Pensions jargon explained – what pension terms mean

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Confused by pensions jargon and terminology? Here’s a guide to pensions jargon and the main terms you’re likely to come across.

Annual allowance: The maximum amount you can pay into a pension. If you pay in more than this you’ll have to pay extra tax.

Annuity: A product that converts a pension fund or lump sum into a regular income for the rest of your retirement.

Annuity rate: The rate of return that you’ll get on your pension if you convert it into a regular income. It works in a similar way to interest on savings, in that the higher the interest rate, the higher the income you’ll get from your pension pot.

Contributions: Money paid into your pension by you and by your employer (if you have one).

Defined benefit pension: A salary-related workplace pension scheme, such as a final salary pension or a career average pension. Your employer provides you with a pension based on your salary while you’re a pension scheme member, not on how well the stock market has performed.

Defined contribution pension: A workplace pension whereby your employer pays in a certain amount to your pension and these, along with your contributions, are paid into a fund. The idea is that it grows over the years and provides you with a pension in retirement. It’s otherwise known as a money purchase pension. It’s sometimes called a money purchase pension.

Flexi-access drawdown: Your pension pot is left invested but you can take an income from it (as much or as little as you like). When you take money out of your pension this way, it limits the amount you can continue to pay into any defined contribution pension you have.

Guaranteed annuity rate: Most annuities pay a guaranteed income for life, but this is not the same as a guaranteed annuity rate (GAR). A guaranteed annuity rate is something that a number of older pension policies had. They offered to pay a ‘guaranteed’ rate (namely they guaranteed the level of the interest rate). At the time these pensions were sold, the rate wasn’t spectacular at all, but because annuity rates have fallen over many years, these are now much higher than you’d generally get on the open annuity market.

Guidance: Information and help that you can get to help you decide what to do with your pension. You can get this for free through a government service called Pension Wise. It’s not the same as financial advice (in that they won’t recommend a specific product for you), but it’s a good starting point.

Income drawdown: Flexi access drawdown is a form of income drawdown. Income drawdown means that you take income from your pension. You have to invest your pension in funds that are designed to produce an income – so you may have to transfer it from your existing pension provider or from an existing fund. It’s important to remember that the level of income you get isn’t guaranteed to remain the same throughout your retirement.

Joint lives annuity: An annuity that will pay an income to another person (normally a husband, wife or civil partner) if the person who’s taken it out dies. The income the annuity provides is typically a percentage of the full pension amount.

Lifetime allowance: The maximum amount of money you have in your pension fund throughout your lifetime and not have to pay a tax charge when you take money out of your pension or receive an income. This fell in April 2016 to £1 million.

Market value reduction (MVR): Sometimes called a market value adjustment (MVA), it’s effectively a charge that’s imposed if you take money out of your pension pot that is invested in a with-profits fund, either before the normal maturity date (or after). It means that you get back less than you would if you’d taken money out of your pension on the maturity date.

Money purchase annual allowance (MPAA): This is a reduced pension contribution allowance that was introduced as part of the ‘pension freedoms’ of April 2015. It’s designed to stop people from taking money out of their pension and paying it straight back in again, picking up the tax relief in between. Currently the normal annual allowance is £40,000, but if you’ve taken money out of your pension flexibly, or cashed it all in, you’ll be subject to the MPAA, which means you’ll only be able to pay in a maximum of £10,000 a year.

Nomination form: A form that you have to fill out to nominate who should receive your pension scheme benefits if you die.

Normal pension age: This is the age at which you can be paid a pension by your workplace pension scheme and not have any money deducted for early retirement. The normal pension age of pension schemes can vary.

Pension fund: A pool of money that’s invested in a range of assets (such as shares, bonds, cash and possibly property) and that has certain tax benefits.

Pensions guidance: This isn’t financial advice but is free guidance designed to tell you what your options are in retirement and

Small pension/ small pot: If you have a pension pot worth less than £10,000, you can take it in one go once you reach the age of 55. There are special rules that apply to this – the main one being that you can only take a maximum of three of these pensions.

State pension age: The age at which you’re entitled to claim your state pension. You don’t have to take your state pension when you reach this age. For women, the state pension age has been rising from 60 since April 2010. It’s nothing to do with your retirement age (when you choose to retire) which may be earlier or later than this.

Tax-free cash lump sum: The lump sum you’re able to take from your pension fund without paying tax on it. Currently the maximum you can take is 25% of your pension pot(s).

Tax relief: This means that some of the money you’d have paid to the government is instead paid into your pension for you. Currently you can get tax relief at different interest rates, depending on the rate you pay tax at.

Uncrystallised pension: A pension that you’ve not cashed in or taken money out of.

Uncrystallised fund pension lump sum: A lump sum that you can take out of a pension pot. Ignore the hideously clunky jargon – it’s basically the big change that ‘pension freedoms’, introduced in April 2015, brought about. If you take a series of cash sums from your pension, you can normally take the first 25% tax free, but you’ll have to pay tax on the remaining 75%.

Related articles:

VIDEO: What is a pension?

Final salary (defined benefit) and defined contribution (pension pot type schemes) – what’s the difference?

How is your company pension protected by the Pension Protection Fund?

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