The pensions world is full of technical terms. In each issue of Pension News we will explain what some of the most common mean.
Just to be clear ‘pension’ is a catch all term that can describe both the investment plan you save into and the income you receive from it in retirement. At its most basic a pension is a tax efficient savings plan.
- Adjusted income
The total amount you have received from any source in the current tax year which is liable to income tax (including any benefits in kind) plus the value you have added to your pension savings in the current tax year.
- Annual Allowance
This is the maximum amount of tax-free pension savings that you can build up over a year. The Annual Allowance for the tax year 2022/23 is £40,000. The earnings limit for the 2022/23 tax year is £240,000 and the minimum reduced annual allowance that you can have under the tapering rules is £4,000.
- Annual Allowance charge
The amount of tax you will need to pay to HMRC if you exceed the Annual Allowance.
- Auto Enrolment (AE) Section
The AE Section is used to meet the statutory auto enrolment requirements. Membership is available to all new full and part-time UK employees of Pearson aged 16 or over and under age 74. If you are aged 22 or over, earning over £10,000 a year and under State Pension Age you will automatically become a member of the AE section, unless you request to join and take advantage of the additional benefits in the Money Purchase 2003 Section.
- Carry Forward
The process of using any unused Annual Allowance in one or more of the previous three tax years to offset your Annual Allowance charge in the current tax year.
- Defined Benefit (DB) sections
This is where your retirement income is based solely on your earnings and the length of time you have been a member of the Plan. The Trustee decides the investment policy for the Plan, not the individual member. The amount of pension you receive is based on your final pensionable salary. Please note the DB sections of the Plan were closed to new members in 2006.
- Defined Contribution (DC) sections
A pot of money based on contributions from you and Pearson. In the Plan, the DC sections are known as the Money Purchase 2003 (MP03) Section or the Auto Enrolment (AE) Section.
- Drawdown (DC Members)
If you do not want to buy an annuity, or spend all your savings, you can transfer your pension pot into a flexible drawdown scheme. This allows you to have your pension fund invested in a way that means you can draw an income (or ad hoc cash amounts), which can be varied in terms of both frequency and amount to suit your personal circumstances. The fund remains yours unlike an annuity where you give an insurance company your pension pot and they guarantee you an income for life.
- Expression of wish form
A form that you should fill out to nominate who you would like to receive any lump sum benefit payable in the unfortunate situation that you should die. The Trustee will decide who the monies should be paid to but you should complete an Expression of wish form in order that they are aware of your wishes.
- Guaranteed annuity rate
Most annuities pay a guaranteed income for life, but this is not the same as a guaranteed annuity rate (GAR). A guaranteed annuity rate is something that a number of older pension policies had. They offered to pay a ‘guaranteed’ rate (namely they guaranteed the level of the interest rate). At the time these pensions were sold, the rate wasn’t spectacular at all, but because annuity rates have fallen over many years, these are now much higher than you’d generally get on the open annuity market.
- Guidance Guarantee
From April 2015, everyone over 55 has been entitled to free guidance and information about their defined contribution options from PensionWise (https://www.pensionwise.gov.uk) or on 0800 136 3944. It’s not the same as financial advice (in that they won’t recommend a specific product for you), but it’s a good starting point.
- Lifetime Allowance
The Lifetime Allowance is the total amount you can take from all your pension savings without facing a tax charge. This is currently £1,073,000 for the tax year (2022/23).
For defined contribution pension schemes, this is your total savings from all your pension pots. For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension(s) by 20 as a rule of thumb. If your pensions are approaching or are above, the Lifetime Allowance you should take independent financial advice.
Remember, pensions are a long-term commitment. What might appear modest today could exceed the Lifetime Allowance by the time you retire. Contact the pensions team if you have any concerns.
- Money Purchase Annual Allowance
The maximum you can pay to a defined contribution arrangement in the current tax year, if you already flexibly accessed benefits in a defined contribution arrangement.
- Pension Input Amount
Either the increase in the value of your defined benefit pension savings or the total contributions paid by you, or on your behalf, into a defined contribution arrangement. You can find this for the Plan on your pension savings statement.
- Pension Input Period
The tax year the growth in your Plan pension is measured.
- Scheme Pays
A facility where your Annual Allowance charge is paid by the Trustee and in exchange you give up some of the benefits you have built up within the Plan.
- State Pension age
The age at which you’re entitled to claim your State Pension. You don’t have to take your State Pension when you reach this age. From December 2018, the State Pension age started rising for both men and women and will continue to do so, reaching 66 in October 2020 and 67 between 2026 and 2028. Check your personal retirement age here https://www.gov.uk/state-pension-age.
Your State Pension age is nothing to do with your retirement age (when you choose to retire) which may be earlier or later than this.
- Tax-free cash lump sum
You can currently take up to 25% of the value of your pension benefits as a tax-free lump sum.
- Tax relief
Your pension contributions are taken out of your salary before tax, which means you pay no tax on them. Your tax relief is worked out automatically by payroll, so you don’t need to do anything.
- Threshold income
The total amount you have received from any source in the current tax year which is liable to income tax (including any benefits in kind).