When it comes to pensions, we appreciate that you can be overloaded with jargon and terms that you just don’t understand. So to help, we’ve put together a jargon buster that helps you understand some of the most common pension terms.
Additional Voluntary Contributions (AVCs)
AVCs are extra contributions you pay into your workplace pension to boost your retirement fund.
The annual allowance is the maximum amount you can pay into a pension each year without a tax charge being applied. It is currently equal to your annual earnings, up to a maximum of £40,000. However, for higher earners this is tapered down to a minimum of £10,000.
Buying an annuity involves cashing in all or part of your pension in exchange for a fixed income that in most cases lasts for the rest of your life.
When staff are automatically enrolled into their workplace’s pension scheme if they are aged between 22 and the State pension age, and earn at least £10,000 a year.
Benefit crystallisation event
There are 13 different benefit crystallisation events, including taking an income from your pension and reaching age 75. At each of these events, your pension is measured against the lifetime allowance. If it exceeds the allowance, you will face a tax charge.
Consolidating involves bringing together several different pensions into a single account with one provider.
This essentially means paying money into a pension.
Defined benefit or final salary pension
A pension set up by your workplace where income is based on your salary and the length of your employment. These pensions guarantee you a fixed income throughout retirement, regardless of how the stock markets perform – however, they are more uncommon these days.
Defined contribution pension or money purchase pension
This is a type of pension built up by personal and employer contributions, tax relief from the Government and any returns on your investments. As your money stays invested, the value of your pension could increase or decrease in line with the performance of the stock markets.
Income drawdown or flexi-access drawdown
This allows you to take an income from your pension as and when you need it in retirement while keeping the rest invested. The untouched pension can continue to rise or fall depending on how your investments perform.
Income Tax is paid on any income you receive from your pension above your personal allowance (currently £11,850). This doesn’t include your 25% tax-free cash. Income Tax is paid at 20%, 40% or 45% depending on how much income you receive each year.
This is the maximum amount you can save in your pension across your lifetime. It is currently at £1.03 million. If you breach the allowance you will pay tax at up to 55% on any excess.
Money Purchase Annual Allowance (MPAA)
The reduced annual allowance for pension contributions that applies after you have started taking money from your pensions in retirement. It is currently £4,000.
Nominated death beneficiary
The person you choose to receive the benefits from your pension in the event of your death. The nomination is made using an expression of wishes form.
Pension carry forward
Any unused pension allowance from the previous three tax years can be carried across to the current tax year, potentially letting you pay up to £120,000 extra into your pension if you have earned enough.
This involves giving up some of your regular salary to be paid into your workplace pension instead. This means you won’t pay National Insurance or Income Tax on that portion of your salary.
SIPPs (or Self-invested Personal Pensions) are a type of pension that offer a wide range of investment options and give you more control over your savings.
Any contributions into a pension, within the annual allowance, are topped up by 20% by the taxman. For higher or additional-rate taxpayers, the Government will top up contributions by 40% or 45% respectively.
Uncrystallised Funds Pension Lump Sum (UFPLS)
You can make lump sum withdrawals from your pension pot – as regularly as you want – while leaving the rest invested. 25% of each withdrawal is paid tax-free with the rest taxed at your normal Income Tax rate.
If you are unsure about your pension and would like some support, please contact one of our experienced advisers today. You can email: [email protected] or give us a call on 01484 448 019.