A beginner’s guide to retirement jargon

The top 10 most commonly used examples of jargon within the pension industry – and what they mean in ordinary language.

Retirement planning can be a daunting task – with so many options available since the pension freedoms, it can be easy to feel overwhelmed with the amount of complex information available. According to the Pensions Policy Institute (PPI), many people struggle to understand important financial fundamentals when it comes to retirement, such as tax, inflation, or how retirement income products work.

WEALTH at work has collated its top 10 most commonly used examples of jargon within the pension industry to help explain some of the financial fundamentals that people struggle to understand.

1) Retirement income requirements

How much money you need to meet day-to-day living expenses and things you may want to do, such as hobbies and travel when you retire.

2) Retirement savings

It is important to consider all savings, not just your pension, as possible income in retirement. This is because it may be possible to keep yourself in a lower income tax band by limiting the amount you take from your pensions, and topping your income up instead with other savings, such as ISAs and shares. 

3) Longevity

The length of time people are likely to live for at any particular age, and therefore how long you need your retirement savings to last. People are generally living longer. A male retiring now at age 65 can expect to live on average to age 83, and a female to age 85. This means that your money has to provide you with an income for about 20 years! For some people, this could be much longer as these figures are average life expectancies.

4) Inflation risk

The rising cost of living means that the buying power of your money is reduced over time. If inflation is 2%, £100 now will be worth £83.68 in 10 years, £68.64 in 20 years, and £56.31 in 30 years. It is quite possible that you will need to provide an income for yourself for more than 20 years, perhaps even more than 30. If you do not protect yourself against inflation, your income may be worth much less than half its present value when you reach your later years.

5) Retirement income products

These are products which people buy with their pension to provide them with an income in their retirement. Traditionally this was an annuity, which provides a guaranteed income for life. However, as people with a defined contribution (DC) pension are able to access their pensions as and when they like (currently from age 55), new and more flexible retirement income products are being introduced to enable this.

6) Annuity

An annuity is an insurance policy which pays a guaranteed income for the rest of your life. The rate is fixed at the time the annuity is purchased. The amount of pension you receive will be based on your individual circumstances, such as the size of the pension fund you use to buy the annuity, your age, interest rates at the time of purchase, and your health/lifestyle.

Once the annuity has been purchased, it will usually not be possible to change its terms. There are also a number of variations on the type of annuity offered such as lifetime annuities, fixed-term annuities and investment-linked annuities, so it is important to understand each type before committing to one.

7) Income drawdown

This is a popular alternative to buying an annuity. It allows you to draw an income from your pension fund while the fund remains invested. You can take 25% of the income tax-free each year; for example, if you withdraw £10,000 a year, £2,500 can be taken tax-free. Alternatively, you could withdraw 25% of your whole pension pot in one go tax-free, however, this is probably not a good idea if you are simply going to re-invest it as it won’t be as tax-efficient as leaving it in the pension.

8) Investment risk

Some retirement income options carry investment risk; this is the risk of an investment return being different from what is expected, and includes the possibility of losing some or all of the original investment. Choosing the right level of investment risk is essential to create an investment strategy that you are comfortable with.

9) Defined benefit (DB) transfers

If you have a DB scheme (also known as a final salary scheme) but would like the flexibility of being able to control the amount of income you receive each year, you can transfer your DB scheme into a DC pension. It is important to note that transferring from a DB pension scheme can mean that valuable guaranteed benefits are given up and many could find themselves worse off. If you are considering transferring out of a DB scheme, you must seek advice from someone who has been authorised to give pension transfer advice by the Financial Conduct Authority (FCA). You can check this on the FCA’s financial services register: register.fca.org.uk.

10) Pension scams

This is when a scammer has persuaded an individual to transfer their pension pot to them or release funds from their pension to invest. It is often invested in high-risk investments or products which hides multiple fees and high charges. In some cases, the funds are stolen outright. Scammers target those approaching retirement as they potentially have access to a lot of money which they want to try to take. Remember the old saying, ‘if something sounds too good to be true, it probably is’.

To help protect yourself from scams, you should check that any firm you take advice from is regulated by the FCA and then proceed with caution. Further information can be found here. You can also visit the FCA’s ScamSmart website, which includes a warning list of companies operating without authorisation or running scams.

Planning what to do with your money in retirement can be confusing for many, especially with the amount of jargon that is often used.

I hope that by explaining some of this jargon, people will have a better understanding and be motivated to look for the support they need. Pensionwise.gov.uk is a good place to start, and many organisations now offer retirement seminars in the workplace, so it is always worth finding out what your employer offers.

Jonathan Watts-Lay is director of WEALTH at work, a specialist provider of financial education and guidance in the workplace.

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