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Retirement Options - Glossary

Annual Allowance (AA)
The amount you, or someone on your behalf such as your employer, can pay into pension plans in a tax year without incurring a tax charge. The AA is £40,000 for the 2016/17 tax year.

Annuity
An insurance company product, which provides you with a guaranteed regular income usually for life, in exchange for a lump sum.

Capped Drawdown
A benefit option that was closed for new entrants on 6 April 2015. Similar to Flexi-access drawdown but with a cap on the amount of income that can be taken each year.

Defined benefit pension
Pay a retirement benefit based on your pensionable income and how long you have been a member of the scheme. Also known as a ‘Final Salary’ or a ‘Career Average’ pension scheme.

Defined contribution pension
A type of pension where the income you receive depends on how much you have paid in (or someone else has paid in on your behalf) and how well your investments have performed. Defined contribution pension plans are also known as ‘money purchase pensions’ and include personal pension plans and stakeholder pension plans.

Flexi-access drawdown (FAD)
A benefit option where your pension pot remains invested, while you take regular or occasional withdrawals. You can usually take up to 25% as a tax-free lump sum when you first decide to move into drawdown.

Guaranteed annuity rate (GAR)
Your pension provider guarantees to convert your pension pot to an annuity using a pre-determined rate. The rate is usually only guaranteed in certain circumstances, for example at the selected retirement date on your plan. GARs are usually higher than those available through shopping around.

Highest tax rate
Also referred to as ‘your marginal tax rate’. Income Tax is split into bands and you pay different rates (0%, 20%, 40% and 45%) depending on your income. Your pension income is added to your other income and then taxed according to which tax band it falls inside. If it pushes your overall income into a new tax band, you may pay tax on it at two or possibly three rates.

Inflation
Increase in the general level of prices of goods and services.

Lifetime Allowance (LTA)
The total amount that you can build up in all of your pension plans, without incurring a tax charge. The LTA is £1 million for the 2016/17 tax year.

If your pension savings are worth more than the LTA when benefits are paid, then you may have to pay a lifetime allowance charge on the amount above the allowance. The charge is:

  • 55% if you take your pension savings as a lump sum; or
  • 25% is you take your pension savings as a taxable income.

If you die leaving a pension pot that has not been used to provide pension benefits, then your nominated beneficiary may be liable for the tax charge on the amount that exceeds the LTA.

Market value reduction (MVR)
An adjustment we make at certain times, which reduces how much you get back if you cash in any part of your investment in the Pension With Profits Fund. For example, when share prices are generally low. It is designed to protect investors who remain in the fund. Each pension provider will have their own terms and conditions covering when an MVR will apply.

Money Purchase Annual Allowance (MPAA)
An Annual Allowance for contributions made to Defined Contributions Pension Schemes triggered by the following events:

  • Taking an income under FAD; or
  • Taking benefits as an Uncrystallised Funds Pension Lump Sum; or
  • Taking income of more than the permitted maximum under capped drawdown; or
  • Switching from capped drawdown to FAD.


Also see Annual Allowance.


Money Purchase Schemes

See Defined contribution pension.

Pot
This is the term for your accumulated pension savings and investments. It may also be referred to as your pension fund.


State Pension
 
A regular payment that you receive from the Government, based on your National Insurance record.


State Pension Age (SPA)

The age you can start to receive your State Pension. The current SPA is 65 for men. For women it is currently around age 63 but is rising every few months to equalise with the SPA for men by 2018. The SPA for both men and women will then increase to reach 66 by 2020. It's due to rise even further to 67 by 2028.


Selected Benefit Date (SBD)

The date you have told us you want to take benefits from your pension. Also called your Selected Retirement Date.  Even once you have set your SBD, there is no compulsion for you to take benefits on that date and can access your benefits any time after your 55th birthday.


Tax-free lump sum

You can usually take up to 25% of the pension pot tax-free when you take benefits.  This is the tax-free lump sum and is also referred to as 'tax-free cash'.


Uncrystallised Pension Fund

A pension pot that has not been used to provide benefits.


Uncrystallised Funds Pension Lump Sum

A benefit option where you can take some or all of your pension pot as a lump sum.

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