...with Nigel Morgan
THE new rules regarding pensions have introduced a number of confusing definitions into the public domain.
Pensions can feel like a foreign language for many people. Terms like flexi-access drawdown and uncrystallised funds pension lump sum are mystifying consumers, but we also find people misinterpreting seemingly more straightforward pensions terms. A small misunderstanding about your pension can lead to a lot of confusion, and mean some consumers don’t get the best option for them.
Citizens Advice, who now deliver the face-toface channel of Pension Wise, 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 puts them at risk of missing out on the best pension options for them. We have dealt with 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, we have identified the pensions jargon which people find most perplexing and have explained them in simple terms including: ●● 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 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. ●● 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.
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. ●● 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. ●● 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).
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
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 per cent 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. ●● 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 pensions funds by 75, this is also a BCE and the savings versus lifetime allowance test is applied.
If you need advice please contact your local bureau who will make you an appointment with one of our specialists.