Additional Voluntary Contributions (AVC)
Contributions you make to your occupational pension scheme over and above those you are required to make under the scheme rules in order to provide you with additional benefits.
The maximum contribution you can make into a pension arrangement in particular year without incurring an additional tax charge.
An insurance contract purchased with your pension fund to provide you with an income for life.
Basic State Pension
The basic level of pension you receive from the State, depending on the number of years in which you have made qualifying National Insurance contributions.
Those in a relationship who have entered into a Civil Partnership in accordance with the Civil Partnership Act 2004.
The process whereby you forego entitlement to benefits from the Additional State Pension in return for lower National Insurance contributions, or your National Insurance contributions are redirected into your pension plan by the State.
An insurance contract purchased with your pension fund to pay a known and guaranteed income for life.
A type of occupational pension scheme, also known as a final salary scheme. The value of the pension is guaranteed and is defined as a percentage of your final salary. If your employer does not have enough in the pension pot to issue your full pension, perhaps due to poorly performing investments, they have to make up the difference.
A type of Occupational Pension Scheme, also known as a money purchase plan. You and/or your employer contribute to the scheme, which is then invested. The value of the pension is based on the contributions paid and how well the investments have performed. Your pension value is not guaranteed as it partly depends on investment performance.
Also known as ‘Income Drawdown’. See Income Drawdown for description.
A term used to describe the payment of a pension and lump sum to a member before the member has reached normal retirement age.
Also referred to as an impaired annuity. An annuity paid on enhanced terms if you are in poor health or are taking medication to control various medical conditions.
Conditions include, but are not exclusive to, High Blood Pressure, Diabetes, Heart Condition, Kidney Failure, certain types of Cancer, Multiple Sclerosis and Asthma. Lifestyle factors are also taken into consideration including Smoking, Weight and even your Postcode.
With an Escalating Annuity, you will receive a lower starting annuity, but your income will increase every year by a fixed percentage e.g. 3% or 5% to combat the effects of inflation. Alternatively, you can choose to have your annuity increase each year in line with the Retail Price Index (RPI). Some providers offer Consumer Price Indexation (CPI) and Limited Price Indexation (LPI).
Final Salary Scheme
A type of occupational pension scheme, also known as a defined benefit scheme. The value of the pension is guaranteed and is defined as a percentage of your final salary. If your employer does not have enough in the pension pot to issue your full pension, perhaps due to poorly performing investments, they have to make up the difference.
Free Standing Additional Voluntary Contributions (FSAVC)
This is a scheme that can be contributed to by a pension scheme member in addition and independent from your occupational scheme (i.e. the contributions are made to an outside pension provider, not in house like AVC’s).
Financial Ombudsman Service (FOS)
A public body set up by Parliament that considers complaints between consumers and financial firms.
Financial Conduct Authority (FCA)
An regulatory body formed as one of the successors to the FInancial Services Authority (FSA) that is funded by and regulates the financial services business in the UK.
Financial Services Compensation Scheme (FSCS)
The FSCS is an independent body set up under the Financial Services and Markets Act 2000. It is the UK’s compensation fund of last resort for customers of authorised financial services firms. They may pay compensation if a firm is unable, or likely to be unable, to pay claims against it, usually because it has stopped trading or has been declared in fault.
Fixed Term Annuity
A temporary annuity that runs for a fixed term and allows an individual to draw an income directly from their pension fund, whilst deferring the purchase of a lifetime annuity.
Government Actuaries Department (GAD)
A government department that provides actuarial advice and guidance to the government and public sector schemes.
Guaranteed Annuity Rate (GAR)
The option to buy an annuity from your existing pension provider at a pre-defined rate. This often applies to pension schemes written in the 1960’s to mid-1980’s.
Guaranteed Minimum Pension (GMP)
The benefit built up in a defined benefit scheme as a result of being contracted out of the Additional State Pension. GMP is the minimum amount that an occupational scheme has to provide for employees who were contracted out of the Additional State Pension between 6th April 1978 and 5th April 1997.
A period of up to 10 years running from the start date of the annuity, which ensures your annuity payments will continue in the event of your death up to the end of the guarantee period. For example, if you choose a five year guarantee and die after three years, your income will be paid to your estate for the remaining two years.
HM Revenue and Customs (HMRC)
A government department that handles the tax approval of pension schemes and taxation of contributions and benefits.
Immediate Vesting Personal Pension (IVPP)
Where one or more of your pension funds are transferred into a personal pension with your chosen annuity provider and is immediately used to purchase your annuity.
Impaired Life Annuity
Also referred to as an enhanced annuity. An annuity paid on enhanced terms if you are in poor health or are taking medication to control various medical conditions. Conditions include, but are not exclusive to, High Blood Pressure, Diabetes, Heart Condition, Kidney Failure, certain types of Cancer, Multiple Sclerosis and Asthma. Lifestyle factors are also taken into consideration including Smoking, Weight and even your Postcode.
Also called drawdown pension or an unsecured pension. This allows you to draw a taxable income directly from your pension fund, enabling you to delay purchasing an annuity. You can also unlock the tax free cash from your pension plans without drawing any income. You retain ownership of the funds which continue to be invested in accordance with your wishes. This is considered a higher risk alternative to an annuity and usually to be considered by those with at least £100,00 of pension funds.
Investment Linked Annuity
A pension annuity which pays an income for life whilst providing the potential to benefit from investment returns. The income payable can go down as well as up.
Joint Life Annuity
With a joint life annuity, you can choose for a percentage of your annuity to be paid to your spouse, civil partner or partner for the rest of their life, after your death. Depending on the chosen annuity provider, you can choose a joint life benefit of any amount up to 100% of your own income. The higher the percentage you choose, the lower your annuity income will be.
A level annuity will pay you a fixed income that will stay the same for the rest of your life as opposed to an escalating annuity that starts lower but increases each year to combat the effects of inflation.
Lifetime Allowance (LTA)
The maximum value of a pension fund that a scheme member can accumulate during their lifetime without incurring a tax charge. This is currently £1 million as of 6th April 2016.
(also known as Pension Commencement Lump Sum)
A tax-free lump sum paid to a member of a pension scheme when their benefits come into payment.
Market Value Adjustment (MVR)
An adjustment made to an insurance policy or transfer value from a pension scheme to reflect the current market conditions when benefits are paid out earlier than originally planned.
Money Purchase Scheme
A type of occupational pension scheme, also known as a defined contribution scheme. You and/or your employer contribute to the scheme, which is then invested. The value of the pension is based on the contributions paid and how well the investments have performed. Your pension value is not guaranteed as it partly depends on investment performance.
This is where a particular service or product is offered by providing information only or facts and figures, where no personal recommendation is made. Clients can then make their own informed decisions and, if they wish, they can apply for these products or services without any advice being given.
Normal Retirement Age (NRA)
The age from which retirement benefits are paid from a pension scheme.
Occupational Pension Scheme
A scheme set up by an employer to provide retirement and/or death benefits to employees.
Open Market Option (OMO)
The right to buy an annuity from a provider other than your current pension scheme provider. This is often referred to as ‘shopping around’ for an annuity.
Payment Frequency & Timing
Your retirement income can be paid monthly, quarterly, half yearly and annually. You can choose whether you want to be paid in arrears or in advance. If you choose to be paid monthly in arrears, you will receive your first payment one month after your annuity has been set up. If you choose to be paid monthly in advance, you would receive your first payment immediately. The payment option you choose will affect the level of annuity income you receive i.e. being paid in arrears will give you a slightly higher annuity than being paid in advance.
Pension Commencement Lump Sum (PCLS)
(also known as ‘tax free cash’)
The Pension Commencement Lump Sum (PCLS) is the lump sum which can be taken on retirement and is broadly calculated as 25% of the total value of a member’s crystallized benefits. Conditions do apply.
Provides a spouse with a share of a pension scheme members retirement benefits on divorce. A spouse is given a credit to put towards their own retirement benefits.
An annuity can be set up ‘with’ or ‘without proportion. If your annuity is payable ‘annually in arrears’ and you die halfway through the year, then half of the annuity payment would be paid to your estate. ‘Without proportion’, no further payment would be made.
Purchased Life Annuity
A purchased life annuity is a single premium life plan which pays an income for life or a fixed period. The income is treated as a combination of a return of capital and interest on the capital. Income tax is only payable on the interest part. This type of annuity is usually purchased with the policy holders own funds as opposed to funds coming from a registered pension plan.
Registered Pension Scheme
A pension scheme approved by HM Revenue & Customs under the Finance Act 2004.
Retirement Annuity Contract (RAC)
The predecessor of the personal pension plan.
This product was available before April 1988 to the self-employed and those in employment who did not have access to an occupational pension scheme.
Self-Invested Personal Pension (SIPP)
This type of pension allows you to make your own investment decisions and offers more investment choice. With a traditional pension plan your investment comprises the choice of funds offered by the pension provider.
Through a SIPP, you can also invest directly in shares or, for example, in commercial property. Although you receive similar tax benefits to normal pensions SIPPs generally have much higher charges.
Short Term Annuity
A temporary annuity that runs for no longer than five years that allows you to draw an income directly from your pension fund, whilst deferring the purchase of a lifetime annuity.
Single Life Annuity
A single life annuity will continue for the rest of your life and payments will stop when you die.
State Earnings Related Pension Scheme (SERPS)
An earnings related top up to the Basic State Pension that operated from 1978 to 1997.
State Second Pension (S2P)
The replacement for SERPS, providing a top up to the Basic State Pension.
Stakeholder Pension Scheme
A type of personal pension plan, offering a low cost and flexible alternative but usually with more restricted choice of investment funds and which must comply with requirements laid down in legislation.
Tax Free Cash Sum
A lump sum usually up to 25% of the value of your pension fund that you are entitled to receive when you start taking your retirement benefits. It is also referred to as a Pension Commencement Lump Sum (PCLS).
The value of a member’s benefits paid when transferring to a new scheme.
Trivial Commutation Lump Sum
(also known as ‘Triviality)
Before 27th March 2014, if you have a total pension pot worth £18,000 or less and have two individual small pension pots each worth less than £2,000, you have been able to withdraw each of your pension pots as a lump sum.
From 27th March 2014, if you have a total pension pot worth £30,000 or less or have up to 3 small pension pots worth £10,000 or less you may be able to take your whole pension fund as a lump sum.
This option can only be exercised between the ages of 60 and 75.
Funds held in a pension arrangement that have not yet been allocated to provide pension benefits.
Also known as pension drawdown or income withdrawal. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income.
A benefit that you can include when setting up your annuity. In the event of death, this is the amount of your pension fund minus the total income already received, that would be paid to your estate or beneficiary, less 55% tax.
With Profits Annuity
With Profits Annuity
Also known as an ‘Investment Linked Annuity’. A pension annuity, which pays an income for life whilst providing the potential to benefit from investment returns. The income payable can go down as well as up.