Bogged down by the pension jargon? We are pleased to bring you a quick-fire guide to help unlock access to pension planning
Whether you’re approaching or already at retirement age, it’s well-known that the technical pension jargon used can often feel like a barrier and stop people from planning efficiently.
When you don’t know the meaning of words, you can feel less confident in making decisions. We aim to fill you with confidence in this finance section and help you know your lump sums from your lifetime allowance.
Busting the pension jargon
Here, Maike Currie shares some of the key terms involved with pension planning:
Most annuities provide you with a lifelong, regular income that is guaranteed to last as long as you live. A quarter (25%) of your pension pot can usually be taken tax-free before you buy the annuity and any other payments will be taxed as earnings.
Flexible retirement income (pension drawdown)
You can leave your money in your pension pot and take an income (up to 25% as a tax-free lump sum) straight away or in stages. The income after the first 25% will be taxed as earnings and the rest of your money stays invested.
If the value of your pensions are close to £1,030,000, or are likely to reach this by the time you retire, then you need to know about the Lifetime Allowance (LTA). The LTA is set by the government and limits the total amount you can build up in pension benefits over your life while still enjoying the full tax benefits.
If you go over the allowance you will generally pay a tax charge on the excess when you take a lump sum or income from your pension pot, transfer overseas or reach age 75 with unused pension benefits.
In some cases, the best way to take money out of your pension is to take a series of lump sums over time, instead of taking all the tax-free cash in one go. When you do this, 25% of whatever you withdraw is free of tax while the other 75% of the money you withdraw will be taxed like any other earned income you receive.
Introduced by the government in April 2015, these reforms changed the way people accessed their pensions drastically, offering retirees more choice when it comes to using their pension savings.
These are plans you set up yourself that allow you to build up a pot of money that you can use to provide income in retirement, normally from age 55. Contributions can usually be made by you and also by an employer. To get their value, just speak to the provider that looks after them. If you think you may have lost track of a plan, try the Unclaimed Asset Register. If they were contracted-out, HMRC may also have a record
The State Pension
A regular lifelong income payable by the UK government that you may qualify for once you reach State Pension Age, currently age 65. The amount you get depends on your National Insurance contribution record. The State Pension age for men and women is increasing and will reach 66 by 2020. It’s due to rise further to 67 by 2028. For more information visit the Government’s dedicated website pages: www.gov.uk/state-pension
A pension plan organised by your employer to help you save for retirement. The employer pays in and you may or may not need to pay in too. They are also known as occupational pension plans. For their current value or estimates of what they might be worth, just speak to your pension plan provider. If you can’t find details of a scheme you had in an old job, the Pension Tracing Service can help.