Pension Glossary – learn the lingo (part two)

Here’s Part 2 of our pension glossary to help you understand some of the terms used when referring to your retirement savings during Pension Awareness Week.

> Link to Pension Glossary part one

Pension transfer

You can transfer your pension fund to a new pension arrangement to get cash from it if you’re 55 or over. If you have a Defined Benefit pension, you have limited options to access your money compared to a Defined Contribution pension. You can transfer a DB to a DC pension, but this is usually not recommended as you may lose value. It is a legal requirement to seek financial advice if your pension has a transfer value of £30,000 or over.

If you decide to transfer out of your workplace defined benefit pension scheme, the trustees who run the scheme convert the benefits you’ve built up into a cash sum. This is called a ‘transfer value’, also known as a ‘cash-equivalent transfer value’ or ‘CETV’.

You must then invest this in a:

• Personal or stakeholder pension
• Pension scheme with another employer
• Self-invested personal pension (SIPP)

Not all employer pension schemes, personal pensions or SIPPs accept transfers, so do check first.

Pensionable earnings

Employers make contributions to an employee’s pension fund based on a percentage of the employee’s earnings. The amount of pay that pension contributions are calculated on is called pensionable earnings.

Depending on the scheme, your pensionable earnings are either your salary at retirement, or your average salary over the period of your membership in the scheme.

Pensionable service

Your pensionable service is the time that you have been in your employer’s pension scheme. It is a factor in calculating your Defined Benefit pension. It isn’t necessarily the same as your length of service in the company.

SIPP

SIPP stands for Self-Invested Personal Pension. It is a Defined Contribution pension ‘wrapper’ which enables you to choose from a range of investment options and manage them yourself, or pay an authorised investment manager to make the decisions for you. SIPPs tend to be more suitable for large funds and for people who are experienced in investing as the risks are generally higher, but they do have the potential for greater growth.

Stakeholder pension

Stakeholder pension schemes are a type of Defined Contribution pension scheme. They are a flexible way to build up retirement income benefits, while benefiting from tax advantages, whether you’re employed, self-employed or not working. They are designed to be accessible to all, and have limits on the charges that can be imposed.

State pension

The state pension is a guaranteed pension provided by the government. You can claim state pension when you reach the state pension age. For men and women, this is currently 65, increasing to 66 by October 2020. The current state pension pays just £175.20 per week, which isn’t enough for most people to live on. At Innes Reid, we suggest that you start saving for your retirement as soon as possible and save as much as you can afford, rather than rely on the state pension alone. You should review your investments at every stage of your working life.

Tax relief

Tax relief is when you can get tax back or have it paid in another way. With a personal pension, the government pays back the money you would have paid on it in income tax. This sets pensions apart from other investments. For example, if you pay income tax at 20%, a contribution of £80 into your pension will turn instantly into £100, because that 20% tax has been added back on. Higher and additional-rate taxpayers are currently able to claim 40% and 45% tax relief.

Unfunded scheme

An unfunded scheme is an employer-managed Defined Benefit pension plan that is generally for public sector employees. It uses the employer’s current income to fund pension payments at the time they are due, rather than building an investment fund in advance. You can’t transfer out of an unfunded scheme, but as it has guaranteed benefits, most people shouldn’t want to leave it.

> Link to Pension Glossary part one

As Chartered Financial Planners, Innes Reid financial advisers hold the G60 advanced pension qualification and are registered as an approved pension transfer specialist with the FCA, which means we can offer you the very best retirement planning service, carefully reviewing all aspects of your personal or company pension plans.

Contact us on tel: 01244 347583 or email: info@innesreid.co.uk for bespoke and independent financial advice on your pension options and retirement plans. We are available at times to suit you.