Pensions Jargon Buster
Let’s face it, the subject of pensions can be a little dry and some of the terminology can seem a bit technical. We hope that this jargon buster will help you to understand your pension entitlement a little better so that you can make the right decisions about your retirement plans.
An annuity is an insurance product that allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life. How much you get is determined by the rate the annuity provider offers.
Capital Gains Tax on Pensions
There is no CGT applied on pension investment growth.
Final Salary/Defined Benefit
Final salary schemes are a type of defined benefit pension scheme that are offered by employers. The benefits you receive at retirement are based on your earnings and your length of membership in the scheme.
Historically, these were fairly common but the enormous cost and liability to companies now means that they are really only available via public sector organisations. You are able to transfer your final salary scheme but you must take professional advice before doing so, as final salary schemes offer valuable guarantees and benefits.
Many companies are now enrolling their employees into Group SIPP schemes. A Group SIPP is a collection of individual pension plans held under the name of the company. Each member has their own pension plan and therefore has access to the full features of the SIPP.
Income Drawdown is a method of accessing your pension pot. Currently, at age 55 or over you can take 25% tax free from your pension and Income Drawdown will allow you to leave the remainder invested as you wish (usually the same investment options as your SIPP or current pension). Drawdown also allows you to draw whatever you like from the pension as and when you need it, either as a regular income or lump sums or both.
The benefits of Income Drawdown are that you can control where the money is invested and how and when you take the pension. The cons include the fact that your money is invested and if you draw too much from the pension you could run out of money before passing away.
Inheritance Tax on Pensions
Another great benefit of holding money within pension schemes is that if the money has been untouched or in drawdown and you pass away under the age of 75, the sum will pass tax-free to your beneficiary.
An investment platform is essentially an online service which allows you to buy, sell and hold funds. It is possible for you to do this yourself directly on a non-advised basis via a D2C (direct to customer) platform, or on an advised basis using a financial adviser who will invest on your behalf.
Managed Funds/Unit Trusts
By using a managed fund, investors' money is pooled together and is used by the investment manager to buy investments and manage them on behalf of all investors in the fund. The fund manager will pick the stock percentage allocation based on their research and aims.
SIPP – Self-Invested Personal Pension
SIPPs can provide a cheap, flexible and straightforward way to save for retirement. Unlike older pension plans, SIPPs allow a wide investment choice, on-line management and oversight and more flexibility in retirement options when it comes to accessing the money saved.
SSAS – Small Self-Administrated Scheme
SSAS pensions are particularly common in small or family-run businesses. SSAS rules allow members to invest in a range of assets including commercial property. The scheme can also offer commercial loans and could therefore provide a loan to the company in order to purchase an asset, such as a new building. Another difference of this defined contribution scheme is that it can borrow money, via a mortgage for example, as long as it’s for investment purposes.
When paying into a pension, you receive tax relief on any contributions that you make. This is at the highest rate of income tax that you pay, provided that the total gross pension contributions paid into your pension scheme, by you, your employer and anyone else don't exceed your annual earnings. There are maximum contribution limits you can pay into pensions, generally speaking up to £40,000 gross per tax year, but if unsure always speak to a financial advisor.
Example: if you were a basic rate tax payer and you paid £8,000 into a pension, you immediately get tax relief of 20% which makes a gross contribution of £10,000 with the additional £2,000 coming from HMRC in the form of tax relief.
Disclaimer: The Royal Mint Limited is not authorised by the Financial Conduct Authority to provide investment advice and nothing on this website should be construed as investment advice.