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Glossary
A
Accrual Rate
The rate at which rights build up for each year of Pensionable Service in a Defined Benefit Scheme. The accrual rate, pensionable service and pensionable salary are used to calculate your pension.
Active member
An individual who is still contributing to, or building up, benefits in a pension scheme.
Additional Voluntary Contributions (AVCs)
AVCs are voluntary pension contributions that ‘top up’ an existing pension. Their aim is to increase the pension income on retirement.
Annual Allowance (AA)
For Defined Contribution (DC) arrangements this is the limit applied to pension contributions each tax year. Contributions in excess of this allowance will not attract tax relief. For Defined Benefit schemes this is the limit on the amount the pension can grow over a tax year.
Annuity
A regular retirement income purchased with a pension fund from an insurance company.
Annuity Rate
This compares the size of an Annuity (how much retirement income it pays each year) with how much it cost to buy.
Auto Enrolment (AE)
Auto enrolment (sometimes called Automatic Enrolment) compels employers to automatically enrol all their qualifying employees into a workplace pension scheme. Certain employees are exempt if, for example, they are too young or earn too little. Employers are also required to contribute to the scheme.
B
Beneficiary Member
An individual who is in receipt of benefits from the pension scheme due to a family member’s death where the family member was in the scheme. These include the spouses or other financial dependants (as defined in the scheme rules) of members who have died.
Benefits
Benefits include any pension, lump sum or other similar benefit payable upon retirement or death.
C
CARE
CARE is an acronym that stands for Career Average Revalued Earnings. A Career Average Scheme is a Defined Benefit scheme where the pension benefits earned for a year depend on the member’s pensionable salary for that year. These benefits then get revalued by reference to an appropriate index to allow for inflation between the date earnings were received and the date on which benefits become payable.
Consumer Prices Index (CPI)
Indexation which can be used to increase or revalue a member’s benefits.
Commutation
The giving up part or all of the pension payable from retirement for an immediate lump sum benefit.
Contracting out
Contracting out meant that individuals in private or workplace pension schemes could ‘contract out’ of the additional State Pension. Contracting out meant that pension scheme members and their employer were able to pay lower National Insurance contributions if the pension scheme provided a certain level of benefits. When an individual ‘contracted out’ it meant they had to give up some of their entitlement to the additional State Pension. Following the change to the State Pension system from April 2016 contracting out was no longer possible.
Contributions
Amount of money paid into a pension pot. These pension contributions can be made by the member and/or employer.
Crystallisation
This is when a retirement benefit of any kind is paid. Examples include, taking a pension, taking an annuity or a taking a pension commencement lump sum. It also includes lump sums paid as a result of death before a member retires. When a member crystallises their benefits, a crystallisation event occurs whereby a test is carried out against the member's personal Lump Sum and Death Benefit Allowance and Lump Sum Allowance.
D
Defined Benefit (DB) Scheme
This is a form of workplace pension. This provides retirement benefits that are based on an individual’s earnings and the length of time that they have been a member of the scheme. Employers must make a regular contribution and employees can also be asked to make a pension contribution.
Defined Contribution (DC) Scheme
This can be either a workplace pension or a personal pension. This provides retirement benefits which are based on how much the individual (and their employer) puts into the scheme, plus the return on those investments, and any charges applied.
Deferred member
An individual who is not an active member of a scheme, usually because they have left employment with the employer that set up the pension scheme, but has not yet taken any benefits from the scheme.
Dependant
Each pension scheme’s rules will say what is meant by a dependant. For HMRC purposes, a person who was any of the following at the date of the member’s death is a dependant of the member: • married to • civil partner of • financially dependent on the member; or • dependent on the member because of physical or mental impairment.
Disinvestment
The withdrawal of an investment from its investment fund.
E
Early Retirement (ER)
The retirement of a member with immediate payment of benefits before normal pension date. For a member in good health this cannot normally happen before the Minimum Pension Age.
Expression of wish
A means by which a Member can indicate a preference as to who should receive any lump sum due on their death that is payable at the discretion of the Trustees. May also be referred to Nominated Beneficiaries.
F
Final Salary Scheme
A form of Defined Benefit (DB) Scheme where benefits are calculated based on the member’s salary at the point they leave the scheme.
G
Guaranteed Minimum Pension (GMP)
The minimum pension which an occupational pension scheme must provide as one of the conditions of contracting out of any State (Government) Pension provision, during employment, for pre-6 April 1997 service (unless it was contracted out through the provision of protected rights).
Guaranteed Minimum Pension (GMP) due date
The date on which a member of a pension Scheme becomes entitled to their Guaranteed Minimum Pension (GMP).
H
His Majesty’s Revenue and Customs (HMRC)
His Majesty's Revenue and Customs, the government department responsible for assessing and collecting taxes.
I
Ill Health Early Retirement (also called Incapacity Retirement)
A term that refers to retirement on medical grounds before Normal Pension Date. Scheme rules may provide for the benefit to exceed that payable on Early Retirement in other circumstances. From 6 April 2006, retirement before Normal Minimum Pension Age is possible where the Ill-Health Condition is met. Where ill health is serious full Commutation of benefits (exchanging it for cash ump sum) is allowable both before and after 6 April 2006 provided that certain conditions are met.
Income Drawdown
This is when you draw a sum of money out of your pension pot, as and when required. The rest of your reduced pension pot continues to be invested.
Independent Financial Adviser (IFA)
Typically, an independent financial adviser will conduct a detailed survey of a client’s financial position, preferences, and objectives. The adviser will then recommend appropriate action to meet the client's objectives.
Information Commissioners Office (ICO)
The UKs independent authority set up to uphold information rights in the public interest. If we were to have a data breach, the Scheme Trustees would need to decide whether the breach should be reported to Information Commissioners Office (ICO).
Internal Dispute Resolution Procedure (IDRP)
This is the system a pension scheme must have to deal with a member’s concerns or complaints. Over the course of a member’s employment, and after they have left, certain decisions are taken that can have an effect upon their rights and benefits. Because of this, where decisions are taken or issues arise, and the member disagrees with them, the law provides them with the opportunity to challenge the decision.
Investment Fund
Member pension pot is invested in investment fund(s). The investment fund may invest in stocks and shares, bonds, property etc. The value of the investment fund may increase or decrease in line with market fluctuations and is not guaranteed.
L
Late Retirement (LR)
The payment of retirement benefits to a member after normal pension date.
Lifestyling
Lifestyling is a feature found in some Defined Contribution (DC) schemes and is an investment strategy that automatically switches your money from funds that are designed to grow your pension pot when you are younger into lower risk funds as you approach your Target Retirement Age (TRA).
Lump Sum and Death Benefit Allowance
The Lump Sum and Death Benefit Allowance is an amount set by HM Revenue and Customs (HMRC) for the maximum amount of tax free lump sum benefits you can receive from all your pension schemes in all circumstances. For the current tax year the limit is £1,073,100.
Lump Sum Allowance
The Lump Sum Allowance is the maximum amount of lump sum that you can take from all your pension benefits at retirement without being charged additional tax. The Lump Sum Allowance is £268,275 for most people for the current tax year.
M
Marginal tax rate
Your marginal tax rate is the highest rate of income tax you pay on each additional pound of income. You can find more information at https://www.gov.uk/income-tax-rates .
Master Trust
Defined by the Pension Schemes Act 2017 as an occupational (workplace) pension scheme which provides money purchase (defined contribution) benefits for two or more connected employers, excluding relevant public service schemes.
Member
A person who has been admitted to membership of a pension scheme and is entitled to benefits under the scheme.
Money Helper
MoneyHelper is a government service which joins up money and pensions guidance to make it quicker and easier to find the right help. MoneyHelper brings together the support and services of three government-backed financial guidance providers: the Money Advice Service, the Pensions Advisory Service and Pension Wise. This service is accessible at www.moneyhelper.org.uk.
Money Purchase
The provision of an individual Members benefits by reference to contributions paid into a Pension Scheme by or in respect of that Member, usually increased by the investment return on those contributions. Also called a Defined Contribution (DC) Scheme.
N
National Employment Savings Trust (NEST)
The National Employment Savings Trust (NEST) is a workplace pension scheme which was set up to facilitate automatic enrolment. NEST has a public service obligation which means that any UK employer can use it for their employees.
Normal Retirement Age (NRA)
The age at which your pension policy or scheme pays you a pension income. The age can vary from scheme to scheme. Also, it is often possible to take your pension before the normal pension age (for example, following early retirement) in return for a lower pension income. The minimum age at which you can take a pension is normally 55 years, however this will be increased to age 57 from 6 April 2028.
O
Overseas Pension Scheme
A Pension Scheme is an overseas pension scheme if it is not a Registered Pension Scheme but it is established in a country or territory outside the UK and satisfies the requirements in the Pension Schemes.
P
Pension
A tax efficient way of saving for retirement. A pension is a regular payment made to people who have taken retirement benefits from a pension scheme. This can also refer to a benefit paid to spouses/dependents (see "Beneficiary Member" definition).
Pension Age
This is the age at which you can ‘take’ (i.e., start receiving income from) your pension. See "Normal Retirement Age”, “Selected Retirement Age”, “State Pension Age” and “Target Retirement Age” definitions.
Pension Credit
The amount of benefit rights that an ex-spouse of a scheme member becomes entitled to following a pension sharing order issued on a divorce.
Pension Commencement Lump Sum (PCLS)
The Pension Commencement Lump Sum (PCLS), previously known as tax-free cash, is the amount of money available ‘tax free’ to the member as a lump sum when they take retirement benefits. There are limits on the amount you can take and the minimum age at which you can take it.
Pension Debit
The amount of benefit rights given up by a scheme member when a pension sharing order is made in respect of that member following a divorce.
Pension Fund
Sometimes referred to as Pension Account. The total sum of money held in a pension to fund a retirement income. It is worth noting that some of the clients we administer are called Pension Fund rather than Pension Scheme.
Pension Increases
An increase to a pension in payment. Such an increase may arise as a result of a rise in inflation or indexation or it may be a discretionary increase.
Pension Increase Exchange
Where a guaranteed future increase is swapped for a higher starting pension.
Pension Protection Fund (PPF)
The Government states the aim of the Pension Protection Fund (PPF) is to provide increased protection for members of defined benefit and hybrid schemes (a mixture of Defined Benefit (DB) and Defined Contribution (DC) benefits) by paying compensation should their employer become insolvent and the pension scheme is underfunded. It will also assume the functions of the existing Pensions Compensation Board that pays compensation to both Defined Benefit (DB) and Defined Contribution (DC) schemes in cases of fraud and misappropriation of scheme assets.
Pension Providers
Umbrella term for organisations that offer pensions within the UK. This includes: • Occupational Pension Schemes, regulated by the Pensions Regulator • Personal Pensions and Stakeholder Pension Schemes, offered by Financial Conduct Authority (FCA) regulated providers • Master Trusts • Department for Work and Pensions (DWP), which provides the State Pension
Pension Sharing Order
An order made which makes provision for the pension rights of a scheme member to be split on divorce
Pension Wise
Pension Wise is a service offering free and impartial government guidance about your Defined Contribution (DC) pension options when you reach the age of 50. The service is accessible at https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise?source=pw .
Pensionable Salary
This is the salary used in setting out what contributions a member must pay and /or in member’s pension calculation and is defined in the scheme rules. This differs by scheme. It can also be known as Pensionable Earnings or Pensionable Pay.
Pensionable Service
The period of employment which counts towards benefit accrual.
Pensioner Member
An individual who is in receipt of benefits from the pension scheme following retirement.
Personal Pension (PP)
A group or individual pension scheme arrangement, which is not an Occupational Pension Scheme. These include: • Individual personal pensions • Self-invested personal pensions (SIPPs) • Free-standing additional voluntary contributions (FSAVCs) • Retirement Annuity Contracts (pre 1987 version of Personal Pensions) • Stakeholder pension arrangements
Q
Qualifying Recognised Overseas Pensions Schemes (QROPS)
A type of pension plan based outside of the UK that meets the requirements, set by HMRC, to allow individuals to transfer their UK pension funds.
R
Regulators
The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR), work in tandem to address risks and harms in the pensions and retirement income sector. These organisations have different statutory remits set by parliament.
Retail Prices Index (RPI)
Indexation which can be used to increase or revalue a member’s benefits.
Revaluation
The application, particularly to Preserved Benefits, of Indexation, Escalation or the awarding of Discretionary Increases. Legislation imposes a minimum level of Revaluation in the calculation of Guaranteed Minimum Pension (GMP) and of Preserved Benefits other than GMP.
S
Salary Sacrifice
An agreement between the employer and employee whereby the employee forgoes part of their future earnings in return for a corresponding contribution by the employer to a pension scheme.
Selected Retirement Age (SRA)
This is the age you choose to take your pension. The minimum age at which you can take a pension in normal health is currently 55 years however this is increasing to age 57 from 6 April 2028. Some people may have a protected pension age earlier than this and some pension scheme rules may impose restrictions on the date members can choose.
Serious Ill Health
Circumstance where the scheme administrator has received written evidence from a registered medical practitioner confirming that the member is expected to live for less than one year. In such cases, full commutation of benefits (exchanging them for a cash lump sum) is permitted, subject to scheme rules.
Service
The full period of employment with an employer.
Small Pots Lump Sums
A small pots lump sum can be taken by pension scheme members who have a small pension pot, valued at £10,000 or less. They will also have to meet the requirements set out by HMRC and be over the minimum pension age (which is currently age 55 but rising to age 57 on 6 April 2028). The small pots lump sum payment must extinguish all benefits held in that pension scheme.
Stakeholder Pensions
Stakeholder pensions are essentially low cost personal pension plans. Given the changes to workplace pension schemes under automatic enrolment, the future of employer sponsored stakeholder schemes are uncertain, as many will require amendment in order to meet the employer workplace pension duties.
State Pension
A regular payment made by the state to people at or above the State Pension Age and to some widows/dependents.
State Pension Age
This is the age at which you can claim your state pension. You can defer (put off) receiving your pension at this age, in return for a higher eventual state pension income. The state pension age has been steadily rising.
Statutory Money Purchase Illustrations (SMPI)
Pension Providers are required by law to send Defined Contribution (DC) members annual statements showing how much their pension benefits could grow to by the time they reach retirement. They're only sent to members up to within 2 years of the scheme's normal retirement age. There are some exceptions for members with small pots who aren't contributing.
T
Target Retirement Age (TRA)
This is the age when you want to retire and could be earlier or later than your Normal Retirement Age. Having a Target Retirement Age different to your Normal Retirement Age may result in a change to how your Defined Contribution funds are invested if you are invested in a Lifestyle option. The minimum age at which you can take a pension is normally 55 years, however this will be increased to age 57 from 6 April 2028.
Tax relief
The schemes we deal with operate on the net pay model so tax relief is the tax members save on their contributions being deducted from their pay before their income tax liability is calculated. Employers also get tax relief on their contributions.
The Pension Regulator (TPR)
The Pensions Regulator is the regulator of work-based pension schemes in the UK. Created under the Pensions Act 2004, it has wide powers and a proactive and risk-focused approach to regulation. Its top priority is to tackle risks to members' benefits, focusing resources on identifying and reducing risks, working with schemes to get them on the right track.
The Pensions Ombudsman (TPO)
An independent organisation set up by law to deal with pension complaints. A member normally needs to follow the Hymans complaint procedure then, if not satisfied with the response, the Scheme’s Internal Dispute Resolution Procedure (IDRP) then, if still not satisfied, they can contact The Pensions Ombudsman (TPO) for assistance.
Transfer Value
This is the amount of money that would be paid to another pension scheme if a member chooses to transfer their benefits to another pension scheme. In Defined Contribution (DC) schemes it is the current fund value at the point of disinvestment. This may be different for a member who has a personal pension scheme, as the surrender value may not be the same as the fund value. In a Defined Benefit (DB) scheme the transfer value is calculated by the scheme actuary. This is also called a Cash Equivalent Transfer Value (CETV). It is important to note that not all members will have a statutory right to a Cash Equivalent Transfer Value (CETV). There are certain obligations for trustees and scheme managers to perform specific checks before transferring a member’s pension in order to prevent scams.
Trivial Commutation Lump Sum
A Defined Benefit (DB) pension that in certain circumstances (and where it meets HMRC’s requirements) can be fully exchanged for a cash sum known as a Trivial Commutation Lump Sum. This is usually when the capital value of the pension is £30,000 or less. The method of calculating the capital value differs for Defined Benefit (DB) and Defined Contribution (DC) schemes and the Trivial Commutation Lump Sum will be subject to tax (with 25% usually being paid tax free). There are different rules for Small Pots Lump Sums and Beneficiary pensions.
Trustee(s)
Each pension Scheme has a Trustee board, or a board of Trustees. Some pension schemes may only have a sole trustee. The Trustee(s) act separately to the employer who set up and effectively pays for the pension Scheme, and act in the interests of the entire pension Scheme membership. Public sector schemes don't have a trustee and personal pensions may or may not be written under trust.
Trust
A legal concept whereby property is held by one or more persons (the trustees) for the benefit of other (the beneficiaries) for the purposes specified by the trust instrument. The trustees may also be beneficiaries.
Trust Deed
A legal document, executed in the form of a deed, which establishes, regulates or amends a trust.
U
Uncrystallised Funds Pension Lump Sum (UFPLS)
A lump sum payment that can be made from any part of your money purchase (Defined Contribution (DC)) pension that has not previously been “crystallised”. Normally 25% of the lump sum is tax free and the balance is taxed at the member’s marginal rate of tax.
W
Workplace Pension
Sometimes referred to as an “Occupational Pension”. A pension arranged by an employer and into which the employer (and often the employee) makes pension contributions on the employee’s behalf. In most circumstances employers have to ‘auto enrol’ their employees onto a workplace pension (see auto enrolment definition above).