Plain speaking about pensions

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Pensions

MoneyPlus Features Team

22nd June 2017 at 12:00am

The world of pensions and savings is one full of tricky terms, but don’t worry. We’re here to make the confusing clear, take a look at our quick jargon buster.

Annual Allowance

The maximum amount that can normally be paid into your pension(s) in a tax year without incurring a tax charge. This is based on your own and any employer contributions and is capped at £40,000 for the 2017-18 tax year.

Simple table displaying annual allowance limits dependent on your annual income level.

You can take advantage of carry forward rules and pay more in if you have unused allowances from previous years. You can find out more about carrying over unused allowances from previous years on Gov.uk

Money Purchase Annual Allowance

A reduced annual allowance called the Money Purchase Annual Allowance (MPAA) applies if you have taken money out of your pension beyond your 25% tax free cash.

Though the current MPAA is £10,000, it is thought that it may be cut to £4,000 as it was announced in the 2016 Autumn Statement. This change has not come in yet, but it could when a new parliament commences.

We would recommend those who get the MPAA pay no more than £4,000 until we know for sure what is likely to happen.

Annuity

A regular, fixed income plan you buy with your pension savings that provides you with a guaranteed income for life or a fixed number of years.

There are different types of annuities including enhanced annuities which pay out more for those in poorer health. Some pensions include the option to purchase an annuity with a guaranteed rate, typically those sold before 1990, these offer specific and usually higher rates than those you can get now, but certain conditions apply.

Auto enrolment

This initiative brought in new-style workplace pensions which employees automatically join unless they choose to opt-out. Both you and your employer pay contributions into your pension which then attracts tax benefits from the government.

Consumer Prices Index (CPI)

The official measure of inflation of consumer prices in the UK. Many pension limits and definitions are related to the increase in CPI; for example the state pension triple lock includes this.

Defined contribution/DC pension (sometimes called ‘money purchase’)

Workplace and personal pensions where you build up your own pot of retirement savings based on investment returns and contributions from you and your employer.

Final salary, career average or defined benefit (DB) pension

An employer’s pension that guarantees a regular income for life. What you get is based on factors such as salary history and length of employment.

Income tax rate/marginal income tax rate

Income tax is split into bands and you pay 20%, 40% or 45% depending on your income, and this is called your marginal tax rate. Pension income is added to any other earnings and taxed according to which income tax band it falls inside.

Income drawdown

Allows you to take a flexible income from your pension while leaving some of your pension savings invested.

Take a look at our flexible income page for more information.

Inflation

Increase in the general level of prices of goods and services and a fall in the purchasing value of money.

Invested

Your pension funds are used to buy stocks and shares and other investments so they have the potential to grow, although of course they can go down as well as up.

If you’re unsure, read our handy guide about the difference between saving and investing.

Lifetime Allowance (LTA)

The maximum amount of pension savings you can build up without incurring a tax charge when you take those savings.

For the 2017-18 tax year, the lifetime allowance is £1 million.

Read more about managing your lifetime allowance in our guide.

Nominated beneficiary/beneficiaries

The people you would like to benefit from your pension savings after your death, as this is not covered by your Will. You can usually do this online; or contact your pension provider.

Pension freedoms

In April 2015, the new rules on pensions allowing everyone age 55 or over to access their private pension savings came into effect. These pension freedoms give people more choice over when and how they take their savings.

Pension ‘pot’

A common term for your total pension savings.

Personal tax allowance

The personal allowance is the amount of income you can have before you need to pay any income tax. For most people its £11,500 for the 2017-18 tax year.

For higher earners with income over £100,000, the personal allowance reduces by £1 for every £2 above this and drops to zero once your income reaches £123,000.

Find out more on about your personal tax allowance on Gov.uk.

SIPP

A SIPP, or Self Invested Personal Pension, is a modern type of pension to hold your invested monies until you decide to draw an income to fund your retirement.

The main difference between a SIPP and other pensions is that there are more investment options to choose from.

State Pension

A regular income from the government when you reach your state pension age. The new full State Pension is £159.55 per week, this is for those who reach pension age after April 2016, as long as you’ve made enough National Insurance contributions, but you could get less.

Your state pension ages can vary from person to person, check your state pension age here.

Tax-free lump sum

The amount you are able to take out of your pension savings without paying tax. 25% of your pension savings can usually be taken tax free from the age of 55, with the rest taxed as income at your marginal rate of income tax.

Remember, tax rules can change and tax depends on your individual circumstances.

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The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in June 2017.

The links provided in this blog are for general information purposes only. Standard Life accepts no responsibility for information contained in the sites or for the sites not being available at all times.