Special pension benefits glossary

Find out how the most common special pension benefits work and whether you’ll still qualify for them if you transfer your pension to a new provider.

Depending on the type of pension you have, you may be entitled to receive special benefits as long as you remain in the pension scheme. While the level of reward will vary from scheme to scheme it’s important to understand what benefits you could lose should you break the conditions of your pension. You can find out if your pension comes with any special benefits by checking your pension paperwork or speaking directly with your pension provider.

Here are some of the most common special benefits, explained.

Defined Benefit/Final Salary

A Defined Benefit 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. If you decide to move your Defined Benefit Pension you may lose some of the benefits you’ve accrued such as a guaranteed retirement income. For this reason it’s a legal requirement to consult an independent financial advisor before moving a Defined Benefit Pension worth more than £30,000.

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. Most Guaranteed Annuity Rates come with strict conditions and you may lose the rate if you transfer to another pension provider. For this reason it’s a legal requirement to consult an independent financial advisor before moving a pension worth more than £30,000 which has a Guaranteed Annuity Rate attached.

Guaranteed Conversion Option (GCO)

Some pensions come with additional insurance benefits such as Life Cover or Critical Illness Cover. If your insurance includes a Guaranteed Conversion Option (GCO), you’ll be able to convert a more basic insurance policy to a whole life policy or new endowment at a pre-agreed date. If your pension has Guaranteed Conversion Option as a feature, it’s likely you’ll lose it upon transferring your pension to a new scheme.

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.

If you have a Guaranteed Minimum Pension your current pension provider is committed to paying this to you, but if you transfer your pension to a new provider you risk losing the benefits you’ve accrued. For this reason it’s a legal requirement to consult an independent financial advisor before moving 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)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. However, if you move your pension or leave your scheme prematurely you are unlikely to receive these benefits.

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. Currently the government is consulting on the implementation of raising the pension age from 55 to 57. As part of this consultation, transferring away from a pension that explicitly has a retirement age of 55 could result in your losing the ability to access your pension from the age of 55. You would instead be required to access your pension from the age of 57 in line with the government’s new proposed rules.

Protected retirement age can also apply to certain careers where early retirement is common such as professional sports, modelling and military service. If you try to move a pension with a Protected Retirement Age it’s likely you’ll lose this benefit and could be exposed to harsh tax penalties if you then go on to withdraw your savings before you turn 55.

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.

If your existing pension comes with Life Cover it’s likely that transferring your pension to a different provider will invalidate your policy and you’ll lose this benefit.

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 are 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.

If Critical Illness Cover is included with your pension, it’s likely that you’ll lose this benefit if you decide to leave your pension scheme and transfer your pension.

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. Should you decide to transfer or close your pension you’ll lose this benefit.

With Profits Fund

When investing or saving into a pension you can choose to invest directly in stocks and shares or in funds that are specially designed to reduce your risk exposure. A With Profits Fund can help protect your money from stock market fluctuations and guarantees you’ll receive a minimum level of profits.

If your pension has been invested in a With Profits Fund it’s likely to be invested on a long-term basis which means you could be penalised for accessing your money early. If you were to transfer your pension savings to a new scheme, you could lose some or all of the benefits accrued in a With Profits Fund.

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.

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

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.

Usually if you choose to leave a pension scheme that has a Loyalty or Fund Bonus set up you will automatically forfeit these benefits.

Earmarked Pension

When you get a divorce it’s custom to split your assets with your former partner. As a pension is one of the largest financial assets you’ll ever own, it’s often included in a financial settlement. An Earmarked Pension lets you take some or all of your former partner’s pension when they reach retirement age and start drawing their pension, effectively earmarking it for later.

This pension sharing option is called ‘Pension Earmarking’ in Scotland and ‘Pensions Attachment’ in England, Wales and Northern Ireland. Usually an Earmarked Pension order moves across when a full pension is transferred to a new scheme, however this is not guaranteed and your new pension provider can reject it.

Pension with Pension Splitting

As part of the financial settlement in a divorce, a court may order your former partner to split their pension with you in a process called ‘Pension Sharing’. If this happens you are entitled to take a share of their pension straightaway and can join their pension scheme or move it into a pension of your own. Not all pension providers will accept a transfer of this nature so you’ll need to speak to the company you wish to transfer to before taking any action.

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