Glossary

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Accrual Rate

The rate at which pension benefits are gained within a final salary scheme. For example 1/80th of final salary for each year of service.

Actuarial Reduction

A reduction in the member's pension, usually due to early retirement.

Active Member

A member of an occupational scheme who is currently employed by the scheme's principal employer.

A-Day

6 April 2006, when the Pension Simplification laws came into force.

Alternative Secured Pension (ASP)

A type of Unsecured Pension, which avoids the necessity for an individual to purchase an annuity by age 75, which used to be the case.

Annuity

A contract issued by an insurance company, whereby they guarantee the annuitant a set level of income per month / quarter / annum. This is purchased by the pension policy holder when the member retires, with the capital value of his pension. Annuities can be level or escalating, on one life or joint life with spouse/partner, and have different guarantee periods. Variations include managed annuities and impaired life annuities.

Annual Allowance

The maximum an individual is able to contribute to a pension in any one year whilst receiving tax relief.

Additional Voluntary Contribution or AVC

Common way pre Pension Simplification for an employee to enhance their Occupational Pension. Could be either a Free Standing AVC, taken out by the member with an insurance company and separate to the main scheme, or an in-house AVC, which would be part of the main scheme.

Basic State Pension

Non earnings related pension paid by the Government. The amount depends upon how many years of National Insurance contributions the individual has paid.

Benefit Crystallisation

The term used to describe a number of trigger points in the life of a pension , when the fund / scheme changes in structure. For example retirement, or taking a lump sum. It is at this point that the scheme is assessed to see whether any additional tax is due.

Contracted(ing) Out

A decision made to not build up benefits within SERPs or S2P. This decision can be made either on an individual basis or a scheme basis, where for example, all members of a particular scheme are automatically contracted out. By being contracted out, the member and the employer maypay a lower rate of NI and instead offer a Guaranteed Minimum Pension (GMP, or if contracted out on a personal basis, a proportion of the NI is redirected to a Contracted Out Personal Pension.) These benefits will be known as Protected Rights.

De minimis level

If a pension is less than this amount, then the entirety could be paid as a tax free lump sum.

Deficit

When a pension scheme has liabilities greater than its assets, it is said to be in deficit.

Deferred Member

Description usually applied to an occupational scheme whereby the member has left the scheme and / or service, but has not yet started to draw a pension. The benefits are called a Preserved Pension.

Dependant

Someone, as defined by specific scheme rules, who is deemed to be financially dependent upon a member of the scheme.

Discretionary Increases

Increases paid by the trustees of a scheme, usually on the advice of the actuaries, which are over and above the increases laid down in the scheme rules.

Drawdown Pension

An option at retirement when a member of a scheme (usually Money Purchase), instead of purchasing an annuity, retains the accumulated funds in tact, and draws an income from the fund. Also known as Income Drawdown.

Earmarked Benefits (1)

Funds held in a pooled scheme, typically as SSAS, which are specifically apportioned for a certain individual's benefits.

Earmarked Benefits (2)

Pension benefits which have become subject to an Attachment Order following divorce or separation.

Enhanced Protection

One of the two forms of protection to allow those with funds in excess of the Lifetime Allowance as of A-Day to avoid an excess pension tax charge (Lifetime Allowance Charge).

Escalation rate

The rate at which pension benefits increase each year, for example 3% pa or the lower of 5% or RPI.

Expression of Wish

The nomination made by a member of a scheme as to who he/she would like to receive any death benefits from a pension scheme in the event of his death. Not binding on the trustees.

Executive Pension Scheme

Occupational Money Purchase Scheme offered by insurance companies, aimed at directors, typically of owner managed businesses.

Final Salary Scheme

Also known as Defined Benefit (DB) pensions. These schemes provide a pension which is linked to the length of service and final salary of a member. Pension is often expressed in £ pa rather than a capital sum. Examples include Public Sector Schemes (NHS Teachers etc) which are Unfunded, and older large company schemes such as the Banks and major retail outlets which are Funded.

Fully Insured Scheme

A scheme where the trustees purchase individual insurance policies and funds for the members.

FURBS / UURBS

Funded Unapproved Retirement Benefit Scheme, or Unfunded Unapproved Retirement Benefit Scheme. Type of pension benefits typically for high earners, who had already accumulated pension benefits to the maximum under pre Pension Simplification regimes. Rarely seen these days since tax concessions were removed. If a FURB, then there is a discrete fund. Unfunded often forms little more than a promise from an employer to pay additional benefits at retirement, without setting aside funds to do so.

Guaranteed Annuity Rate

A contractual obligation offered by some insurance companies issuing Personal Pensions and Retirement Annuity Contracts, that the fund could be used to purchase an annuity at a predetermined rate, irrespective of the open market rate at the time of purchase.

Guaranteed Minimum Pension (GMP)

A guarantee provided by the trustees of a Contracted Out Scheme that the member will receive a pension at least equal to this amount.

Guaranteed Annuity

Annuities are usually paid until the death of the member. However, a guarantee can be sought at outset that the annuity will be paid for example, a minimum of 5 years, even if death occurs during this period.

Graduated Pension Scheme

A predecessor of SERPS. An additional State Pension accrued before 1975.

Group Personal Pension

A group of individual personal pensions for employees of the same company. Each member has his own policy, but for administrative ease and economies of scale, the membersâ?? own policies are grouped together.

Hybrid Scheme

A type of occupational scheme, typically where the benefits are a combination of both Final Salary and Money Purchase.

Lifetime Allowance (LTA)

The maximum amount of pension that can be accrued by a member before an excess fund tax charge, (known as Lifetime Allowance Charge) becomes payable. In 2008/2009 the Lifetime Allowance is£1,650,000.

Lifetime Allowance Charge

The tax charged on funds in excess of the Lifetime Allowance, Currently 55%.

Limited Price Indexation (LPI)

Often seen on Final Salary benefit statements. This is a term used to describe the escalation rate of a pension that is either in deferment or in payment i.e. the member is in receipt of his pension. It is the lower of 5% or RPI.

Market Value Adjustment

This is a mechanism used by insurance companies to reduce the actual value of a With Profits policy, including pensions, when encashed or transferred in adverse investment market conditions.

Money Purchase

Includes all personal pensions and an increasing number of Occupational Schemes. Also known as Defined Contribution (DC). Employer or member pays a fixed amount each month. Monies are invested, so at retirement the member has a fund with which to purchase an annuity and / or a Pension Commencement Lump Sum (PCLS).

Non Contributory

A pension scheme where the member does not have to contribute, and the employer makes all the contributions.

Occupational Pension

Pension scheme provided by employer for employees. Can be either Money Purchase or Final Salary.

Open Market Option

When a member of a Money Purchase Scheme (either occupational or personal) decides to retire, they are offered an open market option, which is the value of the fund that can be used to purchase an annuity. This means that the member is not obliged to buy his annuity from the same scheme which provided the pension plan, and the member can instead shop around for the best rate.

Paid Up Pension

Description usually applied to a personal pension where premiums have ceased, but the member has not yet started to draw his pension.

Pension Commencement Lump Sum (PCLS)

The new name for what everyone once knew as Tax Free Cash.

Personal Pension

This includes Stakeholder Pensions and Self Invested Personal Pensions (SIPPs). Pension taken out by an individual. Does not preclude an employer from contributing. Are always Money Purchase. Most Personal Pensions are issued by Insurance Companies. Available since July 1988 when they replaced Retirement Annuity Contracts.

Phased Drawdown

Similar to Income Drawdown, but where the income each year comprises both tax free cash and annuity / drawdown income.

Preserved Benefits

These are the benefits of an Occupational Pension, when the member ceases to be an active member, either by having left the scheme or left service.

Primary Protection

One of the two forms of protection to allow those with funds in excess of the Lifetime Allowance as of A-Day to avoid an excess pension tax charge (Lifetime Allowance Charge).

Protected Rights

Ni contributions redirected into a personal pension by virtue of the fact the member has Contracted Out of S2P (previously SERPS) are invested in a Protected Rights Personal Pension. Can also be used to describe the lowest amount of pension that can be paid by a Contracted Out Money Purchase Scheme.

Protected Rights Annuity

The annuity which is purchased with a Protected Rights fund.

Registered Pension Scheme

The term which has now replaced the old title of Approved Pension Scheme.

Retained Benefits

These are benefits earned by a member from previous employments.

Retirement Annuity Contract

Predecessor of personal pensions, issued by insurance companies. Called s.226 contracts. Ceased to be issued after 1988. Many still around. Sometimes include Guaranteed Annuity Rates.

SERPS / S2P

State Second pension. Paid in addition to basic state old age pension. Quantum of SERPs / S2P dependent upon NI contribution history.

SIPP

Self Invested Personal Pension. A personal pension where the member has a far wider range of investments from which to chose, including commercial property. Capable of borrowing money.

SSAS

Small Self Administered Scheme. The Occupational Pension version of a SIPP, permitting wide range of investments and the ability to borrow. Can be between 1 and 12 members. Often found in small businesses, and family run businesses with the directors / family as members. Nearly always Money Purchase, but occasionally final salary.

Stakeholder Pension

Since October 2001, most employers that do not already offer a pension scheme must facilitate access to a Stakeholder Pension for their employees. These are very similar to personal pensions, but since Stakeholder pensions have a charging cap, they are usually less expensive to run than a personal pension.

State Second Pension S2P

Replaced SERPS in 2002. Designed so that those on lower earnings will get a larger pension than they would under the older SERPS pension.

Underfunded Scheme

This is a scheme where the assets are, in the opinion of the scheme actuary, insufficient to meet its liabilities.

Unfunded Scheme

This is a pension scheme where there is no fund. Instead, pension payments are paid to pensioners out of receipts, so the scheme acts on a pay as you go basis. Examples include most public sector schemes, and SERPS / S2P

Unsecured Pension

A term used to describe Income Drawdown and Alternative Secured Pension, whereby a pension is drawn from the fund by a member without purchasing an annuity.