Pensions are hard enough to make sense of without having to consider some bamboozling jargon.
Here’s a translation of some of the more common terms into plain English:
An annuity is an insurance contract that offers a guaranteed income until from the date of purchase until death.
Annuities come in different types –
- Enhanced annuities tend to pay a higher income because the investor is likely to have a shorter life due to a lifestyle condition or illness. Lifestyle conditions could include smoking, taking drugs, obesity or alcoholism.
- Index-linked annuities cost more, but keep pace with inflation
- Joint annuities also cost more but pay out to the second person dies
Benefit Crystallisation Event (BCE)
A pension is ‘crystallised’ when drawdown starts and is measured against the lifetime allowance (see below). If the fund exceeds the lifetime allowance, a tax penalty is due,
Other crystallisation events include transfers to a Qualifying Recognised Overseas Pension Scheme (QROPS)
Defined benefit is a pension which typically pays out a guaranteed monthly income based on final salary and length of service with an employer.
These were standard company pensions until employers found them too expensive to fund and switched to defined contribution pensions.
Most civil service and public sector pensions are defined benefit schemes.
Workplace pensions where the employee and employer make contributions typically invested in stock market related funds.
The income paid in retirement depends on the performance of the funds or underlying investments.
A pension is in drawdown when the retirement saver starts taking cash from the fund
Pension rules introduced on April 6, 2015 that allow retirement savers with defined contribution pensions to take money from their pension funds without restriction to spend how they like.
Lifetime allowance (LTA)
A limit set by the government on the amount of money that can be saved in a pension. The lifetime allowance varies and is set to drop from the current £1.25 million (2015-16) to £1 million on April 6, 2016
Minimum retirement age
The age you have to reach before drawing down on a pension. The current minimum retirement age is 55 years old
Qualifying Recognised Overseas Pension Scheme (QROPS)
A QROPS is similar to a defined contribution pension but for expats.
Expats can transfer their UK pensions to a QROPS if they have moved permanently overseas. International workers who have a UK pension fund can also switch their fund into a QROPS.
Tax-free lump sum
Cash you can take from a pension without paying tax, which is generally 25% of the total fund