A-Z of retirement planning
Understanding the jargon
Accrual Rate
The factor used to calculate benefits in a defined benefit scheme. For example, a scheme with an accrual rate of 1/60th, will provide 1/60th of pensionable
salary for each year of pensionable service.
Actuary
The individual appointed by the trustees of an occupational pension scheme to carry out valuations and advise on funding matters.
A-Day
6 April 2006 - the effective date of Pension’s Simplification, when HMRC introduced a single tax regime for all UK pension schemes.
Added Years
A provision of some defined benefit scheme for building extra pensionable service in return for additional contributions.
Additional Pension
The earnings related part of the state pension, paid in addition to the basic state pension.
Additional Voluntary Contribution (AVC)
A facility provided by occupational pension schemes for members to boost retirement savings.
Alternatively Secured Pension (ASP)
Allows a pension scheme member to defer purchasing an annuity at age 75. A defined level of income can be drawn on the invested funds until the member decides to purchase an annuity or dies.
Annual Allowance (AA)
The maximum pension input (earned in a defined benefit scheme and contributions paid into a defined contribution scheme) a pension scheme member is allowed each year without giving rise to a tax charge.
Annuity
A policy that provides an income in retirement.
Basic State Pension
The benefit provided at state pension age to those with a sufficient National Insurance Contribution record.
Cash Equivalent Transfer Value (CETV)
The amount offered to a member of an occupational pension scheme who wants to transfer to another pension scheme.
Closed Scheme
An occupational pension scheme where the membership is no longer open to new employees.
Concurrency
The principle allowing someone to pay into more than one pension scheme at the same time.
Contracted Out Deduction (COD)
The deduction applied to a person’s SERPS entitlement for the period they were contracted out between 1978 and 1997.
Contracting Out
The facility to opt out of the state additional pension and build up benefits in a pension scheme.
Crystallisation Event
An event where pension benefits become payable i.e. annuity purchase, death, starting an unsecured pension etc, and at which time a test against the lifetime allowance is carried out.
Deferred Pension
The benefit awarded to a defined benefit scheme member who has left service early.
Defined Benefit (DB) Scheme
An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary.
Defined Contribution (DC) Scheme
A scheme that provides retirement benefits based on the build up of a ‘pot’ of money, accumulated through the investment of contributions paid by both the employee and the employer.
Early Retirement
The payment of retirement benefits from a pension scheme before a member’s normal retirement date.
Earmarking
Provides a spouse with a share of a pension scheme member’s pension rights on divorce. Spouse’s share is paid when the member draws their benefits.
Employer Access
Employers with 5 or more staff but with no pension arrangement in place must designate a stakeholder pension scheme and offer access to qualifying employees.
Employer Funded Retirement Benefit Scheme (EFRBS)
Previously known as FURBS and UURBS. These are unapproved schemes with no tax reliefs, that an employer funds to provide a member with a lump sum and/or income.
Enhanced Protection
If a member is worried their pension rights exceed, or may exceed, the lifetime allowance, they can safeguard them against a tax charge.
Executive Pension Scheme (EPP)
An occupational pension scheme for selected directors and senior staff.
Expression of Wish
Notification by a member to their pension scheme of how they wish their lump sum death benefits to be paid.
Final Salary Scheme
An occupational pension scheme that provides benefits based on accrual rate, pensionable service and pensionable salary.
Free Standing Additional Voluntary Contribution (FSAVC)
A facility provided by insurance companies for members to boost their occupational pension scheme savings.
Funded Unapproved Retirement Benefits Scheme (FURBS)
Now known as an EFRBS. These are unapproved schemes with no tax reliefs that an employer funds to provide a member with a lump sum and/or income.
Group Personal Pension Plan (GPP)
A collection of personal pension plans provided by an employer to its staff.
Guaranteed Minimum Pension (GMP)
The benefit built up in a defined benefit scheme as a result of being contracted out of the state additional pension.
Hybrid Scheme
An occupational pension scheme that calculates retirement benefits as some combination of two alternatives, defined benefit scheme or defined contribution scheme.
Ill Health Early Retirement
If an occupational pension scheme member is unable to work as a result of a medical condition, they may be entitled to draw retirement benefits early (sometimes enhanced) at any age (no later than 75).
Impaired Life Annuity
A member of a defined contribution scheme may be able to claim an immediate annuity on enhanced terms if they are suffering from poor health, such as high blood pressure, diabetes, heart condition, kidney failure, certain types of cancer, multiple sclerosis and chronic asthma.
Income Drawdown
Also known as an unsecured pension. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income. Available to under 75s only.
Income Withdrawal
Also known as an unsecured pension. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income. Available to under 75s only.
Lifestyling
An investment strategy on defined contribution schemes where a member’s investments are switched automatically as they get older to more secure holdings, such as cash.
Lifetime Allowance (LA)
The maximum value of fund a pension scheme member can accumulate without incurring a tax charge.
Lump Sum
The tax-free lump sum paid to a member of a pension scheme when their benefits come into payment.
Market Value Reduction (MVR)
An adjustment made to the value of a With Profit fund to reflect the difference between the market and actuarial values of the fund.
Money Purchase Scheme
A scheme that provides retirement benefits based on the build up of a ‘pot’ of money, accumulated through the investment of contributions paid by both the employee and the employer.
National Insurance Contribution (NIC)
Payments deducted from pay or declared through self assessment, used by the DWP to fund the state pension and other state benefits.
Normal Retirement Age (NRA)
The contractual age that retirement benefits are paid from an occupational pension scheme.
Normal Retirement Date (NRD)
The date that an occupational pension scheme member reaches normal retirement age.
Occupational Pension Scheme
A scheme set up by an employer to provide retirement and/or death benefits to employees.
Offsetting
A member’s pension rights are offset against other assets as part of a divorce settlement.
Open Market Option (OMO)
A provision of defined contribution schemes allowing members to transfer funds at retirement to draw an immediate annuity with another provider.
Paid Up
The status given to a personal pension plan when a member chooses to cease contributing.
Pension Commencement Lump Sum (PCLS)
The tax-free lump sum paid to a member of a pension scheme when their benefits come into payment.
Pension Earmarking
Provides a spouse with a share of a pension scheme member’s pension rights on divorce. Spouse’s share is paid when the member draws benefits.
Pension Guarantee
Incorporated into a pension once put into payment. It ensures that pension instalments for a specified period are paid, even if the member dies before the period expires.
Pension Offsetting
A member’s pension rights are offset against other assets as part of a divorce settlement.
Pension Protection Fund (PPF)
An independent, levy funded body that compensates members of occupational pension schemes who have lost pension benefits as a result of an employer’s insolvency.
Pension Sharing
Provides a spouse with a share of a pension scheme members retirement benefits on divorce. Spouse is given a credit to put towards their own retirement benefits.
Pensionable Salary
Earnings used to calculate retirement benefits in a defined benefit scheme.
Pensionable Service
Length of qualifying time in a defined benefit scheme used to calculate retirement benefits.
Pensions Credit
A means-tested benefit that boosts a pensioner’s state pension to ensure they have a minimum level of income.
Pensions Simplification
The name given to the changes introduced by HMRC on A-Day. One single tax regime was introduced to replace the previous eight.
Personal Accounts
A new low cost pension scheme being introduced in April 2012. Employers will be able to automatically enroll their employees into this arrangement.
Personal Pension Plan (PPP)
A type of defined contribution scheme. Provides retirement benefits based on the build up of a ‘pot’ of money, accumulated through the investment of contributions.
Preserved Pension
The benefit awarded to a defined benefit scheme member who has left service early.
Protected Rights (PR)
The fund built up in a defined contribution scheme from rebates paid as a result of being contracted out of the state additional pension.
Qualifying Recognised Overseas Pension Scheme (QROPS)
An overseas pension scheme that meets HMRC rules that allow overseas transfers.
Qualifying Year
A year in which an individual has paid, or is is treated as having paid, National Insurance contributions.
Retail Price Index (RPI)
Used by pension schemes to calculate pension increases. It is the average measure of change in the prices of goods and services bought in the UK.
Retirement Annuity Contract (RAC)
The predecessor of the personal pension plan. Available before April 1988 to the self-employed and those in employment who did not have access to an occupational pension scheme.
Revaluation
The increase, normally in line with inflation, of a deferred pension between the date the member leaves service and their NRA.
Salary Sacrifice
An arrangement between an employer and an employee where the employee forgoes part of their pay for a correspending employer contribution to the pension scheme.
Section 32 Plan
An insurance policy designed to accept transfers from defined benefit schemes.
Self-Invested Pension Plan (SIPP)
A type of personal pension plan that gives an individual more investment control.
Short Term Annuity
A temporary annuity hat runs for no longer than 5 years. Allows an individual to draw an income whilst deferring purchasing a full annuity. Available between 50 and 75.
Small Self-Administered Scheme (SSAS)
An occupational pension scheme, usually for small businesses, that gives members more investment control.
Stakeholder Pension Scheme
A type of personal pension plan, offering a low-cost and flexible alternative and which must comply with requirements laid down in legislation.
State Additional Pension
The earnings related part of the state pension, paid in addition to the basic state pension.
State Earnings Related Pension Scheme (SERPS)
Alternate name given to the state additional pension between April 1978 and
April 2002.
State Pension
Administered and paid by The Pension Service, this benefit is made up of the basic state pension and the state additional pension.
State Pension Age (SPA)
The earliest age that the state pension can be taken.
State Pension Date (SPD)
The earliest date that the state pension can be paid.
State Pension Deferral
On reaching state pension age, a pensioner can defer taking their state pension in exchange for a higher pension or lump sum in the future.
State Pension Forecast
An illustration provided by The Pension Service giving an estimate of what state pension an individual may receive at state pension age.
State Second Pension (S2P)
Alternate name given to the state additional pension since April 2002.
Statement of Funding Principles
A statement in which the trustees of a defined benefit scheme set out how the statutory funding objective will be met.
Statutory Funding Objective
The trustees of a defined benefit scheme must ensure that the scheme’s liabilities are covered by appropriate and sufficient assets.
Statutory Money Purchase Illustration (SMPI)
Annual statements issued to defined contribution scheme members, giving forecasts of benefits now and at retirement (in today’s terms).
Tax Relief
Incentive given to those contributing to pension schemes. The government pays 20 per cent (non-earners and basic rate tax payers) or 40 per cent (higher rate tax payers) of a member’s gross contribution.
Tax-Approved Scheme
A pension scheme that has been approved to operate
by HMRC.
Transitional Protection
Comes in two forms - primary and enhanced. Allows an individual to protect accrued pension rights that may exceed the lifetime allowance, thereby avoid a tax charge on the excess.
Unfunded Unapproved Retirement Benefits Scheme (UURBS)
Now known as an EFRBS. These are unapproved schemes with no tax relief’s that an employer funds to provide a member with a lump sum and/or income.
Unsecured Pension
Also known as income drawdown or income withdrawal. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income. Available to under 75s only.
Winding Up
The process of terminating an occupational pension scheme, usually by transferring member’s benefits to individual arrangements.
Winding Up Priority Order
The order in which member' benefits are distributed on the winding up of a defined benefit scheme with an insolvent employer and a funding shortfall. |
