Understanding Pension and Retirement Jargon

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havenifa


Posted on: 19th July 2018

When it comes to pensions, it is understandable that certain jargon and terms can be a bit too much to understand. However, there is no need to worry. This week, we have put together this handy guide that breaks down commonly used pension and retirement jargon.

Additional Voluntary Contributions (AVCs)

AVCs are additional contributions that you can pay into your workplace pension. This will help boost your retirement fund.

Annual Allowance

The annual allowance is the most you can pay into a pension each year without a tax charge being applied. At the moment, the maximum you can pay without a tax charge is equal to your annual earnings, up to a maximum of £40,000. However, this is tapered down to a minimum of £10,000 for higher earners.

Annuity

The process of buying annuity involves cashing in all or part of your pension in exchange for a fixed income. In most cases, this will last for the remainder of an individual’s life.

Auto-enrolment

If an employee is aged between 22 and the state pension age, and earn a minimum of £10,000 a year, they are automatically enrolled in their workplace’s pension scheme. This is known as auto-enrolment.

Benefit Crystallisation Event

There are 13 different crystallisation events. Some of which include taking an income from your pension and reaching age 75. At each event, you will have your pension measured against the lifetime allowance. If your pension exceeds the allowance, you will then face a tax charge.

Consolidation

Consolidation is the process of bringing together several pensions into a single account under one provider.

Contribution

This is a simplified way of saying “paying money into a pension.”

Defined Benefit or Final Salary Pension

This is a pension that is set up by your workplace where income is based on your salary and the length of your employment. Regardless of the stock markets, you are guaranteed a fixed income for life with these pensions. However, they are significantly less common these days.

Defined Contribution Pension or Money Purchase Pension

This pension is built by personal contributions, 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

An income drawdown or flex-access drawdown allows you to take an income from your pension whenever you may need throughout retirement. The rest will remain invested and can continue to rise or fall depending on how your investments perform.

Income Tax

Income tax is paid on any income you receive from your pension that is over your personal allowance, which is currently £11,850. This does not include your 25 percent tax-free cash. Depending on how much you will receive each year, tax is paid at 20, 40 or 45 percent.

Lifetime Allowance

The lifetime allowance is the maximum amount you can save in your pension throughout the rest of your life. The maximum is currently £1.03 million. If you breach this allowance, you must pay tax up to 55 percent on any excess.

Money Purchase Annual Allowance (MPAA)

This is the reduced annual allowance that becomes applicable after you have begun to withdraw money from your pensions in retirement. It is currently £4,000.

Nominated Death Beneficiary

This is the person you would like to pass your pension benefits onto in the event of your death. This nomination is made using an expression of wishes form.

Pension Carry Forward

Any pension allowance from the three tax years prior can be carried across to the current tax year. Potentially, you could be allowed to pay up to £120,000 extra into your pension if you have earned enough.

Salary Sacrifice

Salary sacrifice involves giving up some of your regular salaries to be paid into your workplace pension instead. This means you will not pay national insurance or income tax on that portion of your salary.

SIPPs

Self-invested Personal Pensions are a particular type of pension that offers multiple investment options. This can give you more control over your savings.

Tax relief

Any contributions you make into a pension that is within the annual allowanced are then topped up by 20 percent by the taxman. For higher or additional-rate taxpayers, the Government will top up these contributions by 40 percent or 45 percent respectively.

Uncrystallised Funds Pension Lump Sum (UFPLS)

No matter the time or how much you choose, you can make lump sum withdrawals while leaving the rest invested. 25 percent of each withdrawal is paid tax-free. The rest will be taxed at your normal income tax rate.

Haven IFA are Here to Help

We hope you found this guide useful and has helped you understand some of the jargon that is used on a regular basis. Having an independent financial advisor by your side can help you not only understand your pension but can help you with controlling your pension to save more for a retirement you can thoroughly enjoy. Talk to Haven IFA to see how we can help.