Jargon buster

Annual Allowance

Annual allowance is the limit the Government places on pension savings you can make each year that benefit from tax relief.  The current annual allowance is £40,000 for tax year 2017-18. If you attempt to put more than £40,000 per year in to your pension, this will trigger a tax charge.  However, if you don’t use all the allowance in one tax year, you can carry it forward for up to three tax years.

Annuity

This provides you with a guaranteed taxable income for life. The amount depends on your circumstances when you purchase the annuity, including interest rates, your age, your health and how long people are expected to live. You can choose from different types of annuities, for instance, one that increases each year in line with inflation, or one which pays a dependant’s annuity after your death.

Auto-enrolment

Auto-enrolment was introduced by the Government to encourage people to save for their retirement. Eligible workers are automatically enrolled into a ‘qualifying scheme’ which is a savings arrangement run by their employers. Employers are required by law to contribute to a “qualifying scheme” for eligible workers.

State Pension

This is a pension paid by the Government at State Pension age to everyone who has paid or been credited with sufficient National Insurance Contributions. It is not earnings related.

Contracting Out

Contracting out meant that you gave up benefits from the State Earnings Related Pension Scheme (SERPS) or the State Second Pension (S2P), and instead had a rebate paid to a private pension.

For personal pensions, the Government paid a rebate based on your National Insurance contributions into your pension after the end of each tax year. Contracting out stopped for personal pensions and other money purchase schemes in April 2012, and for defined benefit schemes in April 2016.

Defined contribution scheme

With this type of pension, the size of your retirement income is linked to a number of factors, including how much money has been paid into your pension pot, and the investment growth achieved.

Companies may either run the scheme as an occupational scheme or alternatively provide a group personal pension or group stakeholder plan – often depending on the size of the firm- under a contract between yourself and an insurance company which your employer contributes to.

This is also known as a ‘money purchase’ scheme.

Defined Benefit scheme

This is an occupational pension scheme where your pension is linked to your earnings and how long you work for your employer. The most common type is a ‘final salary’ scheme.

Dependant

This could be anyone financially dependant on you, including your spouse, partner, civil partner, a child or a financially dependant physically or mentally impaired adult.

Final Salary Scheme (also known as Defined benefit scheme)

These occupational pension schemes link your retirement income to your salary and your length of employment. They can pay a pension equivalent of up to two thirds of your final salary, according to the scheme rules.

Financial adviser

This is a financial specialist that can help you make a decision about the best financial solution for you. They are normally authorised to give financial advice in the UK by the Financial Conduct Authority (FCA). There are different types of advisers, as some can only advise on one company's products, whereas others can advise on a range of companies' products. Independent Financial Advisers (IFAs) can advise you on the products offered by all companies. Advisers have to tell you what product range they cover before they offer you any advice, and how much they will charge you.

Full Pension Encashment

This allows you to take the whole of a pension pot as cash in one go, with 25% being tax-free and the remainder subject to tax. Taking an encashment could push you into a higher tax bracket, and taking it all at once could leave you with insufficient funds to support you when you’re older. We recommend you get financial advice before you do this.

Guaranteed Annuity Rate (GAR)

Some older with-profits pensions have Guaranteed Annuity Rates. These give a minimum pension income as a percentage of your policy value, but restrictions apply to them, and they may only apply for instance if you take the pension at the retirement date specified in your policy. Guaranteed Annuity Rates can be very valuable, and could double the income you get compared with buying an annuity at normal rates. These guaranteed rates will be lost if you transfer your benefits to another scheme.

Individual Pensions

You can also save for your retirement in an individual pension, rather than a group pension set up by your employer. You can pay into an individual pension up to certain limits even if you’re not working. It consists of a contract between yourself and an insurance company and your employer may agree to pay into it.

Inflation

The effect of inflation reduces the value of money over time. Some annuities are increased annually by reference to inflation.

Lifetime allowance

The Lifetime Allowance is the maximum you can take from a pension scheme – whether as lump sums or as retirement income – before extra tax-charges are triggered. For tax year 2017-18 this is £1m.

Lump sum

You can choose to make a single contribution to your pension pot, known as a lump sum, at any time before you take your benefits. A lump sum may also be paid out of your pension scheme as a benefit on retirement or on death.

Money Purchase scheme (also know as Defined contribution schemes)

With this type of pension, the size of your retirement income is linked to a number of factors, including how much money has been paid into your pension pot, and the investment growth achieved.

Companies may either run the scheme as an occupational scheme or provide either a group personal pension or group stakeholder plan – often depending on the size of the firm- under a contract between yourself and an insurance company which your employer contributes to.

Nominee

You can ask for someone to be considered to inherit your pension from you when you die. Normally they will be able to take this as a tax-free lump sum and/or income if you die before age 75, but if you are older than that they will be subject to tax. The nominee can be anyone you choose; they don’t have to be a dependant.

Partial Pension Encashment (PPE)

This lets you dip into your pension pot and make as many withdrawals as you want, subject to any limits the insurance company may have. Each time, you’ll get 25 percent tax-free and the rest will be taxed like income. Taking encashments could push you into a higher tax bracket, and could leave you with insufficient funds to support you when you’re older.

Pay As You Earn (PAYE)

This is a method of paying tax. Income tax and National Insurance contributions (when appropriate) are deducted from your salary and/or pension income before you receive it and are paid directly to HM Revenue & Customs.

Pension Credit

The Pension Credit is a means-tested benefit for those who have very low levels of income in retirement. On divorce, it may also mean a division of your pension with your ex spouse.

Pension fund

This is a term given to the pot of money you build up in your Money Purchase pension plan, from payments made by you and/or your employer during your working life and investment returns. You use it to support yourself financially in retirement.

Pension provider

Normally the company that runs a money purchase pension scheme is the insurance company that sets up your personal pension.

Personal pension

This is a money purchase pension plan in your name, which is either an individual pension, or a group pension set up by your employer. With a personal pension, you pay a regular amount (usually every month) or a lump sum to the pension provider, who invests it as requested, on your behalf. Your employer may also pay into an individual personal pension, and will normally be required to pay into a group personal pension.

Relevant UK earnings

This means employment income, income derived from carrying on a trade, profession or vocation, and patent income that is broadly subject to UK income tax. It’s normally the maximum you can pay into a pension and get tax relief.

Risk

When you invest in an investment fund, it's important to consider the risks. This is because the value of any money invested can go down as well as up so you could get back less than you invest. All investment funds have their own risks with some having higher overall risk ratings than others. Higher risk investment funds offer the potential for higher returns but carry with them an increased risk of not getting back all the money you initially invested.

SERPS (State Earnings-Related Pension Scheme)

SERPS was a Government pension for employees that was replaced by the State Second Pension in April 2002.

New State Pension

From April 2016 all State Pensions – Basic State Pension, State Second Pension and Pension Credit – were combined into a new State Pension at State Pension age.

The full new State Pension is currently £159.55 per week and you’ll usually require 10 years of National Insurance contributions to qualify. There are special arrangements for those who would have got more under the old system than the new one. People who had already passed State Pension age by 6 April 2016 are unaffected.

State Benefits

You may be able to claim benefits from the Government during your retirement. These include the Basic State Pension, Winter Fuel Payment, Cold Weather Payment and Pension Credit.

State Second pension (S2P)

S2P is an additional pension paid by the Government to those who had an employer. It’s based on the earnings you paid National Insurance contributions on. Before 2002, the equivalent pension was called SERPS, with slightly different rules. Until April 2012, it was possible to contract out of S2P and have a rebate paid to a money purchase pension instead.

State Pension age

This is the earliest age you can receive your State Pension. It ‘s currently 65 for men and is gradually increasing from 60 to 65 for women. By October 2020 it will be 66 for both sexes, and will go up to 67 by April 2028 and 68 by April 2046. It is likely to rise in line with increasing life expectancy after that.

Tax-free cash

You can normally take up to 25% of your pension fund as tax-free cash when you decide to take your benefits. Taking this will leave you with less of a fund from which to take income withdrawals or to use buy an annuity, which would provide a lower taxable income. Technically this is known as a Pension Commencement Lump Sum. It’s not the same as full pension encashment or partial pension encashment which can be taken before you take your pension provided you are over age 55 or in ill health.

For occupational schemes, it may be possible to take more than 25%, depending on your salary and the period of employment.