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Glossary - Some Common Pension Terms

This page attempts to explain some of the words and phrases used in pensions in a friendly way.


If you are still confused about anything, please contact us and we'll be happy to help.


Active member: An individual who is currently building up pension benefits.


Annual allowance:  An annual allowance for contributions to pension schemes above which tax charges may apply. Under a money-purchase scheme this is the value of the contributions paid in over a period of time known as the "pension input period". However, under a defined benefit or cash balance scheme it is the increase in the value of a member's rights over the scheme year.


Annual allowance charge: A 40% charge for a member where the total of contributions paid (money purchase scheme) exceeds the annual allowance during the pension input period.


Annuity: An annuity is a special investment, provided by life insurance companies. It is a way of converting a lump sum, usually the pension fund you built up during your working years, into an income during your retirement. The annuity is taxed as earned income. You can choose from a number of different kinds of annuity to ensure that the pension you receive is relevant to your circumstances.  


Annuity protection lump sum death benefit: A death benefit that is paid as a lump sum when death occurs during the payment of a lifetime annuity or scheme pension from a money purchase scheme. In general, this is the purchase price less payments made.The scheme administrator becomes liable to a charge to income tax at the rate of 55% on the level of payment made. This is known as "value protection".  


Authorised member payment: Includes pensions or pension death benefits, lump sums or lump sum death benefits, recognised transfers, scheme administration member payments, payments in accordance with a pension share in order or provision, and any other payment prescribed by Regulations.  


Benefit crystallisation Event (BCE): Whenever a benefit crystallisation event occurs, a certain amount is deemed to crystallise for lifetime allowance purposes. The amount crystallised represents the capital value of the benefit being caught by the benefit crystallisation event. The amount crystallised for each of the benefit crystallisation events is measured in a prescribed way.


Chargeable amount: Any amount that is crystallised at a benefit crystallisation event that exceeds the lifetime allowance. This amount gives rise to a lifetime allowance charge.


Defer benefits: This is where you decide that you want to put back your retirement date.


Dependant: A person who is married to or a Civil Partner of the member at the date of the member’s death; a child of the member if the child has (i) not reached the age of 23 or (ii) has reached age 23 and, in the opinion of the scheme administrator, was at the date of the member’s death dependent on the member because of physical or mental impairment; a person who was not married to the member at the date of the member’s death and is not a child of the member is a dependant of the member if, in the opinion of the scheme administrator, at the date of the member’s death the person was financially dependent; a person who was financially dependant on the member because of physical or mental impairment or a person who was married to or a Civil Partner of the member when the member first became entitled to a pension under the scheme.


Enhanced protection:  A means of protecting benefits from the lifetime allowance charge provided certain conditions are met (for example, in money purchase schemes, there must be no further accrual pension contributions after 5 April 2006).


Free standing AVC: Free Standing Additional Voluntary Contribution policies provide additional pension benefits for those who are already members of a company pension scheme. They are set up separately from the main company scheme with an insurance company, building society or other provider that you choose.


Group money purchase scheme: An occupational pension scheme set up by an employer for the benefit of their employees.


Guaranteed Annuity Rate (GAR): Annuity rates move in line with market conditions but where your policy includes a guaranteed annuity rate you may be entitled to a higher pension than is available on the open market.


Guarantee period: An annuity, which continues to pay an income for up to 10 years. If you die before the end of the guarantee period your beneficiaries will receive the annuity for the remainder of that period.


Ill-health condition: You can take your pension benefits on grounds of ill-health at any time before the Normal Minimum Pension Age, as long as you can provide satisfactory medical evidence.


In Arrears and in Advance: If you select your annuity payments to be monthly in arrears, they will be paid at the end of each payment period. If you select your annuity payments to be paid in advance, they will be paid at the start of each payment period.


Joint life annuity: On your death, the annuity will continue to be paid to the person you have nominated, if they are still alive. The percentage of your income they will receive is selected at the outset of the annuity.


Level Lifetime Annuity: An income that pays the same amount until you die. Your annuity is guaranteed never to fall. It will start at a higher value than an Increasing Lifetime Annuity but will give you no protection against inflation.


Lifetime allowance: The lifetime allowance is an overall maximum on the amount of pension savings that any one individual can accumulate in registered pension schemes without being subject to the lifetime allowance charge. The 'standard lifetime allowance' for the 2013/14 tax year was £1.5m. This fell to £1.25m in 2014/15.


Lifetime allowance charge: Anyone who has pension benefits with a value in excess of the standard lifetime allowance after 5 April 2006 will be subject to a tax charge of up to 55% on their excess benefits value known as the lifetime allowance charge. Special rules apply to those with transitional protection.


Lifetime annuity: Benefits are secured by purchasing an annuity for life from an annuity provider.


Normal Minimum Pension Age: This is the minimum age at which you can normally take your pension benefits. It is currently age 55. It is only possible to retire earlier than this if you have a protected pension age, or if you need to retire early because of ill-health.  


Open Market Option: You can decide to take your money built up and buy an annuity with any another insurance company.  The aim of this option is to receive a higher pension.


Pension commencement lump sum: This is the new name for tax-free cash. It is a lump sum that can be paid, typically 25% of the fund value.


Personal pension: Personal Pensions are savings policies for retirement for individuals. They are able to receive regular and single contributions from those who are employed, self-employed, or from an employer.


Primary protection: Members that have a benefits value at 5 April 2006 of more than £1.5 million can use primary protection to reduce or eliminate the chance that a lifetime allowance charge will apply.


Protected Pension Age: If you have a protected pension age you can take pension benefits before the Normal Minimum Pension Age. You may have a protected pension age if you started your pension policy before 5 April 2006 in relation to an occupation that had an early retirement age. You can check your original policy document to see if this applies to you, but if you are not sure you should speak to your adviser or contact us for help.


Recognised transfer: A transfer representing a member's accrued rights under a registered pension scheme to another registered pension scheme or a qualifying recognised overseas pension scheme (QROPS).


Registered pension scheme: To benefit from tax privileges all pension schemes must be registered with HM Revenue and Customs. Schemes set up before 6 April 2006 will normally be automatically registered.


Relevant UK Earnings: This means either employment income; income which is chargeable under Schedule D and is immediately derived from the carrying on or exercise of a trade, profession or vocation (whether individually or as a partner acting personally in a partnership); or income to which section 529 of Income and Corporation Taxes Act 1988 (ICTA) (patent income of an individual in respect of inventions) applies.  


Relevant UK individual: An individual is a relevant UK individual for a tax year if:

  • You have relevant UK earnings chargeable to income tax for that year

  • You are resident in the United Kingdom at some time during that year

  • You have been resident in the United Kingdom both at some time during the five tax years immediately before that year and when the you became a member of the pension scheme, or

  • You, or the your spouse, has for the tax year general earnings from overseas Crown employment subject to UK tax.


Short service refund lump sum: A lump sum benefit paid to a member of an occupational pension scheme because they have stopped accruing benefits under the scheme and have less than two years of pensionable service under the scheme.


Single life annuity: An annuity which makes no provision for anyone else after any chosen Guarantee Period.


Stakeholder pensions: A personal pension plan introduced on 6 April 2001. It has a low minimum contribution and a maximum annual charge of 1.5% for the first 10 years reducing to 1% thereafter. There are no penalties for stopping or suspending contributions or for transferring the fund to another provider. It has the same rules as a personal pension for buying an annuity.


Standard lifetime allowance: The standard lifetime allowance creates a ceiling on the tax-advantaged benefits value that you can build up in all registered pension schemes. The value for the 2014/15 is £1.25m.


Tax-free cash: You may be able to take up to 25% of your pension savings as a tax-free lump sum. This is also known as the pension commencement lump sum.


Trivial commutation: It is possible for benefits to be taken as a lump sum, but the following must apply:

  • The scheme rules allow it.

  • No previous trivial lump sum has been paid more than 12 months ago.

  • All of the benefits under the scheme have to be taken at the same time.

  • The total value of your pension savings is not more than £30,000 for this tax year.

  • You have some standard lifetime allowance available.

  • You are aged 60 or over.


Trivial commutation lump sum death benefit: A lump sum death benefit can be paid to a dependant of a scheme member who died before age 75 because that dependant's entitlement under that scheme is deemed trivial.


Unauthorised member payment: a payment by a registered pension scheme to or in respect of a member of that pension scheme that is not an authorised member payment, or anything which is specifically prescribed as being an unauthorised payment in respect of the member.  


Unsecured pension (USP) A policy which allows you to take an income from it without purchasing an annuity. The income allowed must be below the limit set by the Government Actuary's Department.

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