Business

Make sure you are not defeated by the jargon

Try not to be put off by the gobbledegook
Try not to be put off by the gobbledegook Try not to be put off by the gobbledegook

A farmer sat down with a financial adviser to plan his finances. Later, he received a bill, and rang the adviser to ask what it was for.

“It’s for my advice,” the adviser said. The farmer replied: “But I’m not taking it!”

The point is, though, that our farmer was wise enough to contact an adviser in the first place.

A new report from Aviva shows that many of us do not take advice, and shows the dangers of trying to navigate the tricky world of financial products without an expert’s guiding hand.

It has long been a topic for discussion in the financial services business that documents and information filled with jargon and technical terminology – or psychobabble as I call it – are a sure way of scaring the customer away.

Now it appears that confusion over financial terminology could mean millions of UK adults are taking out policies or other financial products with only a limited understanding of what the product offers ... and what it does not offer.

In fact, two out of five adults say they have ignored information sent by financial providers, because they didn’t understand the jargon used, and as a result nearly half of us (45 per cent) have wound up with either an account or a policy we don’t understand.

In fact, nearly a third of UK adults (29 per cent) say they’ve continued using unsuitable or uncompetitive products, because they ignored confusing information.

Pensions are a good example. Three pension-related terms were used to test the adults in the survey, who were asked to choose the correct definition for each term from a number of definitions that were laid before them.

Less than one in four (22 per cent) adults picked the correct meaning of ‘defined contribution pension’. (If you have a pension where you pay a fixed amount each month, but there is no guarantee of how much you will have as your eventual pension, then it’s defined contribution).

It also appeared that only 22 per cent chose the correct definition of ‘income drawdown’. This is a complex area, but in very simple terms, income drawdown is a method of withdrawing income from a UK pension.

Furthermore, only 16 per cent of people knew what an enhanced annuity was. This is an important one, because if you are eligible, it can mean a significantly better income from your pension. An enhanced annuity may be available to you if you are a smoker, or have certain health issues. The annuity provider will offer you a higher rate, as you may not be expected to live as long as a healthy person of the same age.

The problem with not understanding the financial terms in information you receive is that in many cases, we can actually miss out. One in six (17 per cent) of adults say they missed important changes to their policy due to lack of understanding, and 13 per cent of people are aware that this cost them money.

With many more flexibilities now available as to what you can do with your pension, the financial landscape is more complex than it was before the new pension freedoms were introduced in 2015.

All the more important, then, to be like our farmer above – a man out standing in his field. Take the best advice you can from a qualified, independent financial adviser, and make sure you are not defeated by the jargon!

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005