Glossary

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From 6th April 2006 many new pension terms were introduced and some old ones are no longer as relevant. The right hand column below will say if this applies.

There have also been a number of further changes and these are also covered.

A-Day 6th April 2006 – When many changes to pensions took place New term
Accrual A pension term which means ‘to earn’ benefits in a scheme
e.g. You might have earned 1/60th of your salary for each year in the scheme
Administrator The person responsible for reporting certain events to the Inland Revenue and accounting for any tax due
Actuary The (very clever and highly qualified) person appointed by Defined Benefit Occupational Pension Schemes to advise on funding and the value of the scheme
Annuity A series of regular payments received in exchange for a lump sum paid at the outset
Apart from the odd exception an annuity is guaranteed
Alternatively Secured Pension – ASP A technical term that was used until April 2011 to describe ‘Income Drawdown’ after age 75. This has now been replaced with ‘Capped Drawdown’ New term
Auto-Enrolment Being introduced in stages until 2018 depending on the size of the employer. All employers will have to automatically enrol all eligible employees into a pension arrangement. Once enrolled an employee can then decideto ‘opt-out’ of the scheme. Both employers and employees must make pension contributions. Auto-enrolment does not apply to employees earning less than 10,000 a year.
AVC Additional Voluntary Contribution- see also FSAVC
A further saving into an Occupation Pension Scheme by an employee and member of the scheme
Old term
Beneficiary Normally a member of a pension scheme but also includes potential beneficiaries in the event of the members death. e.g. spouse and children
Benefit Crystalisation Event – BCE An event which triggers a test against the whole value of a persons pensions to see if they exceed the ‘Lifetime Allowance’
There are 11 such events. Click here to view them (opens separate window)
New term
Capped Drawdown Introduced in April 2011as a replacement for both Unsecured Pension and Alternatively Secured Pension(which only came in on 6th April 2006)
In simple termsit means drawing a pension directly from the funds that remain invested and is an alternative to buying an annuity with an insurance company
CETV Cash Equivalent Transfer Value – A value calculated by the Actuary of a ‘Defined Benefit’ company pension scheme. In theory this represents the cash value of the pension rights earned to date. In practice the quoted figure is often considerably less than the true value
In divorce cases professional pensions advice must be sought on the implications of the discrepancies
Commutation The term used to describe sacrificing pension for a cash lump sum
It is very important to check the commutation factor or ratio of cash to pension as almost all schemes make a profit out of you taking cash
Compulsory Purchase Annuity – ‘CPA’ This is a technical term meaning an ‘Annuity’ where the funds have come from an ‘Occupational Pension Scheme’ rather than a ‘Personal Pension’
See also Open Market Option
Contracting-out Swopping your rights to the State Second Pension (used to be called SERPS) for a rebate of National Insurance monies which are then invested into a Personal Pension with an insurance company
Critical Yield – Drawdown The rate at which invested pensions funds have to grow to match the alternative of taking an annuity at the start of drawdown
Critical Yield – Pension transfer The rate at which a Personal Pension fund has to grow to match the guaranteed pension that was promised in a defined benefit/final salary scheme
Defined Benefit A technical way of describing some types of company pension schemes – also known as Final Salary
The benefit is defined as a fraction of salary for each year of employment with the company. e.g. 1/60th or 1/80th
Defined Benefit schemes are almost exclusively run by large employers andonly one scheme run by a FTSE100 company now remains open to new employees
Deed See Trust Deed
Drawdown Drawing an income directly from the pension fund which can remain fully invested
This is an alternative to an Annuity
Also know as ‘Income Drawdown‘ and sometimes ‘Pension Fund Withdrawal’
Earmarking Not a bizarre ritual. It means recording an interest against an existing pension benefit in favour of a former spouse. Always done by court order. This isn’t used so much now as it has been replaced with Pension Sharing. If this is being suggested you need to know why as it can be poor value. Old term
Enhanced Protection Applies to individuals with large pension funds
If they registered before 5th April 2009 the certificate protects all future growth against the Lifetime allowance charge
Warning – This protection can be lost if any further pension savings are made or received
See also Primary Protection
New term
Equalisation Applies to final salary schemes only following a European Court judgement. It means equalising the retirement ages of men and women
Executive Pension Scheme An occupational money purchase pension scheme for employed individuals often directors and/or senior employees
As many of these had higher charges than current levels they should be reviewed
Old term
Final Salary i) An alternative name for a ‘defined benefit‘ company pension scheme
ii) Final Pensionable Salary is a term which describes the salary figure used to calculate a pension on retirement. e.g. Average of last 3 years
Fixed Protection 2012 Effective from 6 Apr 2012. This protected pension savings up to 1.8m from the reduction in the LifeTime Allowance (LTA) down to 1.5m. Savings above the LTA are taxed at 55%
Fixed Protection 2014 Effective from 6 Apr 2014. This protects pension savings up to 1.5m from the reduction in the LifeTime Allowance (LTA) down to 1.25m. Savings above the LTA are taxed at 55%
FSA The Financial Services Authority
FSAVC Free Standing Additional Voluntary Contribution
A sort of Personal Pension (before 2006) for people who were in Employers Occupational Schemes. It wasn’t attached to the employers schemes so was called a ‘free standing’ scheme
Old term
FURBS Funded Unapproved Retirement Benefit Schemes Old term
G60 A Chartered Insurance Institute (CII) qualification which identifies an adviser as having reached a standard by examination in order to advise on more complex pension matters including transferring pensions. The more recent qualification is called AF3
GAD Government Actuaries Department – The GAD rates are applied to calculate the levels of income that may be taken from a pension fund duringincome drawdown
GMP Guaranteed Minimum Pension – The equivalent of SERPS in an Occupational Pension Scheme that has been Contracted-out
Can also apply to a ‘buy-out’ or ‘Section 32‘ policy if the pension was transferred out.
Warning – these may now be worth a lot more so great care must be taken when reaching retirement
Graduated Pension Scheme The State Graduated Pension Scheme ran between 1961 and 1975. People who were employed during this period will have earned some of this. You can get an estimate of how much along with a basic state pension estimate. Download form BR19 from our downloads page
GPP – Group Personal Pension The term used to describe personal pensions when gathered together by an employer
Guaranteed Annuity Rate
or
Guaranteed Annuity Option
Many older Pension Policies have a built in guaranteed rate that was fixed when interest rates were much higher in the past
Some of these guarantees are worth double the current rate
STOP PRESS – Just found one at 247%
Many insurance companies will not tell you about this option and some will send retirement figures quoting the guaranteed ‘annuity’ which is based on current low interest rates. A current annuity is guaranteed but it is not the same as a ‘guaranteed annuity rate’
Check the policy document or ask for help or you may be throwing away half the pension
IFA Independent Financial Adviser
Income Drawdown Drawing an income directly from the pension fund which can remain fully invested
This is an alternative to an Annuity and allows the income to be varied each year. The capital value is not lost on death.
Also know as ‘Drawdown’ and sometimes ‘Pension Fund Withdrawal’. The latest names in use also include Capped Drawdown and Flexible Drawdown
Life Time Allowance – LTA The maximum amount of pension fund value that can be reached after 6th April 2006 beyond which tax is applied at 55%
Started at 1.5m in 2006, then 1.6m in 2007, 1.75m in 2009
Increased to 1.8m by 2010 and then was to be frozen for 5 years.
Since April 2012 it has been reduced to 1.5m again with no promise of an increase (yet)
Pensions in payment are valued at 25 times the amount being received so 60,000 per annum is at the limit
Pension benefits earned before 6th April 2006 could have been ‘protected’ against the tax if the forms were completed correctly before 5/4/2009 as long as no more pension savings are made. (n.b. 30% of forms have been submitted wrong)
New term
Money Purchase A technical term normally used to describe a company pension scheme whereby the pension at the end is based on how much money has been built up over time
The ‘money’ ‘purchases’ the pension
The alternative company scheme type is called ‘defined benefit
MVR – MVA Market Value Reduction – Market Value Adjustment
Applied to a ‘With-Profits’ policy on transfer/vesting usually to reflect poor market conditions
Warning – There are specific dates or conditions when the penalty does not apply but you need to check you have these in writing and understand them
NEST National Employer Savings Trust – Now changed to Auto-Enrolment
The government designed scheme introducing compulsory pension contributions being phased in from October 2012 to February 2018. The eventual result will be all employees paying a minimum 4% (plus an extra 1% added on for tax relief) plus aminimum employer contribution of 3% of earnings above a certain level. Employees can opt out and employers don’t have to subscribe if they have a scheme that matches or improves on the minimums
NRA – NRD Normal Retirement Age – Normal Retirement Date
Offsetting In divorce cases where the value of a pension scheme members benefits are offset against other assets
An alternative to a Pension Sharing Order. Better for some people and not for others. If the two options are being considered then specialist advice should be sought as there is no correct answer
Open Market Option
OMO
The right to take the proceeds of a Personal Pension Fund to a different insurance company with a better ‘Annuity’ rate
In 90% of cases a new company will have a better rate BUT you must check if your existing policy has a better ‘Guaranteed Annuity Rate‘ before sacrificing it
Warning – This right also exists if you have an old Occupational Pension Scheme (money purchasetype) but most people will lose out unless the old trustees take the trouble to find you the best rate. You need an Independent Pensions Adviser to sort this one out for you
Paid Up A technical term meaning a pension scheme or policy which is no longer receiving additional payments
Benefits held under a ‘paid-up’ policy should be investigated to ensure the funds are being properly managed as experience suggests that they are frequently not
Members of a ‘paid-up’ company pension scheme should also consider their options but professional advice is required (G60 qualified Independent Financial Advisers required)
PCLS Pension Commencement Lump Sum – used to be called Tax-free cash
The lump sum payment received when pension benefits first start
Typically 25% of the fund for a Personal Pension or ‘Money Purchase’ company scheme
With a ‘Defined Benefit‘ company scheme part of the pension is sacrificed to provide this. Calculations show that in many cases the retiree is far worse offtaking the lump sum even though it is nice to have. Advice should be sought on this
New term
Pension Fund Withdrawal Drawing an income directly from the pension fund which can remain fully invested
This is an alternative to an Annuity
Also know as ‘Drawdown’ and’Income Drawdown’
Pension Ombudsman The pensions ombudsman determines whether complaints made against those responsible for pension schemes can be upheld and if so the award that must be paid
Pension Protection Fund
PDF
A fund designed by the government (but not guaranteed by it) to rescue final salary pension schemes which are in deficit when their sponsoring employer goes into liquidation
Pension Release A coin termed by firms to encourage an individual to take the cash from their pension at the earliest possible date. The implication is that the pension is somehow trapped. In reality any adviser can arrange this if it is suitable advice. Most people don’t realise the consequences of taking such action. There is no such thing as a free lunch. See the FSA Website
Warning or that given by the Pensions Regulator

Pension Sharing Order
Part of a Divorce settlement whereby the Court orders a pension scheme to transfer benefits from one party to the other
Problems can arise if professional pensions advice is not sought prior to the Financial Settlement as the terms could mean the insurance company or company pension scheme gaining at the expense of both parties to the divorce
Pensioneer Trustee An Inland Revenue approved person or company who primary task (prior toA-day) was to ensure a scheme did not breach the regulations Old term
Personal Pension An individual Pension policy where the eventual benefits are based on how much money has been built up
Benefits are usually a cash lump sum then either an annuity or income drawdown
Phased retirement A method whereby pension benefits are taken in stages over a period of years rather than all at once. This is normally a mixture of the cash lump sum plus some annuity or a href=”#income-drawdown-glossary”>drawdown income each year
Primary Protection Applies to individuals with over 1.5m in pension funds on 6th April 2006 as long as they registered before 6/4/09
The certificate allows them to preserve the higher ratio between their own pension fund and the Lifetime allowance limit
See also Enhanced Protection
New term
Protected Rights That part of the fund within a pension policy that was built up from the National Insurance rebates from Contracting-out of SERPS or S2P (yes read it again)
From April 2012 this has been scrapped so the fund is treated in the same way as any other Personal Pension. You might still find the term on old statements and forms that haven’t been updated yet
QROPS Qualifying Recognised Overseas Pension Scheme
Guidance definitely needed on these
Registered Pension Scheme Any pension scheme recognised by the Inland Revenue and therefore able to benefit from the tax allowances New term
Retirement Annuity A Personal Pension before its name was changed in 1988
Many people still have these and they often have valuable guarantees built in
Some of them are poor valueand some extremely good
Rules See Scheme Rules
S2P Abbreviation for State 2nd Pension. This replaced SERPS in 2002 and provides less benefit (for most people)
Salary sacrifice An arrangement between employer and employee. The employees salary is reduced in exchange for an increase in pension contribution by the employer
Scheme Pension A specific agreed level of Income paid by an Occupational Pension Scheme
This can be an option under a SSAS
New term
Scheme Rules A comprehensive explanation of how a pension scheme must be operated by the ‘trustees’
Normally between 30 and 80 pages of complex technical terminology
The scheme rules overide the simple explanation in the ‘scheme booklet’ in the event of a conflict
A member of a scheme is entitled to inspect the rules
Section 32
Buyout
Transfer Plan
A policy in the name of an individual set by when they transferred their benefits out of a Final Salary Pension Scheme
These can have valuable guarantees built in especially if a GMP applies
If ‘With-profits’ beware of the MVR when taking benefits
The Open Market Option may or may not be worth taking
SERPS State Earnings Related Pension Scheme – A top-up to the basic state pension scheme based on earnings. SERPS ran between 1978 and 2001 when it was replaced by the State 2nd Pension.
You can get an estimate of your entitlement by completing form BR19 from our downloads page
see also ‘Contracting-out
Old term
SIPP Self Invested Personal Pension
An alternative to having all your personal pension with an insurance company policy
Investments can include commercial property and shares
SAAC ‘Special Annual Allowance Charge’. A tax charge introduced by the Labour Government in April 2009 and amended a few times before the Coalition Government removed from 6th April 2011
SSAS Small Self Administered Pension Scheme
The alternative for company Directors instead of going to an insurance company
The Director’s own company sponsors the scheme and the directors are the trustees as well
The company’s own premises are a popular investment asset because Pension Funds are exempt from Capital Gains Tax (as well as tax on interest and rent)
Tax-free cash Tax-free cash. Now called Pension Commencement Lump Sum (PCLS)
The payment received when pension benefits first start.
Typically 25% of the fund for a Personal Pension ‘Money Purchase’ company scheme.
With a ‘Defined Benefit‘ company scheme part of the pension is sacrificed to provide this. Calculations show that in many cases the retiree is far worse off taking the lump sum even though it is nice to have. Advice should be sought on this. You don’t have to take all the cash offered.
Old term
Transfer Value The term used to describe the cash value of a pension fund when it is moving from one scheme to another
Trust Deed A legal document which gives the scheme a legal existence in its own right, appoints the ‘Trustees’ and adopts the ‘Scheme Rules’
A scheme member is entitled to inspect the Trust Deed
Trustee A person with the authority to make decisions in connection with a pension scheme and the responsibility to act solely in the interests of the pension scheme beneficiaries even if that conflicts with outside influences
Unsecured Pension – USP A technical term that was used until April 2011 to describe ‘Income Drawdown‘ before age 75. This has now been replaced with ‘Capped Drawdown’
see also Income Drawdown which is effectively the same thing
New term

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