Special pension benefits glossary

Find out how the most common special pension benefits work. Usually, you'll lose special benefits when you transfer a pension, so it's important to understand what they are.

You can find out if your pension comes with any special benefits by checking your pension paperwork or speaking directly with your pension provider.

Below are some of the most common special benefits explained.

Safeguarded benefits

In practice, safeguarded benefits are any benefits which include some form of guarantee or promise during the saving phase about the rate of secure pension income that the member (or their survivors) will receive, or will have an option to receive. These types of benefits are rare but can be valuable and would most likely be lost upon a transfer. For this reason it’s a legal requirement to consult an independent financial advisor before moving a pension with a safeguarded benefit worth more than £30,000.

Defined Benefit/Final Salary

A defined denefit pension is a workplace pension that pays a retirement income based on the number of years you worked for an employer and other factors, rather than the amount of money you paid in. It’s often called a ‘Final Salary’ pension because the amount you receive in retirement can be based on either a proportion of the final salary you earned or your average salary throughout your career. Defined benefit pensions are rare, but are occasionally still offered to senior employees of large corporations and public sector companies.

Guaranteed Annuity Rate (GAR)

A Guaranteed Annuity Rate (GAR) is sometimes offered as a benefit when you join a pension scheme and promises a favourable rate if you decide to use your pension to purchase an annuity with the same provider. Your annuity rate is guaranteed regardless of the market rate when you retire which could provide you with a higher level of fixed income than you may be offered by another pension provider.

Guaranteed Annuity Rates were particularly popular in the 1980s and 1990s, but are less commonplace in today’s pensions.

Guaranteed Minimum Pension (GMP)

A Guaranteed Minimum Pension (GMP) is a benefit that sometimes came with old defined benefit pensions set up between 6 April 1978 and 5 April 1997, before being discontinued by government. At this time employers could choose to reduce their National Insurance bill by contracting out of the State Earnings-Related Pension Scheme (SERPS), but in exchange they had to guarantee an equivalent minimum fixed retirement income for staff.

Section 9(2B) Rights (Contracted Out)

Section 9(2B) Rights (Contracted Out) refer to a section of the Pension Scheme Act 1993 and the benefits in a contracted-out-salary-related scheme (COSR). They are similar to Guaranteed Minimum Pension benefits and were accrued when employers offering old defined benefit pension schemes were allowed to contract out of the State Earnings-Related Pension Scheme (SERPS). While contracting-out was abolished on 6 April 2016, any benefits accrued are protected and your pension provider is obliged to pay them.

Other special benefits

Some benefits are favourable but don’t provide a guaranteed rate of retirement income. These special benefits would likely be lost upon a transfer, so they are worth knowing about. Some of these special benefits, such as life insurance, can be replaced in the open market.

Protected Tax-Free Cash (PTFC)

Protected Tax-Free Cash (PTFC) may enable you to receive a higher amount of tax-free cash from your pension than is usually allowed. If you leave your pension scheme or transfer your savings to another provider, you could lose your PTFC benefit and may end up paying more in tax when the time comes to take your pension.

Protected Retirement Age (PRA)

At present pension legislation states that you need to be aged 55 or over to access your workplace or personal pension. It’s expected this will rise to 57 from 2028. A protected retirement age can apply to certain careers where early retirement is common such as professional sports, modelling and military service. In addition, a protected retirement age of 55 may be created when moving from a pension scheme that allows access at 55 to a pension scheme that will adopt the new age of 57.

Life Cover

Life Cover is also known as life insurance or life assurance and is sometimes offered alongside a pension. It’s an insurance policy designed to provide money for your loved ones in the event that you pass away during the policy term. Life Cover can provide reassurance that your family will be looked after, as anyone you name as a beneficiary will receive either a lump sum or regular payments when you die.

Critical Illness Cover

Critical Illness Cover is a type of insurance designed to provide financial protection, should you fall ill and are no longer able to work and earn an income. If you’re diagnosed with one of the illnesses listed within your policy, you’ll receive a tax-free lump sum that can be put towards anything from paying your bills to paying for your care.

Waiver Of Premium Benefits

If you have a pension that includes a Waiver of Premium Benefits, it means that your pension contributions could be paid for you if you meet certain criteria. Should you fall ill and are unable to work for 26 weeks or more, the fees will be waived and your pension contributions may be paid for you up until you reach your retirement date.

Guaranteed Growth/Bonus Rate

Savers in some lower-risk pension schemes will benefit from what’s called a Guaranteed Growth or Bonus Rate. Each year they’ll receive a guaranteed increase to their pension savings for as long as they remain a member of the scheme.

Loyalty/Fund Bonus

Some pension schemes reward their long-term customers with a Loyalty or Fund Bonus after they’ve been with the scheme for a set number of years. Whether this is paid to you in the form of a rebate on your annual management charges or as a lump sum when you come to draw your pension will depend on the rules of your scheme.

Other features

Pensions have been around for many decades and can contain a variety of different features, including investment styles and other attached conditions. Some of these features may be present in your pension and they’re not necessarily of value, but are worth being aware of. If you’re interested in these, it’s worth reviewing your pension paperwork in detail, as most modern pensions are likely to be simpler products.

Last edited: 14-11-2022

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