetime and enhanced lifetime annuities, so it’s vital to weigh the pros and cons before proceeding. Fixed-term annuities also involve a commitment—you’ll usually be locked in with the same provider for the entire term.

What If My Pension Scheme Offers a Good Deal?

In some cases, your current provider may offer you a competitive annuity rate—especially if your pension includes a Guaranteed Annuity Rate (GAR) from years ago. These rates, set decades in advance, can sometimes be more generous than current market rates.

Even so, you are still entitled to use the Open Market Option. There is no obligation to accept your scheme’s offer without exploring alternatives. Comparing your GAR with other available rates allows you to make a fully informed decision—and potentially combine a GAR with other annuity features if permitted.

There is no cost to exploring your options, and no risk in requesting quotes from different providers. In fact, the process of comparing rates is encouraged by regulators and consumer protection bodies.

What Do Industry Bodies Say?

Concerns about retirees missing out on income due to lack of information or inertia have led to formal guidance and research on this issue.

In 2012, the Association of British Insurers (ABI) introduced a Code of Conduct on Retirement Choices. Its aim was to improve consumer awareness, encourage shopping around, and ensure that individuals received clear, impartial information when choosing retirement income products.

That same year, the National Association of Pension Funds (NAPF) and the Pensions Institute published a research report highlighting the scale of lost income. It found that retirees collectively forgo up to £1 billion in lifetime income every year by not exercising their Open Market Option.

These findings underscore the importance of making an active, informed choice—and not simply accepting the first offer presented.

Final Thoughts

The Open Market Option exists to give you choice, control, and the opportunity to get the most from your pension savings.

Whether you’re in good health or managing long-term conditions, you have every right to seek out the most competitive and suitable annuity for your retirement needs. This may include higher income through enhanced terms, more appropriate death benefit options, or greater flexibility in how and when your income is paid.