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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There’s currently no limit on the amount of money that you can contribute into a pension each tax year, and you can normally receive tax relief on contributions up to 100% of your earnings.But if your contributions are more than £40,000  a year, tax charges apply that effectively recoup the tax relief you receive on contributions over this amount. This is called your annual allowance and includes all contributions made by other people, such as your employer.


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.


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 capped drawdown pension is a type of income drawdown pension that was available to savers before 6 April 2015. While it is no longer open to new investors, those who already have capped drawdown can use it to withdraw a tax-free lump sum up to 25% of their pension’s value, receive taxable payments within the allowable limit and keep the rest of their savings invested.


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 was only available in Defined Benefit (Final Salary) schemes. Contracting out was abolished from 6 April 2016


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 2018 is a UK law which safeguards personal data. It requires anyone who handles personal data to comply with a number of important rules and gives individuals advanced rights over how their personal data is processed. 


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 usually based on the number of years they have been a member of the scheme, an accrual rate and their earnings.


Defined contribution pension (also know as a money purchase scheme)
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Members of these schemes build 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 (as relating to equity release)
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Drawdown in lifetime mortgage terms is the process of taking an additional cash advance from your pre-agreed cash facility. This is done after the initial advance is paid. Only when a drawdown is taken does the interest start being charged on that amount.


Drawdown pension
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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 they get is usually based on the number of years they have been a member of the scheme, an accrual rate and their earnings.


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.


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. In a landmark decision which will impact most defined benefit (DB) pension schemes, the High Court held on 26 October 2018 that pension schemes must equalise for the effect of GMPs providing different benefits for men and women. 

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 amount of pension savings you can build up without having to pay a tax charge. The amount is set by the government and is currently £1.03m for the 2018/2019 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 2018/2019 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. 


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. The age at which women qualify for the state pension rose from 60 to 65 in November 2018, with the exact date depending on when you were born. From 2019, the state pension age will increase for both men and women to reach 66 by October 2020. Please visit  gov.uk/state-pension-age to calculate your state pension age

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 Statement of Principles 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.