The A to Z of Pensions

The A to Z
of Pensions

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AEI
Average Earnings Index.
The A to Z
of pensions
Annual Allowance
Annual contributions limit of £50,000 set by HMRC. Contributions in excess of this
amount are unlimited, but will be subject to additional tax charges.
Annuitant
A person in receipt of, or who has entitlement to an annuity.
Auto Enrolment
From 2012 the largest organisations in the UK
will have to enrol their workers into a qualifying
workplace pension scheme if they meet certain
requirements. The workers will not have to
make an active decision to become a member
of the scheme, but will have to meet certain
criteria to be eligible for Auto Enrolment.
Workers must have qualifying earnings and
be at least 22 but under State Pension Age.
This practice will gradually be enforced in
medium and smaller organisations over the
following years until 2018.
Auto Enrolment date
Annuity
An annuity is a
form of insurance or
investment which provides a
fixed income to the annuitant
for a set period of time or for
the rest of their life. Annuities
are often used to provide
a retirement
income.
The Auto Enrolment date is the date on which workers are enrolled into their
qualifying workplace pension scheme. When Auto Enrolment first applies to an
organisation they may have a large number of workers who meet the requirements
for Auto Enrolment and whose Auto Enrolment date occurs at that time.
From that point onwards any new workers will have an Auto Enrolment date upon
joining an employer if they meet the requirements. This means they must earn more
than £9,440 a year and must be aged between 22 and the State Pension Age.
Existing workers who do not meet the criteria (aged between 22 and State Pension
Age and earning £9,440 a year) will have an Auto Enrolment date when they first
meet all the criteria for Auto Enrolment.
Please note that these figures are correct for the 2013/14 tax year but are subject
for review by the government every year.
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Company stocks
Company stocks are the shares in the ownership of a company.
These are sold by companies to enable their organisations to grow
and can be resold on the stock market once they have been sold.
The A to Z
of pensions
Compliance regime
The processes and powers of The Pensions Regulator (TPR) which can be used
to ensure that organisations are complying with their employer duties.
Contracted Out
When a scheme is contracted out members do not build up any entitlement to
the State Second Pension. Instead the part of their National Insurance contributions
which would usually be paid into the State Second Pension is paid into their
workplace pension scheme. Only occupational pension schemes can contract
out, and they must meet certain conditions.
Contribution schedule
A contribution schedule is produced by the employer and contains the details of
all the actual contributions made in each pay reference period. This allows them
to process these contributions. An entry is made for each member enrolled in the
scheme and includes their name and National Insurance number and the amount
of employer and worker contributions paid into their retirement pot.
DWP
Department for Work and Pensions.
Defined benefit pension scheme
A defined benefit pension scheme ensures a
level of retirement income to its members;
usually a fraction of the member’s annual
earnings for every year they have been a
member of the scheme. For example,
a member’s pensions may be calculated
as 1/60th x Final Pay x Number of Years
in the Scheme.
Defined
contribution
pension scheme
A defined contribution pension
scheme pays the member a
retirement income dependant on
the contributions made into their
retirement pot, the investment
returns and the amount of
charges over time.
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e Earnings
A worker’s earnings include their salary, wages, overtime,
bonuses and commission. It also includes statutory sick pay and
statutory pay received during maternity, paternity or other kind of family leave.
The A to Z
of pensions
Eligibility
The conditions that must be met by a worker in order to be a member of a pension scheme.
Eligible Jobholders
Workers who must be automatically enrolled into a qualifying workplace pension
scheme when Auto Enrolment first applies to an organisation. They must work in the
UK, be at least 22 but not over State Pension Age and earn more than £9,440 per year
Please note that these figures are correct for the 2013/14 tax year but are subject for
review by the government every year.
Employer duties
In line with The Pensions Act 2008 UK employers will have new duties introduced
from 2012. They will be required to provide some or all of their workers with access
to a workplace pension scheme which meets legal requirements. They will also have
to automatically enrol certain workers into a qualifying pension scheme and pay
contributions on their behalf.
Employer duty date
Defined in legislation through The Employers’ Duties (Implementation) Regulations
2010, this is the date on which the employer duties will first apply to an employer.
Enrolment information
Information which must be provided to workers by employers as part of the process
of becoming a member of a qualifying pension scheme.
Entitled workers
Entitled workers are workers who earn less than £5,668 per annum and do not need
to be automatically enrolled by their employer. Employers must ensure that entitled
workers have access to a pension scheme if they request one, but this does not have to
be a qualifying pension scheme and the employer is not required to make contributions.
Please note that these figures are correct for the 2013/14 tax year but are subject
for review by the government every year.
Estate
The value of what a member leaves behind when they die. This includes property and
possessions less any debts they owe. If a member doesn’t specify who should receive
their retirement pot in the event of their death before retirement those savings will be
classed as part of their estate.
Ethical investment
Means of investing money which are in line with the ethical criteria set out by the trust.
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Fund
A means of investing a member’s retirement money in different
ways. Funds are made up of investments such as shares and other
financial products.
The A to Z
of pensions
Funding level
The difference between the amount of money in a defined benefit scheme’s funds,
and the amount it needs to have in order to pay the promised retirement incomes
to its members.
Gross annual earnings
The amount an individual earns before tax or National Insurance deductions are made.
Group personal pensions (GPP)
A set of personal pension arrangements for workers at one organisation, which is
contributed to by the workers and sometimes the employer. A retirement income is
provided for all workers through this one arrangement.
Guaranteed annuity
A set retirement income that is paid until the annuitant dies, and is guaranteed until
a certain date. Should the annuitant die before that date, the income is then paid to
their dependants until that date.
HMRC
Her Majesty’s Revenue and Customs.
Hybrid scheme
A pension scheme which provides retirement
incomes on a defined benefit basis for some
members, and a defined contribution basis for others.
They may also provide some members with both.
Fund
manager
The person or
organisation that is
responsible for the
day-to-day management
and running of
a fund.
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Implementation regulations
Laws which detail when the process known as staging will
take place.
The A to Z
of pensions
Incapacity
A mental or physical condition resulting in a member’s inability to continue with
any occupation.
Investment returns
A measure of the change in value of an investment over
a specified time period which indicates whether the
investment has made a profit or a loss.
Investment risk
The different financial products which make
up a pension scheme’s investments carry
different levels and types of risks. More risk
means that there is greater potential for
profit and a higher eventual retirement fund,
but there is also a greater potential for loss.
Financial products which carry less risk may
be more secure and less likely to fall in value
but this often comes with lower returns.
Investment
Money that is paid into
a pension scheme is used to
buy financial products such
as stocks and shares, bonds and
properties in order to generate
profit for the scheme.
The financial products
are known as
investments.
Jobholder
A worker who works – or usually works – in the UK, is between the ages of 16 and 75
and to whom qualifying earnings are payable.
Joint life annuity
A joint life annuity is guaranteed for the lives of both the annuitant and their partner.
The payments are paid to one person until they die, and are then transferred to their
partner for the rest of their life.
Lifetime annuity
A financial product which provides the buyer with a retirement income for the rest of
their life. A lifetime annuity is purchased with a member’s retirement pot and must
meet the conditions ruled by the Finance Act 2004.
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Member
An individual who is enrolled in a pension scheme and has not
yet taken retirement or withdrawn their money from the scheme.
The A to Z
of pensions
Minimum contributions
The minimum amount that must be paid into a member’s retirement pot under the
employer duties. This will be introduced gradually and will rise to 8% of qualifying
earnings by 2018. The employer is obliged to make contributions to support
jobholders in building their retirement accounts.
NDPB
Non-Departmental Public Body.
Nominated beneficiary
If a member dies before they take retirement the nominated beneficiary is the person
or number of people, charity, trust, club or society who will receive their retirement
pot. This payment will be made to nominated beneficiaires at the discretion of the
Trustees providing the member has completed their Expression of Wish form.
Non-Eligible Workers
Non-eligible workers are workers who do not fit the eligibility criteria for Auto
Enrolment. Those who earn over £9,440 but are aged between 16 and 21 or between
State Pension age and 74 are non-eligible jobholders, as are those aged between 16
and 74 but who earn between £5,668 and £9,440 per annum. Although employers are
not required to auto-enrol these workers, they can opt in to the qualifying workplace
pension scheme and employers must make contributions on their behalf if they do so.
Please note that these figures are correct for the 2013/14 tax year but are subject for
review by the government every year.
Opt in
When a worker asks their employer to enrol them in to their work-based pension
scheme if they have not been automatically enrolled. The employer must enrol a
worker who opts in to a pension scheme if they are based in the UK, between 16
and 75.
Opt out
Jobholders who have been automatically enrolled or have opted in to a pension
scheme have the right to leave the pension scheme within one month of the
beginning of their membership.
Opt out notice
The notice given by a member who wishes to opt out of their pension scheme.
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PAYE reference
A Pay As You Earn (PAYE) reference number identifies which
tax office is associated with an employer and their workers.
The A to Z
of pensions
Pay reference period
The period over which an employer pays its workers for example weekly, monthly
or every four weeks.
Payment schedule
A schedule which details the dates that payment
of contributions will be made by and the rates of
contributions to be paid by an employer and
their workers.
Pensions Act 2008
A piece of legislation which established the new
employer duties, meaning UK employers will have
to provide some or all of their workers with access
to a workplace pension scheme which meets legal
requirements. They will also have to automatically
enrol certain workers into a qualifying pension
scheme and pay contributions on their behalf.
Qualifying earnings
The earnings used to calculate minimum contributions to a pension scheme. For
the 2013/14 tax year qualifying earnings are those between £5,668 and £41,450.
Employers can choose to calculate contributions on another definition of earnings.
Qualifying pension scheme
A workplace pension scheme which meets certain minimum criteria.
Phasing
The gradual
increase of employer
contributions into
member’s retirement pots.
Contributions will start
at 1% for five years and
then rise to 2%
then 3%.
Retirement income
The money which a member receives after they have taken retirement from the scheme.
Retirement pot
A member’s retirement pot is the amount of money in the pension scheme which is
in respect of their contributions either by the member themselves or the employer,
and any tax relief and investment returns on those contributions.
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s Scheme
beneficiaries
Members of a pension scheme and their beneficiaries.
The A to Z
of pensions
Single life annuity
An annuity which is only guaranteed for the life of the annuitant and is not paid to
any dependants after their death.
Single person director
A person who is both a director of the company and the sole worker in the company.
Sole scheme
The only workplace pension scheme provided by an employer.
Staging
In line with legislation the new employer duties will be rolled out in stages. The
duties will apply to the largest organisations from 2012, whilst medium and smaller
employers will be affected on later dates.
Staging date
The date when employer duties come into effect
and an employer is first required to enrol some
or all workers into a qualifying pension
scheme. This date will be determined
by the size of the employer.
State Pension Age
The age when people normally begin
receiving their State Pension. The State
Pension Age is rising gradually for women
and will be 65 by 2018. The current State
Pension Age for men is already 65. From
December 2018 the State Pension age for
both men and women will increase to age 66 by
October 2020. You can find out what your State
Pension Age is by visiting
https://www.gov.uk/calculate-state-pension.
State
Pension
The retirement income
provided by the government
after State Pension Age. During
the 2012/13 tax year those
eligible for the full amount of
Basic State Pension receive
£107.45 per week.
Statement of Investment
Principles (SIP)
The document that sets out how a pension scheme will invest its members’ money.
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The A to Z
of pensions
t TPR
The Pensions Regulator.
Tax-registered pension scheme
In order to qualify for tax relief a pension scheme must register with HMRC and
comply with the regulations and stipulations of the Finance Act 2004.
Tax relief
The government encourages you to save for your retirement by giving you tax relief
on pension contributions. Tax relief works in different ways depending on how
contributions are paid, and will either reduce your tax bill or increase your pension
fund. If your employer takes the pension contributions before deducting tax you will
only pay tax on the reduced amount, and therefore pay less tax. If you pay income tax
on your earnings before you make your pension contributions the pension scheme
can claim back tax from the government and put it into your retirement pot.
Trustee/Trust
An individual or company appointed to oversee that the running of a pension scheme
is performed in accordance with the trust deed and general principles of trust law.
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NOW: Pensions
3rd Floor,
164 Bishopsgate,
London, EC2M 4LX,
United Kingdom
Tel: +44 (0) 333 33 222 22
nowpensions.com
NOW: Pensions is a UK occupational pension plan.
Membership is only available through an employer.
This is written as a general guide only. It should not be
relied upon as a substitute for specific professional advice.
Please note past performance is not a guarantee of future returns.