Pensions glossary

1: Additional state pension

This is the “earnings-related” part of the state pension. The amount received depends on your earnings, and the national insurance contributions that have been paid, during the whole of your working life.

2: Annual allowance

The current annual allowance, set by the government is £40,000. This limit stipulates how much tax-free money you can invest in your pension, over the given year.

Money purchase annual allowance
HMRC introduced the money purchase annual allowance (MPAA) to ensure that there are no potential recycling issues with individuals claiming tax relief on any new contributions made, having just taken their benefits. Once you take income from your pension you will be subject to a reduced money purchase annual allowance. As of April 2017 this allowance is £4,000.

Are you a higher rate or additional rate tax payer?
If you earn over over £150,000 (or over £110,000 and contribute £40,000 to your pension) you could be hit by the new tapered allowance. The annual allowance for pension contributions has fallen from £40,000 to, potentially £10,000 for higher earners. This will be applicable for contributions made by you, your employer, and any benefits you may have built up from a final salary scheme.
For every £2 of income over £150,000 you earn, your annual allowance will fall by £1. So, if you earn £210,000, your annual allowance will be £10,000.

3: Annuity

This is a type of retirement income which provides you with a regular payment, usually for life. Chelsea FundStore are not currently able to offer annuities.

4: Automatic enrolment

The government recently introduced a new law which is designed to help people save more money for their retirement. It means that most employers have to enrol their workers into a workplace pension, if they are not already part of one.

The pension available through Chelsea is not an automatic enrolment scheme.

5: Basic state pension

This is the first part of the state pension, payable at the state pension age. The amount is dependent on the National Insurance contributions that member has made over their lifetime. To qualify for the basic state pension, at least one of the following:

  • you worked and paid National Insurance contributions
  • you received certain benefits, for example, unemployment, or sickness benefits
  • you were a parent, or carer, and claimed certain benefits
  • you have a spouse or civil partner, whose National Insurance contributions cover you
  • you pay voluntary National Insurance contributions

Some people also get additional State Pension. Whether you get it and how much you get depends on your National Insurance record and what you earn while you are working.

6: Adjusted income

If your threshold income is above £110,000 you will need to refer to your adjusted income, and your annual allowance could be reduced to £10,000 per year. For every £2 of income over £150,000 you earn, your annual allowance will fall by £1. So, if you earn £210,000 your annual allowance will be £10,000.

To work our your threshold income add:

  •   taxable earnings (including salary, bonuses and commission after any salary sacrifice or employer pension contributions)
  •   benefits built up in a defined benefit scheme
  •   any contributions you may have to an occupational/trust based pension scheme.

7: Threshold income

To work out your threshold income add:

  • taxable earnings (including salary, bonuses and commission after any salary sacrifice or employer pension contributions)
  • rental income from property
  • dividends
  • interest on savings
  • self-employed earnings

 

8: Beneficiaries

People who may benefit from a payment from a pension, upon death of the member.

9: Carry forward rule

If you have not used your full allowance in the past three years you could use the Carry Forward rule. 

  Annual allowance Total contributions What can be carried forward
2014/15  £40,000 £40,000 £0
6 April 2015 - 8 July 2015 Up to £80,000* £0 £0
9 July 2015 - 5 April 2016 Up to £40,000* £20,000 £20,000
2016/17 £40,000^ £10,000 £30,000

Based on the above you could carry forward £50,000, meaning you could invest £90,000 in this tax year.**

* In 2015/2016 the rules were slightly amended to align the pension contribution year to the tax year. During this year you were able to invest twice, allowing you to invest up to £80,000.

^2016/2017 and 2017/2018 saw the introduction on the tapered allowance. If you earn over £110,000 your annual allowance could be reduced to £10,000. This would mean the amount you could carry forward would also be reduced. You can find out more about the tapered allowance here.

**Please be aware, the amount of tax relief you will receive depends on individual circumstances, and this may change over time. You must have been a member of a UK-registered pension scheme in each of the year from which you are carrying forward, even if you have not made contributions. You can only contribute as much as you earn, and receive tax relief.

 

11: Crystallisation event

This is usually when the pension benefits become payable, for example buying an annuity, death, taking drawdown and a test against the lifetime allowance is carried out.

12: Defined benefit or salary related pension

These include “final salary” or “career average” earnings-related pension schemes. The amount you get at retirement is based on a number of variables. These could include how long you have been a member of the scheme, your earnings, etc. In most cases, when you retire, you can take some of your pension as a tax-free cash lump sum. The rest you will receive as a regular income, on which you may have to pay tax. If you are unsure, you may wish to seek financial advice.

13: Defined contribution or money purchase pension schemes

Your pension pot is placed into different types of investments, for example shares, or investment funds. The amount in your pension pot when you retire is based on how much has been paid in and how well the investments have done.  In most cases, when you retire, you can take some of your pension as a tax-free cash lump sum. The rest you can be used to purchase an income, on which you may have to pay tax.

14: Department of Work and Pensions (DWP)

This government department is responsible for most pension schemes, through The Pensions Service, and the administration of the state pension. As the Self-Directed Cofunds Pension Account is a personal pension the DWP is not responsible for this pension scheme.

15: Dependants

People who depend financially on the member of a scheme and may receive benefits upon the member's death. This normally includes spouses, civil partners and children.

16: Expression of wish

A notification by a scheme member to their pension scheme to show to whom they would like any lump sum or pension benefits to be paid upon death.

17: Flexi-access drawdown

Flexi­-access drawdown is a new drawdown contract where withdrawals are unlimited, and has been available since 6th April 2015. If you were in "flexible drawdown" before this time, you will have been automatically converted to flexi­-access on 6th April 2015.

With flexi-­access drawdown there is no limit on the amount you can draw from your pension in any year. Whilst you will receive the first 25% of your pot tax free, you will be taxed income tax on the remainder. Following new rules put in place in April 2015 you can:

  • leave it all in the scheme
  • take the whole pension pot in one go
  • take just part of it

By taking income your annual allowance will reduce from £40,000 per year to £10,000 and you will be unable to use the carry forward option.

There is a charge of £100 (+VAT) to set up flexi-­access drawdown, or £300 (+VAT) to withdraw your entire pension pot through flexi-­access drawdown.

Before going into flexi-access drawdown we would strongly suggest seeking independent financial advice or guidance.

Beware of tax! By withdrawing your money you could be pushed over to higher rate tax, or you could be subject to emergency tax. If we have no notification of a tax code then you will be put on the emergency tax code 1060L on a Month 1 basis until further notification from HMRC is received.

Please contact us if you are thinking about going into drawdown.

18: Group self invested personal pension (Group SIPP)

A type of personal pension scheme set up by an employer on behalf of its workers. Self invested personal pensions give workers more choice over how their pots are invested. Although the scheme is arranged by an employer, each pension contract is between the pension provider and the worker. The employer may also pay into the scheme, adding money to each worker's pension pot. Please be aware that the Self-Directed Cofunds Pension Account is not currently a qualifying scheme for automatic enrolment.

19: Individual protection

From 6th April 2016, the standard lifetime allowance was reduced from £1.25m to £1m. Individual Protection 2016 gave individuals a protected lifetime allowance equal to the value of their pension savings on 5th April 2016, subject to the overall maximum of £1.25m.

The protection is not lost by contributing further to a pension scheme, but any pension saving in excess of your protected lifetime allowance will be subject to a lifetime allowance charge. You cannot apply for Individual Protection 2016 if you already hold primary protection.

20: Ill health (early retirement)

If a member of a scheme cannot work due to ill health, or a medical condition, they might be able to take the benefits set out in their pension early.

21: Impaired life annuity

A type of retirement income which may pay you a higher regular retirement income if your life expectancy could be shortened because of your lifestyle or your state of health (for example, if you smoke).

22: Income drawdown and withdrawal

Some defined contribution pension schemes allow you to take an income directly from your pension fund rather than using it to buy a regular retirement income. Your pension fund stays invested, so its value can go up and down. The income is taxable.

23: Life-styling

As you get nearer to retirement, the money you invested into your pension pot is moved gradually to investments that are less risky, and are less likely to lose value in the short term.

24: Lifetime allowance

As of 6th April 2016, the lifetime allowance was reduced to £1m, increasing with CPI each year. This effectively means you can invest £1,030,000 in your lifetime.

25: Money Purchase Annual Allowance

HMRC introduced the money purchase annual allowance (MPAA) to ensure that there are no potential recycling issues with individuals claiming tax relief on any new contributions made, having just taken their benefits.

As of April 2017, the money purchase annual allowance is £4,000 and is triggered once you take income from your pension.

26: Open Market Option (OMO)

This option is for members within a defined contribution scheme to take their pension pots to another provider to buy a retirement income.

28: Pension earmarking

This gives an ex-spouse or ex-civil partner a share of a scheme member's pension rights on divorce. The share is paid when the member takes the benefits.

29: Pension Tracing Service

The Pension Tracing Service is a service operated by the government, which helps scheme members find previous pension schemes. You may have collected a number of pensions over your lifetime, and you may now wish to consolidate them.

30: Personal pension (PP)

A pension that is set up by the individual directly with a pension provider. You pay monthly amounts or a lump sum to a pension provider, who will invest it on your behalf.

31: Public sector schemes

This is the same as a workplace pension scheme, but for government-funded employment, for example teachers, police, nurses. Chelsea is not able to support these pensions.

32: Qualifying pension scheme

A pension scheme that is suitable for auto-enrolment.

Please note that the Self-Directed Cofunds Pension Account is not a qualifying scheme.

34: Shortfall risk

The risk that an investment's actual return will be less than the expected return.

35: State pension

A regular payment from the government you can receive when you reach state pension age. The amount varies and is based on National Insurance contributions.

The current state pension age is 65, for men born before 6th December 1953, and between 60 and 65, for women born after 5th April 1950 and before 6th December 1953.

A new law has been introduced for men and women who will reach state pension age on or after 6th April 2016. Women's state pension age will increase gradually to 65 between April 2016 and November 2018. From December 2018, the state pension age for both men and women will start to increase to reach 66 by October 2020. This is proposed to increase to 68 between 2044 and 2046, although this is subject to review.

36: Tax relief

Tax relief is what the government contributes to your pension, following a contribution, and is based on 20%.

Personal contributions into a pension plan receive tax relief at your highest rate of income tax. Basic-rate tax relief is added on to what you pay into your plan, and the pension provider will add this 6-11 weeks after a personal contribution is made. Higher and additional-rate tax relief can be claimed in addition to basic-rate tax relief through your tax return, if applicable. See below for details.

If you are a higher rate or additional rate tax payer, beware of the tapered annual allowance.

R0128 CFS Tax Relief Chart