Blog » Twelve pension jargon terms you need to know

Twelve pension jargon terms you need to know

November 19, 2018
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

What would visitors from another planet think if they landed on Earth and heard us talking about pension drawdown and annuities?

No doubt ET would have phoned home; when it comes to understanding your pension options, it can feel complicated and alien because of the language some pension companies use. Yet, making sure your pension is properly invested and as cost effective as possible, could mean a retirement for you that’s out of this world.

If Martian’s ever did land on Earth, we’re confident they’d give Pension Access a call to make sure they have everything in place for a financially secure future. And here’s how we’d explain things to them, in plain and uncomplicated English.

Important note: taking pension money early is not right for everyone as it will leave you worse off in retirement.

1. Annuity

This is an insurance company product where you exchange the savings in your pension pot for a guaranteed regular income, usually for life. If you are thinking about buying an annuity, read this first.

2. Attitude to risk

This is the risk you are prepared to take with your pension savings when they are invested. Broadly, you could consider yourself a cautious, medium or high-risk investor.

3. Bonds

Bonds, which make up a proportion of many people’s pension investments, are loans to governments and corporations. The growth from investment in bonds comes from the interest charged as these loans are repaid. Different bonds provide different levels of risk and growth rates. They are designed not to be volatile and generally offer relatively low growth.

Lady calculating her finances | Pension jargon terms you need to know

4. Charges

Sometimes referred to as an annual management charge (AMC). These charges are deducted from your pension to pay for the administration and management of your savings.

5. Death benefits

If you die before the age of 75, your personal pension can be paid as a tax-free lump sum to any beneficiary/beneficiaries of your choice. To find out how you can leave your pension to your children, click here. If you die after 75, your pension can still be paid to your beneficiary as a lump sum, but at the beneficiary’s marginal rate of income tax. It’s possible for beneficiaries to take an income, too. Tax treatment depends on your individual circumstances and may be subject to change.

6. Drawdown

This is an option where from the age of 55 your pension pot remains invested, while you take out a regular income or occasional cash sums. It is often referred to as pension drawdown, flexi-access drawdown (FAD) or income drawdown. You can usually take up to 25% of the pot as a tax-free lump sum when you first decide to move into drawdown. However, releasing money from your pension early will leave you worse off in retirement. We have answered the most common questions about drawdown here.

7. Equities

These are company shares which pensions are invested in to grow the value of your savings and which are traded on stock markets in the UK and around the world. Equities generally offer the greatest potential for growth and, equally, have the greatest potential to go up and down in value. Want to know more about our investment philosophy? Click here for a quick introduction.

8. Final salary pension

Also known as a defined benefit scheme. This is a type of pension where the retirement benefit is based on your pensionable income and how long you have been a scheme member for. With this type of pension scheme, the income benefits in retirement are guaranteed.

9. Pension freedoms

Anyone from the age of 55 and above with a qualifying pension can choose exactly when and how they would like to take their pensions savings. If you want to know more about pension freedoms, click here.

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10. Pension release

This allows you to withdraw your savings from the age of 55 before you retire or reach your chosen retirement age. You can take up to 25% of your private or company pension pot as a tax-free cash lump sum, if you’re not already drawing an income from it. Click here for the pension release facts you need to know.

11. State Pension age (SPA)

This is the age at which you can start to receive your State Pension. The current SPA is 65 for men and women. The SPA for both men and women will then increase to reach 66 by 2020. It’s due to rise even further to 67 by 2028.

12. Tax-free cash

This is the money you can take from your pension pot tax-free from the age of 55. It is usually up to 25%. This is also referred to as a tax-free lump sum.

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