Pensions Glossary

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We want our glossary to be as useful as possible. If you would like to know the meaning of a term which is not listed, please drop us a line at info@charlesderby.com and we will reply with an answer. For complete explanations relevant to your own circumstances and needs, we can arrange a no-obligation initial review meeting with one of our Financial Planning Consultants.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.


Pensions Glossary

Accrual Rate

This rate is used in Defined Benefit pension schemes to calculate the level of pension. Usually expressed as a fraction, such as 1/6oth, the accrual rate is set by each scheme and can vary for different classes of scheme member and or periods of scheme membership, according to the scheme’s rules. The accrual rate multiplied by the number of years of scheme membership is applied to the relevant scheme salary to calculate pension entitlement. For example, someone with 10 years’ service in a scheme with a 1/80th accrual rate retiring on a salary of £40,000 will get a pension of £5,000 (= 10/80 x 40,000).

Accrued benefits

Any pension benefits already ‘earned’. Typically this term relates specifically to pension benefits earned by employees in respect of their membership of an employer’s Defined Benefit pension scheme. In this case, benefits are often expressed in income, as a fraction of salary, based on the number of years’ qualifying service. Cash equivalent values can be obtained from the scheme trustees.

Active management

This is a type of asset management, where the fund manager has the freedom to choose investments. Albeit still within the parameters set for the fund, this freedom provides the opportunity to make more active decisions than passive management. This means that actively managed funds provide more opportunity for the fund manager to ‘get it right’. The opposite is also true! As active funds are more often updated with changes in the underlying holdings, the charges are usually higher than for passive funds. Picking the right active manager is therefore crucial.

Charles Derby has access to a huge range of passive and active managers.

Active member

Refers to employees who are still earning pension benefits in a company pension scheme. (As opposed to deferred or retired members).

Actuarial valuation

Any calculation carried out by an Actuary. Usually refers to the valuations of Defined Benefit pension schemes to assess the assets and liabilities which must be carried out at least every three years by the appointed Scheme Actuary.

Actuary

A person trained and specialising in risk, statistics and financial matters. They are often employed by Insurance Companies to provide insight and analysis. Defined Benefit pension schemes must have an appointed Scheme Actuary to provide advice on the assets, liabilities and valuations. Calculations made by Actuaries provide the basis for any Cash Equivalent Transfer Values available for members to transfer to other pensions.

Added years

Some Defined Benefit pension schemes allow members to buy added years, meaning that in exchange for additional contributions to the scheme, extra years of qualifying service will apply when calculating the total pension entitlement.

Additional voluntary contribution (AVC)

As the name suggests, these are contributions paid voluntarily by company pension scheme members to fund extra benefits. In some cases, employers may offer to pay in more if you do, so it is worth checking what your scheme provides.

Age discrimination

Age discrimination rules apply to pensions. The simple principle is that employers, pension scheme trustees and pension managers must not discriminate against members and potential members on the basis of age.

Alternatively Secured Pensions (ASP)

These are pension contracts which allow people to defer annuity purchase beyond the age of 75. The pension fund remains invested and income is drawn directly. The income each year must be within set limits (designed to provide some protection against exhausting the fund). ASPs are open ended and can be used indefinitely. The fund can be exchanged for an annuity at any time. Any remaining funds on death can be used to provide dependants’ pensions.

Annual Allowance

This is a limit set by the taxman. For Defined Contribution pensions it is the amount paid in during a particular tax year. For Defined Benefit pensions it is the amount of new pension earned in a particular year, coverted into a capital value (pension x 20, e.g. if you earned an extra £10,000 of pension during the year, this would be valued at £200,000). The limit for the 2010/11 tax year is £255,000, so most people are not affected. If the limit is exceeded, a tax charge will apply.

Annual management charge (AMC)

This is typically the way that the cost of Defined Contribution pensions is expressed. Other charges may apply but in some cases, the AMC is the total cost and covers the charges for the pension contract, the investments and the advice. Typcial rates are in the range of 0.5% pa to 2.5% pa. It is important to compare what is being provided as well as the rate itself.

Annuitant

The person receiving the income from an annuity policy.

Annuitisation

The pocess of converting a capital sum, such as a pension fund, into an income by the purchase of an annuity policy.

Annuity

A financial product which provides an income in exchange for a capital sum. Annuities can be bought with pension and non-pension funds. Individuals and pension scheme trustees buying annuities should always seek the best terms available as the income rates vary considerably by provider.

Charles Derby pension services can include full retirement advice and research.

Annuity deferral

Some Defined Contribution pensions have set retirement dates, but, in many cases it is possible to defer taking the benefits. Annuity deferral is where the purchase of the annuity is actively chosen to be delayed. This can have benefits but risks too, so careful consideration is recommended.

Annuity rate

The income rate payable. Usually expressed as a percentage, e.g. 6%, meaning that £600 of annual income is payable to someone investing £10,000. The annuity rate payable depends on a range of factors, such as the age, sex and lifestyle habits of the purchaser. Rates are also affected by current market conditions and so change frequently. Rates vary considerably between providers and policies cannot be changed after being bought, so shopping around for the best deal is vital.

Auto-enrolment

A process operated by employers whereby employees are automatically entered into the company’s pension scheme, unless the employee actively chooses to opt-out.
Basic state pension

The pension payable to individuals at and over state pension age. The amount of the pension depends on each individual’s National Insurance Contributions (NIC) payment record. A minimum of 1 year’s NICs must have been paid to get some pension. If NICs have been paid for 90% of the indvidual’s working lifetime, the full pension is payable. The full basic state pension is £97.65 per week for a single person and £156.15 per week for couples in the 2010/11 tax year.

Bulk Annuity

Refers to the set up of multiple annuity contracts when a pension scheme chooses to secure pension benefits outside of the scheme for a number of members.

Buyout Policy

These contracts are set up to receive pension transfers and can be set up by individuals on their own or trustees on behalf of many scheme members. Sometimes referred to as ‘Section 32' or Section 32a Buyouts (a reference to the originating legislation) these policies may allow greater investment potential than continuing scheme membership.
Care Annuity

A type of annuity specific to people needing to fund the cost of providing long term care. Subject to qualifying terms, the income rates are usually very high (to reflect short life expectancy) and payments can be tax-free if paid directly to the Care Provider.

Career Average Revalued Earnings (CARE) Scheme

A type of Defined Benefit pension scheme. Instead of calcalating the pension based on the person’s final salary, earnings are averaged throughout the period of scheme membership. The average is revalued to retirement but the resulting earnings taken into account in calculating the pension will usually, but not always, be lower than an equivalent final salary scheme.

Cash Equivalent Transfer Value (CETV)

This is the value available to Occupational Pension Scheme members who want to transfer to another pension. The value should reflect the level of pension being exchanged for the transfer value. But, the calculations are complex and advice is highly recommended before taking a transfer from a Defined Benefit pension scheme.

Closed scheme

An occupational pension scheme that is no longer open to new members. Schemes may also be closed to future accrual, i.e. even members of the scheme are not accruing any further benefits. Unlike Wound-up schemes, Closed schemes still exist and hold assets to provide the member benefits already accrued.

Commutation factor

This sets how much pension will be given up if a member of a Defined Benefit pension scheme chooses to ‘commute’ (exchange) income for the payment of an immediate cash sum. Commutation factors are often not very generous and in some cases it is better to transfer out of the scheme to derive the bext value for money.

Concurrency

It is possible to be a member of more than one pension scheme and pay in to separate pension policies simultaneously. Where this is the case, concurrency applies. Tax limits, such as the Annual allowance apply to the aggregate of all pensions.

Contracting Out (and Contracting In)

The name given to the opting out of the state additional pension in return for contributions into a private pension arrangement. Contracting in is simply the reverse, when someone who has chosen in the past to opt out decides to opt back in (whereby contributions to the private pension arrangement will cease and entitlement to additional earnings related state pension benefits will resume).

Conventional Annuity

These annuities provide terms fixed at the outset, such as the starting income and options like continuing income for a spouse. Changes to the terms agreed at the outset cannot be made after purchase. This inflexibility is too restrictive for some, but, it does underpin the key virtue of conventional annuities, namely, that they provide guaranteed income. For those buying conventional annuities with a pension fund, the income is guaranteed to be payable for life, no matter how long this may be. Income can be set to rise, for example in line with inflation, but starting income is reduced compared to level payment annuities. The alternatives to conventional annuities include Investment-linked annuities and Income Drawdown pensions.

Crystallisation Event

This is the technical name for any event where pension benefits become payable. It includes buying an annuity, starting an Unsecured Pension and death. The name Crystallisation is used because the full value of pension benefits are assessed at the date of the event, i.e the full value is crystallised, for a test against the Lifetime Allowance (to check if any tax is due).
Deferred member

This refers to someone who has built up benefits in an Occupational Pension Scheme but is no longer an active member of the scheme. Typically, this is due to leaving the company but it also applies where members choose to opt out of the scheme. The benefits earned are kept in the scheme or can be transferred to a new scheme or individual pension policy.

Deferred pension

This term usually refers to Defined Benefit pension schemes and is the amount of pension available to deferred members at the scheme’s retirement age. Deferred pensions are the responsibility of the scheme unless a Cash Equivalent Transfer is taken. In which case, the scheme has no further responsibility to pay the pension.

In the more general sense, pension benefits from a range of policies and schemes can often be deferred. This has pros and cons and advice is recommended.

Charles Derby Financial Planning Consultants can advise on all types of private pensions.

Defined Benefit pension schemes (DB pensions)

These are types of Occupational Pension Scheme run by companies for their employees. The benefits to be paid by the scheme are defined by a calculation taking into account the scheme’s accrual rate, the length of scheme membership, aka pensionable service, and the pensionable salary. Final Salary schemes are one type of Defined Benefit pension scheme.

Defined Contribution pension schemes (DC pensions)

These operate like simple investment products such as Individual Savings Accounts (ISAs), in as much as, they are financial products which allow money to be paid in and invested. All contributions go into the ‘pot’, and the value is simply the money paid in plus any growth after charges. Some group DC pensions are called Money Purchase plans – what you get at retirement is the value of the pot, and the pension income is whatever that money can purchase. DC pensions are available for self employed, employees and non-tax payers and can receive employer contributions, transfers, your own contributions and even contributions payable by someone else on your behalf.

As for all pensions, tax-approved DC pensions offer tax advantages, but also come with restricted access to your pot of money (to ensure that the benefits are payable at retirement). With Personal Pensions for example, the benefits can usually only be taken at age 55 plus.

DC pensions do not have commutation factors when you choose to reduce pension in favour of taking a tax-free lump sum. This makes them more transparent, as a percentage of the pot can simply be cashed-in. In most cases, you can cash-in up to 25% of the pot tax-free.

Department for Work and Pensions

This government department has responsibility for the rules governing all types of UK pension schemes. It is also responsible for the administration of all State pensions.
Early leaver

Someone who leaves an Occupational Pension Scheme before reaching the scheme’s retirement age. The term applies to all leavers, whether due to leaving the employer (and therefore becoming ineligible for the pension scheme) or simply opting out of the scheme.

Early retirement

Most pensions provide the option of taking benefits before the ‘normal retirement age’. It is important to weigh up whether early retirement is feasible and take into account any lost benefits, e.g. future contributions that would otherwise be payable by an employer.

Special rules apply in the case of retiring early due to ill health and for those with very short life expectancy. Otherwise, the minimum age for early retirement is normally 55.

Earmarking

This term is used in two different situations. On divorce, earmarking is one method for pension assets to be shared. It means identifying the pension assets of one spouse and notionally allocating them to the other. The receiving spouse’s share will be paid when the original pension holder draws their benefits.

Earmarking can also relate to how the monies in a pension scheme are divided up between the scheme members. Earmarked funds are designated for individual members (and usually held in separate policies). Non-earmarked funds are held in totality by the scheme and allocated by the trustees.

Employer Funded Retirement Benefit Schemes

These are non tax-approved schemes operated by employers, usually to provide high earners with extra benefits in addition to those provided in the company’s tax-approved Occupational Pension Scheme. Previously known as FURBS and UURBS (Funded Unapproved Retirement Benefit Schemes and Unfunded Unapproved Retirement Benefit Schemes) they do not attract tax privileges but can be very flexible, e.g. providing the whole value as a lump sum to the employee.

Enhanced Annuity

Annuity rates vary depending on a range of factors, including life expectancy. Enhanced annuities pay more income than conventional annuities to those with lower than normal life expectancy. Lifestyle and diet, smoking and medical conditions can all be taken into account in assessing the income payable.

Enhanced Protection

This term relates to the protection of pension benefits from tax charges. It is only relevant to those who had accrued pension benefits built up before 6th April 2006 and who applied for the protection before 6th April 2009. It allows benefits to be drawn above the Lifetime Allowance without tax charges, but, protection can be lost through a range of events.

This is a complex issue and advice is recommended if you have Enhanced Protection to ensure that the protection is not lost. Excess tax charges for benefits above the Lifetime Allowance are penal.

Equivalent Pension Benefit

This name referred to the pension benefits built up by contracting out of the Graduated State Pension Scheme (the first Additional state pension scheme which closed in 1975).

Equivalent value

In some divorce cases, pension assets are not earmarked or split, but rather, are offset against other assets. In these cases, the pension incomes must still be translated into equivalent cash values in order to assess them in line with other assets.

Escalation

This term is used to mean the increases in payment made to pension incomes actually in payment. For annuities, the rate of increase or escalation is set at the outset and can be a fixed percentage, typically 3% per annum, or an index, such as the Retail Prices Index. For Defined Benefit schemes, the scheme rules will dictate the rate of escalation, which may allow for some discretion on an ongoing basis.

Expression of wish

Often a form to complete, an Expression of Wish allows scheme members to notify the scheme trustees or administrator who they wish any benefits payable in the event of their own death to be paid out to.
Final Salary Pension Scheme

One of the types of Defined Benefit pension schemes. In this case, the pension payable at retirement is a multiple of the member’s ‘final salary’. The final salary taken into account will not necessarily be the basic or normal salary at that time, as it may include overtime and bonuses but could also have deductions. Scheme rules will dictate the exact earnings to be taken into account.

Financial Assistance Scheme (FAS)

This government scheme, established in 2005, was set up to provide employees with compensation for lost pension benefits as a result of their employer becoming insolvent with a ‘hole’ in the pension scheme (less assets than the scheme’s liabilities). The FAS has since been super ceded by The Pension Protection Fund.

Financial Ombudsman Service (FOS)

This service considers and adjudicates on complaints between consumers and financial services businesses. It is an independent body funded by industry levies. Some assistance on pension matters of dispute or possible fraud may be better directed to The Pensions Advisory Service and or The Pensions Regulator.

Financial Conduct Authority (FCA)

The FCA regulates the financial services market in the UK, including; advisory businesses like Charles Derby and product providers, such as insurance, investment and pension companies. It is an independent government funded organisation.

Financial Services Compensation Scheme

This scheme protects consumers in the event of a financial provider becoming insolvent and being unable to meet claims and policy values. The scheme is independent and funded by levies, providing 90% protection without limit in the case of any relevant pension provider.

Flexible Annuity

These annuities share some of the features of conventional annuities, but, they allow changes to be made once the annuity is in place. They offer the potential for rising income payments through investment options, but, income may also fall.

Free Standing Additional Voluntary Contributions (FSAVCs)

Similar to AVCs but paid to a separate provider and held outside the main scheme, FSAVCs often provided wider investment choice.
Government Actuary’s Department (GAD)

It provides actuarial actuarial services to many of the UK public service pension schemes and also sets the maximum income limits on Unsecured and Alternatively Secured Pensions.

Graduated Pension Scheme

A state pension scheme operated between 1961 and 1975. It was the forerunner to the State Earnings Related Pension Scheme (SERPs) which itself was the forerunner to the current state additional pension scheme, the State Second Pension (S2P).

Group Personal Pensions (GPPs)

These are simply collections of Personal Pensions, typically set up by companies for some or all of their staff. Unlike Occupational Pension Schemes, employers providing access to a GPP do not have to pay in, but in most cases they do, making membership valuable.

Guaranteed Annuity

This term is sometimes used to describe conventional annuities which offer guaranteed income (as opposed to Flexible and Investment-linked annuities which usually pay variable incomes).

Guaranteed Annuity Rate (GAR)

Some past contracts offered to convert accrued Defined Contribution pension funds at retirement into income using annuity rates fixed at the outset. This proved to be expensive as the policies were prevalent when interest rates were high, meaning the annuity rate fixed at the outset was often much higher than the rates current at the time of retirement. It is important to check on any old pension contracts, such as Retirement Annuity Contracts, whether a GAR applies, but also note that exercising the option may only be possible on a prescribed annuity basis, which may not suit circumstances.

Charles Derby researches all types of private pensions for our clients and we can analyse all benefit options.

Guaranteed Minimum Pension (GMP)

This is the name of pension benefits built-up from contracting out of the state additional pension through a Defined Benefit pension scheme.
Hybrid pension schemes

These are Occupational schemes that provide a mix of Defined Benefit and Defined Contribution pensions.
Ill Health Early Retirement

Subject to conditions, pension income may be payable before normal retirement age due to ill health. Occupational scheme provisions for early retirement through ill health will be set in the schemes’ rules.

Impaired Life Annuity

These annuities take into account medical conditions to more accurately assess life expectancy. They can pay substantially higher incomes than other conventional annuities.

Income Drawdown (aka Income Withdrawal)

These are pension products used at and in retirement to provide flexible retirement benefits. The technical name for them is Unsecured Pension pre age 75 and Alternatively Secured Pension after the age of 75. The rules on maximum income and death benefits are different before and after age 75, but the mechanics are the same: the pension fund remains invested and income is directly paid, or ‘drawn down’.

Investment-linked Annuity

These annuities share some of the features of conventional annuities, but the income payable after the first year is dependent on investment returns. This means that future income can fall as well as rise. They can be used to combat inflation without sacrificing starting income making them a relevant alternative to conventional annuities with escalating payments.
Joint Life

Pension annuities can pay a continuing income to someone else in the event of the main annuitant dying. This is one of the options when setting the basis for annuity payments, and when included, two people are included in the contract, making it a ‘Joint Life’ annuity. The continuing income can be at full rate or set as a percentage. As the potential total income payments are higher, the starting income is lower. Purchased Life annuities can pay a continuing income based on either annuitant dying first. This is known as a Joint Life First death basis.
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Late retirement

Most pensions allow benefits to be deferred until a later date (not usually later than age 75). Late retirement simply relates to taking benefits later than the expected or scheme retirement age.

Lifestyling

In the world of pensions, this means a series of automated fund switches in the lead up to retirement. The aim is to reduce volatility by decreasing the holdings in higher risk (and potentially higher reward) funds and increase the holdings in lower risk, more stable funds, such as fixed interest and cash funds. It suits the many people who prefer less risk as they approach retirement. It may not be appropriate if you want to use an investment-linked product into retirement.

Lifetime Allowance

Introduced in 2006, this is the maximum amount of pension value an individual can have without incurring tax penalties. Defined Contribution and Defined Benefit pensions are both included (for Defined Benefit pensions, a capital value is calculated by multiplying the pension income by 20). The Lifetime Allowance is £1.8m for the 2010/11 and 2011/12 tax years, but it is scheduled to fall to £1.5m from 2012/13.

Limited Price Indexation (LPI)

This is a pensions specific term relating to the limiting (in terms of what is taken into account) of inflation. One measure of inflation in the UK is the Retail Prices Index (RPI). LPI is simply RPI but with a cap. LPI is used by some pension schemes to set annual increases for pensions in payment. The cap was 5% from 1997 to 2005 and is now 2.5%.
Money Purchase Pension

These are Occupational Defined Contribution pension schemes which employers must pay into for all scheme members. Members can also pay in contributions. See Defined Contribution pensions.
National Employment Savings Trust (NEST)

A new pension scheme due to be launched in 2012. It will make employer contributions to staff pensions compulsory, unless employees opt out of the scheme or the employer operates an alternative qualifying workplace pension scheme. Minimum contributions will be enforced, eventually rising to 4% for employees and 3% for employers.

National Insurance Contributions (NIC)

A form of tax which affects benefit entitlements, including state pensions.

National Insurance Contributions Office (NICO)

This government body deal with all aspects of NIC payments and can provide help if you want to consider making top up payments to improve your state pension benefits. They can also help with information and assistance on the process as you reach retirement. Go to www.hmrc.gov.uk/nic http://www.hmrc.gov.uk/nic

There are a wide range of Government departments, agencies and other bodies set up to administer and manage state pensions. This means there is little value we can add when it comes to assessing state pensions, and consequently, we do not provide advice on state pensions. We have included links where we think it will help you find the right agency or department.

Normal Retirement Age

Most pensions are set up to a designated retirement age. For Personal Pensions this is somewhat arbitrary as benefits can be taken from age between 55 and 75. For Occupational pensions, the scheme sets a normal retirement age and there can be penalties for taking benefits before this age.
Occupational Pension Scheme

A pension scheme provided by a company for its employees is an occupational pension scheme. They can be Defined Benefit, Defined Contribution or a combination of the two. Some occupational pension schemes are governed by a trust, which holds all the schemes’ assets and is run by trustees for the beneficiaries (the employees who are members of the scheme).

Offsetting

Pension assets should be taken into account in divorce and they can be offset against other assets as part of divorce settlements.

Open Market Option (OMO)

This option allows Defined Contribution pension holders to select which company to use at retirement for their annuity. By having access to the open market and not being limited to the existing pension provider, substantially higher incomes can be payable.
Paid up pension

Personal Pensions with no ongoing contribution are said to be ‘paid up’, which is simply a reflection of a ceased regular payment. It does not mean that the pension fund has reached a total whereby no further contributions need to be paid.

Pension Commencement Lump Sum (PCLS)

The technical name for the tax-free cash lump sum payable from approved pensions, and something of a misnomer, as in some cases, the pension income does not need to commence in order for the lump sum to be payable. For Phased Retirement plans, the lump sum can be paid in whole at one time or in stages.

Pension Earmarking

This provides one spouse with a share of the other’s pension rights on divorce, but unlike pension sharing, the funds are not split, and the spouse’s share is only payable at the same time as the pension scheme member’s.

Pension Forecast

These provide estimates of expected benefits at retirement. Forecasts are not guaranteed and depend on variable factors. For state pension forecasts, go to: https://secure.thepensionservice.gov.uk/statepensionforecast/

For all private pensions, your Charles Derby Financial Planning Consultant can help to group together and understand all forecasts.

Pension Guarantee Period

Annuities can be set up with various options, including the option of a guarantee period. The income payable to the annuitant is already guaranteed to be payable for life, but, with a guarantee period included, the income will continue for that period, even if the annuitant has already died. This option provides some potential for protecting dependents, but is not as effective as writing the annuity on a joint life basis. Guarantee periods are normally 5 or 10 years (the maximum).

Pension Protection Fund (PPF)

This fund provides a compensation safety net for members of Defined Benefit pensions where the employer becomes insolvent and the scheme is in deficit (and therefore unable to pay promises benefits). Note however that full protection is not provided to members prior to retirement and the process of a scheme being taken on by the PPF is lengthy, meaning that delays in payment are likely.

Pension sharing

Pension benefits cannot usually be assigned to anyone else other than the individual scheme members, but, in the case of divorce, a share can be allocated to a spouse. This provides a fund for them in their own name, and benefits do not have to be taken at the same time as the original scheme.

Pension Tracing Service

This service is run by The Pensions Service, a government body, and it helps people to track down lost or forgotten pension benefits. They have information on over 200,000 Personal and Company pensions. For further information, try: http://www.direct.gov.uk/en/Pensionsandretirementplanning/PlanningForRetirement/AboutToRetire/DG_10027189.

Pension Unlocking

A process releasing benefits ahead of the expected retirement date. Beware of inflated claims that may be promoted in advertising – pension unlocking is simply taking benefits early and it is important to weigh up all options before taking benefits early, as this may jeopardise sustainability of retirement income. With Personal Pensions, benefits can be taken from age 55 onwards.

Pensionable salary

Defined benefit schemes set a formula to calculate the pension that will be payable at retirement. This formula uses a pensionable salary which may be different from the employees’ actual salary, as bonuses and other fluctuating earnings may not be taken into account, and other anomalies may apply.

Pensionable service

This is the length of pension scheme membership taken into account when calculating Defined Benefit scheme pensions. The period may not be the same as the period of service with the employer, e.g. because there was a waiting period before employees were eligible to join.

Pensions credit

This is a government benefit with two parts: A Guarantee Credit which is a means-tested benefit which tops up income in retirement to a minimum level (£132.60 in 2010/11). And, the Savings Credit which aims to ensure that private pensions savings provide some return (even in the event of someone being able to claim the means-tested Guarantee Credit). http://www.direct.gov.uk/en/Pensionsandretirementplanning/PensionCredit/DG_10018692

Pensions Ombudsman

An independent body which considers complaints by scheme members and other pension beneficiaries against; scheme trustees, administrators, pension managers and employers.

Personal Pension Plans (PPPs)

An individual contract which allows the build up of a pension fund for one person. PPPs are Defined Contribution pensions, so the value of the fund at retirement is determined by the money paid in plus any growth less charges. The income payable when benefits are taken can be set up in a variety of ways. The most popular of which is via a conventional annuity. The income from a Personal Pension annuity depends on market conditions, the fund value and the annuity basis (which options are included) and so it cannot be known until benefits are being taken. Personal Pensions are available to almost everyone and allow a private pension to be built up to supplement state pensions. They can also be set up to run alongside a company pension scheme.

Charles Derby Financial Planning Consultants help many many people plan their retirement income through Personal Pensions.

Premium Holidays

Some old pension contracts enforced penalties for stopping premiums whereas most modern contracts allow contributions to be stopped and started at any time without penalty. Where older contracts provided some allowance for premiums to be ceased without penalty, it was referred to as allowing a premium holiday, i.e. time off from paying in.

Premium Waiver

This optional benefit allows contributions or premiums to be waived (because they start to be paid by the pension provider instead) if the individual cannot work due to illness or injury. This provides valuable protection that pension benefits will continue to be funded. There is usually a waiting period of 6 months before the provider starts to make payments, but providing eligibility is maintained, the premiums may be paid right through to the set retirement date.

Preservation

Legislation introduced in 1975 which made it compulsory for Occupational pension schemes to offer deferred pensions to early leavers who completed a minimum scheme membership period (5 years before 1988 and 2 years since).

Preserved pension

The pension benefit held in an Occupational scheme for members who have left the scheme.

Protected Rights

The value of funds in Personal Pensions built up through contracting out are known as Protected Rights. These funds are treated differently from funds created by individuals’ own direct contribution. For example, annuity rates for Protected Rights are unisex.
Qualifying Recognised Overseas Pension Scheme (QROPs)

Some overseas pension schemes are ‘recognised’ by HM Revenue and Customs, meaning that it is possible to transfer accrued UK pensions to these overseas schemes. Any UK protections will be lost on transfer and advice is highly recommended before transferring benefits to any overseas scheme.
Retail Price Index

This is one of many measures of inflation in the UK. The RPI is used by some pension schemes to calculate pension increases. Annuity payments can be set up to rise (and potentially fall) in line with RPI.

Retirement Annuity Contract (RAC)

These are old Defined Contribution pensions. Some operated with guaranteed annuity rates making them more akin to Defined Benefit pensions. They were the forerunner to Personal Pensions and although many continuing RACs are still in force, it was not possible to start a new one after 1988. They are sometimes referred to as Section 226 contracts (which relates to the original code of legislation which introduced them).

Revaluation

Defined Benefit schemes must revalue pension benefits for deferred members. This revaluation increases pensions, usually in line with inflation, between the date the member left the scheme and their normal retirement age.
Salary Sacrifice

A formal arrangement between employers and employees that should be documented with the employer’s local tax office. It allows employees to forgo taxable income in favour of an employer contribution to their pension. This can produce reductions in overall tax (National Insurance Contributions) providing a net gain that can be used to boost pension savings. Some state benefit entitlements may be affected.

Section 32 Plans

Pension policies which can receive transfers of some Occupational pension scheme benefits. They can be suitable for some people and offer pros and cons compared to Personal Pensions.

Self Invested Personal Pension (SIPP)

These are a type of Personal Pension which offer wide investment options, including for example, the purchase of selected commercial properties to hold in an individuals’ or a group of individuals’ pension funds. They can be used pre and into retirement.

Short Term Annuity

Unlike normal annuities, which are payable for life, short term annuities are payable for a set period, not normally longer than 5 years. It costs less to provide income for just 5 years (compared to buying lifetime income) so a remaining fund can be left invested. This can provide some additional flexibility and the possibility of growth which may provide higher future income.

Single Life

Annuities written on the basis that income is payable to the annuitant only, with no contingency for a continuing income to someone else are ‘Single :Life’ annuities.

Small Self Administered Scheme (SSAS)

A type of Occupational pension which allows up to 12 people to pool their assets and invest outside traditional funds.

Stakeholder Pension

This type of Defined Contribution pension is similar to a Personal Pension, but some aspects of the product are controlled by legislation, e.g. maximum charges are prescribed.

State Additional Pension

This is the earnings-related element of the state pension. Any entitlement is payable in addition to the basic state pension. It has been known as the Graduated Pension Scheme, the State Earnings Related Pension Scheme in the past and is now called State Second Pension (S2P).

State Pension Age

This is the minimum age that state pensions can start to be paid. The current ages are 65 for men and 60 for women, but ages for both are increasing and will be equalised over time: On 6 April 2010, the State Pension age for women started to increase gradually from 60 to 65, to match men’s. The government has announced new proposals for increasing State Pension age. This will mean women’s State Pension age will increase more quickly to 65 between April 2016 and November 2018. From December 2018 the State Pension age for both men and women will start to increase to reach 66 by April 2020.

Statutory Money Purchase Illustrations

These are forecasts of Defined Contribution pensions, which provide estimates of the benefits payable at retirement. The underlying assumptions used to make the calculatons are prescribed and apply to all providers.
Tax Relief

Tax-approved Pensions provide valuable tax reliefs. Money paid in receives tax relief at either 20% or 40% (for basic and higher rate tax payers respectively). Funds in approved pensions are largely tax free too, and, when benefits are taken, it is usually possible to take a full 25% of the fund out as a tax-free lump sum. Most tax reliefs are automated and do not need to be claimed, but, the extra 20% available to higher rate tax payers must be claimed through self assessment.

The Pensions Service

This part of the Department for Work and Pensions is responsible for the administration of state pensions. Go to: http://www.dwp.gov.uk/about-dwp/customer-delivery/the-pension-service/ for more information.

The Pensions Advisory Service

This is a government funded independent body that provides information and helps to resolve pension disputes for members of the public. http://www.pensionsadvisoryservice.org.uk/

The Pensions Regulator

A government body which regulates Occupational Pension schemes. They provide best practice guidance and help, but can also enforce penalties on employers and trustees. http://www.thepensionsregulator.gov.uk/

Transitional Protection

Allowed individuals to protect pension entitlements accrued before 6th April 2006.

Triviality

This facility allows small pension funds to be paid out as cash, rather than income. Individuals must be aged at least 60 and pension funds to be taken as cash under triviality rules must be less than 1% of the Lifetime Allowance.
Unauthorised Payment

Any payment made from a tax-approved pension scheme or policy which is not authorised by HM Revenue and Customs. All unauthorised payments are subject to penal tax charges.

Unsecured Pensions

These are pension products used at and in retirement to provide flexible retirement benefits. They are called Unsecured because retirement income has not been secured via an annuity. It does not mean there is no consumer protection but because options are retained and the pension funds remain invested, the value can fall as well as rise with changes in the underlying value of the pension fund.

Unsecured Pensions (and Alternatively Secured Pensions after the age of 75) provide an opportunity for investment growth, allow annuity purchase to be deferred and provide options for dependents in the event of the plan holder dying. These products carry risks but due to their flexibility, e.g. allowing part encashment to allow single and joint life annuities to be bought to match changing needs, they are popular with young retirees and those wanting to keep their options open.
Variable Annuity

These annuities share some of the features of conventional annuities, but, they allow changes to be made once the annuity is in place. They offer the potential for rising income payments through investment options, but, income may also fall.
With Profit Annuity

These are one of the types of Investment-Linked Annuities. They share some of the features of conventional annuities, but future income is determined by investment returns. In this case, the underlying investments are all invested in the provider’s With Profit fund. These funds aim to reduce volatility by smoothing out investment returns. They can be a good alternative to conventional annuities paying a rising income, as they can offer higher starting incomes and although there is risk of future income falls, the risk is lowered due to the smoothing of investment returns.

Winding Up

This is the process whereby an Occupational pension scheme is completely terminated and ceases to exist. Member benefits are usually transferred to individual pension contracts.
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