Choosing the right pension can be difficult, which is why we've created this jargon buster to explain some of the most commonly used words and terms. The tax information we provide is based on our understanding of current tax law and could change.
The Annual Allowance for the 2017/2018 tax year is £40,000. If the total gross contributions paid by you, your employer or a third party, into any UK Registered Pension Scheme you’ve taken out are over the Annual Allowance, you’ll be subject to a tax charge. If you’re also in a final salary pension scheme (defined benefit), your gross contributions for that scheme will be based on the increase in the value of your benefits during the tax year.
In some circumstances a reduced Annual Allowance may apply:
- A Money Purchase Annual Allowance (£4,000 gross for the 2017/2018 tax year) will apply each tax year once you take money directly out of any money purchase (defined contribution) pension pot you have, unless you:
- only take your tax-free cash lump sum, or
- take all of it under the small pension pot rules, or
- continue taking Capped Income Drawdown.
Not all of these options will be available from every pension pot.
- Your Annual Allowance may also be reduced if your income (including the value of any pension contributions) is over £150,000 and your income (excluding the value of any pension contributions) is over £110,000.
The Annual Allowance will not apply in the tax year in which you die or if you access your pension pot because of serious ill health.
More information is also available at www.gov.uk
You should contact your adviser if:
- You expect your total gross contributions into all pension schemes to exceed the Annual Allowance in any tax year as unused allowances may be available from previous tax years;
- You have any additional questions, including whether your Annual Allowance will be reduced.
Annual management charge (AMC)
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.
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 asset.
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 more for their retirement. Employers will automatically enrol their eligible employees into their pension scheme. Employees then have the option to opt-out.
Find out more about automatic enrolment by visiting www.gov.uk/workplace-pensions
You can normally 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.
The difference between the 'buying' (offer) and 'selling' (bid) price of units in an investment fund.
The price you sell your units in your investment fund for.
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 Drawdown. Whilst in Capped Income Drawdown, there is no impact to your Annual Allowance.
This 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 pensions.
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 access your pension pot (this is known as a single contribution).
Defined Benefit Pension Scheme
Sometimes also called a final salary scheme, is one that promises to pay out a guaranteed amount of income at your selected retirement date.
Defined Contribution Pension Scheme
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.
Derivatives are contracts usually giving a commitment or right to buy or sell assets on specified conditions, for example on a set date in the future and at a set price. The value of a derivative contract can vary. Some derivatives can have large changes in their value over a short period of time, while others may be more stable.The value of some types of derivative can even move in the opposite direction to a particular market.
Derivatives can generally be used with the aim of enhancing the overall investment returns of a fund by taking on an increased risk, or they can be used with the aim of reducing the amount of risk an investment fund is exposed to. The value of derivatives may vary more than an investment in shares, fixed interest securities or commercial property.
If one of the parties in a derivative contract suffers financial difficulty, they may not be able to make some of the payments they owe. This can affect the value of a fund invested in derivatives.
An investment that conforms to a range of ethical and environmental guidelines.
Also known as a withdrawal charge, some companies charge a fee when you cash in your units.
An investment fund that a company other than Legal & General manages.
This is an option that can usually be taken from age 55 onwards from a defined contribution pension pot. Your pension pot is left invested and an income taken directly from it. There are no limits to the amount of income that can be taken. When the first income payment is made, the Money Purchase Annual Allowance will be triggered. Please see the Annual Allowance explanation for more information.
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.
A 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.
HM Revenue & Customs is the part of the Government that is responsible for collecting tax.
Index-tracker (or passive fund)
Index-tracker 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 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.
An investment fund managed by Legal & General.
There are no restrictions on the value of the total benefits payable from all your Registered Pension Schemes. However, anything over a certain level, called the Lifetime Allowance, 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 2017/2018 is £1 million. Certain circumstances may mean you have a different personal Lifetime Allowance - for example, if you’ve registered with HMRC for protection. Depending on the type of protection you have, any contribution to a plan may mean you lose your protection.
Is the name of our service that allows you to manage some of our products online. For some pension plans you can change your contributions, switch funds or simply check up on the value of your plan whenever it suits you.Registering and using My Account is fast and simple - just visit: www.legalandgeneral.com/login
National Employment Savings Trust (NEST)
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. To find out more about NEST, visit The Money Advice Service website.
Income after tax is deducted.
Is a company (or person) who looks after the ownership of investments on behalf of someone else.
This 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 company pensions.
The price at which you buy units in an investment fund. So if you have £10,000 to invest and the offer price is £1 a unit, you could buy 10,000 units.
Open-ended investment companies (OEICs)
Are established as companies that issue shares to investors. The value of an OEIC is set on a daily basis and divided into shares of equal worth. They are similar to unit trusts as they pool investors' money and they can invest in sub-funds in different market sectors giving greater diversity.
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.
The Government offers free and impartial guidance to anyone aged 50 or over, that has a defined contribution pension. They offer guidance 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 pension pot. 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.
Pound cost averaging
To benefit from pound cost averaging you need to invest money on a regular basis. Spreading your investment over a period of time will help to cushion you from fluctuations in the price of units as you will buy more units when the unit price is low and fewer units if the price increases.
Registered Pension Scheme
A scheme that is 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.
Selected retirement date
The date you intend to access your pension pot. 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.
Small pension pot
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.
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The State Pension is a regular payment from the Government that you can get when you reach State Pension Age. The State Pension you’ll receive will depend on the date you reach your State Pension Age and the number of qualifying years you have. Find out more about the State Pension at www.gov.uk
This is where stocks and shares in companies can be bought and sold.
Switching is when you move your investment from one investment fund to another.
Tax-free cash sum
An amount of cash that can be taken from a pension pot tax free, usually up to 25%.
There’s no limit on how much you can contribute, however, there is a limit on how much tax relief you can get.
Your contributions before basic rate tax relief is added are net contributions. We add tax relief up to the basic rate, which we reclaim from HMRC, on the contributions you make. Your contributions after basic rate tax relief is added are gross contributions.
If you have no earnings, or earn up to £3,600 in a tax year, you can contribute £2,880 net across all your pension schemes and get tax relief of £720, giving you a gross contribution of £3,600. If you earn more than £3,600 in a tax year, you can get tax relief on 100% of the earnings you contribute up to the Annual Allowance.
For example, if you pay £80 a month as your net contribution, we currently add £20, as the basic rate of tax is 20% (£80 divided by 0.8 = £100).
Your contract is for the gross contribution, so if the basic rate of tax changes, the amount you pay will change. If you’re a higher/additional rate taxpayer, you can reclaim any further tax relief through your yearly tax return.
Tax relief does not apply to:
- Transfer payments
- Employer contributions
- Any contributions on or after your 75th birthday.
When you reach age 75 your regular net contribution will increase as your contract is for the gross contribution and the tax relief will no longer be added.
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
This is where an adviser looks at the value of your current pension and the value of alternative options available to you. We strongly recommend that you seek advice to evaluate all your options before transferring the value of your pension pot.
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 live in the UK and are here for at least 183 days in a tax year.
Uncrystallised Funds Pension Lump Sum (UFPLS)
A type of benefit that can be taken from a defined contribution pension pot if you are aged 55 or over, made up of 25% tax-free cash with the remaining 75% taxed in the same way 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.
The degree of unpredictable change over a period of time, normally short term, in the investment market.