- A Day. On 6 April 2006 HMRC introduced a single tax regime for all UK pension schemes. This is also often referred to as Simplification.
- Alternative investment market (AIM). AIM is a UK stockmarket mainly for smaller companies. Investing in AIM-listed shares is generally deemed high risk and the value of shares can fall sharply.
- Annual allowance. This is the maximum amount of new money eligible for tax relief in a single tax year. Her Majesty’s Treasury (HMT) sets the annual allowance.
- Annuity. An annuity is an income paid for the rest of your life. You can buy annuities from an insurance company. An annuity can be a fixed amount, or it can increase by a fixed amount or in line with inflation. Your husband, wife or other dependants can continue to receive the annuity after you die. The annuity may also have a guarantee period such as five or 10 years. See also income withdrawal.
- Beneficiary. An individual who is eligible to receive benefits.
- Benefit Crystallisation Event. This is when benefits become payable such as drawing a pension commencement lump sum or moving into drawdown and are then tested against the lifetime allowance.
- Benefits in kind. Examples include a company car or other valuable employment benefit that is treated for tax purposes as if you have received cash. Employer contributions to a pension are not treated as benefits in kind.
- Capped Drawdown. This form of income withdrawal is subject to an annual maximum amount of income that can be taken, which is reviewed every three years (and every year after age 75).
- Connected Party. This is relevant in relation to SIPP where any contract to buy or sell is disallowed where the parties include a relative, such as a spouse, or partner (of a partnership) or controlling director of a company.
- Contracted-out. Nearly everyone can expect a Basic State Pension when they reach State Pension age. If you are employed and earn above a certain amount, you will also pay National Insurance Contributions. These contributions provide an additional amount of pension, known as the State Second Pension and the level of benefit is based on the earnings on which you have paid National Insurance Contributions. However, instead of the Government paying the additional pension, you can ask the Government to pay a contribution to a personal pension plan instead and this is referred to as contracting-out. This money (or rebate) is invested and provides you with a pension instead of the State Second Pension. The invested money is called ‘Protected Rights’.
- Drawdown. This is another term for income withdrawal.
- Equities. These are shares in a company.
- Expression of wish. This is notification by a pension member detailing how they wish their death benefits to be paid.
- Fixed Protection. If you have this form of protection, the normal limit on your pension fund size will be replaced by £1,800,000, if greater. The normal limit on your pension fund size is £1,500,000 in the tax year 2012/2013.
- Flexible Drawdown. This is a form of income withdrawal that is not subject to minimum or maximum limits. To be eligible for this, you must meet the minimum income requirement.
- Fund supermarket. This is an online shop where you can buy and sell investments including funds, unit trusts and OEICs.
- Futures. These are contracts under which the seller must sell, and the buyer must buy, an investment at a fixed price at a fixed future date. Futures carry a high risk since the market price in the future may be very different to the fixed price under the contract. Futures can produce very high profits or losses.
- Government Actuaries Department (GAD). This is the Government department that provides actuarial advice and guidance to the Government.
- Gilts. These are UK Government debt issued by HM Treasury and based in sterling. Gilts are listed on the London Stock Exchange.
- Hedge funds. These are private investment firms who usually invest in high-risk investments. There are usually fewer than 100 individual investors in a hedge fund. This allows the fund to avoid many of the regulations that apply to other pooled investment schemes such as OEICs.
- Her Majesty’s Revenue & Customs (HMRC). HMRC is a Government department that controls the tax relief available to pensions and the rules that apply to the benefits you may take.
- Her Majesty’s Treasury (HMT). HMT is a Government department. It sets the level of annual allowance.
- Illiquid assets. These are assets that can be difficult or slow to convert to cash. Property is a good example of an illiquid asset. Unquoted shares can also be illiquid because there may be only a small number of possible buyers.
- Income withdrawal. This means using some pension fund to provide an income while leaving the rest of your fund untouched. The amount you can take will depend on which of the two types of drawdown is used – Capped drawdown or Flexible drawdown.
- In specie contribution. This is a way of moving existing assets into a pension without selling the assets. The advantage of an in specie contribution is that it avoids the costs associated with selling an asset.
- Investment return. The difference between the money that you originally invested and the total amount that you receive from that investment at the time when you cash it in. Investment returns can either be positive or negative.
- Investment trust. An investment trust is a form of pooled investment with a limited number of shares. Investment trusts may specialise in particular types of investment such as UK equities.
- Joint Commercial Property Purchase. This is when members pool their funds to purchase a commercial property, or with a third party. You would normally expect to complete this exercise via a SIPP or SSAS.
- Lifetime Allowance (LTA). The maximum pension fund that may be accumulated without incurring a tax charge.
- Loans. A loan may be made to unconnected parties by a SIPP at a commercial lending rate. A SIPP may not lend to a connected party.
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- Minimum Income Requirement. To satisfy this requirement you must have a guaranteed minimum pension income. For the 2011 / 2012 tax year this is £20,000. This income source must be a state pension, a pension scheme (subject to pension regulations and not from Capped Drawdown) and / or a lifetime annuity purchased by a pension scheme.
- Money Purchase Scheme. This is a pension scheme where your money is invested and the size of your fund is determined by how the investments perform. Examples include personal pension, grouped personal pension and SIPP.
- National Employment Savings Trust (NEST). This is a new workplace pension scheme open to employers of any size. It’s designed to meet the needs of a target market who are largely new to pension saving.
- Open-ended investment company (OEIC). An OEIC is a form of pooled investment, similar to an investment trust. OEICs are companies that issue shares on the London Stock Exchange. They then use the money raised from shareholders to invest in other companies. If an OEIC does well, it can issue more shares and hence the reason why these are referred to as being open-ended.
- Options. These are similar to futures. The difference is that an options contract creates a right to buy or sell, rather than making it compulsory.
- Pension Commencement Lump Sum (PCLS). PCLS is the tax free lump sum that can be paid to a member when their benefits are crystallised. Where Protection does not apply typically this will be 25% of the member’s fund.
- Pension input periods. This is the period of time, usually 12 months, used to measure the amount of contributions paid or benefits accrued for testing against the Annual Allowance.
- Pension Simplification. See “A Day”.
- Protected Rights. See also the definition for ‘contracted-out’. Protected Rights are the benefits you get if you contract out of the State Second Pension. The term ‘protected’ does not mean that the funds are protected from investment risk. Instead, it means that, if you are married when you retire or die, the type of pension that must be purchased must include certain spouse’s benefits and must include certain guarantees on death. This is not a feature of non-Protected Rights funds.
- Protection. Some pension savers may have benefits valued in excess of the Lifetime Allowance or a pension commencement lump sum of greater than 25% that they have safeguarded against a tax charge. That safeguarding is referred to as protection.
- Quoted shares. These are shares in a limited company where there is a share price published on a recognised stock exchange.
- Revised timetable for automatic enrolment. Small firms have been given an extra year to prepare for the auto-enrolment of their employees into a qualifying workplace pension scheme. While larger employers will start the process in October 2012, small firms with fewer than 50 employees will not commence until May 2015 (instead of April 2014 as originally timetabled).
- Self invested personal pension or SIPP. This is a form of personal pension that can include a very wide range of investments, can accept transfers including in specie contributions, and can be used for income withdrawal.
- Shares. If you own a share in a company, it means you receive dividends (part of the profits paid to shareholders) from the company and a portion of any proceeds if the company is sold. You can buy and sell quoted shares on a recognised stock exchange. Unquoted shares are owned by a limited number of people and you are only likely to be able to buy and sell with those people. Shares are more risky in the short-term than some other assets because you only receive whatever is left from a company after it has paid its debts and met other commitments (for example, salaries). If a company does well, its shares can shoot up in value. If a company does badly, its shares can become worthless.
- Simplification. See “A Day”.
- SSAS. A SSAS is a form of occupational pension scheme that can include a very wide range of investments, can accept transfers including in specie contributions, and can be used for income withdrawal.
- Traded endowment policies. These are endowment policies that have been sold to, and traded by, regulated brokers.
- Transitional arrangements. These are special rules that apply to people who already had large pension funds on 5 April 2006. Transitional arrangements may reduce or remove the extra tax charge for large funds. You have to register with HMRC to benefit from transitional arrangements.
- Trust. A trust is a number of assets and it is governed by rules set out in a document called a trust deed. Trustees ensure that the trust is run in line with those rules.
- Trustee. A trustee is an individual or a company with responsibilities to make sure that a trust is run in line with its rules.
- UK Relevant earnings. This is an earnings limit used to set the maximum tax relievable pension contribution. (Your employer may be able to make a larger contribution than this.) Relevant UK earnings are broadly the same as your taxed earnings, but they do not include dividends or bank interest.
- Unquoted shares. These are shares that do not have a price quoted on a recognised stock exchange.
- Venture capital trust (VCT). A VCT is a form of pooled investment specialising in companies that have recently been set up (‘start-up’ companies).
- Workplace pension scheme. This is any pension scheme arranged by an employer for the company’s workers. Changes to legislation commencing in 2012 will mean that employers with one or more workers will be required to offer a qualifying workplace pensions scheme (QWPS). Such a qualifying scheme sets out specific minimum standards for workplace schemes.
- Waiting period for auto-enrolment. There is an optional waiting period of up to three months before an employee has to be automatically enrolled in to a qualifying workplace pension scheme. Employees can choose to opt in during this time, in which case, the employer must ensure contributions are paid immediately.
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