Additional state pension is a part of the state pension and is accrued by employed (not self-employed) people. The amount you get depends on your earnings and the National Insurance contributions you have paid during your whole working life. For people reaching State Pension age from April 2016 onwards, it is due to be replaced by a new single flat-rate State Pension.
All gross contributions paid by you, your employer or a third party, into any UK Registered Pension Scheme over the Annual Allowance, will be subject to a tax charge. For final salary schemes, contributions are defined as the increase in the value of member benefits. The Annual Allowance for the tax year 2015/2016 is £40,000. This will reduce to £10,000 once you take money from any pension pot you have other than if you only take your tax-free cash amount, take your money under the small pension pot rules or if you continue capped income drawdown if it’s available on your plan.
Where the total contributions exceed the Annual Allowance in a given tax year, unused allowances from up to three previous tax years may be available. For this purpose the Annual Allowance for each of the three previous tax years is assumed to be £40,000 for the tax year 2014/2015 and £50,000 for the tax years 2013/2014 and 2012/2013. You must have been a member of a UK Registered Pension Scheme in the current tax year and in the tax years you wish to use the unused allowance from. Once your Annual Allowance is reduced to £10,000, you will not be able to use any allowances from previous tax years.
The Annual Allowance will not apply in the tax year in which you die or if you take your benefits because of serious ill health.
Annual Management Charge (AMC) is the charge to cover set up and management costs, administration and day-to-day fund management.
An annuity is what most people call their ‘pension’. It’s a financial product that provides you with a regular income, usually for life. You can use all or part of your pension pot to buy an annuity from an insurance company
Asset Allocation is the way you’ve decided to invest. For example:
different types of investment (for instance, shares or bonds);
what markets (what regions or countries, for example the UK or overseas market); and
what sectors (for example technology or health care).
Assets are what investment funds invest in. They have a significant impact on the performance of an investment so it’s important to understand the differences between the main types of assets.
There are four main types of asset and each has its own characteristics:
1. Equities – also known as ‘shares’, are a share in a company that allows the owner of those shares to participate in any financial success achieved by that company. They’re considered by many investment experts to be good for long-term growth but their value can go up and down a lot in the short term.
2. Fixed interest securities – also known as ‘bonds’, they are essentially a loan usually to a company or a government – the company or government pays regular interest on the loan and then pays it all back at a set date in the future. The value of fixed interest securities does go up and down. It tends to go up and down less than the value of shares but potential returns are often lower.
3. Commercial property – here you buy ownership in buildings, such as office blocks or shopping units. Property funds may grow from rising property values and rent paid by tenants. Property value is opinion based so the value may go up and down.
4. Cash – Some investment funds keep a proportion of your money in cash, adding flexibility to your ‘asset mix’ and making the investment fund more stable. The proportion of the investment in cash is usually quite low as the growth potential is low. So it’s low risk but offers the lowest potential return.
Automatic enrolment is a Government initiative to encourage people to save for their retirement. Employers will automatically enrol their eligible employees into their pension scheme. Employees do have the option to opt-out. You can find out more about automatic enrolment by visiting the Workplace Pensions page on the government website.
When taking your pension benefits you can take up to 25% of your pension pot tax free and use the rest of your pot to buy an annuity, take a regular income directly from your pot or take a lump sum. Different products will have different options available. You should shop around to find the best product to suit your circumstances.
Nominating a beneficiary means if you die before you take your benefits and a lump sum becomes available you can request who you would like this lump sum paid to. Your pension provider will not be bound by your nomination but will take it into account when deciding who to pay your benefits to.
Capped Income Drawdown is one of two types of income drawdown where your pension pot can be left invested and an income taken directly from your pot. It is only available to those who were already in drawdown before 6 April 2015. There are restrictions on the amount of income that can be taken, however, it is possible to change from Capped to Flexi-Access Income Drawdown. Whilst in Capped Income Drawdown, there is no impact to your Annual Allowance.
A Company Pension is a scheme set up by an employer to provide benefits for when their employee retires. Typically, both the employer and the employee make regular contributions into the scheme. These are also known as occupational pension.
A contribution is a payment into your pension plan made by you, your employer or any other person (called a third-party). You can usually pay regular contributions every month or every year. You can usually make one-off contributions at any time before you take your benefits (this is known as a single contribution).
A defined benefit pension scheme is sometimes called a final salary scheme and is one that promises to pay out a guaranteed amount of income at your selected retirement date.
A Defined Contribution Pension Scheme is also known as a Money Purchase scheme, a pot of money is built up and is then used to provide retirement benefits. Unlike defined benefit schemes, these schemes do not provide a guaranteed income. The value of your pot will depend on a number of factors including the amount paid in, charges deducted and investment performance.
An ethical investment is one that conforms to a range of ethical and environmental guidelines.
An exit charge, also known as a withdrawal charge, is the fee some companies charge when you cash in your units.
External fund – an investment fund that a company other than Pension provider you are dealing with manages.
Flexi-Access Income Drawdown is one of two types of income drawdown available where your pension pot can be left invested and an income taken directly from your pot. It was introduced on 6 April 2015 and there are no limits to the amount of income that can be taken. When the first payment of income is made, the reduced Annual Allowance of £10,000 will apply.
A fund is a collection of assets that you can invest in. Money is pooled together from various sources and managed by a professional investment fund manager. This means that you can invest a fairly small amount while still enjoying the benefits of a larger investment fund.
Fund Manager – professional person who manages an investment fund on behalf of investors. Each investment fund has aims and financial goals that the investment fund manager tries to meet.
Gilts are bonds issued by the Government to raise money. When you invest into a gilt your money is lent to the Government who agree to pay an amount of interest over a certain period of time.
Income before tax is deducted is known as Gross Income.
HM Revenue & Customs (HMRC) is the part of the Government that is responsible for collecting tax.
Index-tracker funds (also know as passive funds) invest in most or all of the same shares, and in a similar proportion, as the index they are tracking, for example the FTSE 100 Index. Index-tracker funds aim to produce a return in line with a particular market or sector, for example, Europe or technology. They are also sometimes known as ‘tracker funds’.
The increase in prices over a period of time are tracked by the Office for National Statistics UK. As prices rise, what you can buy with a fixed amount of money falls, so your money has less buying power. This is known as inflation.
If the value of the total benefits payable from all your Registered Pension Schemes is over a certain level, called the Lifetime Allowance, it will be subject to a tax charge of up to 55% on the excess.
For most people their Lifetime Allowance will be the standard Lifetime Allowance. The standard Lifetime Allowance for the tax year 2015/2016 is £1.25 million.
Certain circumstances may mean you have a different personal Lifetime Allowance because you have obtained protection for your pension pot from HMRC. You will have completed an HMRC form if this applies to you. Depending on the protection you have, any contribution to a plan may mean you lose your protection.
National Employment Savings Trust (NEST) is a pension provider set up by the Government as part of its changes to workplace pensions. Employers who have to enrol their eligible employees into a pension scheme as a part of automatic enrolment can use NEST instead of a private pension scheme. Once a member, you can carry on saving even if you change jobs or stop working. The Money Advice Service has more information about NEST.
A Nominee is a company (or person) who looks after the ownership of investments on behalf of someone else.
Occupational pensions are a schemes set up by an employer to provide benefits for when their employee retires. Typically, both the employer and the employee make regular contributions into the scheme. These are also known as company pensions.
A pension pot is the money built up within a Defined Contribution Pension Scheme. This could be through transferring in other pensions, making single or regular contributions or receiving pension credits as a result of a divorce settlement. This money is then used to provide benefits.
From April 2015, the Government will offer everyone free and impartial advice, over the phone or face to face. You can find out more on their dedicated Pension Wise website.
A document that provides a guide to how much you might get back from your plan. It’s based on a number of example investment growth rates and it shows the charges you may pay. It assumes that charges will remain at their current level, and your contributions and funds selection remain unaltered throughout the term of your plan. You may have more than one personal illustration.
A registered pension scheme registered in the UK under Chapter 2 of Part 4 of the Finance Act 2004. A Registered Pension Scheme qualifies for special tax privileges.
When you invest in an investment fund, it’s important to consider the risks. This is because the value of any money invested can go down as well as up so you could get back less than you invest. All investment funds have their own risks with some having higher overall risk ratings than others. Higher risk investment funds offer the potential for higher returns but carry with them an increased risk of not getting back all the money you initially invested.
The date you choose to take benefits from is your selected retirement date. This is normally from age 55.
Shares are sold by companies to raise money. Shareholders are entitled to a share of company profits, usually paid as dividends, and have the right to vote on major decisions. If the company is a Public Limited Company their shares will be available to buy on the stock exchange.
A small pension pot is a type of benefit that can be taken if you are aged 55 or over and have a pension pot value of £10,000 or less. You can only take three in a lifetime.
Stakeholder pensions are a flexible, tax-efficient way of saving money for your retirement. By law, the yearly charges must be no more than 1.5% of your pension pot for the first 10 years and no more than 1% of your pension pot after that. A pension plan can only be registered as a Stakeholder plan if it meets strict standards set by the Government.
The basic State Pension is a regular payment from the Government that you can get when you reach State Pension age. To get it you must have paid or been credited with National Insurance contributions.
A tax-free cash sum is the amount of cash that can be taken from a pension pot tax free, usually up to 25%.
When you earn money you are taxed at the Basic Rate of Tax (BRT) leaving you with your taxed income. If you choose to make payments to a pension scheme from your taxed income then you will receive back the tax that you paid on that money as a “bonus”. The amount going into your pension pot will be the amount you pay along with the tax bonus. This process is called receiving tax relief.
You can transfer the value of some pension pots between providers. We would recommend you seek advice before you do this and request a transfer value analysis, so you can compare all the options available to you.
Transfer value analysis is where an adviser looks at the value of your current pension and the value of alternative options available to you.
Dividend payments can be made to shareholders of a company in the United Kingdom from that company’s profit. The amount of payment is decided by the company directors.
You are considered a UK resident if you live in the UK and are here for at least 183 days in a tax year.
Uncrystallised Fund Pension Lump Sum (UFPLS) – a type of benefit that can be taken from a pension pot if you are aged 55 or over, made up of 25% tax-free cash with the remaining 75% taxed as earned income.
A unit is a share of an investment fund. Each investment fund is split into units. The number of units you hold is your share of the investment fund.
A unit trust is simply a pool of individual investors’ money, which buys a range of investments. The trust is divided into units. The number of units you hold represents your share of the trust.
Volatility is the degree of unpredictable change over a period of time, normally short term, in the investment market.
The guidance contained in this site is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.
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