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Retirement Glossary

 

If a term is not here and you want it explained, email us and we will add it and let you know.

 

A-Day

Took place on 6 April 2006 and is otherwise know as pension simplification. Replaced the existing eight tax regimes with a single regime. The A-Day rules were designed to make saving into a pension less complex and they have brought many benefits. For instance individuals can now save into both a company and individual pension and can also draw a pension while working.

 

Alternative investment market (AIM)

AIM was launched in 1995 as a submarket to the London Stock Exchange. It enables smaller companies to float shares in a more flexible regulatory market. Investing in AIM stocks can have significant tax advantages and can be used as a means of mitigating inheritance tax.

 

Alternatively secured pension (ASP)

ASP was introduced in April 2006 in response to objections from religious groups opposed to annuitisation. ASP enables people to remain invested in the markets after the age of 75 – good news to those who find annuities inflexible or would prefer to defer purchase. However, ASP has been heavily taxed by the government as a means of making it less attractive. On death the remaining fund can only be used to either provide an income for dependants or make a charitable donation.

 

At-retirement

Point at which individual decides to retire. Will often involve making decisions such as whether to purchase an annuity or go into income drawdown.

 

Annuity

A guaranteed, regular income paid for the duration of an individual’s life. An annuity is funded by some or all of a person’s pension savings. Annuities can be set up to either pay an individual’s pension or also provide for that individual and their spouse/family. There are many different types of annuity available see enhanced, variable, fixed term definitions below.

 

Bare trust

These trusts have no discretionary element so the gift made is considered to be absolute.

 

Benefit crystallisation event (BCE)

Point at which benefits from a pension are paid. An individual can have several of these during their lives and they often take place pre retirement. HMRC has identified eight different BCEs. These include the need to take a lump sum in the event of ill health, purchasing a lifetime annuity and the paying of death benefits. BCEs ensure the lifetime allowance is applied to all an individual’s benefits.

 

Decumulation

Stage in life when income is taken from an individual’s pension fund.

 

Discretionary trust

These trusts enable trustees to distribute income at their discretion so beneficiaries can be provided for according to their needs. As the trust is so flexible it also is taxed more heavily.  Can be used for passing on pension benefits or pension life cover and death-in-service benefits to dependents.

 

Equity release

Process by which retirees can release income from their homes without having to move out or sell the property. These plans are typically either home reversions or lifetime mortgages (see references below).

 

Enhanced annuity

Aimed at people suffering from medical conditions that may reduce their life expectancy. Enhanced annuities often pay a higher income to these individuals as a result of this perceived decreased life expectancy.

 

Fixed term annuity

These products enable the individual to purchase an annuity for a fixed term (i.e. ten years) rather than purchasing one that provides an income for life. They allow people to delay making irrevocable decisions until they have a better understanding of their future needs.

 

Government Actuary Department (GAD) limits

Minimum and maximum income withdrawal limits from an individual’s unsecured pension plan. These figures are based on GAD tables on long dated gilt yields.

 

Home reversion

Home reversions enable individuals to sell all or part of their home. In exchange for this they will receive a tax free lump sum and are able to remain in their home rent free for as long as they wish. Both the individual and the home reversion company share any increase in the property’s value. Home reversions were regulated in 2007.

 

Income drawdown

See unsecured pension

 

Inheritance tax

Otherwise know as death duty. This is a tax that arises on the death of an individual. For the 2007/2008 tax year this tax is payable on estates worth over £300,000 and comprises 40% of the surplus. This nil rate band rises every tax year. By 2010 this level (known as a nil rate band) will rise to £350,000.

 

Lifetime mortgage

A loan is secured against the individual’s property which then provides either a regular income or tax free lump sum. There are no monthly repayments to meet as the loan plus any interest accrued is paid when the property is sold. This is currently the most popular form of equity release in the UK.

 

Long term care

Long term care takes many different forms. As well as the care provided to the elderly in retirement homes it can also refer to the care many ill or elderly people receive within the home (domiciliary care) or respite care.

 

Open market option

The right of an individual to shop around for the best annuity for their circumstances.

 

Pension commencement lump sum

Used to be known as tax free cash. The option to take up to 25% of a pension fund as a lump sum upon retirement.

 

Personal accounts

Part of the government’s ongoing pension reform. From 2012 employers must either enrol employees in personal accounts or else into another good quality pension scheme. Employers will be required to pay 3% of earnings for their employees. Employees will pay 4% with the government adding in 1% in tax relief. Contributions will be based on band earnings between £5,000 pa and £33,500 pa. These amounts will be indexed in line with earnings.

 

Phased retirement

Allows the individual to effectively spread their retirement over a number of years. Helpful for those people who may wish to work part time during retirement, phased retirement allows you to split retirement savings into several sections and encash them as needed. This allows the individual to take tax free cash (25%) from each individual section and they can use the rest to either go into income drawdown or purchase an annuity.

 

Postcode annuity

This process takes into account where the individual lives when calculating annuity rates.

 

Power of attorney

Process by which an individual is granted power of another person’s financial affairs and/or welfare. This can be done when a person is deemed to have insufficient mental capacity to make informed decisions on their own behalf. Alternatively someone travelling for an extended period of time may wish someone else to deal with their affairs while they are away. Enduring Power of Attorney (EPA) was in place until October 2007. This only related to a person’s financial affairs. However, this has now been replaced by Lasting Power of Attorney (LPA) which also includes welfare decisions.

 

Protected rights

The rights built up in contracted-out final salary and personal schemes in lieu of state benefits.

 

Self invested personal pension (SIPP)

SIPPs have exploded in popularity since A-Day. The definition of a SIPP is a source of much discussion but a pure SIPP is seen as a personal pension offering a wider choice of investments to the adviser and their client. The costs associated with this flexibility meant that in the past SIPPs were mainly used by high net worth individuals. However, the introduction of hybrid and execution only SIPPs have done much to decrease costs and increase popularity. SIPPs were regulated in 2007.

 

Small Self Administered Scheme (SSAS)

Self invested pension often used by small businesses, a SSAS is established under trust and enables members to act as trustees of the scheme. This enables them to control the scheme and its investments. SSASs can help to enrich the business as well as its members’ retirement pots by allowing the members as trustees to invest in the business via secured loans.

 

Tax free cash

See pension commencement lump sum

 

Transfer values

Value given to an individual who chooses to leave their final salary scheme. Also seen as CETV, cash equivalent transfer value.

 

Treating Customers Fairly (TCF)

Principles based regulation designed to improve the standard of service customers receive from advisers.

 

Unsecured pension

Otherwise known as income drawdown. Enables an individual to take an income directly from their pension fund rather than buying an annuity. As the fund remains invested the individual can benefit from any investment growth and remain in control of their fund. However, once the individual hits 75 they will need to either purchase an annuity or go into alternatively secured pension. The amount of income taken is subject to Government Actuary Department (GAD) limits.

 

Variable annuity

Variable annuities are often referred to as the “third way.” These products offer the client a guaranteed minimum income for life with the possibility of benefiting from investment growth. The fund is assessed on a regular basis and if it has grown then the client can receive an increased income in accordance with this. These products also offer death benefits.

 

Wrap account

Platform enabling adviser to see all of a client’s assets in one place. Enable advisers to provide a better service to clients by streamlining administration and enabling them to complete transactions more rapidly.