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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Accrual rate
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A term that could appear in your pension statement and, in this context, means the proportional amount of pensionable earnings you will receive from your final salary scheme (Defined Benefit scheme) for each year of service - often described as 1/60th or 1/80th.


Alternatively secured pensions
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Alternatively secured pensions were abolished from 6 April 2011.

They were a type of drawdown pension applicable to those aged over 75.


Annual Allowance
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The maximum amount of pensions savings that you can get tax relief on each year – based on your own and any employer contributions. In the tax year 2017-18 the Annual Allowance is £40,000. If you're not earning, you can still get tax relief on savings up to £3,600 a year.

See also Money Purchase Annual Allowance (MPAA).


Annuity
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An annuity is a product which pays a regular income in exchange for a lump sum.


Annuity protection
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Annuity protection (also known as value protection) is an option you can choose when you take out your annuity that returns a lump sum to your beneficiaries if you die without receiving the full value of your pension savings.

You can protect a percentage of your pension savings – up to 100% – so that when you die, your beneficiaries will receive the value of your protected pension savings less the total gross income paid to you already as an annuity income.

For the tax year 2017/18, if you die before age 75, the lump sum and/or income will be free of tax. If you die aged 75 or older, the lump sum and/or income will be taxed as income.

Beneficiary
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Someone who benefits from a will, a trust, a life insurance policy or death benefits from an annuity.

Capped drawdown
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A type of drawdown pension arrangement that has limits placed upon it by the Government as to the maximum level of income that can be taken from it. The 2015 pension freedoms introduced new flexi-access drawdown arrangements with no restrictions on the amounts that can be withdrawn. Existing capped drawdown plans will continue unless you convert the plan into a new flexi-access drawdown.


Contracting out
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You or your employer were given the option to opt out of the State Second Pension (formerly the State Earnings Related Pension Scheme) in exchange for lower National Insurance contributions (and higher pension contributions) or a rebate into your pension. From 6th April 2012, this is only available in Defined Benefit (Final Salary) schemes.


Conventional annuity
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A conventional annuity is an annuity purchased with the proceeds of a pension plan, which pays a guaranteed, regular income for life. The income payable from this type of annuity is not linked to the performance of investments.

Defined Benefit pension (also known as a final salary scheme)
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With this type of pension, the amount of retirement income an employee gets is set in advance. The amount of income they get is based on the number of years they have been a member of the scheme and their salary at or near their retirement date.


Defined Contribution Pension
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Also known as a “Money Purchase scheme”

Members of these schemes build up a pension fund by investing personal and/or employer contributions during their period of membership.

These contributions build up over time, to provide the member with a pot of money that they later use to generate a retirement income. It is essential that you consider all the ways you can convert your pension savings into an income and then shop around for the best deal before making your final decision.

Money Purchase schemes include most personal pensions and stakeholder pensions, including those arranged through your employer.

You should check whether your pension has a Guaranteed Annuity Rate or other form of guarantee, and if you’re in any doubt ask your pension provider(s). These guarantees will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere or use it other than to take an income you may lose these valuable guarantees.


Dependant
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Someone who is financially dependent on you, typically a partner. Annuity providers often require proof of this - such as a joint utility bill or mortgage/bank statement.


Dependant's pension annuity
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An option when buying an annuity that means, in the event of death, your annuity income may continue to be paid to a surviving spouse, civil partner, or dependant. If you choose for your annuity to be paid to a dependant, they may be asked to prove that they are financially dependent upon you.


Drawdown pension
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A drawdown pension is a way of generating an income whilst your pension fund remains invested. You decide when and how much income you drawdown from your investments. Referred to as ‘flexi-access drawdown’ under new rules from April 2015.  See also: Flexi-access drawdown.

Enhanced annuity
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An enhanced annuity is an annuity that pays a higher income to an individual if aspects of their lifestyle (such as smoking and drinking alcohol) or medical history may shorten life expectancy.


Escalation + inflation linking
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This describes the way in which an annuity income can grow each year - you may choose to have no increase (level annuity) or increase your annuity each year at a fixed rate (say 3% per year) or in line with the change in a measure of inflation, such as the Retail Prices Index (RPI) for example.

Final salary scheme
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Also known as a Defined Benefit scheme. With this type of pension, the amount of retirement income an employee gets is set in advance. The amount of income you get is based on the number of years you have been a member of the scheme and your salary.


Fixed term annuity
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A type of arrangement that offers a guaranteed income for a fixed term and a guaranteed maturity amount at the end of the term. At the end of the term you need to decide what to do with the remainder of your pension pot, which could include taking a lump sum payment or purchasing a further income.


Flexi-access drawdown
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Allows you to draw any amount of income from your pension scheme without any restriction while leaving the pot invested. You can take 25% as a tax-free lump sum when you first decide you want to go into drawdown. Replaced Flexible Drawdown and Capped Drawdown from April 2015, though existing users of Capped Drawdown can continue in that plan.

Guarantee Period
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An annuity income is payable for as long as the annuitant - the person receiving the annuity - lives. If they die soon after purchasing an annuity, they may feel that they won't have had the best value. They can therefore choose a Guarantee Period (up to 30 years), which means that, if they die within that Guarantee Period, the annuity will continue to be paid for the remainder of that period. Annuitants can nominate anyone to receive the income from their Guarantee Period, either directly to the annuity provider or through their will.


Guaranteed Annuity Rate (GAR)
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A guaranteed income offered by some pension schemes if you take a lifetime annuity out with them – often hard to match if shopping around.


Guaranteed Minimum Pension (GMP)
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This is the part of the pension benefits built up in Defined Benefit schemes which relates to contracting out between 1978 and 1997, and is roughly equivalent to the amount of State Earnings Related Pension Scheme (SERPS) which would have been paid for that period. This is the minimum pension payable under the scheme. As GMP is a replacement of a state benefit, certain restrictions apply to the income you receive from it.

Impaired annuity
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An impaired annuity is an annuity that pays a higher income than a standard / conventional annuity for those who have significantly lower life expectancy due to an existing medical condition.

Joint life annuity (also called dependant's pension / annuity)
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In the event of your death, your annuity income may continue to be paid to a surviving spouse, civil partner or dependant if you have selected a joint life annuity. If you choose this option, the dependant may be asked to prove that they are financially dependent on you.

Lifetime Allowance
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The Lifetime Allowance is the maximum value of pension savings an individual is allowed to draw without incurring tax penalties. The amount is set by the Government and is £1m for tax year 2017/18. Whenever you draw benefits from a pension scheme, these are tested against the lifetime allowance and your pension provider will tell you the percentage of the lifetime allowance you have used.

Money Purchase Annual Allowance (MPAA)
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The 2017/18 Annual Allowance is £40,000. This is the maximum amount you can contribute to a money purchase pension each year before attracting a tax charge.

If you access your pension flexibly, for example:

  • taking the pension fund as one cash sum, known as an Uncrystallised Fund Pension Lump Sum (UFPLS), or
  • flexible drawdown with regular income, or one off amounts

and you want to continue to pay further contributions, your annual allowance is reduced from £40,000 to £4,000. This is called your Money Purchase Annual Allowance (MPAA).

Also see Annual Allowance.


Money Purchase Pension
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Also known as a Defined Contribution pension. Money Purchase schemes include most personal pensions and stakeholder pensions, including those arranged through your employer.

Members use these schemes to build up a pension fund by investing personal and/or employer contributions during their period of membership. These contributions build up over time to provide the member with a pot of money. Whilst the amounts you and your employer pay into your pension fund are set, the value of the pension fund at the time you plan to retire is not set and may carry investment risk.

You should check whether your pension has a Guaranteed Annuity Rate or other form of guarantee, and if you’re in any doubt you should check with your pension provider(s).

These guarantees will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere or use it other than to take an income you may lose these valuable guarantees.

Open Market Option
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The ability for you to shop around and buy an annuity from any annuity provider, not just the company that provides your pension. This option enables you to search for the best annuity rate for you.

Pension Commencement Lump Sum
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You can normally take up to 25% of your pension fund as a lump sum, which is currently tax-free. This is now known as a Pension Commencement Lump Sum, but may also be referred to as a tax-free lump sum or tax-free cash. The Pension Commencement Lump Sum is yours to do with as you see fit.

State Pension age
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The age you have to reach to be entitled to draw your State Pension. Please visit the Gov.uk website to calculate your State Pension age.

Tax-free cash
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You can normally take up to 25% of your pension fund as a lump sum, which is currently tax-free.

This is now known as a Pension Commencement Lump Sum (PCLS), but may also be referred to as a tax-free lump sum or tax-free cash. The Pension Commencement Lump Sum is yours to do with as you see fit.

Value protection
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Value protection (sometimes known as annuity protection or capital protection) is an option you can choose when you take out your annuity that returns a lump sum to your beneficiaries if you die without receiving the full value of your pension savings.

You can protect a percentage of your pension savings – up to 100% - so that when you die, your beneficiaries will receive the value of your protected pension savings less the total gross income paid to you already as an annuity income.

The lump sum will be paid tax-free if you die before age 75. If you die after age 75, the lump sum will be taxable your beneficiary’s marginal rate of tax.