Jargon buster

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

Accrual rate
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A term that could appear in your pension statement and, in this context, means the proportional amount of pensionable earnings you will receive from your final salary scheme (defined benefit scheme) for each year of service - often described as 1/60th or 1/80th.


Alternatively secured pensions
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Alternatively secured pensions were abolished from 6 April 2011. They were a type of drawdown pension applicable to those aged over 75.


Annual allowance
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The maximum amount of pensions savings that you can get tax relief on each year – based on your own and any employer contributions. In the tax year 2017-18 the Annual Allowance is £40,000. If you're not earning, you can still get tax relief on savings up to £3,600 a year.

See also Money Purchase Annual Allowance (MPAA).


Annuity
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An annuity is a product which pays a regular income in exchange for a lump sum.


Annuity protection
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Annuity protection (also known as value protection) is an option you can choose when you take out your annuity that returns a lump sum to your beneficiaries if you die without receiving the full value of your pension savings. You can protect a percentage of your pension savings – up to 100% – so that when you die, your beneficiaries will receive the value of your protected pension savings less the total gross income paid to you already as an annuity income.

For the tax year 2017/18, if you die before age 75, the lump sum and/or income will be free of tax. If you die aged 75 or older, the lump sum and/or income will be taxed as income.


APR
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Annual percentage rates - an indication of how much interest will be charged on a loan including known charges associated with taking out the loan. APR rates can be used to compare similar types of credit, over similar periods.

Beneficiary
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Someone who benefits from a will, a trust, a life insurance policy or death benefits from an annuity.

Capped drawdown
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A type of drawdown pension arrangement that has limits placed upon it by the government as to the maximum level of income that can be taken from it.The March 2014 budget announced that these limits would be removed from April 2015.


Contracting out
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You or your employer were given the option to opt out of the State Second Pension (formerly the State Earnings Related Pension Scheme) in exchange for lower National Insurance contributions (and higher pension contributions) or a rebate into your pension. From 6th April 2012, this is only available in Defined Benefit (Final Salary) schemes.


Conventional annuity
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A conventional annuity is an annuity purchased with the proceeds of a pension plan, which pays a guaranteed, regular income for life. The income payable from this type of annuity is not linked to the performance of investments.

Data protection
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The Data Protection Act 1998 is designed to safeguard personal data. It requires anyone who handles personal information to comply with a number of important principles. It also gives individuals rights over their personal information.


Defined benefit pension (also known as a final salary scheme)
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With this type of pension, the amount of retirement income an employee gets is set in advance. The amount of income they get is based on the number of years they have been a member of the scheme and their salary at or near their retirement date.


Defined contribution pension (also know as a money purchase scheme)
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Members of these schemes built up a pension fund by investing personal and/or employer contributions during their period of membership.

These contributions build up over time, to provide the member with a pot of money that they later use to generate a retirement income. It is essential that you consider all the ways you can convert your pension savings into an income and then shop around for the best deal before making your final decision.

Money Purchase schemes include most personal pensions and stakeholder pensions, including those arranged through your employer.

You should check whether your pension has a Guaranteed Annuity Rate or other form of guarantee, and if you're in any doubt ask your pension provider(s). These guarantees will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere or use it other than to take an income you may lose these valuable guarantees.


Dependant
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Someone who is financially dependent on you, typically a partner. Annuity providers often require proof of this - such as a joint utility bill or mortgage/bank statement.


Dependant's pension annuity
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An option when buying an annuity that means, in the event of death, your annuity income may continue to be paid to a surviving spouse, civil partner, or dependant. If you choose for your annuity to be paid to a dependant, they may be asked to prove that they are financially dependent upon you.


Drawdown
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A type of retirement income product that allows you to draw an income directly from your pension fund. Also known as income drawdown.

Enduring Power of Attorney (EPA)
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A legal document giving the attorney the power to make decisions on behalf of someone else, which continues should that person lose their mental or physical capacity in the future. If they become mentally incapacitated, this document needs to be registered with the court of protection. In October 2007, EPAs were replaced by Lasting Powers of Attorney (LPA), however existing EPAs continue to be valid.


Enhanced annuity
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An enhanced annuity is an annuity that pays a higher income to an individual if aspects of their lifestyle (such as smoking and drinking alcohol) or medical history may shorten life expectancy.


Equity
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Equity is the value of your home minus any outstanding mortgage or other debts secured against it.


Escalation + inflation linking
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This describes the way in which an annuity income can grow each year - you may choose to have no increase (level annuity) or increase your annuity each year at a fixed rate (say 3% per year) or in line with the change in a measure of inflation, such as the Retail Prices Index (RPI) for example.


Estate
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Your estate is the name for everything you own, including your home, possessions and any savings or investments.

FCA
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The Financial Conduct Authority - the UK's financial regulator set up by the government to regulate financial services and protect your rights. This means they set standards that financial services firms have to meet and take action if they don't.


Final salary Scheme
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Also known as a defined benefit scheme. With this type of pension, the amount of retirement income an employee gets is set in advance. The amount of income you get is based on the number of years you have been a member of the scheme and your salary.


Fixed term annuity (FTA)
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A type of arrangement that offers a guaranteed income for a fixed term and a guaranteed maturity amount at the end of the term. The Government Actuary's Department (GAD) currently limits the maximum amount of income that can be taken from capped drawdown arrangements, however the March 2014 budget announced the removal of this cap from April 2015.

Guarantee period
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An annuity income is payable for as long as the annuitant - the person receiving the annuity - lives. If they die soon after purchasing an annuity, they may feel that they won't have had the best value. They can therefore choose a guarantee period (typically 5 or 10 years), which means that, if they die within that guarantee period, the annuity will continue to be paid for the remainder of that period. Annuitants can nominate anyone to receive the income from their guarantee period, either directly to the annuity provider or through their will.


Guaranteed Minimum Pensions(GMP)
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This is the part of pension benefit built up in defined benefit schemes, which relates to contracting out between 1978 and 1997 and is roughly equivalent to the amount of State Earnings Related Pension Scheme (SERPS) which would have been paid for that period. This is the minimum pension payable under the scheme. As GMP is a replacement of a state benefit, certain restrictions apply to the income you receive from it.

HMRC
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In 2005, the Inland Revenue and Her Majesty's Customs and Excise merged to form Her Majesty's Revenue & Customs.

Impaired annuity
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An impaired annuity is an annuity that pays a higher income than a standard / conventional annuity for those who have significantly lower life expectancy due to an existing medical condition.

Joint life annuity (also called dependant's pension/annuity)
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In the event of your death, your annuity income may continue to be paid to a surviving spouse, civil partner or dependant if you have selected a joint life annuity. If you choose this option, the dependant may be asked to prove that they are financially dependent on you.

Lifetime allowance
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The Lifetime Allowance is the maximum value of pension savings an individual is allowed to draw without incurring tax penalties. The amount is set by the government and from the 6 April 2016, was reduced to £1m. This remains unchanged for the 2017/18 tax year.

Whenever you draw benefits from a pension scheme, these are tested against the lifetime allowance and your pension provider will tell you the percentage of the lifetime allowance you have used.

Money Purchase Annual Allowance (MPAA)
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If you've flexibly accessed your benefits, the Money Purchase Annual Allowance (MPAA) is the amount that can be paid in one year to your money purchase arrangements without a tax charge applying. For the 2017/2018 tax year, the MPAA is £4,000.


Money purchase pension
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Also known as a defined contribution pension. This is a term given to pensions which you and/or your employer contribute into, and can be either a personal pension or an occupational pension. The amounts you and your employer pay into your pension fund are set. The value of the pension fund at the time you plan to retire is not set and may carry investment risk.

Open market option
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The ability for you to shop around and buy an annuity from any annuity provider, not just the company that provides your pension. This option enables you to search for the best annuity rate for you.

Pension Commencement Lump Sum (PCLS)
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You can normally take up to 25% of your pension fund as a lump sum, which is currently tax-free. This is now known as a Pension Commencement Lump Sum, but may also be referred to as a tax-free lump sum or tax-free cash. The Pension Commencement Lump Sum is yours to do with as you see fit.


Proportion
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Proportion is only relevant if you choose to receive your annuity income payments in arrears. If you choose with proportion, a final proportionate payment will be made to cover the period between your last payment and the date of your death. If you choose without proportion, your final annuity income payment will be the last normal payment before you die.

State Pension age
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The age you have to reach to be entitled to draw your state pension. This is currently 65 for men and 60 for women born on or before 5 April 1950 but will be changing. You can calculate your State Pension age over at Gov.uk.

Tax-free cash
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You can normally take up to 25% of your pension fund as a lump sum, which is currently tax-free. This is now known as a Pension Commencement Lump Sum (PCLS), but may also be referred to as a tax-free lump sum or tax-free cash. The Pension Commencement Lump Sum is yours to do with as you see fit.


The Equity Release Council
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The Equity Release Council is the industry body for the equity release sector. Each member of the Council that provides equity release products is signed up to the Equity Release Council’s Code of Conduct which puts in place a number of safeguards and guarantees for consumers. Prior to May 2012 this organisation was known as Safe Home Income Plans (SHIP).

Value protection
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Sometimes known as annuity protection or capital protection, value protection is an option that returns a lump sum (minus total gross payments made and tax), if the annuitant dies without having received the full value of their pension fund, giving the ability to protect up to 100% of the original pension fund.