11 July 2018
With the Football World Cup in full flow, phrases like “At The End Of The Day”, “Bags Of Pace”, “Over The Moon”, and more recently “bantz” and “VAR” have come out of the woodwork. Is there anything worse than abbreviations and needless complexity?
Whilst fans seem to embrace and foster the peculiar language of football, it does create a barrier to entry. And so it is with pensions. Better understanding breeds engagement, so it is vital that we break down the buzzword barriers. Here, LCP Partner Alex Waite elects a handful of the worst pension culprits and suggests how to simplify these confusing phrases into everyday language:
Annuity – You probably see it all the time, and yet it’s one of those words that doesn’t actually look like it means anything. An annuity is quite simply a sum of money paid to someone each year, usually for the rest of their life. Therefore, the payment you get from your pension fund is technically an annuity. However, common usage often specifically refers to the guaranteed income provided by an insurance policy – so “annuity” can be used to mean “an insurance contract paying a pension”.
Auto-enrolment – This is the Government policy to have everyone automatically join a pension scheme, provided they are eligible. It is now a legal requirement which employers and employees must be aware of. Typically to be eligible you just need to be over the age of 22 and earn over £10,000 per year although some people still aren’t eligible, particularly those working in the gig economy. This a major step forward because the default position is now that people are opted-in, rather than missing out (often without even knowing about it!).
Flexible Drawdown – A flexible drawdown is a situation in which someone takes an amount of money (lump sum) that has been made available through a Defined Contribution arrangement. This is usually seen with an income drawdown plan, which allows you to stay invested in a fund after retirement while also drawing an annual income from it (or from its growth). Within certain limits, there is a lot of flexibility for the saver regarding how much income is taken each year.
Pension – While this may seem obvious, we are seeing more and more uses of “pension” as a catch-all for any kind of saving for the future. The Oxford English Dictionary definition includes “a regular payment made during a person’s retirement from an investment fund”. Of course, the nature of retirement has morphed somewhat in recent decades, given changes in working trends and so people these days often start to take a pension, but still carrying on working. See Retirement.
Retirement – The definition of “retirement” used to be the period after stopping work: at age 65 for men, age 60 for women, or earlier due to ill health. The modern workforce however is very different, with many individuals carrying on working into their 70’s and even 80’s. That said, work beyond a certain age tends to be more likely to be part-time or for the charity sector and as such it is a period when income from prior savings can be drawn down as required to supplement what would otherwise be a low income in later years. See Flexible Drawdown.
Transfer Value – If you decide to move from one pension scheme to another, the transfer value is the amount of money your old scheme would pay to your new scheme instead of any pension benefits they might have otherwise paid you.
VAR – In pensions, Value at Risk is a risk metric that attempts to quantify, for a given likelihood, the minimum size of an adverse shock that could hit a pension scheme. Often VAR is calculated using complex mathematical models requiring many assumptions for deeply unknowably outcomes in the future. As such, rather like football’s Video Assistant Referee, it’s important to appreciate that VAR doesn’t always give the full picture!
Simplifying pension savings jargon to everyday language would go a long way to tuning people in, rather than tuning them out.
So let’s jettison the jargon, to help make saving less daunting.
Further reading / other resources:
- NEST Phrasebook https://www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/docs/NEST-phrasebook,PDF.pdf
- TPR Glossary http://www.thepensionsregulator.gov.uk/Glossary.aspx