Special Pension Benefits Glossary

What's a pension fund?

This might be one of the most straightforward questions yet slightly complex to answer than you might think.

Retirement comes with its plate of challenges and so depending on the type of pension you choose, you might be eligible for unique benefits provided that you remain in the pension scheme. While the rewards vary from one pension scheme to another, you must understand the perks you might lose if you break your pension plan contract. You can figure out if your pension plan comes with several unique pension benefits by scheming through your pension paperwork or via speaking directly with your pension provider.

That said here’s a comprehensive guide to special pensions benefits glossary.

Defined Benefit/Final Salary

The Defined Benefit Pension or final salary is a workplace pension that allows you to get a retirement income based on the years you’ve worked for your boss and several other factors rather than the amount of capital you paid in. It’s commonly referred to as the ‘final salary’ pension since the amount you get in retirement can be grounded on either a percentage of the final salary you got or your average annual income.

Defined Benefit Pension1 plans are rare. Nonetheless, they’re occasionally still offered to older employees of established firms and public sector organizations. If you choose to move your DBP, you might lose some of the benefits accrued like the guaranteed retirement income. Due to that reason, the law requires you to consult an independent financial advisor before you move a Defined Benefit Pension that’s worth more than €30,000.

Guaranteed Annuity Rate (GAR)

Most pension providers offer you the Guaranteed Annuity Rate (GAR) as a benefit when you join a pension plan, and it promises you a favourable rate if you opt to use your pension to buy an annuity with the same lender. Your annuity rate is guaranteed despite the market rate when you retire. It could offer you a higher level of fixed income than another pension lender might provide you with.

Guaranteed Annuity Rates might not be so popular today as they were in the 1980s and 1990s. Most GARs today come with stringent conditions, and you might lose the rate if you opt to transfer to another pension provider. For that reason, it’s vital to consult a financial advisor before you swap to a pension worth more than £30,000, with a Guaranteed Annuity Rate attached.

Guaranteed Conversion Option (GCO)

Some pension schemes come with supplementary insurance benefits like the Life Cover or Critical Illness Cover. Therefore, if your insurance includes a Guaranteed Conversion Option (GCO), you’ll be able to convert your more basic insurance2 policy to a whole life policy or a new endowment at a pre-contracted date. If your pension plan features the Guaranteed Conversion Option, then there’s a probability that you might lose it when you switch your pension to a new pension plan.  

Guaranteed Minimum Pension (GMP)

A Guaranteed Minimum Pension (GMP) was a benefit that pensioners used to get with the old Defined Benefit Pensions that were set up between 6th April 1978 and 5th April 1997, before the government discontinued it. At that point, employers would choose to reduce their National Insurance bill through contracting out of the State Earnings-Related Pension Scheme (SERPS). However, in exchange, retirees would have to guarantee a correspondent minimum fixed retirement income for employees.

If you have the Guaranteed Minimum Pension, your present-day pension provider is committed to offering you this benefit. Nonetheless, if you opt to transfer pension plans to a new pension provider, you face the risk of losing the pension benefits you’ve amassed. So, due to this reason, be sure to get legal advice from an independent financial advisor before you swap to a pension with a Guaranteed Minimum Pension worth more than £30,000 attached.

Section 9(2B) Rights (Contracted Out)

Section 9(2B) Rights (Contracted Out) refers to the section of the Pension Scheme Act 1993 and the benefits you get from a contracted-out-salary-related scheme (COSR).

These pension perks are similar to those offered by the Guaranteed Minimum Pension benefits and were amassed when employers providing their staff with old Defined Benefit Pension schemes were provided with the opportunity to contract out of the State Earnings-Related Pension Scheme (SERPS).

While contracting-out was eradicated on 6th April 2016, any benefits you got from it are safeguarded, and your pension provider is required by law, to pay them. Nevertheless, if you decide to transfer your pension or discard your pension plan prematurely, you’re unlikely to get these benefits.

Protected Tax-Free Cash (PTFC)

The Protected Tax-Free Cash (PTFC) is one of the best benefits when it comes to pension schemes since it allows you to receive a higher amount of tax-free capital from your pension plan (more than most providers allow). However, if you terminate your pension scheme or transfer your savings to another pension provider, you might end up losing your PTFC benefit and end up paying more in tax when the time comes to take your pension plan.

Protected Retirement Age (PRA)

Currently, pension laws state that you must be aged 55 and above to acquire your workplace or personal pension. Nonetheless, if you have the Protected Retirement Age (PRA) indicated in your pension scheme, you’ll be entitled you to withdraw your pension plan earlier. The Protected Retirement Age is a unique benefit that must have been offered before 6th April 2006 for it to be deemed valid. It’s usually only pertinent to specific careers where early retirement is popular – these include occupations like professional sports, modelling and military service.

If you’re not happy with your pension plan and you have the Protected Retirement Age you might lose the benefit. You might also be eventually exposed to strict tax penalties if you go on to withdraw your savings before you turn 55.

Life Cover

Life Cover is also referred to as life insurance or life assurance, and it can be offered alongside a pension scheme. The benefit is an insurance policy that’s designed to provide cash to your family if you die during the lifetime of the insurance cover.  

Life Cover can offer your family reassurance that they’ll be taken care of. If you name your heirs as beneficiaries on your Will, then they’ll get either a lump sum3 or monthly income when you pass away.

If your current pension plan includes the life cover then transferring it to another pension provider will invalidate your policy and you’ll lose it.

Critical Illness Cover

Critical Illness Cover is a form of insurance that specifically designed to offer you financial security. If you become sick and are no longer able to work and earn some revenue, the Critical Illness Cover will protect you.

If you’re also diagnosed with one of the ailments listed on your policy, you’ll get a tax-free lump sum that you can put towards anything from paying your bills, your mortgage and even your long-term care.

If this benefit is included with your pension scheme and you decide to transfer it or leave it, then you’ll end up losing the cover.

Waiver of Premium Benefits

If you have a pension scheme that includes the Waiver of Premium Benefits, it means that you can have your pension contributions cater for if you meet particular criteria. If you fall ill and aren’t able to work for two years or more, the provider will waive your fees, and your pension contributions will be catered to until you reach your retirement date. However, if you opt to transfer or disregard this benefit, you might end up losing it.

With-Profits Fund

When you decide to invest or save into a pension fund, you can opt to either invest directly in stocks and shared or in funds that are uniquely designed to lower the risk of exposure. A With-Profits Fund helps in safeguarding your capital from stock market fluctuations, and it guarantees you that’ll receive a minimum level of returns.

If your pension scheme includes the With-Profits Fund, it’ll probably get invested on a long-term basis, meaning that you might get penalized if you choose to access your pension pot early. If you were to move your pension savings to a newer scheme, then you might lose some or all of the pension benefits accrued in a With-Profits Fund.

Guaranteed Growth/Bonus Rate

As per the pensions terminology guide book, if you’re in a low-risk pension plan, you might benefit from a Guaranteed Growth or Bonus Rate. You’ll get a guaranteed increase every year to your pension savings provided that you remain a member of your pension plan.

While it’s possible to transfer a pension scheme with a Guaranteed Growth or Bonus Rate, you might pay high exit charges. It may also be puzzling to find a new pension provider that’s willing to accept such a transfer.

Loyalty/Fund Bonus

Some pension plans reward their long-term consumers with a Loyalty/Fund Bonus after they’ve subscribed to a scheme for several years. Whether this pension scheme is paid to you in the form of reimbursement on your yearly management charges or as a lump sum when you withdraw your pension will entirely depend on the type of scheme you have.  

Generally, if you opt to discontinue your pension scheme when you have a Loyalty or Fund Bonus set up, you’’ instantly have to forfeit these benefits.

Earmarked Pension

According to pensions terminology UK, when you file for a divorce, it’s custom that you’ll have to split your assets with your ex. Since a pension scheme is one of the most significant financial investments you’ll ever own, it’s often included in a financial statement. An Earmarked Pension allows you to take some of your ex’s entire pension when they reach the state retirement age and start withdrawing their pension funds, successfully earmarking it for later.

The pension sharing option is referred to as the ‘Pension Earmarking’ in Scotland and ‘Pensions Attachment’ in England, Wales and Northern Ireland. Typically, an Earmarked Pension order moves across when you transfer your full pension to a new scheme. Nonetheless, this isn’t guaranteed, and your new pension provider has the right to reject it.

Pension with Pension Splitting

As part of the financial settlement, the court, after proceeding might order your former spouse to split their pension plan with you in a process referred to as ‘Pension Sharing’. If that happens, you’ll be entitled to take a share of their pension right away, and you can join their pension plan or move it into a pension scheme of your own. However, not every pension provider can accept a transfer of this nature. Therefore, you’ll have to speak to the firm you want to transfer to before you take any action.

Common Questions

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