Thursday, 18 July 2013

Explaining Pensions Terms and Expressions

This is an alphabetical list which helps to cut through the jargon often used when discussing pensions.

Incorporates changes made from 6 April 2013

·       UK pension plans / schemes applicable to expats

·       ALWAYS Get a professional Adviser

·       Understanding QROPS & QNUPS

A Day
6 April 2006 was the day the UK Government pension simplification rules came into effect.

ASP - Alternatively secured pensions
At the age of 75 an alternatively secured pension would allow an individual withdrawal of income, similar to an unsecured pension fund such as income drawdown

Since 6 April 2011, no new ASP can be commenced but existing ones can continue until the next review date. The existing ASP fund can be transferred to Income Drawdown (Unsecured Pension) plan or an annuity commenced.

AVCs – Additional Voluntary Contributions
A pension top-up for an occupational pension scheme. The scheme members pay contributions into an arrangement run by the employer to boost the main pension.

FCA - The Financial Conduct Authority
The FCA has taken on the role previouslyundertaken by the FSA - the UK's financial services regulator. The FCA also ‘passports’ authorised advisers to operate in other countries. For a recommended adviser click here.

FSAVCs – Free-Standing Additional Voluntary Contributions
A pension top-up policy for an occupational pension, but separate from the employer’s pension scheme and normally run by an insurance firm.

The Financial Services Authority - was replaced by the Financial Conduct Authority (FCA) in April 2013

Group Personal Pension
A type of personal pension offered by some employers but not classified as occupational (see money purchase pension).

Lifetime allowance
This is a limit on the value of retirement benefits that you can draw from approved pension schemes before tax penalties apply. The Lifetime Allowance was £1.5m in the 2012/13 tax year but reduced to £1.25 million in 2013/14, from 6th April 2013. Anyone whose fund is approaching or is already above these figures needs to act soon! Please email me

Lifetime annuity
A lifetime annuity converts money from a pension fund into pension income, which is taxable. There are different types to suit different circumstances and often treated more favourably for tax purposes in other countries.

Money purchase pensions
Some occupational pensions and all personal, group personal, stakeholder, FSAVCs and some AVCs are money purchase pensions. The contributions are invested in, for example, the stockmarket or bonds. The size of the fund depends on the contributions and how well the investments perform. At retirement, there is a choice of options to provide you with a retirement income.

Occupational pension
These are only available through employers and run by pension scheme trustees. There are two types – salary-related (defined benefit) and money purchase (defined contribution).

Pension Commencement Lump Sum (PCLS)
Though often referred to as ‘Tax-Free Lump Sum (see below), PCLS is more accurate as it MUST be taken as the first benefit.

Pension Liberation
Increasing numbers of pension savers are being targeted by unscrupulous companies encouraging them to access their pension savings early. This is commonly known as 'pension liberation' and has significant tax consequences. This is from HMRC Website

Personal pension
A pension policy taken out by an individual from an insurance company or another financial institution and into which personal contributions are made. It may also be offered by employers.

Protected rights pension
This is the part of a pension fund which was used to contract out of the UK State Second Pension (SERPS or S2P) that must be used to buy a protected rights annuity.

QNUPS -  Qualifying Non UK Pension Scheme, which means it meets the criteria set by the regulations the UK government brought out in February of 2010. This means that or a UK or non-UK resident, there is an opportunity to make contributions to overseas schemes, established as QNUPS, with the knowledge that those funds will be sheltered from UK IHT. Individual advice should be taken in all circumstances from a regulated and authorised adviser. Please email for a recommendation.

Q - Day
6th April 2012 is the day on which fundamental changes to QROPS became effective.

QROPS - Qualifying Recognised Overseas Pension Schemes
These became available from A-Day. It is a pension scheme set up outside the UK that is regulated and recognised for tax purposes as a pension scheme in the country in which it is located. The QROPS planholder and the QROPS policy don’t have to be in the same country and this is almost always an advantage. QROPS have been established in various countries across the world, many in jurisdictions with beneficial tax rules. QROPS can now also be established with similar rules to SIPP (please see below). For specialist advice click here

Salary-related pension scheme (final salary or defined benefit)
A type of occupational pension. The amount of pension you get is worked out on your salary at or near retirement, or when you left employment, and your pensionable service.

Self invested Personal Pension (SIPP)
Essentially the same as a Personal Pension described above. However, with a SIPP the individual can exercise discretion over the investment policy, subject to the rules of the SIPP provider. This should always be done with professional guidance and if you want access to a specialist, please Email me

Stakeholder pension
A type of personal pension that has to meet certain standards set by the UK Government. An individual can take one out or it may be available through an employer, but is not classified as occupational. 

State Pension
The UK Pension Service (part of the Department for Work and Pensions) will pay the basic State Pension based on an individual’s National Insurance contribution record. In addition, individuals may also qualify for the State Second Pension based on their own earnings and National Insurance contributions.

State Second Pension
The State Second Pension is an additional State pension paid on top of your basic State Pension. This was called SERPS. Self-employed people cannot build up a State Second Pension.

Tax-free lump sum
An amount of cash set by tax law which you can take at retirement free of tax. Salary-related occupational pension schemes may have different rules on the amount of tax free cash you can take. This is only tax-free to UK residents. Tax-free cash should correctly be called ‘Pension Commencement Lump Sum’ (PCLS) since it can only be taken as the first benefit from a pension Plan

Unsecured Pension (Income Drawdown)
This is an alternative to buying an annuity but provides an income whilst the pension is still invested. At age 75, the unsecured pension must cease and be replaced by either a Lifetime Annuity or ASP. For non UK residents or those intending to become non-resident, QROPS could be another alternative.

Pensions Advisers, including the ones that I recommend, will be happy to cut through the jargon. Email me for a recommendation

Additional Posts



UK Pension Plan but you live in Spain

David Goodall
Financial Pages in Spain