Pensions 

People do not understand pension terms and rules

People do not understand pension terms and rules

Savers over the age of 55 are finding it difficult to understand key pension terms and rules even after they have retired.

Advice firm Portafina spoke to 2,000 individuals aged 55 to 75 and found only 20 per cent knew what the lifetime allowance was.

They also struggled to correctly describe the annual allowance, as only 35 per cent knew that it was the £40,000 annual limit that can be paid into a pension each year on which individuals can claim tax relief.

Nearly as many (31 per cent) incorrectly thought that the annual allowance "restricted the amount you were allowed to take out each year without being taxed" which implied a confusion with the money purchase annual allowance, according to Portafina.

Fewer than half of savers understood the term income drawdown, despite this option being the second most popular method of withdrawing defined contribution pension savings, according to FCA data published in September.

There was also confusion over the difference between defined benefit and DC schemes. 

Half of those polled understood the core benefit of a final salary DB scheme as "a pension that promises to pay you a guaranteed income for life from a set age".

In comparison, 48 per cent accurately described a DC pension as "a scheme where the size of your pot depends on how much has been invested and how those investments have performed", but nearly a quarter (23.5 per cent) thought that it was combined "company state pension funds".

Jamie Smith-Thompson, managing director at Portafina, said: "This research highlights that there is still a widespread lack of knowledge of decumulation options and tax limitations associated with optimising DC pensions savings and withdrawals. 

"We know from the FCA’s statistics that nearly a third (31 per cent) of income drawdown purchases are still non-advised, which is worrying given the increasing propensity to ‘over-drawdown’ and the minefield that is investing for growth as well as steady income. 

"The continued use of technical language on paper-based statutory documentation does not help. Providers’ wake up packs and annual statements need to become more visual, more real-time and available in a clearer format on all digital devices."

The research also found that very few individuals could identify key pension acronyms.

Only 4.5 per cent of them identified TVAs (transfer value analysis); while just 1 per cent recognised TVCs (transfer value comparator) as a pensions acronym. 

Only 1 per cent recognised what FAD (flexi access drawdown) meant, despite the fact that FAD is the only drawdown option for new income drawdown policy holders. 

But measures to improve the way industry communicates with people have already been actioned.

As part of a consultation in June aimed at making retirees do the best they can with their pension pots, the FCA proposed changes to wake up packs, which will come into force in November 2019.

Wake-up packs will be issued to savers on their fiftieth birthday and will have to include a generic warning on the risks around accessing a pension pot.