Jargon buster

Annual Allowance

Annual allowance is the maximum amount that a saver can contribute tax-free to their pension each year. The current annual allowance is £40,000 as of 6 April 2014. Pension saving that exceeds the annual allowance triggers a tax charge. 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 an income for life, the amount of which depends on circumstances when it’s bought including; interest rates, your age, your health and how long people are expected to live. You can choose from different types of annuities.

Auto-enrolment

Auto-enrolment is required under legislation that was introduced by the government to help encourage people to save for their retirement. Eligible workers are automatically enrolled into a ‘qualifying scheme’ by their employers. Employers are required by law to contribute to a “qualifying scheme” for eligible workers.

Basic state pension

This is a pension paid by the Government at state pension age to people who have paid or been credited with sufficient National Insurance Contributions. It is not earnings related. It will be replaced by the single state pension in April 2016.

Contracting Out

Contracting out meant that you gave up benefits from State Earnings Related Pension Scheme (SERPS) or the State Second Pension, and instead saved in a private pension.

For personal pensions, the Government refunded part of 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, but is available for defined benefit schemes until April 2016.

Defined contribution scheme

This is the same as a money purchase scheme. It can be an occupational trust based scheme or a personal pension arrangement under a contract with an insurance company.

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 dependent on you, including your spouse, partner, civil partner, a child aged under 23 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 when you retire 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

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

You can take the whole of your pension pot as cash in one go if you want. If you do this, you could end up with a large tax bill and run out of money when you retire. 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 often only if you start to receive the pension at a date shown 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 may be lost if you transfer your benefits to another scheme.

Individual Pensions

You can also save for your retirement in an individual pension. This is basically your own pension pot that will continue regardless of where you are working. You can even pay into an individual pension if you’re not working, up to certain limits. 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 pensions are increased annually by reference to inflation.

Lifetime allowance

The life-time allowance is the maximum pay-out from a pension scheme – whether as lump sums or as retirement income – that can be received before extra tax-charges are triggered. From 6 April 2014 this is £1.25m.

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 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.

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 a tax-free lump sum or income if you die before age 75, but if you are older than that they will have to pay tax. The nominee can be anyone you choose – they don’t have to be a dependant. To avoid inheritance tax potentially being due, the scheme administrator will make the final decision on who inherits your pension, but will take your nomination into account.

Partial Pension Encashment (PPE)

This lets you dip into your pension pot and make as many withdrawals as you want, as long as you withdraw at least £5,000. Each time, you’ll get 25 percent tax-free and the rest will be taxed like income.

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 paid into it by you and/or your employer during your working life and investment returns. You use it to provide an income when you retire.

Pension provider

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

Personal pension

This is a pension plan you personally hold and invest in. 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 your personal pension. It is a money purchase pension plan

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 is 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.

Single State Pension

From April 2016 all current state pensions – Basic State Pension, State Second Pension and Pension Credit – will be combined into a single state pension at state pension age.

This will be at a higher level than the basic state pension and, like it, will depend on how many years of National Insurance contributions you have paid or been credited with, but not on how much you earned. There are special arrangements for those who would have got more under the old system than the new one. People who have already passed state pension age 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 is based on the earnings you paid National Insurance contributions on. Before 2002, the equivalent pension was called SERPS, with slightly different rules. It has been possible to contract out of S2P and have a private pension instead, but this option was removed for money purchase pensions from April 2012.

State pension age

This is the earliest age when you can start to receive your state pension. It is currently 65 for men and in 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. 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 pension. Taking this will reduce the pension from the scheme and therefore the income you have during retirement. Technically this is known as a Pension Commencement Lump Sum. It is 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 health.

Units

‘Units’ are like shares of the fund. For unit-linked funds, the value of each unit depends on the value of the investments held by the fund, and the number of units in it. For our unitised with-profits fund, the value of units isn’t directly related to the value of the fund itself, but depends instead on the bonuses and reductions that we decide. For example, the value can fall if we apply Market Value Reductions, although the fund offers guarantees at the retirement date which is shown in your plan documents.