“Flexi-access drawdown”, “open market option” and “safeguarded benefits” are some of the many pension terms confusing consumers, putting them at risk of missing out on the best pension options, according to Citizens Advice South Hams.
The leading local advice charity, which hosts face to face Pension Wise appointments in Totnes, says people would find it easier to understand their pensions if the industry used simple, standard language.
For instance, Citizens Advice staff 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 sooner.
Janie Moor, manager of Citizens Advice South Hams says, “Understanding what your pension options are is hard enough without having to deal with complicated wording. Having a better understanding of what the terms mean puts consumers on a better path to choosing a retirement option which is right for them.”
Citizens Advice explain some of the most confusing jargon:
- 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.
- Benefit Crystallisation Event (BCE): A BCE is an event that triggers the need to test your pension savings against the Lifetime Allowance, to check they are within the savings limits allowed. If they go above this limit, excess funds will be subject to an additional tax charge. A BCE happens in a number of circumstances, such as when you access your pension funds by purchasing an annuity or drawdown product. Also if you die before taking any of your pension pot or you have not taken all of your pension funds by 75, this is also a BCE and the savings versus lifetime allowance test is applied.
- 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, either to provide an income or as 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.
- Guaranteed Annuity Rates (GARs): This is a rate guaranteed by your pension provider when you took out your policy. As annuity rates have worsened over the years, these are likely to be valuable and guarantee you a fixed rate of income much higher than the annuity rates on offer today.
- 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. From April 2016, the allowance is set at £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.
- Open market option: This is the right to shop around for an annuity: you don’t have to stay with your current pension provider. The rates offered by different annuity providers can vary dramatically and once you have chosen, it can be very 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).
- 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 have restrictions.
- 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 due to any transfer charges.
- 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.