Investment Basics: Pension Terminology Explained
The financial world has much of its own jargon and terminology. Possessing some understanding of some of this information will be of benefit to investors and savers.
Here is Ranfurly's guide to some of the more common financial phrases, used in both NZ and the UK, that you may need to know to help you understand pensions.
Defined benefit pension - A pension which typically relates your earnings and time spent in a job when you stop working, to the income paid in retirement. Also called a final salary pension.
Defined contribution pension - A pension where the retirement income paid, relates to the value of an investment fund. Returns are based on how much you have paid in and fund growth, rather than salary and service. Also called a money purchase scheme, most private pensions are defined contribution schemes.
Flexible access - Flexible access lets a retirement saver decide how they want to take their money from a pension, once they reach 55 years old - as a lump sum, regular income or as lump sums as and when they choose.
Income withdrawal - This allows a retirement saver to take pension money under flexible access rules while leaving the rest of the fund intact.
Annuity - An investment typically bought with a pension pot that offers a guaranteed retirement income for life. Annuities can come in various forms that pay different amounts of money - for instance, enhanced annuities pay more to someone suffering ill-health.
State Pension - Regular payments from the government to an individual once they have reached state retirement age.
State Retirement Age - The birthday when someone starts receiving the state pension. In the UK this rises to 66 years old for everyone by October 2020. In NZ, this is 65 years old.
Workplace pension - A pension scheme provided by an employer. Typically, a defined contribution scheme.
SIPP - A self-invested personal pension, controlled by a retirement saver, which has a wide range of investment opportunities.
QROPS - A qualified recognised overseas pension scheme. A QROPS has UK reporting obligations for 10 years following the transfer to the QROPS.
Overseas transfer charge - A tax based on 25% of a pension fund value, charged to members moving UK pension money to a QROPS that is not exempt from the rules. The transfer is exempt if the member is resident in the country of registration of the QROPS and remains in that country for 5 complete and consecutive UK tax years.
UK - Lifetime Allowance - The maximum value of pension savings that you can build up without incurring a tax charge at the time you draw out your savings as cash or pensions (and without leaving a tax charge for your beneficiaries if you die before age 75). For the tax year 2017-18 the Lifetime Allowance is GBP 1 million. From 6 April 2018, the standard Lifetime Allowance will be indexed annually in line with the Consumer Prices Index (CPI). If you exceed the allowance you pay tax on the excess amount at 55%, if taking the pension as a lump sum or at 25%, if you take it as income. The same savings aren't assessed twice - so if you put GBP 2 million into drawdown this will have been tested and the excess taxed at that time and no further Lifetime Allowance charge is due. If you die leaving untouched pension savings that exceed the Lifetime Allowance - and they haven't already been assessed against it, your nominated beneficiary will be liable for the extra tax charges on the amount that exceeds the Lifetime Allowance.
UK - Uncrystallised Funds Pension Lump Sum (UFPLS) - A cash sum taken from a pension pot that has not paid out any retirement income. For each withdrawal, usually the first 25% (quarter) will be tax-free and the rest will be taxed at your appropriate tax rate.
If you have any other queries regarding Overseas Pension Schemes and Transfers, click below to contact Ranfurly.