According to a new survey, confusing jargon deters many workers from investing in pensions. We give you the basics in simple language.
According to research conducted by JPMorgan INVEST, providers of financial education in the workplace, confusing financial terms and complicated jargon deter workers from making the most of their pensions.
JPMorgan INVEST found that more than half of us (53%) believe that pension providers use industry jargon to exaggerate the complexity of pensions. Indeed, we Brits are so baffled by the secret language of pensions that over a quarter of us think that a CD (27%) and a DVD (31%) are pension terms! (Editor's note: CD = compact disc; DVD = digital versatile disc.)
Only a fifth of Brits (20%) understand basic pension vocabulary, such as what is meant by defined contribution and defined benefit schemes. Sadly, this ignorance has serious consequences: JPMorgan INVEST warns that two in five workers (40%) have made inadequate pension provision, with almost half (47%) blaming their dithering on baffling financial jargon.
If you'd like to overcome your pensions blind spot and avoid "poverty though ignorance", here is a basic "jargon buster" to start you off, courtesy of JPMorgan INVEST and The Motley Fool:
Defined-benefit scheme (also known as a final-salary scheme)
Over eight in ten adults (81%) don't understand what this is
Members of a defined-benefit scheme are promised a guaranteed pension for life, usually based on their final salary and the length of their membership of the scheme. These are the "gold standard" of company pension schemes and cost a packet to fund, which is why so many have been closed down in recent years!
Defined-contribution scheme (also known as a money-purchase scheme)
Nearly eight in ten (78%) don't understand what this is
Employees and/or employers pay into an investment fund. As these funds are usually stock market-linked, the size of the final pot and the income that it will generate are uncertain, as these depend on the amount paid in and the performance of the underlying investments. So, employees know what is going in, but not what they will get out!
Self-invested Personal Pension (SIPP)
Almost three-quarters (74%) don't understand what this is
Since pensions A-Day on 6 April 2006, investors have more freedom of choice when it comes to deciding where to invest their pension contributions. New rules also allow members of company pension schemes to contribute to a personal pension. A particular type of personal pension, a SIPP, allows investors to exercise a greater degree of control over their pension investments: in effect, they become their own fund manager, choosing when and where to invest. SIPPs also offer a wide range of options on retirement and can be tailored to suit your personal needs. A SIPP is a do-it-yourself pension, in effect!
Additional voluntary contribution (AVC)
Over half (52%) don't understand what this is
Most company pension schemes insist on a certain level of monthly contributions from the employer and/or employees. If workers choose to pay in extra contributions on top of this minimum amount, these are known as additional voluntary contributions, or AVCs.
So, there you have it: the basics of pensions in a nutshell. If you'd like to learn more, read Ten Things To Know About Pensions and this Fool School series on pensions. Finally, remember that, when it comes to pensions, ignorance is rarely bliss, so do your homework before increasing your contributions!
More: Use the Fool to compare investments, compare savings accounts and compare credit cards!
