Pension Planning

Understanding your pension benefits

· 7 min read

When a company or employer offers a ‘pension package’, a term you might have heard before, they’re offering a pension alongside a series of benefits.


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Pensions often include benefits.

When a company or employer offers a ‘pension package’, a term you might have heard before, they’re offering a pension alongside a series of benefits.

Pension benefits tend to enhance the longer you spend in employment. Senior employees of public and private sector jobs are most likely to be offered pensions that come with an array of specific benefits.

Transferring or switching pensions

Pension providers offer benefits as an incentive to stick with them instead of transferring your pension. Consequently, if you transfer your pension, you will typically lose some or all of your existing pension benefits.

If you're considering moving or transferring your pension, you should look at the benefits you have accrued and are due to receive in the future. Some, like loyalty bonuses, can affect the value of switching pensions when you’ve been with the same provider for a long time.

In the case of defined benefit pensions worth more than £30,000, the law requires you to seek independent financial advice if you want to transfer. An advisor can help you ascertain whether switching is worth it if you lose any or all of your pension benefits.

While pension benefits are more common in defined benefit contribution schemes, many private pensions also offer a series of benefits and bundled financial products like insurance.

For some, the value added by these benefits can be considerable. But others might already have life insurance or other cover and therefore don’t require it ‘bundled’ in with their pension.

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These are the sort of factors you must weigh up when shopping for a new pension.

Here is a glossary of pension benefits, features and marketing terms.

Critical Illness Cover

Another type of insurance that can be ‘bundled in’ with a pension as an additional benefit.

Critical illness cover provides financial protection for if you fall too ill to work. You’ll have to be diagnosed with an illness covered by your critical illness policy. Critical illness payouts are usually paid out as lump sums.

Defined Benefit/Final Salary

Final-salary pensions are usually provided to public sector workers with many years' service. They're also common for senior private-sector workers.

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Defined benefit pensions, also called final salary pensions, provide a guaranteed income for life, calculated from your salary and employment record. Defined benefit pensions can be exceptional, providing income for life that rises each year to accommodate inflation.

Employers may contribute as much as 15% of your wages into a defined benefit scheme to meet their final salary promises. You will have to speak to a financial adviser before moving a defined benefit pension worth more than £30,000.

Earmarked Pension

Earmarked pensions allow you or your partner to draw from a pension when you reach retirement age in the case of divorce or separation. This is also known as a Pension Earmark Order.

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It enables both parties of a separated marriage or union to access joint pension pots as and when they reach retirement age.

Guaranteed Annuity Rate (GAR)

A Guaranteed Annuity Rate (GAR) provides an enhanced, protected rate that you can access if you buy an annuity with your current pension provider.

These are less common now, but if you have a GAR, you'll lose it by switching to a new pension provider. It’s worth comparing your GAR to other annuity rates on the market to weigh up whether it’s competitive or not.

Guaranteed Conversion Option (GCO)

A Guaranteed Conversion Option (GCO) applies to pensions that provide additional insurance benefits like life cover or critical illness insurance. If your insurance includes a GCO, your basic insurance policy will be convertible into a whole life policy at a specific date.

Again, this type of benefit will be lost when you switch pension providers, but your new provider might match it.

Guaranteed Growth/Bonus Rate

Some pension schemes provide a guaranteed increase to savings each year someone remains a member of the scheme.

Guaranteed Minimum Pension (GMP)

Between 6 April 1978 and 5 April 1997, employers could contract out of the SERPS but had to guarantee an equivalent pension rate for staff instead. This enabled the employer to reduce their National Insurance contributions.

GMPs are not a pension benefit as such. However, if it applies to you, your employer is committed to paying it.

Life Cover/Insurance

Life cover or life insurance can be ‘bundled’ in with a pension. Life insurance provides a benefit to your chosen beneficiaries if you die in the policy term. Life insurance usually pays a lump sum called a death benefit.

Loyalty/Fund Bonus

Similarly, some pension schemes provide loyalty bonuses for longer-term savers. This is usually paid as a rebate of pension fee charges or could take the form of an additional sum you can draw when you crystallise your pension.

You will usually lose any such loyalty bonuses if you transfer pensions.

Pension with Pension Splitting

It may also be possible to directly split a pension in the case of divorce or separation, moving them into separate pots or accounts.

Protected Tax-Free Cash (PTFC)

PTFC could allow you to withdraw a higher % of tax-free cash from your pension than the typical 25% allowed but typically only applies to some occupational pension schemes.

Again, you’ll lose this benefit if you leave or transfer the pension scheme.

Protected Retirement Age (PRA)

Formerly, many professions in the UK came with a Protected Retirement Age (PRA). On 6th April 2006 - ‘A-day’ - Protected Retirement Ages were essentially scrapped.

Some people with a PRA that took their pensions out before this date retain the right to cash in some of their pension from age 50. This is a benefit you will lose if you transfer your pension from one covered with a PRA.

Section 9(2B) Rights (Contracted Out)

Similar to Guaranteed Minimum Pension schemes. This refers to a section of the Pension Scheme Act 1993 concerning a contracted-out-salary-related scheme (COSR). This section provides rights on a defined benefit basis under a contracted-out salary-related pension scheme.

Similarly to the GMP, if this applies to you, your employer is committed to it once you retire.

Waiver Of Premium Benefits

A Waiver of Premium Benefits means that you could waive your pension contribution commitments if you cannot pay them if you’re unable to work, for example. Should you be unable to work for 26 weeks or more, your pension fees and minimum contributions will be waived until you can pay them again or retire.

This is another example of a benefit typically lost when you leave or transfer a pension from one with a Waiver of Premium Benefits.

With Profits Fund

A With Profits Fund is designed to decrease your pension’s exposure to risk. This provides a very steady and stable way to accumulate your pension pot. However, it also reduces the likelihood of more considerable gains.

With Profits Funds usually guaranteed a minimum level of profits from your pension investments.

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Pension Times Finance Experts
Pension Times Finance Experts
Written collaboratively by Pension Times’ in-house finance experts.
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