Pension Jargon Buster


Fixed income for life paid regardless of how long annuitant lives. There are many variants and options to this but generally if the annuitant dies early they prove to be bad value. Paid from a Final Salary Scheme and depending on the scheme rules as spouse may receive 50 or 66% of the annuity.

Annuity Rates
Determines the level of income paid and is also dependant on age, health and fluctuates according to gilt yields and interest rates.

Allocation Rates
Generally investment companies holding SIPPs or old personal pensions may take an upfront charge on the underlying funds using an allocation rate, for instance a 98% allocation rate means if a 100GBP was the premium 98% would actually be invested.

Additional voluntary contributions are made to top up an existing UK Company Pension Scheme.

Came into force 6 April 2006 and radically changed UK pension rules allowing 100% of earnings to be saved, contributions to a personal pension whilst also being employed and a member of a company pension scheme whilst also introducing a lifetime limit on the amount available in a pension fund from UK taxed relived contributions. Was called Pensions Simplification.

Annual Allowance
The Annual Allowance for the tax year 2013/2014 is £50,000. It takes into account all gross contributions paid by an individual and employer to any registered pension scheme. In the case of final salary schemes, ‘contribution’ is defined as the increase in the value of benefits for active members.

If the total contributions add up to more than the Annual Allowance, then a tax charge is paid above the Annual Allowance. The Annual Allowance will not apply in the tax year in which you die or if you take your benefits on the grounds of serious ill health.

Basic State Pension
The basic state pension is paid to men at 65 and it was paid to women at 60 but since April 2010 has been gradually increased so that it too will reach 65, by November 2018. Then, both men and women will see their SPA rise gradually to 66 by April 2020. It is based on the number of contribution years on national insurance contributions.

Benefit Crystallisation Event
Any event that results in the payment of an authorised benefit from a Registered UK Pension Scheme. Whenever benefits are taken, either on death or retirement or a transfer to a qualifying recognised overseas pension scheme, it must be checked that the individual’s Lifetime Allowance has not been exceeded.

Department of Work & Pensions form required to be completed in order to obtain a forecast of possible State pension benefits.

Individual or individuals who will benefit from the death of a pension member. Depending on the type of scheme an income may be payable or a lump sum of the remaining fund may be paid but this could be subject to a Lump Sum Death Benefit charge of 55% if paid from a UK defined contribution scheme or Personal Pension/SIPP and the member was taking benefits.

Cash Lump Sum/Computation
An option to take part of the value of a pension fund as a lump sum but will result in a lower pension income. If taken when UK resident then limited to 25% of the fund and generally free of UK income tax.

Company Pension Scheme
Run by an individual’s employer and can either be defined benefit or defined contribution.

Cash Equivalent Transfer Value-A member of a defined benefit scheme that has more than 12 months to go before attaining the scheme’s normal retirement age can take a cash equivalent transfer value (CETV) to another registered UK pension or QROPS. A CETV statement reflects the capital value of the pension benefits (i.e. income and/or potential lump sum) that have been accrued to date, or which are in payment. The CETV of final salary schemes rarely reflects the true value of the accumulated pension rights especially if in deficit as the transfer value may be reduced to reflect the underfunding position.

With a money purchase arrangement the CETV is the transfer value of the funds that have accrued to date.

COMPS Contracted Out Money Purchase Scheme
It was possible prior to 6 April 2012 to contract out of the state additional pension by receiving rebates from the government and invest them yourself and hope that the fund would grow. It is not now possible to contract out via COMPS.

Contracted in Money Purchase Scheme- a money purchase scheme that allows the individual to also remain in the additional State Scheme.

From 2006 principle allowing someone to pay into more than one pension scheme at the same time.

Critical Yield
This is the rate of return required by your chosen investment fund/s to provide and maintain an income at least equal to that which could be provided if an annuity had been purchased at outset instead.

Deferred Pension
Benefit awarded to a defined benefit member who leaves services early.

Defined Benefits
An employer scheme where benefits are defined at outset i.e.: 1/60 for each year of services.

Defined Contribution
Pension income depends on what is paid into fund and also the investment performance.

Financially dependent on the member or a child who has not reached the age of 23

Dependant’s income
The income paid to your dependant when you die.

Deferred Annuity
An annuity which commences at a future date.

Deferred Pension
Entitlement to payment in the future i.e.: early leaver but can be anyone whose retirement has been postponed.

Deferred Retirement
Late retirement after normal retirement age

Inflation proofing and pension adjusted for RPI/increases

Early Retirement
Taking benefits before normal retirement date i.e.: ill health.

Enhanced Protection
Pension benefits built up before 6/4/2006 and possible to avoid the Lifetime Allowance Charge. No further contributions are allowed.

Pensions in payment or preserved benefits increase by a fixed percentage or may be RPI.

Financial adviser
A financial specialist who can help you make a decision about the best financial solution for you. Some advisers can only advise on one company’s products, others can advise on a range of companies’ products. Independent financial advisers 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.

Fixed Protection
Protection available against lifetime allowance charge for those individuals with pension funds of more than 1.5M after 6/4/2012

Final Salary
Pension linked to an individual’s final salary- i.e.: 1/60 for each year of service.

Flexible Drawdown
Introduced in 2011 a pension fund in excess of the fund required to support a GBP20,000 pension p.a is allowed to be taken as a lump sum.

Frozen Benefits
Pension benefits that are deferred but also do not increase in value

Provision for future benefit liabilities to defined benefit schemes.

Government Actuary’s Department-set rates for annuity income

Government Actuary’s Department (GAD) maximum
This is the maximum amount of income allowed under Government rules. It’s a specified percentage of the GAD limit. The GAD maximum amounts allowed under HMRC rules may change.

Guaranteed Payments
Payments normally part of an annuity which is guaranteed to be paid for a set period.

Income Drawdown
Action of taking income from pension fund whilst also leaving fund invested to grow. Can take income of between 0 -120% of GAD but will also depend on risk profile.

Increase in prices and standard of living which can clearly effect the purchasing power of retirees income.

Lifetime allowance
Limit of total pension fund allowed before extra tax charges apply-currently a limit of 1.5M.

OMO – Open Market Option
Allows individual to shop around and source best annuity rate available.

Pension Earmarking
Part of a divorce settlement where spouses share paid when member draws benefit

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 provide, who invests it as requested, on your behalf. Your employer may also pay into your personal pension.

Protected rights (PR)
Protected rights refers to the money built up with rebate payments from the Government when a person has contracted out of the State Second Pension.

Note: From 6 April 2012 the Government stopped the ability to contract out for defined contribution schemes, and the restrictions on how Protected Rights can be used have been removed.

QROPS – Qualifying Recognized Overseas Pension Scheme
HMRC recognized overseas scheme that members can transfer UK pension schemes to in order to provide certain benefits in jurisdiction where they reside.

Salary Sacrifice
Reduction in salary which is used by employer to fund pension.

SASS – Small Self Administered Scheme
Normally for a maximum of 12 members and offers greater investment benefits.

SIPP – Self Invested Personal Pension
Gives greater investment freedom.

Low cost personal pension that meets certain criteria with regard charges and fees.

State pension
The State Pension is paid by the Government and is made up of two parts, the ‘Basic State Pension’ and the ‘Additional’ or ‘State Second Pension’. Nearly everyone can expect to get a Basic State Pension when they reach state pension age. The State Second Pension is the additional pension that the Government provides on top of the Basic State Pension. Prior to April 2002, the Additional Pension was called the State Earnings-Related Pension Scheme (SERPS). Before 6 April 2012 the Government used to allow people to opt out of the State Second Pension. This was known as ‘contracting out’. By contracting out the Government paid some of a person’s National Insurance contributions into a personal or occupational pension plan. It is still currently possible to be contracted out by being a member of a contracted out salary related occupational pension scheme.

Free cash sum-only applies to Uk residents and known as Pension Commencement Lump Sum-max of 25% may be taken free of income tax in UK

Available when pension funds are very small and can be taken as a lump sum after income tax paid. Must be aged over 60 and current limit set at £18,000.

Winding up
Scheme terminates and pension usually transferred to personal pension or into Pension Protection Fund.