A to Z of In-Retirement Planning

Advance or Arrears

The first pension payment from an annuity comes at the beginning or end of the chosen instalment period. By taking payments in arrears, the level of pension payable will increase, although the difference will be marginal the more frequent the payment.

Annuity

An annuity is a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior instalment payments or more often in a single payment. The purchase of an annuity is typically facilitated by way of personal monies or more often an accumulated pension fund.

Capital / Value Protected Annuities

Death benefits may be provided in lump sum form via capital or value protected annuities, which provide the option of a lump sum upon death. This will equate to the purchase price of the annuity less pension instalments paid out. If death of the annuitant occurs prior to age 75, there will be no tax to pay. If death occurs age 75 or over the recipient will pay Income Tax at their marginal rate when the lump sum is added to other income.

Capped Drawdown

Formerly known as Income Drawdown or Unsecured Pension (USP), this was an option for those considering retirement who wished to enjoy a large degree of flexibility to their retirement income planning and / or wish to keep their pension fund invested. Income could be drawn within prescribed limits that are periodically reviewable. Capped Drawdown was, and for those that remain in it is, a complex area and advice strongly recommended, due to the many important points of consideration. With the introduction of the new ‘pension freedom’ legislation in April 2015, Capped Drawdown, along with Flexible Drawdown, has been replaced with Flexi-Access Drawdown. This is a much more flexible option, but nonetheless one which we believe requires independent, professional financial advice.

Commission

Amount paid by a financial institution such as an insurance company or investment house to an intermediary such as an IFA for business placed. Following the implementation of the Retail Distribution Review on 1st January 2013, commission is no longer permitted on new transactions, being replaced with fees, either charged explicitly or implicitly ‘facilitated’ within any investment.

Commutation

Relinquishing either a part of or the entire pension income that would have been provided under a Final Salary or Money Purchase Pension Scheme in favour of a lump sum.

Compulsory Purchase Annuity

An Annuity purchased from the proceeds of a pension fund and is taxed as earned income.

Flexi-Access Drawdown

With regard to retirement options, in April 2015 the previous Capped & Flexible Drawdown options were replaced by Flexi-Access Drawdown. Unlike Capped Drawdown, there are no limitations on what level of pension may be drawn from the accumulated funds and unlike Flexible Drawdown previously, no minimum levels of income are required to be proven before accessing this flexibility. As with previous rules, 25% of accumulated pension funds continue to be available as a tax free cash (TFC) lump sum, with any remainder being subject to Income Tax at your prevailing rate. This may be enjoyed at the outset or over a period of time through a phased crystallisation of benefits.

Flexible Drawdown

Where individuals enjoyed a guaranteed income of at least £20,000 per annum, Flexible Drawdown was an option. This provided such individuals with the flexibility to make unlimited withdrawals from their pension fund, although to do so may give rise to other important issues such as tax planning. As with Capped Drawdown, Flexible Drawdown was a complex area and advice is strongly recommended. With the introduction of the ‘pension freedom’ legislation in April 2015, Flexible Drawdown, along with Capped Drawdown, has been replace with Flexi-Access Drawdown, which did away with the requirement to underpin the flexibility with a guaranteed minimum income.

Guaranteed Period

A pension can be payable for a minimum number of payments. Typically this will be for 5 years or a maximum of 10 years.

Illustration / Quotation

A document indicating the returns you may receive from an investment, based on standard growth rates and showing the impact of charges. In the case of a pension annuity illustration, this will confirm the income payable based upon the pension fund available and annuity rates applicable at that time. The quotation will usually be guaranteed for 14 days, as rates are quite fluid and susceptible to change.

Immediate Annuity

An annuity where payments commence straight away.

Indexation or Escalation in payment

A pension can be increased each year, either by a fixed percentage, by the value of Retail Price Index (RPI) or Average Earnings Index (AEI). The upside is that the real purchasing power of the pension will to some degree be maintained. The downside is that the initial pension will be considerably lower as a consequence.

Joint Life Annuity

Pays a benefit throughout the joint lifetime of two people.

The payments cease on second death but the purchasers of the annuity can choose to have the annuity reduced on first death by a pre-determined percentage and thereby obtain a higher initial annuity for the same purchase price than they would if the annuity did not reduce on first death.

Open Market Option

Where a client is considering the guaranteed annuity route to derive pension income in their retirement, one should be aware that they enjoy an entitlement to ‘shop around’ for the best annuity rate. Regardless of which provider the pension fund is with, they should never take their initial offer of pension without researching what alternative providers can provide. Annuity purchase is a one-time occurrence and cannot be undone. In doing so significant improvements in pensions may be secured.

Pension

A regular income usually paid from retirement until death.

Phased Retirement

This is where an individual takes benefits from their pension fund in stages, using a combination of tax-free cash and income to produce a very tax efficient income.

Regularity of payments

These tend to be monthly, quarterly, half-yearly or yearly.

Trivial Commutation

With the introduction of the pension freedom legislation, the trivial commutation rules for defined contribution arrangements is generally obsolete. However, such rules still apply to defined benefit arrangements where the value of all of an individual’s pension rights do not exceed £30,000.

If the member hasn’t previously drawn or become entitled to any other benefits under the registered pension scheme before the trivial commutation lump sum is paid, as with an Uncrystallised Fund Pension Lump Sum (UFPLS) 75% of the lump sum paid is treated as taxable pension income for the tax year the payment is made, subject to tax via PAYE. The remaining 25% is tax free,  reflecting that, if the trivial commutation lump sum wasn’t paid and normal benefit rules applied, the member would (generally) be entitled to a tax-free pension commencement lump sum, representing 25% of the capital value of the benefits coming into payment.

Uncrystallised Fund Pension Lump Sum (FPLS)

Un Uncrystallised Fund Pension Lump Sum (UFPLS) is a lump sum, drawn wholly or partially from a pension fund which is paid as part tax free lump sum (25%) and part taxable income (75%). The latter is subject to Income Tax at the individual’s marginal rate in the year of payment when added to other income.

Income Tax will be deducted at source under the PAYE system. As such, taxable ad hoc lump sum withdrawals are likely to have an excessive amount of tax deducted initially, with any excess needing to be reclaimed. Consequently, we consider investment and tax advice to be essential. You also may wish to time any such withdrawals towards the end of the tax year, to reduce the time between tax being paid at source and any excess being reclaimed.

 

Widows / Widowers Pension

Where required, a pension may continue after the annuitant’s death. This will either be at the same level, effectively a joint lifetime pension, or on a reduced basis, typically at 50% or 2/3rds of the initial amount.