Are you still saving for your retirement or getting ready to draw your pension, but mystified by the jargon involved?
Just what on Earth does ‘annuity,’ and ‘defined contribution’ even mean – and why should you have to know just to get your hands on your own pension savings? If pension jargon leaves you feeling baffled and overwhelmed, you’re not alone.
New research has revealed that the majority of people at or nearing pension age in the UK are unsure of basic pension terms.
Jargon is a ‘barrier to pension planning’
The survey of retirees aged 45 to 75+ by Legal & General Retail found that around one in five (22 per cent) find complicated terminology a significant obstacle when researching pension options.
Three in 10 (29 per cent) did not fully understand the term ‘State Pension,’ almost three quarters (73 per cent) struggled with the term ‘annuity’ and even more (82 per cent) had limited knowledge of what ‘defined contribution’ means.
The research, conducted with the University of Sheffield, found that confusion over pension jargon can be a barrier to appropriate pension planning.
Alberto Montagnoli, Professor of Economics at Sheffield University said: “It’s worrying to see that financial terms are misunderstood. This could potentially lead to individuals failing to plan appropriately for their retirement. We need to make financial language easier for everyone to understand.”
The survey found that around one in five retirees (22 per cent) believe complicated terminology is an obstacle to researching pension plan options. This issue was more common among people in their 40s and 50s taking early retirement, who reported that they were most confused about complex jargon and an overload of information.
6 ways to get your pension on track sustainably
New free tool
Legal & General has created a free tool – Deciding How To Use Your Pension – to help people navigate pension income jargon. It includes explainers, links to PensionWise and expert guidance and is designed to help every retiree get the best from their pension income.
Lorna Shah, Managing Director Retail Retirement, Legal & General Retail said: “Clarity of pension terminology and the options available at retirement are key to effective planning. We are committed to providing clear, accessible information and resources to guide our customers towards informed decisions. Across our website and content, we have made a conscious effort to reduce the use of pension jargon to make it more accessible.”
Most-used jargon, busted
Let’s decode some of the jargon that you’re most likely to come across when exploring your pension options.
Defined contribution pension: These schemes take contributions from both you and your employer and invest them to provide a pot of money at retirement. Individual savers bear the investment risks.
Defined benefit pension: Also known as a ‘final salary’ pension scheme. These provide a guaranteed income after retirement, which is inflation linked (though this is sometimes capped) and usually continue paying out to spouses after you die.
Often referred to as ‘gold-plated’ due to their generosity compared with stingier and riskier defined contribution schemes, they have mostly died out in the private sector but are still often available to those working in the public sector.
Annuity: An insurance product that provides a guaranteed income for life. They are unpopular and widely condemned for being restrictive and offering poor value, but interest rate rises led to annuities becoming more attractive again.
However, many people don’t shop around for the best deal, or mistakenly buy unsuitable products that don’t take account of their health or provide for their spouse after death.
Pension freedoms: These were introduced in 2015 and apply to anyone who has a defined contribution workplace pension today. The freedoms allow you to flexibly access the money saved in your pension plan. They initially came into force for pension savers from the age of 55, but this will rise to 57 from April 2028.
