In spite of the fact that savers have now had the option of shopping around at the point of retirement for almost 40 years, the rates at which the ‘open market option’ has been used have long been a bone of contention for the regulator.
Until the Finance Act of 1975, those starting to take an income from their pension would purchase their annuity from their existing pension provider.
Since that legislation was enacted, savers have been able to choose to buy their annuity from a range of annuity providers.
In the annuity market this gives savers the opportunity to shop around to find the option that works best for them in terms of lump sums, guarantees, escalation, and death benefits.
Most importantly, at least in the annuity market, it means savers can move away from a provider offering a low income in retirement and find an alternative provider offering a higher ongoing pension.
The open market option also has relevance within the drawdown market, although the benefits it potentially offers to savers work in less direct ways than within the annuity market.
Savers have never directly been able to access a higher annual pension by switching drawdown product. This is because the income taken from the drawdown pot is decided by the saver and their adviser, not set by the provider.
However, the range of different charges applied by drawdown providers, and the different options offered in terms of income and investment flexibility, has meant there has also been value in assessing the options available from different providers when deciding to take income.
One key difference between annuities and drawdown in terms of the ability of savers to choose between providers is that this choice can be made at any point after someone has moved into drawdown.
With an annuity the option of moving to another provider typically has to be made at the point the annuity is initially purchased, making low levels of take-up of the open market option a significant issue within that market.
In the drawdown market, a saver can choose to switch provider at any point before or after they have crystallised some or all of their benefits, making the take-up of the open market option, specifically at the time benefits are initially taken, less of an issue.
Regulatory intervention
Regulators have attempted to address low levels of take-up of the open market option on several occasions in the past.
The most significant intervention until recently came in 2002, when the then Financial Services Authority’s Traded Endowment Policy and Open Market Option Disclosure Requirements Instrument introduced the requirement for providers to issue a ‘wake-up letter’ to a pension scheme member at least four months before that customer’s intended retirement date, and also where the customer asked for a retirement quotation if this was more than four months before that date.
The information which had to be provided with the wake-up letter included:
