Glossary of Pension-Related Terms
A financial product (insurance policy) that provides a guaranteed income for the rest of your life (a lifetime annuity) or for a set number of years. An annuity is purchased from an insurance company, typically using the money built up in an existing pension plan. The amount of annuity you receive will depend on your age, the value of your fund, annuity rates and the type of annuity you want to buy.
2. Defined Benefit Pension
An employer-based pension plan that pays a guaranteed retirement income. Your “defined benefit” is calculated based on factors such as your salary and how long you’ve worked for your employer. Sometimes known as “final salary” pension schemes, such plans are increasingly rare in the private sector, where they have largely been replaced by defined-contribution plans.
3. Defined Contribution Pension
Typically a personal or stakeholder pension, sometimes referred to as a money purchase pension plan. It is a type of pension built up through contributions by you (and your employer if employed) and any investment returns. The value of your pension savings may fluctuate based on investment performance. Pension benefits may be distributed upon retirement in a variety of ways, including through an annuity, flexi-access income drawdown or UFPLS.
4. Final Salary Pension (refer to 2 above)
A “final-salary pension” is a defined benefit pension, as described above. Rarely now offered in the private sector, where they have been broadly replaced by defined contribution plans, they are still available to workers in the public sector.
5. Guaranteed Annuity Rate (GAR)
A guaranteed annuity rate under your pension policy promises to pay you a specific annuity rate at your retirement date. Found in some older pension policies, guaranteed annuity rates are often at a higher rate than offered now. While this can offer a significant value to the holder, the rate is non-transferable (i.e. may not be matched if transferring your pension to an alternative provider) and terms and conditions may apply, e.g. the rate may only be available on a set retirement date.
6. Flexi-Access Drawdown
Also referred to as income drawdown, it is a way to access your money purchase pension savings as and when desired during your retirement, while your remaining funds remain invested. This type of pension provides more flexibility than an annuity, and can mean you/your beneficiaries receive more money than you would under an annuity. However, income levels are not guaranteed, your funds typically continue to be exposed to market fluctuations and you could exhaust your pension during your lifetime. Flexi-Access Drawdown replaced capped drawdown from April 2015, though existing users of capped drawdown can continue in that plan.
7. Uncrystallised Funds Pension Lump Sum (UFPLS)
Introduced in April 2015, uncrystallised funds pension lump sum (UFPLS) allows you to withdraw some or all of your pension savings from a money purchase plan as a lump sum. Within the limitations of the Lifetime Allowance, usually with each withdrawal the first 25% of the UFPLS will be paid UK tax free, with the balance taxed as pension income.
8. Lifetime Allowance
The Lifetime Allowance (LTA) is the maximum value of pension savings that you can build up without incurring a UK tax charge at the time you draw out your pension savings as cash or pension (and without leaving a tax charge for your beneficiaries if you die before age 75). For the tax year 2022-23 the LTA is £1,073,100. If you exceed the LTA, UK tax is payable on the excess amount at 55% if taking the excess pension as a lump sum or at 25% if you take it as income. In some circumstances, a person may have a higher LTA if that person applied to HMRC for certain protections.
9. Market Value Reduction (MVR)
A reduction to a with profits policy that could apply if it is cashed in before or after its maturity date or other date(s) as specified in the policy.
10. Money Purchase Pension (refer to 3 above)
A money purchase pension plan is also known as a defined contribution plan.
11. UK State Pension
A regular payment from the UK government that you qualify for when you reach State Pension age. The amount that you receive will depend on your National Insurance record. You need 10 years of UK National Insurance contributions to be eligible for the new State Pension, however, you may be able to use time spent abroad to make up the 10 qualifying years.
12. Pension Commencement Lump Sum (PCLS)
When you start to draw from a UK pension, you can usually take up to 25% of your defined contribution pension (up to your LTA limit) as UK tax-free cash. PCLS is often known as UK “tax free cash” or a UK “tax free lump sum”. Tax-free cash may also be available from a defined benefit scheme.
13. Uncrystallised Pension
An uncrystallised pension is one where no pension benefits have been withdrawn.
14. Crystallised Pension
Crystallising your pension occurs when you start to take retirement benefits from your pension via flexi-access drawdown, uncrystallised funds pension commencement lump sums (UFPLS) or an annuity. In the UK, you can crystallise your pension from the age of 55, although this will be rising to age 57 in 2028.
15. Safeguarded Benefits
Safeguarded benefits are defined as benefits that are not money purchase or cash balance benefits. This means defined benefits, guaranteed pensions including Guaranteed Minimum Pensions (GMPs) and Guaranteed Annuity Rates (GARs).
16. Pension Transfer
A pension transfer is a transaction between two different pension schemes at the request of a member where the fund value from one scheme is transferred to another of the member’s choosing.
A QROPS is a Qualifying Recognised Overseas Pension Scheme. A QROPS is a pension scheme set up outside of the UK (and regulated as a pension scheme in the country where it is established), but recognized by UK HMRC as being capable of accepting a transfer value from a UK-registered pension scheme. A QROPS must meet certain HMRC requirements to qualify. HMRC publishes a list of pension schemes that have told HMRC that they meet the conditions to be a recognised overseas pension scheme and have asked to be included on the list. This list can be found at https://www.gov.uk/guidance/check-the-recognised-overseas-pension-schemes-notification-list
18. Overseas Transfer Charge
Since 9 March 2017, the UK levies a 25% tax charge known as the Overseas Transfer Charge (OTC) on transfers to QROPS, save for certain exceptions. These exceptions are where: (i) both the individual and the pension scheme are in countries within the European Economic Area (EEA); or (ii) if outside the EEA, both the individual and the pension scheme are in the same country; or (iii) the QROPS is an occupational pension scheme provided by the individual’s employer. In addition, the transfer may become chargeable if, within the five complete tax years following the date of the transfer, the conditions which were met to make the transfer tax free cease to be met.
A SIPP or self-invested personal pension, is a UK tax deferred pension “wrapper” that holds your investments for retirement. A SIPP is a type of UK registered personal pension plan that is personal (as opposed to workplace) pension set-up with an applicable UK pension provider.A SIPP can provide greater flexibility with the investments you can choose over other types of pension plans. Contributions to a SIPP count towards your annual allowance, and benefits from a SIPP count towards your lifetime allowance.
20. Guaranteed Minimum Pension
Prior to 6 April 1997 to be contracted out of the State Second Pension, a pension scheme had to promise to provide a pension at least equivalent in value to the pension a member would have received under the State Second Pension. This pension amount was known as Guaranteed Minimum Pension (GMP). Up to 5 April 2002, the State Second Pension was known as State Earnings Related Pension Scheme (SERPS).