With the recent revelation that 32% of UK adults admit to not taking their pension seriously as they find it confusing, and pensions topping the list of financial topics people wish they’d learnt more about at school3, it is unsurprising that people are struggling with understanding some of the most common pension jargon.
Of those recently surveyed by Portafina, only 1% correctly identified the definitions of all the key terms presented to them, and less than half (43%) were able to correctly define ‘personal pension’.
The five pension terms4 that the highest percentage of people struggled to correctly define are:
1. Lifetime allowance (82% incorrect)
2. Annual allowance (65% incorrect)
3. Drawdown (63% incorrect)
4. Personal pension (57% incorrect)
5. Final salary (55% incorrect)
The lifetime and annual allowance evidently had most people scratching their heads, with the majority of Brits struggling to define these. Nearly a third of those surveyed (31%) think the annual allowance is a limit on how much money you can take from your pension in a year rather than the limit on the amount you can pay in and still receive tax relief.
Unless an individual’s pension is expected to reach a million pounds, it’s unlikely that they will come across the lifetime allowance. Unsurprisingly 8 in 10 people (82%) struggled to pick out the correct definition for this term, which is a limit on the amount of pension benefit that can be drawn from a pension over a lifetime without incurring extra tax charges.
Worryingly, one in ten (10%) believed that ‘pension release’ was money your employer takes out of your pension when you retire. The term actually refers to when people take money from their pension from the age of 55 onwards. Employers do not take money from your pension, and if you are paying into a workplace pension, they contribute towards it too.
Perhaps more concerningly, almost one in ten (7%) believed that ‘drawdown’ referred to when you have used all the money from your pot and your pension closes, which is almost the opposite to the real definition, ‘a way of taking money from your pension, either as a regular income or as one-off payments as and when you need them.’
Not surprisingly, the research revealed that those aged 55-64 have the most thorough understanding of pension terms, with the highest percentage of this age group correctly identifying the definitions on 80% of the questions.
Portafina also quizzed the nation on common pension terms and acronyms, to see whether they could identify the real among the fake, however, not one person from the 2,000 polled was able to correctly differentiate between all of those tested. In fact, more than half (52%) believed that none of the listed terms5 were pension related, and over two thirds (69%) believed that none of the listed acronyms were associated with pensions.
Of the fake terms listed, almost one in ten (9%) believed that ‘Gold Standard’ was a pension-related term, and almost one in 20 (4%) thought that common text slang ‘LOL’ and ‘BAE’ (3%) were pension acronyms.
Commenting on the findings, Jamie Smith-Thompson, Managing Director at Portafina, said: “As someone within the pension industry, when I take a step back and look at the language pension savers are expected to comprehend, it’s really quite eye-opening. Excessive use of pension jargon is doing very little to build trust in a savings tool which could transform people’s future plans, and with numerous bizarre terms and phrases used freely by advisers and in important documents, it’s no wonder it can be so hard to engage people when it comes to saving into a pension.
“The industry and the government are trying to make pensions more accessible. Yet, with developments such as the pension dashboard still some way off it’s the responsibility of every pension provider and adviser to cut the jargon and be more human. At the end of the day, you shouldn’t have to learn a new language just to understand your pension options. There are plenty of good regulated financial advisers whose job is to make everything as clear as possible for you. So, it’s important to find the right one for you.”
Think you know it all when it comes to pensions? Take Portafina’s quiz to see how you fare against the rest of the nation:
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