At Jones Hill, we know that pensions terminology can be confusing for those thinking about their retirement for the first time. We’ve put together a handy glossary of the most important terms you’ll ever need to know when it comes to understanding your pension.
Annuity – This is a type of financial contract that guarantees a fixed or variable payment of income. It can be monthly, quarterly, biannually or annually, and it can last for the life of the annuitant, called a lifetime annuity, or for a previously specified period of time, often called a term annuity or temporary annuity. Those diagnosed with health problems or other issues can qualify for what’s known as ‘enhanced annuity’, where they are entitled to receive more, and these are always lifetime annuities.
Basic State Pension – The flat rate for a State Pension is paid to everyone who has met the minimum contribution requirements for National Insurance. It currently stands at £110.15 per week for a single person, but changes come into play each year to keep the basic pension rate in line with inflation. Bear in mind that even with the proposed new flat rate of £140 per week, this is just £20 per day – the poverty level in the UK is, apparently, £17.50 per day!
Contribution – This is an alternative term for the word ‘payment’. Your pension contributions are essentially what you or your employer have pay into your pension scheme.
Drawdown Pension – This allows you to keep your savings for retirement invested and draw an income directly from your plan, instead of buying an annuity. Drawdown pensions come with a number of stipulations, one of them being regular reviews and preferably on-going financial advice from an impartial expert.
Early Retirement – This hardly needs any explaining – it’s what we’re all aiming for! This is when someone takes their pension benefits before the ‘normal’ retirement date stated in their pension plan documentation.
FCA – This stands for the Financial Conduct Authority, and it helps to regulate the financial services in the UK. It was formed as a successor to the FSA (Financial Services Authority).
GPP – A GPP (or Group Personal Pension) is set up by an employer on behalf of their employees. All of the pension contracts are arranged by the employer, but are between the pension provider and the employee.
Higher Rate Tax – The dreaded phrase ‘higher rate tax’ is 40% for those with a taxable income above £32,010 for 2013/14 (plus their personal allowance).
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