Quantcast
Menu
Save, make, understand money

Editor's Pick

Jargon buster: pensions terminology explained

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
12/08/2015

If you aren’t sure what terms such as annuity or drawdown mean, this guide should help ease the confusion.

Recent reforms have given individuals more choice as to how to manage their pensions. However, the changes have made understanding pensions more difficult.

The Institute of Chartered Accountants in England and Wales (ICAEW) has explained some of the newest terminology and the most commonly used terms by producing a glossary of definitions to ensure that everyone can get to grips with the options available to them.

 Annuity

An annuity is a form of insurance or investment which is issued by an insurance company. This investment provides a series of annual payments over the lifetime of one or more individuals, or for a fixed term. Payments are often index linked once the initial investment is made, although some contracts may link payments which are based on any investment returns made during the contract.

Capped and Flexible Drawdown

Before the changes introduced by Pensions Act 2014 capped and flexible drawdown were alternative ways of accessing the pension pot. Under capped drawdown the withdrawal was restricted to a fixed percentage of a basis amount. The basis amount is established from the 15 year gilt yield tables published by the government’s actuary department. If capped drawdown was not started before 6 April 2015 it is no longer available. Flexible drawdown is no longer available.

Flexi-pension

Flexi-pensions were introduced in April 2015 under Freedom and Choice in Pensions. This flexible scheme allows members from the age of 55 the freedom of choice as to how to manage their pension pot. Members can choose between a single lump sum payment, a series of smaller withdrawals over time or a combination of the two. It is possible to take 25% tax free at the outset with all subsequent withdrawals being taxed as income (flexi-access drawdown) or each withdrawal can be treated as 25% tax free and 75% taxable (uncrystallised funds pension lump sum – UFPLS).

Defined Contribution (DC) Scheme

These schemes are also known as money purchase plans.

The DC scheme is a pension plan to which both employers and employees will make contributions based on annual salary. The pension pot is determined by how much is paid into the scheme and of the growth in the fund at the time the pension is taken.

Defined Benefit (DB) Scheme

A defined benefit pension scheme is calculated by how many years you have worked for your employer and your earnings combined. The definition of earnings can vary according to the scheme rules.

Self-invested Personal Pension (SIPP)

This scheme offers flexibility and is ideal for anyone who wants the responsibility for managing their own investments. A self-invested personal pension can offer a broader range of investment options compared to a standard plan. For example, stocks and shares, commercial property, exchange traded fund and investment and unit trusts.

Basic State Pension

A flat-rate basic State Pension will be introduced for people reaching State Retirement Age from 2016 in the form of a regular payment. Entitlement to a full flat-rate State Pension requires a minimum of 35 years of national insurance contributions, rather than the current regime of 30 years.

State Pension Age (SPA)

State Pension Age is the earliest age at which you can draw your State Pension and depends on the year you were born. SPA is being equalised for men and women and will be increased to 66, 67 and 68 on a phased basis.

State Graduated Pension

If you were working between April 1961 and April 1975, you will have built up the rights to a state graduated pension. This is an earnings related State pension payable in addition to the Basic State Pension.

State Earnings Related Pension (SERPS)

The State Earnings Related Pension was introduced in 1978 and SERPS is now known as the State Second Pension (S2P). This scheme is an earnings related part of the State retirement pension and is assessed on national insurance contributions and earnings.

Lifetime Allowance

The current lifetime allowance is £1.25m; however this is set to fall to £1m in 2016. Although the majority of people will not be affected, it is important to be aware of the allowance if you are approaching or above £1.25m.

Annual Allowance

From 6 April, 2014 the annual allowance for tax relief in pension savings within a registered pension scheme was reduced to £40,000. If pension savings exceed this amount there is a tax charge and details have to be declared on a Self-Assessment tax return. The Finance (No. 2) Bill 2015 introduces a taper to the £40,000 allowance for those with income in excess of £150,000 with effect from 6 April 2016. There will be a £1 reduction in the allowance for every £2 of income in excess of £150,000 with a minimum allowance of £10,000.

[article_related_posts]