A-Z of Pre-Retirement Planning
With effect from 6th April 2011, the maximum permissible pension contribution was £50,000 per annum. With effect from 6th April 2014, this reduced to £40,000 per annum.
The types of underlying instruments one may invest into in accumulating a retirement portfolio, specifically cash, fixed interest (Gilts & corporate bonds), property (commercial & residential) and equities (stocks & shares)
Under the Pensions Act 2008, with effect from their allocated ‘staging date’, every employer in the UK must put certain staff into a pension scheme and contribute towards it. This is called ‘automatic enrolment’.
A form of investment where an investor has their investment pooled with that from other investors into a fund with the total sums involved being invested and managed by a fund manager. Typically these are funds, Open Ended Investment Companies (OEICs), Unit Trusts or Investment Trusts
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, and has been replaced with fees, either charged explicitly or implicitly by way of ‘facilitation’ within any investment.
This described a member of an Occupational or Personal Pension Scheme who was also a member of the State Second Pension Scheme (S2P) or prior to that the State Earnings Related Pension Scheme (SERPS).
This describes a member of an Occupational or Personal Pension Scheme who is not a member of S2P or prior to that SERPs. With effect from 6th April 2012, contracting out via a defined contribution arrangement such as a personal pension plan (PPP) ceased and individuals were automatically contracted back in. See also ‘Protected Rights’.
Defined Benefit Pension Scheme
Often known as Final Salary arrangements, these are schemes where accumulated benefits are usually linked to the service of an employee / member of the scheme and salary. Often this is expressed as a fraction for each year of service, i.e. 1/60th, 1/80th, etc. Entitlement to pension commencement lump sum / tax free cash is usually by way of separate accrual based upon the same salary and service factors or more often by way of commutation of accumulated pension income entitlement. Due to the expense of providing these benefits, access to these schemes has diminished over the years, with many employers closing the scheme to new members, future accrual or indeed closing the scheme altogether in favour of defined contribution arrangements such as Group Money Purchases (GMPs) or Group Personal Pension Plans (GPPPs). Civil service defined benefit schemes are more commonly known as Superannuation Schemes.
Defined Contribution Pension Arrangements
These are alternatively known as Group Money Purchase schemes. Rather than accumulating specific benefits within a Defined Benefits Scheme, more commonly nowadays employers offer pension arrangements where they contribute a specific contribution, usually expressed as a percentage of salary. The terminology can also refer to similar contribution based arrangements such as a Group Personal Pension Plan (GPPP).
Benefits provided by an employer for employees and usually paid for by the employer. These can include pension arrangements, death in service, sick pay entitlement, critical illness, and private medical insurance. Enhanced benefits over and above can often be secured at additional cost to the employee.
Executive Pension Plan (EPP)
An occupational pension arrangement that is normally used for individual Directors and / or senior employees. Prior to 5th April 2006, commonly known as ‘A Day’, these were governed by occupational pension scheme rules and not a personal pension. Since 6th April 2006 all pension schemes are under one set of rules and, therefore, the popularity of these has waned somewhat in favour of Personal Pension or Self-Invested Personal Pensions (SIPPs). However, they can provide valuable benefits, particularly higher than 25% tax-free cash entitlements. Therefore, individuals with such arrangements should seek advice. A self-invested EPP is commonly known as a Small Self-Administered Scheme, or SSAS for short.
Final Salary Pension Schemes
See Defined Benefit Pension Scheme
Flexible Employee Benefits
Where a company offers employees a choice of benefits so that they may pick and choose those that are specific to their needs and requirements.
Free Standing Additional Voluntary Contributions (FSAVCs)
A stand-alone policy that an individual utilised to make additional contributions in order to supplement their benefits under an Occupational Pension Scheme. No tax-free cash was permitted from these plans, which had to be utilised to provide income only. However, since 6th April 2006, when the pension rules were simplified, their popularity has diminished in favour of personal pensions.
A term for any investment vehicle which pools together the money of individual investors and invests it in keeping with a specific mandate of investment aims and objectives. These can be sector specific, e.g. Technology, Healthcare, etc, geographically specific, e.g. UK, European, Emerging Markets, etc., or proffer a specific style of management, e.g. small cap, mid cap, income, value, etc.
A person who is responsible for investing money within a specified mandate, i.e. rules and objectives. Their primary aim is to outperform their sector of the market, by investing in a range of asset classes, which they believe will grow in value. Often supported by substantial resource in the form of researchers and analysts.
This is the physical value of pension benefits accumulated.
The premium paid by the policyholder before any tax relief or discount is taken into account.
Group Additional Voluntary Contribution (GAVC) Scheme
A group of individual AVC plans for members of an occupational pension scheme to supplement their main scheme benefits. As with GPPPs, due to sheer member numbers, these may benefit from discounted charges.
Group Money Purchase Pension Schemes
A pension scheme that provides benefits based on specific contributions made and the investment return on those contributions. At retirement the accumulated fund is used to provide income, tax-free cash or a combination of the two.
Group Personal Pension Plan (GPPP)
This is a group of individual Personal Pension Plans (PPPs) for employees of a business. Due to bulk buying power, this may benefit from discounted charges. Often contributed to by both employees and the employer, contributions are typically linked to and expressed as a percentage of salary. A GPPP is not an Occupational Pension Scheme.
Guaranteed Annuity Rates (GARs)
Some older pension policies enjoy an inherent GAR. This will be a conversion factor that applies to the fund usually providing that the fund is crystallised at or beyond a certain age and often where pension income is taken in a certain structure. These can be very valuable benefits, as they will often far exceed any competitive, conventional annuity rate. Therefore, one should establish whether an existing policy has one before considering transferring to an alternative pension or annuity provider.
Guaranteed Minimum Pension (GMP)
This is the minimum pension that must be provided as one of the conditions of contracting out within a Defined Benefit Scheme.
Illustration / Quotation
A document or quotation estimating the returns you might get from an investment based upon standard actual growth rates or real rates of return. These take into account the effect or impact of charges.
This is the maximum fund that may be accumulated without adverse tax consequences in the form of a lifetime allowance charge.
The Lifetime Allowance has changed since inception on ‘A Day’ on 6th April 2006.
Accumulated funds in excess of the Lifetime Allowance will be subject to a lifetime allowance charge of 55% if the funds are taken as a lump sum and 25% if taken as income. The net result is likely the same as income will be subject to 40% Income Tax.
It is possible to apply for protection against the lifetime allowance. Specifically two forms of protection, Fixed Protection 2016 and Individual Protection 2016 were introduced on 6th April 2016 when the Lifetime Allowance reduced to £1 million. Those intending to apply for the former had to ensure that active membership of pension schemes ceased from 6th April 2016. There is no deadline for applying for Fixed or Individual protection 2016. We strongly recommend individuals with pension funds approaching or exceeding the Lifetime Allowance seek independent financial advice.
When the employer pays the full cost of benefits and the employee is not asked to contribute. The term most frequently applies to employer sponsored pension arrangements but other employee benefits may also be included.
Non-Protected Rights (NPR)
This is the value of benefits accumulated by way or employee or employer contributions. With effect from 6th April 2012, there ceased to be a difference in the treatment of these funds as opposed to funds that have been accumulated, as a result of contracting out, known as Protected Rights.
Occupational Pension Scheme
Set up by an employer for employees, it is run by Trustees and usually provides life insurance and pension benefits. These are Defined Benefit Schemes or Defined Contribution Schemes, and can be contributory or non-contributory.
When an employee decides to leave or not join an Occupational Pension Scheme provided by his/her employer. Such decisions should be made with the utmost of care, as valuable benefits may be otherwise lost
An income usually paid either by the Government or from an accumulated pension fund or scheme. Pensions are subject to Income Tax but not to National Insurance.
The period of service with an employer that is used to calculate ‘service related’ pension benefits from an Occupational Pension Scheme.
Personal Pension Plan (PPP)
An individual pension plan into which an employee, employer or self-employed individual may contribute to accumulate benefits that provide a tax free cash lump sum and / or income in their retirement.
This is the benefit that remains in an employer’s pension scheme after a member of that scheme leaves the service of the employer or the scheme is discontinued. Where the scheme is a Defined Benefit Scheme, the benefit will be an annual pension entitlement that is increased each year with increases announced by the trustees. Where the scheme is a Defined Contribution Scheme, this will be a value of pension fund that will remain invested, until the selected retirement age, where is it will be utilised to provide retirement benefits.
Protected Rights (PR)
This is the value of benefits accumulated as a result of contracting out of S2P or SERPS (See contracting out). With effect from 6th April 2012, there ceased to be a difference in the treatment of these funds as opposed to funds that have been accumulated by way or employee or employer contributions, known as Non-Protected Rights.
Small Self Administered Scheme (SSAS)
A SSAS is an Occupational Pension Scheme, specifically a self-invested Executive Pension Plan (EPP), generally set up by the owners of small businesses. They enable members to have control over the manner in which scheme funds are invested. A SSAS must have fewer than 12 members and allows a wide degree of investment choice, beyond that which would normally be available via an EPP.
Stakeholder Personal Pension
Similar to a Personal Pension in that they offer a way for people to save for their retirement. Employers with five or more employees who do not offer any other kind of pension scheme have to provide access to a Stakeholder scheme.
State Earnings Related Pension Scheme (SERPS)
The predecessor to the State Second Pension (S2P). If an individual were employed, part of their National Insurance contributions were paid towards the State Earnings Related Pension Scheme, which is paid on top of the basic state pension at retirement. If they chose to contract out of SERPS using a Personal Pension Plan the Government paid the money that would have gone into SERPS into the Plan.
State Second Pension Scheme (S2P)
If an individual were employed, part of your National Insurance contributions were paid towards the State Second Pension Scheme, which is paid on top of the basic state pension at retirement. If they chose to contract out of S2P through a Personal Pension Plan the Government paid a rebate in National Insurance into the Plan each tax year. However, contracting out of S2P ceased via defined contribution arrangements with effect from 6th April 2012, with the last contributions in respect of the 2011/2012 tax year being paid across in the months following.
Instead of retaining a Preserved Benefit when leaving an Occupational Pension Scheme, a member has the right to transfer its value to a new employer’s scheme or a Personal Pension Plan. The transfer value is the amount that is transferred. In the case of a Defined Benefit Scheme, this will be actuarially calculated as no physical pot or fund exists. With regard to a Defined Contribution arrangement, this will be the value of the fund accumulated, less any early encashment penalties. Where invested into a With Profits fund, this will be the fund value plus any calculated Terminal Bonus and / or less any Market Value Adjustment. Care should be taken and professional advice is strongly recommended, as the decision to transfer is a complex matter and valuable benefits such as guaranteed returns or Guaranteed Annuity Rates may be otherwise lost.