abcdef An Explanation of Pension Terms Pension Term / Name Annual allowance Annuitant Annuity Bonuses Commutation Commutation for Smaller Pension Funds 10,000 or less Also Known or Previously Known As Pension Income Retirement Income Pension Small Lump Sums Stranded Pots Small Pension Pots Description HMRC has set an Annual Allowance for the total payments that you and your employer can make to all your pension arrangements. This allowance is 40,000. Any contributions made that exceed the annual allowance will not receive tax relief and are liable to a tax charge. If you take any form of flexible access payment, from any pension plan, including an Uncrystallised Funds Pension Lump Sum, your Money Purchase annual allowance reduces from 40,000 to 10,000 with immediate effect. A person who is entitled to receive benefits from an annuity. There can be more than one annuitant associated with an annuity. For example a husband and wife could both be an annuitant on the same annuity. A financial product bought from a pension provider with the retirement fund, saved in a pension policy, less any tax free lump sum which has been paid. The annuity pays an income to the policyholder for the rest of their life. Please refer to Reversionary Annuity if an income for a widow or dependant is desired. Buying an annuity is a one-off decision that will set the income throughout retirement and cannot be changed once it has been set up. Depending on the policy terms and conditions, a bonus may be payable at the normal retirement date. Such bonuses are lost if the policy is ended earlier than agreed at the start of the policy. This includes early retirement, transfer or by taking the open market option before the agreed date. Giving up some or all of a pension in exchange for a lump sum. On or before 5 April 2015 For Occupational Pension Schemes (OPS): This is the ability to commute small benefits from OPS if certain conditions are met. These include that the member has reached age 60 but not age 75, that the total value of all payments made by the OPS and any related OPS schemes is 10,000 or less. Page 1 of 8
Commutation for Smaller Pension Funds 30,000 or less Deferral Defined Contribution Pension Scheme Emergency Tax Triviality Postpone taking retirement benefits Money Purchase Pension Plan abcdef For Personal Pensions (PP), Free Standing Additional Voluntary Contribution plans (FSAVC) & Retirement Annuity Contract (RAC): This is available where the fund under the plan is 10,000 or less and certain conditions are met. Again this is only available between the ages of 60 and 75. Only three such Small Pension Pots can be taken in a lifetime. On or after 6 April 2015 As above but payment is available from the age of 55. If the total value of the policyholder s pension benefits from all pension arrangements does not exceed a certain level and they are aged between 60 and 75, it may be possible, subject to certain conditions, to pay the total funds as a cash sum. Since the 2012/13 tax year, the level has been a fixed monetary amount of 18,000. This increased to 30,000 for new commutation periods that commenced on or after 27 March 2014. This will not be available after 5 April 2015. HMRC have also stated that there are no transitional arrangements for payments that are requested before 6 April 2015 but paid on or after this date. Therefore if (for example) an application for Trivial Commutation is received prior to 6 April 2015 and we are unable to process it in time for the tax year end, and the payment is made on or after 6 April 2015 and can t be paid as a small pot commutation ( 10,000 or less), the payment must be treated as an Uncrystallised Funds Pension Lump Sum (please see below for an explanation of this term). If a policyholder is approaching their Selected Retirement Date and they are not ready to take their pension benefits, they can choose to defer them until a later date. Abbey Life do not allow the deferral of pension benefits beyond the age of 75, so if a policyholder wishes to defer the benefits of their Abbey Life pension beyond the age of 75, they will need to transfer the benefits to a provider who allows this. A pension scheme that pays the member a retirement income dependant on the contributions made into their retirement pot, the investment returns and the amount of charges over time. Rate of tax applied by HMRC when the individual s Page 2 of 8
abcdef tax code is not known, or hasn t been given for a new tax year. Tax is calculated on a month 1 basis which means that only 1/12th of the annual personal allowance can be used when calculating the tax. For more information on tax and how it is calculated, please visit HMRC s website www.hmrc.gov.uk Enhanced Annuity Impaired Life Annuity This is an annuity product which could pay a higher level of income than a standard annuity and is based on factors that may affect how long a person will live, e.g. their health, being a smoker or their occupation. Abbey Life does not offer an enhanced annuity product, so if a policyholder feels they are eligible for one, they will need to choose another provider. Exit charges Final Salary Pension Plan Former Protected Rights Contributions Defined Benefit Pension Scheme PRC Protected Rights Contributions If the plan is terminated before the original retirement date, either as a result of transferring to another pension provider or early retirement, there will be a certain level of initial costs that have not been recovered via management charges. These costs are normally recovered over the entire term of the plan. Any costs that have not been recovered will be deducted prior to making any payment in respect of transfer or early retirement. The term remaining to the nominated retirement age will determine the level of the charge and the longer the term remaining, the higher the charge. A pension scheme that ensures a level of retirement income to its members; usually a fraction of the member s annual earnings for every year they have been a member of the scheme. For example, a member s pension may be calculated as 1/60th x Final Pay x Number of Years in the Scheme. In 1988, it became possible for individuals to opt out (also known as Contracting Out) of the Government's State Earnings Related Pension Scheme (SERPs), which later became known as the State Second Pension (S2P). This was in addition to the Basic State Pension. Under a Money Purchase Pension Plan, instead of the Government taking all of a person s National Insurance contributions and crediting them with a SERPS or S2P pension, they would redirect that part of the National Insurance contribution to the chosen pension provider in the form of a rebate to be invested into the individual s own private pension. Contracting Out under a Money-Purchase Pension Page 3 of 8
Free Standing Additional Voluntary Contribution plan Guaranteed Minimum Annuity Rate Income Drawdown FSAVC GMAR Guaranteed Annuity Rate GAR abcdef Plan was abolished in 2012 and the restrictions on the funds, such as the need to use 50% of the fund to provide a spouse/civil partner s pension, were removed. A pension product taken out by an individual to top up their benefits from an OPS Some older pension products had a form of protection whereby the effective annuity rates, if the annuity is taken with us at the time of retirement, would be no less than that set out in the policy conditions. Withdrawal of income from a registered pension scheme where the fund remains invested and an income is taken from it. There are two types of income drawdown flexible and capped. Income Drawdown is only available on Abbey Life s Small Self Administered Scheme (SSAS) products. From 6 April 2015, flexible and capped drawdowns are being replaced by Flexi-Access Drawdown. Anyone that currently has capped drawdown will be able to continue with their arrangement but the limits will be removed. If a person with Capped Drawdown exceeds the current cap, they will automatically convert to Flexi-Access Drawdown. Lifetime Allowance LTA This is the maximum amount of retirement savings that can be built up over one s lifetime before tax penalties apply. It is set by the Government. A tax charge is applied to the value of retirement savings in excess of the LTA. The amount of the tax charge depends on whether the excess savings are paid in the form of a lump sum or an annuity. The LTA for the 2013/14 tax year was 1.5 million. For the 2014/15 tax year, the LTA is 1.25 million. If a person s pension savings are worth more than this when they take their benefits, they will have to pay the lifetime allowance tax charge on the excess unless they have some form of lifetime allowance protection. Please visit HM Revenue & Customs website at: www.hmrc.gov.uk for more information on the types of protection available. Money Purchase Pension Plan Occupational Pension Scheme Defined Contribution Pension Scheme OPS A pension scheme that pays the member a retirement income dependant on the contributions made into their retirement pot, the investment returns and the amount of charges over time. A pension product set up by an employer for the benefit of their employees Page 4 of 8
abcdef Open Market Option OMO This is the option to use the retirement savings to buy an annuity at a current market rate from a different pension provider than the pension provider you have been building up your pension pot with. The tax free lump sum is often paid from the original pension plan by the pension provider before the remaining fund is paid to the policyholder s chosen provider. Pension Wise A free and impartial government service that helps you understand your new pension options. Pension Wise won t recommend any products or tell you what to do with your money. You can get guidance on your pension options from the Pension Wise website; www.pensionwise.gov.uk If you prefer to speak to someone, you ll soon be able to talk to an impartial guidance specialist on the phone or face to face. They ll talk about the steps you can take to turn your pension pot into income for your retirement. You can register your interest if you d like to take part in upcoming trials of phone or face-to-face guidance by visiting the Pension Wise website; www.pensionwise.gov.uk. Personal Pension PP A pension product taken out after 30 June 1988 by an individual for their own benefit. Pension Simplification A-Day Pension tax simplification Pension tax simplification, often referred to as "pension simplification" which took effect from 6 April 2006. This was a radical overhaul of pension legislation. The aim was to reduce the complicated legislation which had built-up over the preceding years. The Government wanted to encourage retirement provision by simplifying the previous eight tax regimes into one single regime for all individual and occupational pensions. Phased Switching Life styling This feature, if allowed and selected on the policy, is a gradual switch of units from the original funds into a low risk fund. A fraction of the units in the fund(s) will be automatically switched without charge each month commencing 60 months prior to the selected retirement date. The fraction switched will be determined as one over the remaining term in months to the selected retirement date with 1/60 th switched in the first month, 1/59 th in the second month and so on until the entire fund has been switched by the Page 5 of 8
selected retirement date. abcdef Contributions received after the transfer process has begun will continue to be allocated according to the original investment fund choice. The transfer of units from the original funds to low risk funds will not apply to units already invested in low risk fund(s) for which Abbey Life considers it unnecessary, for example the Protected Growth Fund. This investment strategy can have a major impact on the investment fund. As retirement approaches, the fund is likely to be at its largest and small percentage variations will make a significant difference. Transferring into a lower risk fund too early can limit potential growth. Policyholder Protected Tax Free Lump Sum Retirement Annuity Contract Retirement Fund Reversionary Annuity Member Pension holder Protected TFLS Protected Tax Free Cash Sum Protected TFCS PTFCS RAC Pension Fund Pension Pot Retirement Pot Pension Savings However, using this strategy can ensure that gains made from higher risk funds are locked in, consolidating the fund at a time when any losses incurred would be hard to make up. In the same way any losses incurred in recent years would also be locked in. Person for whom the pension has been set up Applies to Occupational Pension Schemes (OPS) only. This is the maximum TFLS available on retirement funds built up before 6 April 2006 and which is calculated based on the legislation in place at that time. A Protected TFLS is often higher than 25% of the retirement fund. If you take an Uncrystallised Funds Pension Lump Sum you will lose your PTFLS A pension product taken out before 1 July 1988 by an individual for their own benefit. The money saved in a pension policy to provide an income (or annuity) in retirement. On a joint life annuity this is the annuity which becomes payable to the second annuitant on the death of the first annuitant. The second annuitant is normally a spouse, civil partner or dependant. Page 6 of 8
Selected Retirement Date/Age Small Self Administered Scheme Tax Free Lump Sum (TFLS) Nominated Retirement Date/Age (NRD/NRA) Chosen Retirement Date/Age (SRD/SRA) Proposed Retirement Date/Age SSAS Tax Free Cash Sum (TFCS) Pension Commencement Lump Sum (PCLS) Cash Lump Sum abcdef The date/age selected by the policyholder at the beginning of the pension policy at which the policyholder hoped or expected to retire and from when benefits would be paid. For example, this is often set at their 60 th or 65 th birthday. An occupational pension scheme where the members are normally company directors or key staff. A SSAS usually has less than 12 members and, in some cases, all the members are trustees. For more information on small self-administered pension schemes please visit HM Revenue & Customs website at: www.hmrc.gov.uk A percentage of the Retirement Fund, usually up to 25%, which can be paid to the policyholder free of tax. Please also see Protected Tax Free Lump Sum. Transfer Value TV Payment from a Pension Scheme to another pension scheme in lieu of benefits which have accrued to the member to enable the receiving arrangement to provide alternative benefits. Uncrystallised Funds Pension Lump Sum (full fund) UFPLS Taking your whole fund as cash You take your whole pension fund / pot in one go usually 25% is tax-free and the remaining 75% is taxable. Example Your pot is 40,000. You can take 10,000 tax-free. The remaining 30,000 would be taxable. If you re considering this option you should think about how you can use the money to give you an income in retirement. Uncrystallised Funds Pension Lump Sum (flexible) UFPLS The Bank Account option You can leave your money in your current pension pot and take money from it when you need it. How often you take money out and how much is up to you usually 25% of each sum you take is tax free. However, this means you can t take the whole 25% tax-free lump sum from your pot in one go. This option is a bit like a savings account. Not all providers offer it. You may have to pay administration charges every time you withdraw money. Abbey Life do not offer this option. Page 7 of 8
abcdef Workplace pension Workers are being automatically enrolled into a workplace pension by their employer. Once you re enrolled, not only will you pay in to it but so will your boss and the government. This is to make it easier for you to start saving. You can opt out if you want to, but that means losing out on employer and government contributions and if you stay in you ll have your own pension that you get when you retire. Every employer must automatically enrol workers into a workplace pension scheme who: are not already in one are aged between 22 and State Pension age earn more than 10,000 a year work in the UK More information on Workplace Pensions can found at www.gov.uk/workplacepensions All our literature is available in large print, Braille and on audio tape or CD. RET/Explanation of terms (03/2015) Abbey Life Assurance Company Limited Registered in England 710383 Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Winchester House 1 Great Winchester Street London EC2N 2DB For quality control and training purposes telephone calls may be recorded and randomly monitored. Page 8 of 8