We’ve simplified this site as best we can, but if you get stuck, this jargon buster should help explain the most commonly used terms.
A type of retirement income that provides you with a regular payment, usually for life.
See Tax-free cash sum.
Pays a retirement income based on your salary and how long you have worked for your employer. Defined benefit pensions include ‘final salary’ and ‘career average’ pension schemes. Generally only available from public sector or older workplace pension schemes.
Defined Contribution Pension
Builds up a pot to pay you a retirement income based on contributions from you and/or your employer. Includes workplace, personal and stakeholder pensions.
See Defined Benefit Pension.
Flexi Access Drawdown (or ‘flexible income drawdown’)*
Allows you to withdraw funds from your pension pot and then take any amount of income without restriction while leaving the remaining funds invested. You can take 25% as a tax-free lump sum when you first decide you want to go into drawdown. Replaced flexible drawdown and capped drawdown from April 2015, though existing users of capped drawdown can continue in that plan.
A competitive guaranteed income offered by some pension schemes if you take a lifetime annuity out with them – often hard to match if shopping around.
See Marginal rate of tax.
The rate of increase in prices for goods and services. There are a number of different measures of inflation in use but the most frequently quoted and most significant ones are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The inflation rates are expressed as percentages for example, if CPI is 3%, this means that on average, the price of products and services we buy is 3% higher than a year earlier.
Allows you to draw an income from your pension scheme while leaving the pot invested. Referred to as flexi access drawdown under new rules from April 2015.
There are no restrictions on how much income you can receive. However, if the total value of your pension savings exceeds your ‘Lifetime Allowance’, as set by the Government, the excess will be
subject to an additional charge payable to HMRC. For the tax year 2015-16 the Lifetime Allowance is £1.25 million. This will reduce to £1 million from 6 April 2016.
If you exceed the Lifetime Allowance you pay a charge on the excess amount at 55% if taking the pension as a lump sum or at 25% if you take it as income. The same savings aren’t assessed twice – so if you put £2 million into drawdown this will have been tested and the excess taxed at that time and no further Lifetime Allowance charge is due.
If you die leaving untouched pension savings that exceed the Lifetime Allowance – and they have not already been assessed against it – then your nominated beneficiary will be liable for the extra charges on the amount that exceeds the Lifetime Allowance.
Income tax is split into marginal bands and you pay different rates (20%, 40% and 45%) on earnings that fall into each band.
For the tax year 2015-16 any earnings below £10,600 attract no tax; earnings between £10,600 and £42,385 you pay 20%; earnings between £42,386 and £150,000 you pay 40% and earnings over £150,000 you pay 45%.
The example below, from The Money Advice Service, shows how pension income can push you into a new tax bracket when added to your other earnings. It assumes earnings of £30,000 and a taxable pension income of £15,000. Therefore total taxable income (earnings + pension) is £45,000.
|How the tax is broken down and calculated|
|First £10,600||No tax||
Next £31,785 taxed at 20%
|Final £2,615 taxed at 40%||£1,046||
|Total tax paid||£7,403|
|The tax paid on the pension income part of total taxable income|
|£12,385 taxed at 20%||£2,477|
|£2,615 taxed at 40%||£1,046|
|Total tax on pension income||£3,523|
Money Purchase Pension
See Defined Contribution Pension.
This is a regular payment from the Government that is paid to men at 65 and women between 60 and 65. The amount payable depends on when you retire and the number of years of qualifying National Insurance Contributions (NICs) you have paid or been credited.
An amount of cash set by law that you can take at retirement free of tax. It’s usually up to a quarter (25%) of your pension pot. Sometimes simply referred to as ‘tax-free cash’ or ‘cash lump sum’.
*Source: Money Advice Service: Your pension: it’s time to choose.
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