Pensions


Frequently used terms

 

A-Day
April 6, 2006, is known as ‘A-Day’ in the pensions industry; it’s the date that legislation brought in a raft of new pension rules. Two of the most important changes were that members of company pension schemes could save into a personal pension scheme at the same time, whilst another allowed people to draw their State Pension and continue to work.

Additional State Pension (ASP)
The Additional State Pension is a benefit derived from three, earnings-related schemes that ran consecutively from April 1961: the Graduated Retirement Benefit, the State Earnings-Related Pension Scheme (Serps) and the State Second Pension (S2P) so, depending on your age and employment history, you may be eligible for payments from each of the individual schemes.

Annual allowance
The annual allowance limits the amount of tax relief you can claim each year on contributions to your pension scheme(s). The ‘standard’ annual allowance for tax years 2018-2019 and 2019-2020 is £40,000 per year, but, if you earn over £150,000, this decreases on a tapering scale to just £10,000 for those earning over £210,000.

Annuity
An insurance product that pays a guaranteed income, either for the rest of your life (a lifetime annuity) or for a fixed period of time (a temporary annuity), and is usually purchased with a defined contribution scheme pension pot. There are a variety of options to help you tailor make your annuity package. As it’s a ‘product’, it pays to shop around to get the best deal.

Automatic enrolment
Introduced on October 2012, ‘auto enrolment’ requires every employer to formally assess their staff and automatically enrol any ‘eligible jobholders’ they employ into a ‘qualifying workplace pension scheme’ (QWPS). It fundamentally changed the employment benefit landscape, taking membership of pension schemes from being an ‘optional benefit for some’ to a ‘compulsory benefit for many’.

Additional Voluntary Contribution (AVC)
Workplace pension schemes require members to make an identical and regular contribution, say 5% of their salary, each month. An AVC is an additional contribution that individual members can make to increase their pension benefits. In defined benefit schemes your AVC buys extra years; in defined contribution schemes it increases the value of your pension pot.

Benefit crystallisation event (BCE)
An ‘event’ that causes a person’s pension funds to be measured against their lifetime allowance. There are eleven defined events including using the funds to buy an annuity, using the funds to provide drawdown pension benefits, starting to draw benefits from a pension scheme and transferring funds to a QROPS.

Capped drawdown
A type of drawdown product that was available up to 6 April 2015. The ‘cap’ limits the value of income withdrawals to a maximum of 150% GAD (Government Actuary Department) tables, the cap being linked to the investor’s age, the fund value and the prevailing long-term gilt yield. Although no longer available for new investors it still continues in operation.

Career Average Revalued Earnings (CARE) scheme
A type of defined benefit scheme which averages your salary throughout your career to determine the income you receive when you retire.

Cash Equivalent Transfer Value (CETV)
The notional cash value of a defined benefits pension scheme. A series of actuarial principles and assumptions are used to calculate the capital sum which, if invested appropriately, would provide the benefits due to the member. The CETV is the amount you would receive if you wanted to transfer or cash-in your pension pot.

Contracting out (of Serps and the Second State Pension)
Until 2012 employees could ‘contract out’ of Serps or S2P: in exchange for paying less National Insurance they gave up their entitlement to receiving a benefit from them. The principle behind the opportunity was that it allowed individual employees to use the money they would have paid as a National Insurance contribution to build up additional retirement benefit through an alternative, and probably more rewarding, workplace or private pension scheme.

Crystallisation
The terms used to describe whether a person has – ‘crystallised’ – or has not – ‘uncrystallised’ – taken benefits from their pension fund. If the person has taken any form of benefit the fund is said to have crystallised. If they have not taken any benefit the fund is said to be uncrystallised.

Defined benefit (DB) pension scheme
DB schemes ‘define’ the ‘benefit’ a member receives on their retirement as a guaranteed, pre-agreed amount. It’s paid directly to you so you don’t have to buy an alternative product, eg: an annuity or drawdown contract. DB schemes were once popular with public sector organisations and large companies but a combination of rising life expectancy and stock market turmoil caused significant ‘black holes’ in many DB pension funds. The employer carries the investment risk.

Defined contribution (DC) pension scheme
DC schemes have become the most common type of workplace pension scheme. As a member you make regular contributions to a pension scheme which, along with any contribution from your employer and tax relief, is invested in a fund, or funds, of your choice. Until April 2015, when pension freedom was introduced, you received the accumulated amount and had to buy an annuity or income drawdown product. The member carries the investment risk.

Drawdown
See Income drawdown.

Financial Adviser
To offer financial advice an individual must represent or be an appointed representative of a firm registered with the Financial Conduct Authority (FCA). The FCA requires firms to ensure that individuals acting for them have ‘appropriate qualifications’ as determined by the Financial Services Skills Council (FSSC). There are two types of financial adviser: independent and restricted.

Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) is the financial services industry’s regulatory body and oversees the conduct of individuals and companies who provide financial services. The FCA keeps a register of the firms and individuals it regulates. IFAs are regulated by the FCA and must meet strict competence and qualification requirements. For more information, please visit the FCA website.

‘Financial secure and comfortable retirement’
Being able to enjoy retirement with no financial worries and a good standard of living. It’s something we all want – but it’s something we have to plan for.

The Financial Ombudsman Service
The Financial Ombudsman Service investigates complaints relating to many financial services. If you’re unhappy with the service you’ve received from an organisation, you must give them the chance to resolve matters but, after eight weeks, you can ask the Financial Ombudsman Service to intervene. For more information, please visit the Financial Ombudsman website.

Final salary scheme
A type of defined benefit scheme where your retirement benefit is based on your final salary. It was commonly offered by large companies and public bodies.

Flexi-access drawdown
Flexi-access drawdown is a way of using your pension pot to provide a regular income. You can take up to 25% as a tax-free pension commencement lump sum and then invest the balance into one or more funds that provides (taxable) income as and when you need it. Flexi-access drawdown was introduced in April 2015, superseding capped drawdown products.

Free standing additional voluntary contribution (FSAVC) scheme
An FSAVC is similar to an AVC but the scheme is not connected to the employer’s workplace pension scheme, it’s a separate scheme offered by an insurance company and is similar to a personal pension.

Graduated Retirement Benefit
Graduated Retirement Benefit was an early form of earnings-related pension intended to top-up the basic State Pension; it preceded Serps and ran from April 1961 to April 1975. Benefit accrued from buying ‘units of graduated contribution’ which increased in value over time. The benefit received is based on the value of the units when payment starts.

Guaranteed Minimum Pension (GMP)
The minimum pension an occupational pension scheme has to pay those employees who were contracted out of the State Earnings-Related Pension Scheme (Serps) between 6 April 1978 and 5 April 1997. From 6 April 1978 until 5 April 1988, cost of living increases were paid by the state in the State Pension; from 6 April 1988 they were paid by the occupational pension scheme – hence the distinction between ‘Pre-1988 GMP’ and ‘Post-1988 GMP’.

Income drawdown
A method of using your pension pot to provide a regular retirement income by reinvesting it in a fund specifically designed and managed for income drawdown. Drawdown funds allow you to leave your pension pot invested but take sums of money from it as and when you want to. As the pot remains invested it continues to benefit from any investment growth.

Independent financial adviser (IFA)
A financial adviser who offers independent advice about financial matters and recommends suitable products from the whole of the market. The term has a specific meaning: IFAs are regulated by the Financial Conduct Authority and must meet strict competence and qualification requirements.

Lifetime allowance
This sets a limit to the total value of your overall pension pot, ie: all your pension pots combined, before you have to pay an additional tax. Introduced in 2006 at £1.5million, the allowance was linked to the Consumer Price Index on 6 April 2018: it fell to £1.03million in tax year 2018-2019 and rises to £1.055million in tax year 2019-2020. Any excess is taxed at 25% if withdrawn as income or 55% as a cash lump sum.

Multi-employer pension scheme
A workplace pension scheme offered by an organisation that is not your employer, ie: the entire scheme is brought in. Generally they are ‘qualified workplace pension schemes’ designed for auto enrolment use and are sometimes referred to as ‘master trusts’.

National Employment Savings Trust (NEST)
A multi-employer pension scheme set up by the government to help employers fulfil their auto enrolment duties.

NOW! Pensions
A low-cost rival to NEST set up by ATP, a Danish retirement specialist that runs the Danish National Pension.

One Financial Solutions
A firm of independent financial advisers that offers advice and practical assistance on all aspects of pensions. Please call us on 020 3714 9565 for a confidential discussion about how we may be able to help you.

Pension commencement lump sum (PCLS)
When you retire you can take up to 25% of your pension pot as a tax-free lump sum.

Pension ‘freedom and choice’
From April 2015 new pension legislation introduced fundamental reforms to the way we can access our pensions. If you are aged 55 or over and are a member of a defined contribution pension scheme, you are now free to cash it in rather than buy an annuity or income drawdown product.

Pensions Ombudsman Service
The Pensions Ombudsman Service is an independent organisation that investigates complaints about how pension schemes are run. The service they provide is free of charge and covers both personal and workplace pension schemes. Decisions on maladministration are binding on all parties. For more information, please visit the Pensions Ombudsman website.

Pension pot
The combined total of your and, if applicable, your employer’s contributions to your pension scheme along with any tax credits and investment growth. When you retire you use your pension pot to buy a regular income (or a Lamborghini).

Pension Protection Fund (PPF)
The PPF was established to pay compensation to members of defined benefit pension schemes when there is a qualifying insolvency event in relation to the employer and insufficient assets in the pension scheme to cover PPF levels of compensation. For more information, please visit the the Pension Protection Fund website.

People’s Pension
A multi-employer pension scheme set up by B&CE to help employers fulfil their auto enrolment duties. It is said to be the largest private sector workplace pension scheme in the UK with over 1.2 million members.

Private pension
A pension scheme designed for use by an individual away from work. Common schemes include personal pension plans (PPPs), SIPPs and stakeholder pensions.

Prudential Regulation Authority (PRA)
The Prudential Regulation Authority is part of the Bank of England and was created by the Financial Services Act 2012 to ensure the ‘prudential’ (ie: using care and forethought) operation of any organisation offering financial services. (Note: despite its name, it is not related to Prudential plc.) For more information, please visit The Bank of England’s website.

Qualifying years
Those years in which an individual has either paid National Insurance or has received a National Insurance credit. The number of qualifying years is used to calculate the value of the Basic State Pension: 30 qualifying years are needed to receive the full Basic State Pension under the ‘old’ State Pension system whereas 35 years is needed under the ‘new’ State Pension system.

Qualifying recognised overseas pension scheme (QROPS)
Pronounced “q-rops”, this is an overseas pension scheme that meets requirements set by HMRC and is used by UK citizens who have a UK pension fund but are emigrating. A QROPS can receive transfers of UK pension benefits without incurring an unauthorised payment and scheme sanction charge. HMRC publish a list of QROPS on their website.

Qualifying workplace pension scheme (QWPS)
A pension scheme that can be used for auto enrolment in that it satisfies specified ‘qualifying criteria’ and ‘minimum requirements’. Not all existing pension schemes meet these requirements – if your organisation has a pension scheme it will need to be assessed for compliance. If it doesn’t meet the guidelines it will have to be modified so that it can be used and, if it can’t be modified, you’ll have to find an alternative scheme to use alongside it or to replace it.

Restricted financial adviser
A financial adviser who is restricted in the advice they give and the products and product providers they recommend. The adviser, or firm, must clearly explain the restriction and the reason for it, eg: the adviser works for a specific product provider or may have chosen to specialise in a specific market. Restricted advisers have to be approved or authorised by the FCA.

Risk
‘Risk’ is at the heart of every investment strategy and, potentially, the greater the risk you are prepared to take, the greater the potential return you may receive on your investment. But how much risk are you prepared to take? This is usually assessed by a simple, but revealing, psychometric test that determines your ‘attitude to risk’ – the result having a direct bearing on which investment funds are recommended to you by you investment adviser.

Salary sacrifice
This provides the opportunity for an employee to give up part of their gross salary for a particular benefit. It’s frequently associated with pension schemes: employees give up part of their pay and, in return, their employer makes an equivalent contribution to their pension pot. Employees save on income tax and both the employer and employee save on National Insurance contributions.

Section 32 policy

A ‘Section 32’ or ‘buyout policy’ is a deferred annuity contract, a policy or contract purchased using funds from a registered pension scheme. It is called a ‘Section 32 policy’ as this was the section in the Finance Act 1981 that referred to deferred annuity contracts.

State Earnings Related Pension Scheme (Serps)
Serps was an earnings-related pension scheme that ran from 6 April 1978 until 5 April 2002 after which it was superseded by the State Second Pension (S2P). Serps was a ‘career average’ pension scheme paid in addition to the basic State Pension but only to those employees who paid Class 1 National Insurance contributions, ie: those whose earnings fell between the Lower and Upper Earnings Limits.

State Pension (‘old’)
The State Pension is a contribution-based benefit provided by the state and is based an individual’s National Insurance contribution record. The ‘old’ State Pension is calculated using a complex, multi-tier system that was superseded by the ‘new’ State Pension on 6 April 2016 – but only for those reaching their State Pension age on or after that date. It is still used for those who reached State Pension age before 6 April 2016.

State Pension (‘new’)
A new, single-tier system was introduced on 6 April 2016 with the objective of making the system both simpler and fairer. Although still based on an individual’s National Insurance record, the qualification method changed and it introduced a flat-rate payment, doing away with the Additional State Pension. The new system is only used to calculate the State Pension for those who reached State Pension age on or after 6 April 2016.

State Pension age
The age you become eligible to receive your State Pension – but not necessarily a workplace or private pension – it’s based on your date of birth. Recent legislative changes initially equalised the difference in State Pension age between men and women and then increased it from 65 to 66, 67 and, finally, to 68 years.

State Second Pension (S2P)
The State Second Pension replaced Serps on 6 April 2002. An earnings-related scheme, it extended receipt of additional benefits to ‘low earners’, ie: anyone earning between the Lower Earnings Limit and the Class 1 National Insurance threshold, along with carers and those receiving Child Benefit or some illness or disability benefits.

Self-invested personal pension (SIPP)
Universally referred to by its acronym, a “sip” is a ‘tax wrapper’ that holds investments and is designed primarily for those wanting to manage their own investments from the full range approved by HMRC.

Small, self-admistered pension scheme (SSAS)
A “Sas” is generally set up to provide retirement benefits for a small number of a company’s directors and/or senior or key staff. The number of members is generally limited to 12.

Stakeholder pension
A type of defined contribution pension scheme regulated by the government: they must have a default investment fund, a low minimum contribution, flexible contributions, limited charges and charge-free transfers.

Uncrystallised flexible pension lump sums (UFPLS)
One-off or regular cash withdrawals from a pension fund that has not been ‘crystallised’. The first 25% of any UFPLS withdrawal is tax free, the remaining 75% is classed as taxable income and is taxed at the appropriate rate.

Wrapper
A tax ‘wrapper’ is a type of private pension scheme, for example personal pension plans, stakeholder pension plans and SIPPs, that ‘wrap’ the various investments together to allow benefit from tax breaks, in particular the opportunity to gain tax relief on money paid in.

 

How can One Financial Solutions help you?

One Financial Solutions is here to help you. We’ll work with you, assess your current circumstances, review your retirement goals and help you put in place a pension strategy to meet them, ensuring that having a ‘financially secure and comfortable retirement’ isn’t something that’s left to chance.

We’ll assess the value of your State Pension and make sure you receive everything you’re entitled to. We’ll review any workplace and private pensions you may have and recommend any changes we feel are beneficial. If you need a pension scheme we’ll find one for you and, as a truly independent firm of financial advisers, we’ll select one from the entire market and make sure it’s the best one for you.

So, if you’re looking for specific help about any aspect of your pension or just want advice on the subject, please call us on 020 3714 9565 or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.