Pension Glossary 101: Part Two

Part two of our helpful pensions glossary covers everything from L – Z. If you haven’t had a chance to take a look at part one, click here to brush up on your pensions terms from A-J, then get to grips with the second part in this Jones Hill double bill.

Lower Earnings Limit – This is the point at which your earnings will build up the right to state pension benefits.

Member – Different from an ‘active member’ of a plan, who is actively making payments, a ‘member’ is someone who is still entitled to benefits under their pension plan.

NIC – National Insurance Contributions are deducted from the income of all employees on a scale which is linked with income levels. You need 30 years of National Insurance Contributions in order to get a full State Pension on retirement.

Open Market Option – Buying an annuity from their own pension provider is not the only option for the retired, and more often that not it’s not the best option – we can compare rates and arrangements for other insurance providers and purchase the one that suits you best.

Preserved Benefits – These are classed as the benefits a pension scheme member has already earned when they stop making payments, or when their scheme closes. They are also known as frozen benefits, and they will be paid when the individual takes their benefits.

Redirecting payments – You can change the funds that future payments are invested in by redirecting your future payments. It won’t affect any payments that have already been invested, and many providers don’t charge for this service.

SIPPs – A self-invested personal pension gives the planholder maximum flexibility and choice with regards to their investments. It is best for those who are more comfortable with investment risk and they can be more expensive to run.  SIPPs are also used for pension income drawdown contracts.  Alternatives to SIPPs are SSAS – Small Self Adminstered Schemes.  If you’re considering either, take professional, independent advice.

Tax Relief – Tax relief means that some of the money that would have been paid to HMRC will be paid into your pension plan instead, encouraging those saving for their retirement.

Upper Accrual Point – This is the maximum earnings that are used to build up the right to state pension benefits.

With-Profits Fund – If your pension plan contains this type of fund, your fund manager retains a percentage of the profits to supplement your investment earnings in the case of a bad year for returns. It helps to smooth out the instability of the stock market, but it can incur heavy penalties for those that cash in early., usually called a Market Value Reduction.

Pension Glossary 101: Part One

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).

When Should You Be Thinking About Retirement?

It is a question that sits at the back of many people’s minds. It doesn’t hold much weight during your 20s and 30s, but by the time you reach your 40s, retirement will be on the horizon and you’ll be wondering when you should start putting real, concrete plans into place.

So when should you start thinking about retirement? The answer, according to many experts, is as early as possible. The earlier you start making plans and paying into a pension (this will soon become compulsory thanks to auto-enrolment), the better quality of life you will have when you retire. Thinking you’re ‘too young’ to start thinking about pensions is one of the biggest mistakes many savers make, purely because every year you work without paying into a pension, you are essentially losing money.

People live longer nowadays than they ever have done before, which can often mean that retirement stretches out for longer than you think. In order to avoid living off a pittance when you retire, it’s important to put away some savings early on. It’s better to save smaller amounts over a longer period of time, than to rush paying into your pension in the last five years before you retire.

Savings need time to grow, and the longer you give them, the better they will look when you finally receive those projected pension figures. Would your income now be enough to live on in 20 or 30 years? Think of how much you would need to save in order to achieve that figure when you retire. You are the only person who can save for your future.

If you are rapidly approaching retirement age and still worried about how much you’ll be able to draw when you retire, get some advice. Independent financial advisers are often full of tips that can help you to boost your income close to retirement, and you can be sure that they are impartial, with only your wellbeing and financial status in mind. Just as it’s never too early to think about your retirement, it’s also never too late to boost your retirement income and ensure you are set up for your life post-work.

If you have worries about your pension plan or you simply want to reassure yourself that you’re on the right track, speak to Jones Hill independent financial advisers today.

Countdown to Your Pension: A Complete Guide

It’s never too early to start thinking about your pension, and putting away funds that can be used as your income later in life. At Jones Hill we have put together a helpful timeline that will help guide you through the pensions process – starting ten years in advance, so you have plenty of time to perfect your policy and your plan.

10 Years Away

With retirement ten years away, it’s time to take a step back and review all of your current savings and investments. Be sure to take into account any pensions that you may have lost track of from years gone by. There is a Pension Tracing Service that can help you to calculate these figures, as well as a predicted figure of your state pension from the Pension Service. With ten years to go, you’ll be able to work out if you’re on course for the pension you want, and you’ll have plenty of time to make up the difference if your projected income is less than you’d hoped.

Five Years Away

Conduct another review of your finances, and assess how much risk there is involved with your investments. Around five years before retirement is the perfect opportunity to begin reducing your involvement with investments that have a higher risk status, turning to those that have a more steady flow of income. At this point, a sizeable loss would be hard to recover so close to the date of your retirement. Reduce risk five years from retirement to ensure your income becomes more steady and reliable.

One Year Away

This is where things start to get serious. Get an up-to-date overview of your state pension, and put together detailed plans for your predicted income expenditure in the run up to your retirement, and the first few years afterwards. This is the point when independent financial advice is highly recommended, to ensure that you are fully prepared for retirement, and to help make any small adjustments that might be necessary.

Six Months Away

Your pension provider will send you a letter confirming your date of retirement and the current value of your fund. For those who have saved with different providers over this year, this may result in multiple letters and a few quick sums to figure out what this means for your total income.

Three Months Away

Again, you’ll receive a letter from your pension provider, this time outlining the annuity they are prepared to pay you for your pension. In certain cases, it is sometimes worth consolidating your various pension pots (if you have more than one) in order to receive a more competitive annuity arrangement. Shop around, seek some independent advice, and find the best rate for you.

Retirement Day

By the time your retirement arrives, you should feel happy and comfortable with the decisions you made in the years leading up to drawing your pension, whether you received independent pensions advice or whether you did your own research and figured out your own best policy. You should have enough to enjoy a happy and fruitful retirement.

Jones Hill Offers Expert Advice as 14% of Employers Cite Pensions as Key Concern

In a landmark year for pension policies and legislation change, one of the country’s leading independent financial advisory services is demystifying the pension process for businesses in the Wiltshire area. Jones Hill are experts in the world of pensions and finance, and their team of friendly, non-nonsense experts are helping to educate businesses on the new auto-enrolment changes and simplify pensions for all employers at a time when pensions are undergoing the biggest reform since their inception.

A recent report by insurance company Aviva found that 14% of employers view legislative change and updates to policies such as pensions as one of their key business concerns. Many employers are still getting to grips with what the new auto-enrolment policies mean, and many are struggling with aspects such as communicating the changes to their workforce, on-going compliance management and the overall cost of making the changes. 

Businesses with fewer than fifty employees are not required to make the changes until mid-2015, and many SMEs are still trying to strategise for the impending legislation change. Jones Hill offer a simple service for businesses to help them solve these issues and set up a foolproof pension plan for their employees that will keep them on the right side of the law. 

Brian Hill, ranked in the top 200 Independent Financial Advisers in the UK, and Managing Director of Jones Hill, said, “This year is a complex year in the world of pensions, and many employers are anxious to make sure they get everything right. At Jones Hill, we are here to offer specialist support for businesses that are implementing these changes, supporting them and offering professional advice throughout this transitional period.”

He adds, “We are accredited by organisations such as the Society of Pension Consultants, so our clients can rest assured that they will receive the very best advice, and we won’t overcomplicate things. We pride ourselves on being able to simplify these processes for our clients. We don’t bombard them with jargon and we don’t look to make a complicated matter even more confusing; we are a friendly bunch and we want to make sure our clients come away with an in-depth understanding of the pension process, rather than a head full of complex lingo and no real comprehension of what they must do.”

The team at Jones Hill are down-to-earth without ever compromising the kind of professional attitude and impartial advice you’d expect from a financial adviser. There are no gimmicks, no flash cars and no formal offices; just valuable advice coming from a team of experts that have become instrumental to many Wiltshire businesses as they assess their financial operations. 

With the deadline approaching for smaller businesses to put auto-enrolment schemes into place, services like those offered by Jones Hill are more important than ever in ensuring that businesses remain compliant, and understand every element of their new policies thanks to uncomplicated advice and simple explanations.

The Annual Allowance

Individuals can save as much as they like towards their pensions each year, but there is a limit on the amount that will get tax relief. The maximum amount of pension savings that benefit from tax relief each year is called the annual allowance.

It includes employer contributions as well as individual and third party contributions. If the total from all sources – which is called pension input – is higher than the annual allowance then individuals may have to pay a tax charge on the excess amount.

The pension input is the increase in an individual’s pension savings over what is known as the pension input period. It is not necessarily the same as the contributions that have been made and received tax relief within the tax year.

If there is unused annual allowance from the three previous tax years then this can be carried forward to mitigate any excess pension input in the tax year in question.

The annual allowance charge is not payable in the tax year in which an individual dies and there is also no pension input for pension arrangements from which an individual becomes entitled to a serious ill health lump sum or a severe ill health pension where they are unlikely to be able to work again.

The annual allowance for tax year 2013/2014 is £50,000 as it was in 2011/2012 and 2012/2013. It reduces to £40,000 in 2014/2015 and is unlikely to increase in value before at least 2018.

The Pension Input

The pension input is made up of

• The total annual increase in the value of an individual’s defined benefit (DB) pension rights for the pension input period, and
• The contributions by or on behalf of the individual to defined contribution (DC) schemes for the pension input period.

In a DB scheme, the pension input is the difference, taking into account inflation, between the capital value of the pension an individual would have been entitled to receive at the start and end of the pension input period. Early retirement factors, contributions to added years AVCs and the value of death in service benefits can be ignored.

The opening and closing values for pension rights are calculated using a factor of 16:1.

If the DB scheme provides tax free cash in addition to the pension rather than by commutation then the amount of the tax free cash at the start and end of the pension input period is added on to the opening and closing pension values.

To take inflation into account, the opening value of the individual’s DB pension rights is increased by the annual rise in the Consumer Prices Index (CPI) to the September in the tax year before the one in which the pension input period ends, that means that the 12 month CPI increase to September 2012 is to be used to revalue the opening value of any pension input period ending in tax year 2013/2014.

Emma is a member of a final salary scheme that provides for each year of service a pension of 1/80th and an additional tax free lump sum of 3/80ths of annual pensionable salary. The scheme year and pension input period runs from 1 April to 31 March and in March 2014 Emma has completed twenty years pensionable service. Her pensionable salary increased from £42,000 to £50,000 following a promotion. Her pension input amount for the 2013/2014 tax year is:
		Input period
		Start date	End date
	Completed years of pensionable service	19	20
	Pensionable salary	£42,000	£50,000
	Accrued pension	£9975	£12,500
	Accrued pension x 16	£159,600	£200,000
	Tax free cash	£29,925	£37,500
	Opening value increased by CPI (2.2% Sept 2012)	£193,694
	Closing value		£237,500
	Pension input		£43,806

There is no pension input for deferred members of DB schemes as long as their benefits do not increase in value by more than CPI (or, if greater, in line with the scheme rules that applied at 14 October 2010) and they were deferred members for the whole of the pension input period.

Pension Transfers

Pension transfers don’t count towards the annual allowance unless they are a pension credit as a result of divorce from a non registered pension scheme.

Any contributions paid to the original scheme before the transfer are still tested against the annual allowance in the usual way.

The Pension Input Period

The pension input period does not have to match the tax year. Any pension input amounts paid after the pension input period end date but before the end of the tax year will not be tested against the annual allowance in that tax year but in the following tax year.

Individuals can have different pension input periods for different pension schemes they are a member of and there can be different pension input periods for different arrangements within the same scheme.

For a DC pension the first pension input period starts when the first contribution – no matter what the source – is made into it after 5 April 2006. Transfers in do not count and contracted out rebates did not either before they were abolished.

For a DB pension the first pension input period starts when benefits start accruing after 5 April 2006. For members before 6 April 2006, this will be 6 April 2006 and for individuals who join after 5 April 2006 this will usually be the date of joining pensionable service.

The first pension input period end date depends on whether the input period started before 6 April 2011 or not.

• If it started before 6 April 2011 it would have ended on the anniversary of the start date unless it was changed.

• If it started on or after 6 April 2011 it will end on the following 5 April unless it is changed.

• Subsequent pension input periods start the day after the end of the previous input period and last a year unless it is changed.

For example, a first pension input period that started on 29 January 2007 would normally have ended on 29 January 2008 and subsequent pension input periods will normally run from 30 January to 29 January while a first pension input period that started on 29 January 2014 would normally have ended on 5 April 2014 and subsequent pension input periods will normally run from 6 April to 5 April.

If an individual dies or takes all their benefits from an arrangement the pension input period will continue to the end date.

The pension input period end date can be changed although it depends on the type of scheme as to who can change it.

If it is a DC scheme it can be changed by either the scheme administrator or member. If it is a DB scheme it can only be changed by the scheme administrator.

When changing the end date the following rules apply

• A pension arrangement can only have one pension input period end date in a tax year.

• The new end date can only be the current date or in the future. Before 19 July 2011 it could have been changed retrospectively.

• If the first pension input end date started after 5 April 2011 the first end date is automatically the next 5 April. This can be ended sooner, or later than 5 April as long as it’s within a year of the start of the first pension input period.

• Subsequent pension input periods normally last a year but can be closed early or extended to any date in the tax year following the tax year in which the pension input period started.

DB scheme administrators generally change members’ pension input periods so that they tie in with the scheme year end date or company accounting date.

HMRC does not have to be informed about changes to pension input periods.

If an individual wants to change the pension input period end date they need to contact the scheme administrator who may need the request in writing.

If both an individual and a scheme administrator change the end date for the same pension input period then it’s the first request which determines which date applies.

Carry Forward of Unused Annual Allowance

From tax year 2011/2012 individuals can carry forward unused annual allowance from the previous three tax years to the current tax year. This allows individuals to have pension input above the annual allowance in a tax year without facing a tax charge. This can be useful for people who have an unusually high level of pension input in a tax year, for example, because of promotion or a sudden pay rise.

• Unused annual allowance can only be carried forward to the current tax year from the previous three tax years.
• This can only be done after the current year’s annual allowance has been used up.
• Unused allowance is used up starting from the earliest year available.
• The individual must have been a member of a pension scheme at some point during the tax year being used to carry forward unused allowance. This could be as an active, deferred or retired member of a scheme.
• For tax years 2008/2009 to 2010/2011 the annual allowance is deemed to be £50,000.
• Following the reduction in Annual Allowance for 2014/15, the Carry Forward entitlement for previous tax years, up to and including 2013/14, will remain at £50,000
• If there’s unused annual allowance to carry forward from a previous tax year but the annual allowance has been exceeded in a later tax year within the three year period that excess will use up some of the unused allowance from the previous tax year.

This does not apply to tax years 2009/2010 and 2010/2011 as any excess over £50,000 in those years does not use up previous years’ unused allowance. The excess is treated as zero. However, if contributions in 2010/11 or 2009/10 exceeded £50,000, no carry forward allowance is permitted.

• For DB schemes, the pension input calculation method outlined above is used for all tax years to determine whether there is any unused allowance.
• 
  
• Although carry forward is from previous tax years, it is based on pension input in the pension input periods that end in the previous and current tax years.
• 
  

Carry Forward & Tax Relief

• There is no carry forward of tax relief from previous tax years. Tax relief is only given in the tax year the pension contribution is made.
• Individual and employer contributions made to use up unused annual allowance are subject to the usual tax relief rules. Employer contributions are subject to the ‘wholly and exclusively’ test at the time they are made and tax relief on individual and third party contributions are limited to 100% of the individual’s UK relevant earnings (or £3600 if greater) in the tax year the contribution is made.

Stephen is a member of a defined benefit pension scheme and also has a SIPP which he funds from self employed earnings. He varies his contributions to the SIPP with a view to maximising them where possible as his self employed earnings change. In 2013/2014 he has made contributions in excess of the annual allowance after estimating what his pension input for the defined benefit scheme would be. The final position after confirmation of the pension input into the defined benefit scheme is:
	Tax year	Pension input	Annual allowance	Unused allowance	Cumulative carry forward available
	2008/2009	£25,000	£50,000	£25,000	N/A
	2009/2010	£62,000	£50,000	£0	N/A
	2010/2011	£30,000	£50,000	£20,000	N/A
	2011/2012	£70,000	£50,000	(£20,000)	£45,000
	2012/2013	£40,000	£50,000	£10,000	£20,000
	2013/2014	£85,000	£50,000	(£35,000)	£30,000
In 2011/2012, there was £45,000 unused allowance available. The pension input was £20,000 in excess of the annual allowance for 2011/2012 and has therefore used up £20,000 of the unused allowance from 2008/2009. The remaining £5000 unused allowance from 2008/2009 is lost for future tax years and the £20,000 unused allowance from 2010/2011 can be carried forward to 2012/2013 and if not used up to 2013/2014.In 2013/2014, there was £30,000 unused allowance available made up of £20,000 unused allowance from 2010/2011 and £10,000 from 2012/2013. The pension input was £35,000 in excess of the annual allowance for 2013/2014 and therefore uses up the £20,000 unused allowance from 2010/2011 and the £10,000 unused allowance from 2012/2013. There is still an excess of £5000 on which an annual allowance tax charge will be payable. There is no carry forward available for 2014/2015.

Information requirements

From tax year 2011/2012 scheme administrators must provide annual allowance information if individuals request it.

If an individual’s pension input to a pension scheme is greater than the annual allowance then the scheme administrator must provide details of the pension input to the scheme and the annual allowance for the tax year and each of the three previous tax years. This information must now be sent by the next 6 October following the tax year. For 2011/2012 this didn’t need to be done until 6 October 2013.

If an individual asks for annual allowance details the scheme administrator must provide it within three months, or by 6 October following the tax year if this is later.

Annual Allowance Charge

If the pension input exceeds the annual allowance and any carried forward unused allowance then there is a tax charge of up to 45% on the excess.

The amount payable depends on the rate of income tax that an individual would pay if the excess amount was included in their taxable income as the top slice of that income. The chargeable amount is

• 20% on any excess that falls into the basic rate tax band
• 40% on any excess that falls into the higher rate tax band
• 45% on any excess that falls into the additional rate tax band

Where a relief at source pension contribution, usually to a personal pension, or a gift aid payment has been made in the tax year the basic rate tax band is extended as normal.

Example

Laurent earns £150,000 and as a result of contributions he has made to his personal pension and the increase in the value of his current employer’s defined benefit arrangement he has £32,000 excess pension saving on which the annual allowance charge is due.

Laurent’s contribution to his personal pension was £20,000 gross which means his higher rate and additional rate thresholds are extended by £20,000. His additional rate threshold would therefore start at £170,000.

Adding the £32,000 excess to Laurent’s earnings means that £20,000 of the excess will fall below his additional rate threshold and therefore be subject to 40% tax and the remaining £12,000 will be in excess of the additional rate threshold and be subject to 45% tax.

Laurent’s annual allowance charge will therefore be £13,400 (£20,000@40% + £12,000@45%).

The charge payable is the same whether a contribution is paid to an occupational pension or a personal pension.

Paying the Charge

The annual allowance charge is normally paid through self assessment. If an individual who does not complete a tax return incurs a liability then they should contact their tax office. The charge is payable even if the individual is not resident in the UK.

The charge can sometimes be paid out of pension benefits. This has been allowed since tax year 2011/2012.

Pension schemes can choose to offer this but they only have to pay the charge on an individual’s behalf if:

• The charge is over £2000
• The pension input to that scheme was greater than the annual allowance, and
• The individual chooses to have the scheme meet the charge from their pension benefits.

The individual must choose to have the scheme to pay the charge by 31 July in the year following the end of the tax year the charge relates to. This means for a charge due for 2013/2014 the individual must make the decision for the scheme to pay by 31 July 2015.

The individual can only require that the scheme pays the charge on any excess over the annual allowance which occurred under the scheme.

If the scheme pays then the individual’s pension benefits are reduced.

• In DC schemes the individual’s fund value is reduced by the amount of the charge.
• In DB schemes the member’s pension rights are reduced actuarially.

Pensions in payment can also be reduced actuarially to pay the charge but GMP benefits cannot be reduced so in some cases the scheme may not be able to meet the liability.