A-Z workplace pensions jargon buster

Here’s our list of some of the common terms and what they mean.

A

Additional voluntary contributions (AVCs)
Pension contributions above the member’s normal contributions, which are paid in to provide additional benefits at retirement. An AVC facility was a legal requirement until 2006, although some employers still offer an AVC facility. Contributions paid into an individual pension pot separate from an occupational scheme are known as free-standing AVCs (FSAVCs).

Annual allowance
Maximum amount of pension savings an individual can invest in any tax year. The limit for the 2014/15 tax year is £40,000. Any contributions over this limit will be subject to a tax charge.

Annual management charge (AMC)
A charge which is often taken from the value of the pension pot. It includes a number of expenses such as administration costs and investment charges, as well as charges to cover expenses incurred by the fund manager.

Annual statement
Document issued once a year to members which includes information such as the contributions invested over the year and the current value of their pension pot. It’s a regulatory requirement that all members receive an annual statement.

Annuity
Can be bought with the value of the pension pot at retirement. An annuity provides regular payments to the member for the rest of their life (or until the end of an agreed period of time).

Automatic enrolment (auto-enrolment)
Legal duties introduced in 2012 under which employers who have reached their staging dates must enrol eligible jobholders (employees who meet a certain set of criteria) into a qualifying workplace pension scheme and pay contributions. The staging date is the date on which each employer must start to comply with their duties; the largest employers have staged first. The regulations are far-reaching and often complex. More information can be found at www.friendslife.co.uk/auto-enrolment

C

Capped drawdown
A retirement product under which people withdraw money from their pension fund. Under capped drawdown, the amount of income that can be taken is subject to a maximum limit. The government sets a limit based on the equivalent level that an annuity would pay. The limit is set by the Government Actuary Department (the ‘GAD limit’), and is designed to ensure the individual doesn’t run out of money.

Contract scheme
A defined contribution (DC) pension scheme which does not have trustees in place. For example, a group personal pension scheme or a stakeholder pension scheme.

Contracted-in money purchase (CIMP) scheme
A workplace pension scheme which is set up under a trust agreement. Its name comes from the fact the scheme was not used to provide benefits in place of the State Second Pension (S2P – contracting out of S2P under a defined contribution scheme was abolished in April 2012).

Contracting out
Under a defined contribution (DC) scheme, this used to be where an employee left the State Second Pension (S2P – or the additional State Pension systems which preceded S2P). A rebate of National Insurance contributions was paid by HMRC to the member’s pension pot. Contracting out into a DC scheme was abolished in April 2012, however may still exist for defined benefit (DB) schemes.

Corporate platform
A single system, typically online, that gives employees access to a workplace pension, other savings products and financial education resources. These are growing in popularity as a replacement for employers just offering a workplace pension scheme on its own.

D

Default investment fund
A fund (or funds) into which the member’s pension contribution will be invested when they join the scheme if they don’t make an alternative investment choice. Default investment funds are compulsory under stakeholder pension schemes and for any scheme used for automatic enrolment.

Deferred member charge
Sometimes called ‘active member discount’, this is where different charges apply for active scheme members and members who have left employment (and/or stopped paying contributions). The government has confirmed that this practice will be banned from April 2016.

Defined benefit (DB) scheme
A scheme under which the member’s benefits are normally related to their earnings when they leave the scheme, as well as their length of pensionable service with the employer. The benefits are defined in the scheme rules and build up irrespective of the contributions paid and any investment returns. Sometimes known as a ‘final salary’ scheme. DB schemes have steadily declined in popularity over the last 10-20 years; we do not include any specific terms relating to DB schemes elsewhere on this page.

Defined contribution (DC) scheme
A scheme under which the member’s benefits are linked to the value of their own pension pot. This value will be based on the contributions paid in and any investment returns. Sometimes known as a ‘money purchase’ scheme.

Department for Work and Pensions (DWP)
A government department responsible for setting welfare and pension policy.

F

Flexible drawdown
A retirement product under which people withdraw money from their pension fund. Under flexible drawdown, there are no limits to what can be taken out of the fund (much like an instant access savings account). To qualify, a member must have a minimum guaranteed income already in payment. Flexible drawdown is, in effect, what all customers now have access to albeit without a minimum income limit.

Fund manager
The investment firm or individual responsible for the management of an investment fund.

G

Group personal pension (GPP) scheme
A type of defined contribution (DC) pension scheme which is established between an employer and the pension scheme provider.

I

Income drawdown
A retirement product under which people withdraw money from their pension fund. There are two types of income drawdown: capped drawdown or flexible drawdown.

L

Lifestyling
An investment strategy used in defined contribution (DC) schemes. Under lifestyle, a member’s investments are changed based on their age and length of time until they are due to retire. As members approach retirement monies are moved into funds with less risk and that are less likely to change dramatically in value,

Lifetime allowance
The maximum amount of pension savings which can be built up over an individual’s lifetime that benefits from tax relief. Any savings above the lifetime allowance will be subject to a tax charge.

M

Master trust
A master trust is a pension scheme designed for multiple employers under one trust arrangement. The different employers benefit from being under the single trust, but each is administered separately.

O

Occupational pension scheme
A less commonly used definition for a pension scheme set up by an employer for the benefit of their employees. Sometimes specifically used to denote a defined contribution (DC) scheme set up under trust.

Open market option
Term used for the freedom of choice members have at retirement. Members do not have to buy an annuity from their pension provider; they can shop around other annuity providers for the best option.

P

Pension input period (PIP)
The period of time over which how much a member has saved into their pension is calculated. It is used to determine whether a person has exceeded the annual allowance in a particular tax year. Most PIPs run for the tax year (a PIP can’t run for over 12 months), however members can choose their own PIP if they wish.

Pension Quality Mark (PQM)
An independent standard or accreditation which recognises high-quality defined contribution (DC) pension schemes. It is run by the National Association for Pension Funds (NAPF), and is open to contract and trust-based schemes.

Postponement period
Under automatic enrolment, the employer can delay assessing their employees against the legal requirements for up to three months. This is known as a postponement period or ‘waiting period’.

Q

Qualifying earnings (QE)
Under automatic enrolment, these are earnings between the upper and lower earnings thresholds. Pension contributions are then based on a percentage of earnings between these limits. While QE is seen as the standard for automatic enrolment, employers do not have to use qualifying earnings as a basis for contributions; three alternative tiers with different minimum contribution levels are available depending on how the employer defines pensionable earnings.

R

Registered pension scheme
This term is used by HMRC for schemes that meet a certain set of requirements which allow the scheme to provide the tax privileges (in particular, tax relief) available to workplace pension schemes.

S

Salary exchange
As part of a salary exchange agreement between the employee and employer, part of the employee’s salary is given up. The employee does not pay tax or National Insurance on the amount sacrificed. Their employer will then pay an amount equal to the salary given up, along with any employer contribution. Sometimes known as ‘salary sacrifice’.

Section 32 (s32)
A policy which is established following a transfer from an occupational pension scheme. The transfer can be requested by a member, the scheme trustees or by an ex-spouse who is awarded a share of the member’s pension savings as part of a divorce settlement.

Self-invested personal pension (SIPP)
SIPPs were developed for people who wanted to decide where their pension contributions are invested, and to have access to a much wider range of investments than would be provided under most normal pension products. Employers can provide group SIPPs for their employees with a wider range of investment options for people who are happy to make their own investment decisions.

Small pot transfers
Proposed future legislation in which a pension pot under a certain amount (it has been suggested this may be £10,000) would automatically move with an employee to their new employer when they change jobs. Sometimes referred to as ‘pot follows member’.

Stakeholder pension scheme
A stakeholder pension scheme is simply a type of personal pension scheme. The main difference is that a stakeholder has to satisfy a number of standards. These include being able to accept contributions as low as £20 a month, and an annual management charge of 1% (this can rise to 1.5% after 10 years).

T

Tax-free cash
A lump sum available to members when they take their pension benefits, normally up to 25% of the value of their pension pot. Taking a lump sum means that the amount left to buy an annuity or use for drawdown will reduce. The lump sum is paid free of tax. Sometimes called a ‘tax-free lump sum’.

Tax relief
The government incentivises pension saving by giving members tax relief on their pension contributions. Tax relief will either reduce their tax liability or increase the value of their pension contributions and investment return, depending on the type of scheme they are a member of.

The Pensions Regulator (TPR)
A public body which regulates UK-based workplace pension schemes.

Triviality
Where a member can cash in the full value of their pension from age 55, if the value of their pension savings is below a certain level. Sometimes known as ‘trivial commutation’.

Trust deed and rules
For pension schemes set up under trust, the deed is a legal document which establishes, regulates or amends the trust agreement. The rules attach to the trust deed and establish the operational rules for the scheme, including eligibility and contribution levels.

Trustee
A person who, either individually or with a board of trustees, has a legal duty to administer the occupational pension scheme benefits on behalf of the member.

Like this? Try these...

The Pension Regulator’s glossary
Investopedia’s financial dictionary

Saturday 19 August 2017
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