Glossary of UK Pension terms

Feb 20, 2008
Annuity
If you have any form of personal or money purchase pension you have to buy an annuity before age 75. An annuity is an income paid to you for life by an insurance company in return for your pension pot. Once you have bought an annuity you cannot usually change your mind and switch to a different one at a later stage. Nor can you get your money back if you die the day after buying one because annuities work by a system of cross subsidy - those who die early subsidise those who live to a ripe old age. The advantage is that they will pay you an income no matter how long you live.

Approved New Zealand Superannuation Fund
Registered superannuation schemes that are subject to the New Zealand Superannuation Schemes Act 1989 and Securities Act 1978.

AVC (Additional voluntary contributions scheme)
You can supplement your pension contributions to build up an even larger retirement fund. AVC's attract tax relief on the premiums, but the final benefits are taxed as income. AVC's are better for basic rate taxpayers and Peps are better for higher rate taxpayers as a way of supplementing pension income. Employees are allowed to save up to 15% of your taxable earnings into a pension plan. When you retire the company is not allowed to pay out a cash lump sum.

Final salary or defined benefit schemes
This gives the employee a fraction of their salary on retirement for each year they have worked.

HMRC
HM Revenue & Customs www.hmrc.gov.uk


Investment trust pensions
These are pooled equity investments allowing you to pay pension contributions and enjoy the tax advantages.

ISA (Individual savings accounts)
Individual Savings Accounts (ISAs) were introduced on 6th April 1999 which replaced PEPs and TESSAs. ISAs are not an investment in their own right. They are a tax-free wrapper in which you can shelter investments. People over the age of 18 living in the UK can invest a maximum of £7,000 per year in each tax year. 16 and 17 year olds can invest up to £3,000 in a mini cash ISA.

Investment may be made in two components: equities and cash. There are strict limits on how much you can put in each component, and the limits depend in part on whether you use a 'maxi ISA' or a number of mini ISAs.
Until 5th April 2004 ISAs benefited from a 10% tax credit on UK equities. Stock and share investments which can be held in an ISA include unit trusts, open ended investment companies (OEICs), investment trusts, ordinary shares, preference shares and fixed interest corporate bonds.

PEPs in existence at 6th April 1999 may continue to be held outside an ISA with the same tax advantages. TESSAs in existence at 6th April 1999 are allowed to run their full five year term.

Income from ISA investments is tax free and you don't have to report it on your tax return. Capital gains are also exempt from CGT.

Lifetime Allowance
A standard lifetime allowance is the maximum amount of pension savings that can benefit from tax relief. This figure rises over time and the proposed amounts are as follows:
2007 - £1.6 million
2008 - £1.65 million
2009 - £1.75 million
2010 - £1.8 million

The standard lifetime allowance is based on the approximate amount of money that would be needed to purchase a pension equal to the maximum HM Revenue & Customs (HMRC) would permit under the tax regime. Funds in excess of the lifetime allowance are felt to have benefited the individual unduly from pension scheme tax advantages and therefore a tax charge is made. Funds taken in excess of this will likely be taxed at 55%.


Money-Purchase or defined benefit schemes
This is where the employee and employer have contributed a set percentage of the employee's salary into the scheme. At retirement an annuity is paid out.

PEPS (Personal Equity Plans)
It is no longer possible to start a new PEP or add to an older one. Personal Equity Plans (PEPS) are investments that are totally tax exempt, both on the capital and income side.

PIE (Portfolio Investment Entity)
The QROPS funds we recommend for your UK Pension Transfer are PIE approved investments. From October 2007 taxation of New Zealand managed funds was changed to PIE. Capital gains on New Zealand and Australian (some exceptions) equities are exempt and income is taxed at the investors marginal tax rate. From April 2008 maximum tax is 30% even for a 39% tax payer. International investments are taxed under the Fair Dividend Rate method (FDR) tax at the investors marginal tax rate on the opening value plus 5% growth.


QROPS (Qualifying Recognised Overseas Pension Scheme)
HMRC require any pension transfers to go into a QROPS registered scheme. If this is done incorrectly you will be subject to a 55% withdrawal tax.

SIPPS (Self-invested personal pensions)
SIPPS offer greater flexibility than ordinary personal and occupational pensions. You can have many types of investment in them, including British and foreign stocks, unit trusts, investment trusts, managed life funds, unit linked funds and commercial property. They have the same tax relief as ordinary personal pensions.

SERPS (State Earnings Related Pension Schemes)
Part of the National Insurance contributions goes towards your SERP which is paid out on top of your state pension when you retire.

TESSA ( Tax Exempt Special Savings Account)
These lasted for five years and you were allowed to invest up to £9,000 over the life of each account. You got all your interest tax-free and once your five years were up you could either take your money or put your money into a new TESSA account (and continue to receive tax-free interest). The last day you could open one was 5 April 1999, so there aren't any TESSAs in existence any more. But you were allowed to roll a TESSA that matured between 6 April 1999 and 5 April 2004 into what is known as a TESSA-Only ISA (or TOISA for short) so that you could continue to receive tax-free interest.

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