Citizens Advice Shropshire clears up pension jargon baffling consumers
“Flexi-access drawdown”, “open market option” and “safeguarded benefits” are some of the pension terms most confusing for consumers, reveals Citizens Advice Shropshire
The local charity, which delivers face to face Pension Wise appointments in Shropshire, says people would find it easier to understand their pensions if the industry used simple, standard language to describe their products.
Some people are also unclear about terms which appear to be more straightforward, putting them at risk of missing out on the best pension options for them.
For instance staff in Shropshire have reported cases where consumers wrongly believed that their ‘selected retirement date’ was set in stone as the date they could access their pension, when in fact they could have accessed their savings ahead of this date
To help people get to grips with their pension, staff at Shrewsbury have identified the pensions jargon which people find most perplexing and have explained them in simple terms including:
- Open market option: This is the right you have to shop around to find an annuity that suits your needs. You don’t have to stay with your current pension provider. The rates you are offered by different annuity providers can vary dramatically and once you have made your choice, it can be extremely difficult and often impossible to go back on your decision.
- Safeguarded benefits: These are special features attached to your pension pot that guarantee certain payments. Safeguarded benefits are usually defined benefit pensions (for example, a final salary pension, guaranteed minimum pension, or guaranteed deferred annuity). Some defined contribution pensions have features attached which make them safeguarded, which includes a guarantee from your pension provider about the rate of pension to be provided when you retire (for example, a guaranteed annuity rate).
- Uncrystallised funds pension lump sum (UFPLS) or ‘taking cash in chunks’: This option became available through the new pension freedoms. It allows you to take multiple withdrawals (cash lump sums) from your pension. For each withdrawal, 25 per cent is tax-free and the other 75 per cent is taxed at your marginal tax rate for that tax year. The remainder of your pension pot remains invested.
Recent research from national Citizens Advice shows more than a quarter (27 per cent) of people with defined contribution pensions feel that they don’t understand their pension plan, while fewer than one in five (19 per cent) feel very confident.
David Prince, Pension Wise Guidance Case Worker at Citizens Advice Shropshire said:
“Pension decisions can be hard enough without having to translate tricky wording.
“Many people coming to visit us are mystified by the jargon being used and our staff are here to help clear up the confusing language.”
“Having a better understanding of what the terms mean puts consumers on a better path to choosing a retirement option which suits them.”
To book a free face to face or telephone Pension Wise appointment, call 0300 330 1001 or visit www.pensionwise.gov.uk. You can also book an appointment for a later date by visiting Citizens Advice bureaux in Shrewsbury, Oswestry, Ludlow or Telford.
The other most confusing pensions jargon include:
Annuity: An annuity is an insurance product that gives you a guaranteed regular income, either for your lifetime or for the term of the annuity, which can be a shorter fixed period.
There are lots of different types of annuities. You don’t need to stay with your current provider to buy an annuity and can shop around to find the best product for you. You’ll usually get a higher retirement income by shopping around.
Guaranteed Annuity Rates (GARs): This is a rate that was guaranteed by your pension provider when you took out your policy. As annuity rates have worsened over the years, these are likely to be very valuable and guarantee you a fixed rate of income much higher than annuity rates on offer today would buy.
Selected retirement date (SRD): When you take out a personal pension, you select the date when you think you would like to access your pension pot. You do not have to take your pension at the SRD, you may be able to take it earlier or later, but you should check the terms and conditions of your policy with your provider, as some policies may have restrictions.
If your pot is invested in with profits funds, the provider will often have the ability to apply a reduction to your fund if you take it at a date other than your SRD.
Transfer value: If you want to move your pension from one provider to another, this is the amount you’d get if you moved your pension elsewhere. It may be less than the ‘fund value’ of your pension because it will include any charges for transferring.
Flexi-Access Drawdown (sometimes referred to as getting an adjustable income): This option means that your money remains invested in a pension fund. You can draw money out directly from the pension pot flexibly, to either provide an income or to take lump sums.
You can only take one tax-free lump sum of 25% of the total pot when you put the whole pot into drawdown. All other money drawn will be taxed as income.The money left in your pension can be invested, so the level of funds could go up or down.
Lifetime allowance: The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from all of your pension schemes – whether lump sums or retirement income – without triggering an extra tax charge.
It applies to the total of all the pensions you have, including both your defined contribution and defined benefit schemes, but excluding your State Pension. This is currently set at £1.25million and from April 2016 this will change to £1million. In some circumstances you can apply to protect your pension savings. If you are above this threshold, a tax charge will be applied to any excess payments.