Unfortunately, the trustees of a final salary pension scheme are not required to provide an open-market option, which would enable you to purchase whatever annuity suited you.
When considering your options, it is worth noting that pension income is subject to tax if your annual income exceeds your personal allowance, which at your age is £10,500 this tax year. If you are a basic-rate taxpayer this will reduce the scheme pension from £504 to £403 a year.
However, you have the option of taking the money as a lump sum. This has the advantage of giving you control over how best to use it. If you do this, 25% of the lump-sum payment would be tax-free, with the remainder being taxed at 20%. This provides you with a payment of £9,825 after tax.
You could use this money to buy an annuity but I wouldn’t recommend it as you would lose the capital. Instead, you could reinvest it into a corporate bond fund via an individual savings account. It could then provide a tax-free income of about £450 a year, which is better than the net income you would receive from the pension scheme.
The Fidelity Moneybuilder range of funds provides good value, with no charges to set up an ISA. This will enable the ISA to be established with the full value of the lump sum while giving you access to the capital without any exit penalties being applied.
What is an open-market option?
Upon retirement most people have to take their pension pot and use it to buy an annuity. Around this time your pension provider will send you a pack telling you your retirement date is approaching and that your pension is going to mature, outlining the annuity they will sell you.
However, you don’t have to buy the annuity your pension provider offers you. This is where you can take an open-market option, which means you shop around on the open market, with other annuity providers, to see if you can get a better deal elsewhere.
The annuity you choose will determine how much income you receive for the rest of your life - so it is not a decision to be taken lightly. Going for the open-market option will usually get you a better deal but it is also worth taking financial advice to make sure you maximise your pension to get you the best possible retirement income.