Only a small minority of individuals have a full understanding of key pension concepts, with just one in 10 clear on the meaning of the term ’open market option’ and 23 per cent knowing what an annuity is, according to research carried out for Nest.
Respondents to the survey, carried out on around 2,000 individuals by YouGov, were asked to put terms into five categories: I completely understand the term; I mostly understand the term; I only vaguely understand the term and I have no idea what the term means.
Only 14 per cent of respondents said they completely understood the term lifestyling.
The research found people’s own assessments of their understanding was often misleading. Of people who said they ’completely understand’ or ’mostly understand’ the term lifestyling, which gave a combined result of 35 per cent, over 20 per cent could not provide an explanation of what it meant, and those that did gave answers such as “something to help day-to-day activities”.
In general, women tend to be less likely to claim they understand pension terms than men. The likelihood to understand pension terms tends to increase with age and those on the highest incomes were more likely to claim they completely understand each term.
Some terms were easier for respondents to understand than others, with ’contributions’, ’estate, fund’, ’investment’, ’pension’ and ’nominated beneficiary’ all considered easy to understand.
People were less confident about terms such as annuity, risk and return, lifestyling and open market option.
Nest has used the research to develop a phrasebook of key terms, phrases and principles. The phrasebook can be downloaded from Nest Corporation’s website. Nest has also set up an online forum and published an interactive game to continue the debate about pension terms.
Lawrence Churchill, Nest Corporation chair, says: “The way we talk to our members and employers will be critical; many won’t have much, if any, experience of pensions or other complex financial products. We hope our work contributes to the drive to reduce jargon in the financial services world more generally.”
Minister for pensions Steve Webb says: “I welcome Nest’s phrasebook as a big step forward in making pensions easy to understand. Employers and workers alike find pensions very complicated.  As we move forward with radical reforms to automatically enrol people into workplace pensions it is vital that we use clear and simple language to make that process as straightforward as possible.”
Helen White, director of life and savings at the Association of British Insurers says: “It is crucial we use the next 12 months to get people ready for this huge change and we welcome the work Nest is doing. We need to make sure that we, as a pensions industry, are communicating in the clearest and simplest terms with people so that they understand why it is good to save and what they can expect from their pension.”
