Glossary

Annual Allowance

This is the maximum amount of tax privileged pension savings you can make each year.  It is based on your earnings for the year and is capped at £60,000.  Under a defined contribution (money purchase) scheme, this is simply the value of the contributions paid by you and your employer during a tax year. However, under a defined benefit (final salary) scheme it is the increase in the value of a member’s rights during the tax year.  There is a tax charge on the amount of any contribution paid (by the member, employer or a 3rd party) in excess of the Annual Allowance each year.

Annual Allowance Charge

This charge is due on the value of the pension input amount that is in excess of the Annual Allowance plus any unused Annual Allowance carried forward from the previous three tax years or Money Purchase Annual Allowance (if applicable). The rate of charge is the same as the individual’s marginal rate of Income Tax.

Annuity

An annuity is simply a series of regular payments that someone receives. In pension terms Lifetime Annuities must meet a number of criteria:

• Lifetime Annuities can only be provided by life assurance companies
• Payments must be made to the pensioner at least annually for the lifetime of the pensioner
• The annual rate of annuity can go down as well as up, as agreed at outset.
• The annuity can be paid after the pensioner’s death for a period agreed at the outset. There is no longer a requirement to have to purchase a lifetime annuity with pension savings.

Asset

Possession that has intrinsic value.

Asset class

A distinct category of investment such as bonds, equities or cash.

Asset allocation

The practice of distributing an investment across different types of investment to meet investor requirements or respond to market conditions.

Bond

A security issued by a company or government that usually pays a fixed income and promises to return the original capital paid for it on maturity.

Capital

Money used for investment.

Capital Gains Tax

A tax paid on the sale of chargeable asset.

Carry Forward

It may be possible to reduce or completely avoid the Annual Allowance Charge using carry forward.  Carry forward allows unused Annual Allowance from the previous three tax years to be carried forward and added to the Annual Allowance for the current year.

Please note, you must have been a member of a registered pension scheme in an earlier year if you are using carry forward and tax relief will only be available on your relevant earnings in the tax year a contribution is made.

Cash

The collective term for uninvested capital and money held on deposit.

Compounding

The practice of continually reinvesting investment income to create a larger pool of capital.

Corporate Bond

A bond issued by a company (as opposed to a government bond such as ‘gilt’).

Coupon

The income paid on a bond expressed as a percentage of its issue value.

Credit rating

An assessment of a bond issuer’s financial strength, indicating its ability to meet the payments promised on its bonds.

Crystallise

There are a number of events that can cause a pension fund to become crystallised. One of which is the action of taking benefits from your pension savings, you crystallise benefits to bring them into payment or place them into drawdown. See Benefit Crystallisation Event.

Default

A situation where a company or government is unable to meet the income or capital payments on its bonds.

Defined Contribution

See Money Purchase, defined contribution is just another name for the same thing.

Dividend

The slice of profits that a company pays out to its shareholders.

Emerging market

A developing economy, often in the early stages of applying free market principles. Can be volatile but can experience high growth rates.

Employee share scheme

A scheme by which an employee acquires shares in their employer.

Enhanced Annuity

Enhanced annuities are a growing part of the annuity market and because they take into account an individual’s personal health and lifestyle the income amount offered can be considerably bigger than non-enhanced or standard annuities.

Equity

Another name for an ordinary company share; the collective term for investment in shares.

Estate

The total value of all assets and possessions.

Exchange Traded Fund (ETF)

A tradeable share that tracks the value of a market index or sector.

Fixed income/Fixed interest

An alternative term for bonds.

FTSE 100

A stockmarket index that follows the overall value of the largest 100 companies traded on the UK stock market.

GAD income limit

These limits only apply to capped drawdown set up before April 2015. Although it is possible to remain in capped drawdown after that date.

Maximum income limits restrict the amount of income an individual could withdraw from their drawdown fund. The intention is to try and ensure that funds are not depleted and income is sustainable. Income limits permitted range from £0 to 150% of a figure calculated to be equivalent to a single life annuity for someone of the same age as the person taking drawdown.

Gilt

A bond issued by the British government.

Gross

Income before any deductions including tax.

High-yield bond

Bonds with a sub-investment grade credit rating that have to pay a higher yield to compensate for the higher risk they involve.

Ill-health conditions

If a member is suffering from ill health they may take benefits at any age where the scheme administrator accepts qualified medical advice to the effect that the individual satisfies the ill-health condition, and so is and will continue to be, medically incapable (either physically or mentally) as a result of

• injury,
• sickness,
• disease, or
• disability

of continuing his or her current occupation and as a result of the ill-health ceases to carry on the occupation. There are separate criteria that must be met for all benefits to be paid as a serious ill-health lump sum.

Income tax

Tax payable on all forms of income, including salary, bank account interest, bond income and share dividends.

Index

A measure that follows the rises and falls in value in a stock market.

Index-linked

Any investment whose return is linked to inflation in order to keep its purchasing power.

Individual Savings Account (ISA)

A tax free wrapper for investments with the option of a stocks and shares and/or cash account.

Inflation

The tendency of the price of goods and services to rise over time, reducing the purchasing power of your money.

Inheritance tax

A tax paid on certain lifetime transfers and the value of an estate on death.

Interest

The return earned on a cash deposit or bond.

ISA

See Individual Savings Account.

Laddering

The practice of investing across different maturities of bond to create a regular stream of maturing capital and/or take advantage of different rates of interest.

Lifetime Allowance

Lifetime allowance (LTA) is the maximum amount you can save into your pensions (workplace or personal) in your lifetime without paying extra tax. In April 2023, the LTA  was frozen at £1,073,100 and the charge was removed.

As of 6 April 2024, LTA has been abolished from pensions tax legislation and two new allowances have been introduced:

• Lump sum allowance – in most cases, this will be a combined limit of £268,275 (25% of the previous LTA) on the cash that can be paid to a person tax-free (referred to as a pension commencement lump sum (PCLS)) and also the tax-free element for uncrystallised funds pension lump sums (UFPLS).
• Lump sum and death benefit allowance – this will be a combined limit of £1,073,100 (the same as the previous LTA) on the tax-free portions of any lump sums that can be paid in life and death, to or in respect of an individual.

It is important to note that the previous LTA framework still applies for LTA events raised before 6 April 2024.

Lifetime Allowance Charge

This charge is due on the value of pension savings taken in excess of the Lifetime Allowance. The rate of charge depends upon how the excess is taken:

• As a lump sum – 55%
• To provide an income – 25% and the income will be subject to Income Tax at the individual’s marginal rate

Liquidity

Refers to how easily an investment can be bought and sold; general term for cashbased investments.

Liquidity fund

A fund that invests across a wide range of different cash investments in order to diversify risk and achieve an attractive yield.

Money market fund

Another name for a liquidity fund.

Money Purchase

Money Purchase is a type of funding method used in pension schemes, pension arrangements or pension plans. These types of scheme are also known as Defined Contribution.

Essentially contributions are made into the scheme, by the individual, their employer or other parties. The funds accumulated are invested until the individual wishes to take benefits. The benefits are then provided via a number of possible options. See Retirement Options for details.

Money Purchase Annual Allowance

In April 2015 there was a new Annual Allowance introduced called the Money Purchase Annual Allowance (MPAA).  This is normally triggered by taking income from your pension using income drawdown (also known as flexi-access drawdown) or using an uncrystallised funds pension lump sum.  However, other actions can trigger it.

If the MPAA has been triggered, only £10,000 can be paid to all defined contribution plans in any tax year before the Annual Allowance tax charge is applied.  Accrual under a defined benefit arrangement is not tested against the MPAA but is of course included in a test against the standard Annual Allowance.

Net

Income after any deductions including tax.

OEIC (Open Ended Investment Company)

An investment fund that is very similar to a unit trust but with a more flexible structure.

Pension Input Amount

Pension savings are called ‘pension input amounts’. The amount of pension savings under all arrangements and schemes (including defined benefits) of which an individual is a member counting for a tax year is the ‘total pension input’ amount.

The amount is calculated by adding contributions made to money purchase arrangements and the value of further benefit accrual in defined benefits schemes. The value of further accrual in defined benefit schemes is calculated by multiplying the increase in benefits less inflation, by a factor of 16.

The value of an individual’s pension input is measured over a period called a pension input period (this may not be the same as a tax year).

Potentially Exempt Transfer

A lifetime transfer of value that will only be subject to tax if you die within seven years of making the transfer.

Real returns

The investment return you make after the effect of inflation has been taken into account.

Relevant Benefit Crystallisation Event

A Relevant Benefit Crystallisation Event (RBCE) is essentially an action you normally instigate when you take benefits from your pension savings. The process tests the value of the benefits being crystallised against the individual’s lump sum allowance or lump sum and death benefit allowance. If the value of benefits taken exceeds the lump sum allowance or the lump sum and death benefit allowance then the excess will be subject to income tax at the recipient’s marginal rate.

Risk

The likelihood that an investment can fall in value.

Save As You Earn (SAYE)

An all employee share scheme that enables employees to save regular amounts with the intention of buying shares in their employer.

Share

A security issued by a company that gives the holder the right to vote on company issues and receive a slice of the company’s profits in the form of a dividend.

Self Invested Personal Pension

A flexible personal pension scheme managed on behalf of an individual that can hold a very wide range of investments.

Uncrystallised funds

These are money purchase pension funds that have not been crystallised.

The main difference between crystallised and uncrystallised funds is that the former have been tested against the lump sum allowance or the lump sum and death benefit allowance and the latter have not, but will be at some future date.

Unit trust

A pooled investment fund managed by a professional fund manager. So-called because the fund is divided into units of equal size whose value tracks the performance of the underlying portfolio.

Volatility

The tendency for an investment’s value to fluctuate.

Yield

The income being earned on an investment expressed as a percentage of its current value.