Time to cut out the jargon from pensions

People simply aren’t saving enough into their pension funds. Despite the relative success of the auto-enrolment rollout and the increase of minimum contributions from 5% to 8%, there’s still a culture of misunderstanding surrounding pensions. With a reported 51% of the public believing that the minimum contributions are in line with the recommended rate of saving, this is unfortunately not the case. With experts generally recommending a figure closer to 13%, something needs to change for people to have a real understanding of their pensions.

IFA firm Portafina conducted research in February 2019 on a sample of over 2,000 people between the ages of 18 and 70, designed to find out how much we know and, more commonly, don’t know about the world of pensions. The figures paint a pretty clear picture that something needs to be done. With less than 1 in 5 (19%) knowing exactly what a pension is, 72% not knowing when they would be able to withdraw money from a private pension and 31% having no idea when their pension would be taxed (and a further 40% thinking they knew, but being wrong) clearly there is an issue to be addressed.

So why is it that we don’t understand? It might be because of all the technical jargon. In fact, 85% of those surveyed in the Portafina report said that if they received clearer information about their pension in plain language and direct, coherent graphics, they would be able to make more informed decisions. When confronted with 7 common examples of pension related terms, only 37% knew what some of them meant, with a quarter not understanding any of them at all. Perhaps this is just a symptom of a larger problem regarding the lack of financial education available.

According to the Government guidance, since the introduction of financial education to the national curriculum in 2014, pupils at key stage 4 should be taught about “income and expenditure, credit and debt, insurance, savings and pensions, financial products and services, and how public money is raised and spent.” Despite this, estimates put the figure of schools actually delivering this education at around 40%, as although it’s compulsory for secondary schools, academies and free schools are not bound by the official curriculum.

It’s a shame that so many people are missing out on the benefits and later life income available through proper pensions practice. If you, like many others, feel that you need the jargon done away with and pension information delivered in an understandable and accessible way, please do ask for advice from a professional.

You may have a defined benefit pension and be aware of pension transfers but not have heard of partial transfers.

A partial transfer is a pension option that allows you to cash in a portion of your retirement fund, while still retaining the rest as a guaranteed income. They are a way of accessing your defined benefit cash without taking on the risk of a full transfer and, for those with very large pensions, they can prevent you from exceeding your lifetime allowance.

Yet the vast majority of pension trustees do not offer these transfers. According to a report by The FTAdviser in March 2018, only 15% of schemes offered partial transfers.

Some trustees may be put off due to the complex administration involved. Helen Ross, actuary and investment consultant at XPS Pensions Group, however, sees no reason why offering partial transfers shouldn’t be the norm. “People are given binary options between either security or flexibility and there is nothing in between. Providing partial transfers is beneficial for businesses too, as it makes things simpler for consumers and it’s cheaper to do in the long run.”

With the reforms to the pensions market that we’ve seen in recent years, the doors have been opened to great freedom and choice for consumers accessing their pension pots. That comes with lots of opportunities but also bears the risk of people running out of money earlier than planned – particularly when performing a full defined benefit transfer. Mary Stewart, head of corporate solutions at LV, says, “we strongly believe there is a role for partial transfers to allow DB scheme members flexibility over their retirement options, while maintaining the certainty and security of a regular income.”

Members of pension schemes need to have access to the options and information to make good decisions about their retirement and personal finances. For some, a partial transfer may be what’s needed. If you think that may be the case for you, ask your scheme administrator if it’s a viable option and discuss it with your financial adviser.

For those who want to stay safe from the efforts of pension scammers, help is out there. It’s just as well because such help is in high demand. Between August and October alone last year, the Financial Conduct Authority’s (FCA) ScamSmart website had over 173,000 unique visitors. That’s around 3,145 people per day on average, or one person every 27 seconds.

The FCA and The Pensions Regulator founded their pension fraud awareness campaign in the summer and since its launch, the number of visitors has rocketed. The website highlights common red flags to watch out for, as well as offering a form for reporting suspected fraudsters.

The scams are becoming more and more sophisticated and there’s big money involved. In 2018, pensioners reported being conned out of £23m, up from £9.2m in 2017 – that’s an average of £91,000 each. Once the fraudsters have the money, it’s very unlikely that it will be recovered, so the key to protecting yourself lies in prevention. The Head of Enforcement at the FCA, Mark Steward, has said: “Pension scams are very difficult to spot. [Scammers] try to make the victim feel afraid or uncertain, worried their money is better off somewhere else. [They] will target people from all walks of life and with any size pension.”

There are practical steps you can take to cover yourself and the Get Safe Online website offers six great tips for avoiding fraudsters:

1. Never reveal your personal or financial data, including usernames, passwords, PINs or ID numbers.
2. If you must supply payment information to people or organisations, make sure they are genuine and never reveal your passwords.
3. Remember that a bank, or any other reputable organisation, will never ask you for your password via email or phone call.
4. Do not open email attachments from unknown or untrusted sources.
5. Do not readily click on links in emails from unknown or untrusted sources. By rolling your mouse pointer over the link, you can reveal its true destination which will be displayed in the bottom left corner of your screen.
6. If this destination is different from what is displayed in the text of the link in the email, beware – only click through if you are certain it is safe.

The best thing you can do is stay vigilant and get in touch with a watchdog or trusted resource if you’re unsure. FCA research shows that more than 10 million British adults are likely to receive an unsolicited pension offer a year. Thankfully, this number should reduce as new regulations from the Treasury banning pension cold calling will have recently come into effect.

Since increased pensions freedoms were established in April 2015, the FCA says that £3 billion worth of annuities have been rejected by over 55s. Now, nearly three in five over 55s are refusing the guaranteed annuity rate (GAR) offered to them by their pension provider. Of these, nine out of ten are taking the cash instead.

A GAR means that if you use your pension to buy an annuity, you are guaranteed the rate that you get paid until you die.

Nowadays, a worrying proportion of pensions with large GARs are being cashed in, indicating that people might not be thinking through their decision because some GARs can provide a very generous income for retirements. Hargreaves Lansdown report that GARs are being rejected on 35% of applicable pensions worth more than £30,000.

If you have a GAR, you might be losing out over the course of your retirement if you decide to cash it in.

GARs were a common feature of pensions that date from the 80s and 90s. The rates on these are typically much higher than the best rates on the open market today, because they were set at a time when annuity rates were greater. In the 1980s and 1990s you could buy an annuity with a considerably higher rate than you could find today.

When making a decision to cash in your pension, doing the following will make you less likely to lose out:

1. Check your paperwork. Although you probably feel like you have an unfeasible amount of pensions paperwork, take the time to sift through it to find out if you have a GAR. If you aren’t sure, call your provider to check. Remember that if you’re still unsure, you can get in touch with the Pensions Advisory Service for free help.
2. Have a look at the terms. Even though a GAR could boost your retirement income, their terms can be a little rigid. Some GARs apply to your dependant’s pension, others don’t. Often, GARs are very inflexible about when you are able to take your income.
3. Take an integrated approach. It’s unwise to consider all of your pensions in isolation. Instead, it’s best to consider them as individual building blocks that contribute to your overall retirement income. A holistic approach will help you consider in which order to draw on your different pension pots. Usually, it’s best to use a pension that doesn’t have any guarantees if you plan on retiring early.
4. Get a requote. If you don’t think that the terms of the offer suit your circumstances, talk to your provider to try to find an alternative option. Chances are your provider won’t volunteer this option so it’s always best to ask.
5. Think about a partial transfer. If you have a larger pension with a GAR, transferring out a portion of the money could be an option while buying a fixed rate annuity with the rest. This would mean that you maintain the benefit of higher annuity rates whilst getting a cash lump sum.