Active management: Actively managed funds are investment funds managed by a specialist investment manager or a team of specialists who, within certain limits, have the freedom to choose which companies to invest in and how much to invest in each company. In this way, they attempt to use their knowledge and experience to beat the returns you could achieve by simply investing in an index, like the FTSE100.
Annuities: An annuity is a product offered by insurance companies. Basically, you give the insurance company the balance of your pension savings, after you’ve taken any tax free cash, and the insurance company will pay you an income for the rest of your life however long you live. This is called a ‘pension annuity’. There are other types of annuity (see Purchased Life Annuity).
Additional State Pension: As well as the basic State Pension, you may qualify for an additional pension from the state. This will increase the overall amount you receive from the State when you retire.
Asset allocation: Asset allocation is about ‘diversifying’ your savings. Put more simply, it means spreading your money across different types of investments. For example, you may choose to invest 40% of your money in equities, 30% in bonds and the rest in cash. It refers to the proportion of your money you hold in each investment category
Attendance Allowance: This is an allowance which is paid tax free to people aged 65 or over who need care because of an ilness or disability.
Bank Base Rate: The Bank of England sets the bank interest rate, known as the Bank Base Rate each month. It is the rate at which the Bank of England lends to other financial institutions and is set by the Monetary Policy Committee in response to economic conditions.
Basic State Pension: The basic State Pension is a regular income most people can receive when they reach the State Pension Age. The amount payable is based on the number of years you’ve been paying National Insurance contributions (or received National Insurance Credits) over your working life. Both men and women must have paid National Insurance contributions for 30 years to qualify for the full basic State Pension.
Bonds: Sometimes referred to as fixed interest investments, these are effectively loans to companies and governments. Just like paying off a mortgage, the companies and governments pay interest on the loan and must repay the loan at the end of the term.
BR19: BR19 is an application form you complete to receive a forecast of your pension benefits from the State. The forecast will tell you how much you are entitled to based on the amount you’ve paid in National Insurance contributions so far, plus how much you should receive when you reach your State Pension Age.
Bus pass: One of the benefits of getting older is that you can qualify for free off peak travel on local buses. The precise terms differ depending on where you live in the UK.
Capped drawdown: Capped drawdown allows you to take an income, or to choose not to take an income, without ever buying an annuity. However the maximum income you can receive is limited to roughly the same income you would have received if you had bought an annuity. See flexible drawdown if you want a higher income.
Capital Gains Tax: Capital Gains Tax (CGT) is a tax on the increase in the value of things you own (like a second home or shares for example) during the time you have owned them. Any tax is due when you ‘dispose’ of them (usually by selling them or giving them away). The rate of tax you pay depends on your personal tax position. Basic rate taxpayers pay a rate of 18%, while higher and 45% rate taxpayers pay a rate of 28%. Tax is only payable on gains in excess of the annual allowance of £10,900 (2013/14).
Cash: In an investment sense, this doesn’t literally mean cash, but usually money held on deposit. This is generally considered very secure, but historically the returns are much lower than other investment classes.
Cold Weather Benefit: If you receive Pension Credit (or certain other benefits),you should automatically qualify for an extra payment called the Cold Weather Payment. This is paid for each week that the weather is exceptionally cold between 1 November and 31 March, based upon where in the UK you live.
Consumer Price Index: The Consumer Price Index (CPI) tracks the change in the price of a basket of goods and services that a typical household might buy or use. The CPI is the key measure of inflation for the UK and is used by the Bank of England in making interest rate decisions.
Consolidation: If you have two or more pension pots it can make sense to bring them together into one pension pot. For example, you could get a better annuity because your total pension pot is higher. This process is called ‘consolidation’.
Contracted in: If you are contracted-in to the State Second Pension then you pay the full, contracted-in rate of National Insurance contributions and are entitled to full benefits from the State Second Pension for the period that you are contracted in.
Contracted out: ‘Contracted out’ means that you have opted out of the additional State Pension so you will no longer build up benefits in the scheme (though there are some instances where you will still be entitled to part of the additional State Pension).
Conventional annuities: A conventional annuity pays a guaranteed income for life that can never fall below the amount payable initially.
Commutation rate: This is the rate at which you can exchange pension for tax free cash in a defined benefit scheme. For example, if your pension scheme offers you a commutation rate of 15:1 that means for every £15 of cash you take you’ll lose a £1 of pension.
Council Tax Support: Council Tax Support can be claimed by people on a low income. Normally it is paid by reducing the amount of Council Tax you have to pay. In some cases, people may qualify to have all of their Council Tax paid. Others may qualify for a reduction in the amount they pay.
Deferred Payment Scheme: If you need long term care and the value of your assets, leaving aside the value of your property, is more than a specified amount (and you don’t want to sell your home), you can ask your local Social Services department if they will allow you to defer payment. This way, you don’t have to incur any of the costs of your care and you repay the amount when the property is eventually sold.
Dependant: A dependant is someone who relies on another person to support them financially. There is a precise definition of who qualifies as a dependant for the purposes of receiving a pension or lump sum on your death.
Defined benefit scheme: Defined benefit plans are often called ‘final salary’ pensions. This is because they commonly provide a proportion of your earnings close to retirement. For example, they may pay 1/60th or 1/80th for each year of service. Some plans calculate benefits based on the average salary you receive over the time you worked for the employer.
Defined contribution scheme: These schemes are often called ‘money purchase’ plans. Money is usually paid into the plan by you and/or your employer. At the point of retirement, you will have a pot of money, based on how much has been paid in, plus any growth on the money (less the costs of running the scheme).
Enhanced annuities: Sometimes called lifestyle annuities, these annuities usually pay a higher income each year if your lifestyle is likely to shorten your life expectancy. For example, smoking or poor diet (leading to overweight or obesity).
Equities: These are shares in publically quoted companies. Equities have historically produced high returns when compared with many other investments, but also carry greater risk of loss.
Equity release: Equity release is a way of releasing equity from your home without moving or taking in lodgers. You can take a lump sum or a regular income and you don’t need to repay any of the money until after you die.
Equity Release Council: A voluntary trade organisation established in 1991 dedicated to the protection of equity release clients and the promotion of safe home income and equity release plans. All participating equity release companies that produce products for releasing equity in the home must comply with certain conditions that protect customers buying these products.
Fixed term annuity: These products aren’t strictly annuities. They pay an income, but only for a limited number of years – not for life. Usually, they are sold for periods of 5 or 10 years. At the end of the fixed period, an amount of money is payable (called the ‘maturity value’), that can be used to buy an annuity that pays an income for life or, alternatively, to buy another fixed term annuity or, depending on your circumstances, you could choose one of the drawdown options.
Flexible annuities: A flexible annuity is effectively a form of investment linked annuity. That means your money can be invested in a mix of assets including equities, but while this gives potential for growth, the income you are paid each year can fall (though some of these products offer a guarantee that your income can’t fall below a certain level).
Flexible drawdown: Flexible drawdown allows you to take as much as you like from your fund, but you have to demonstrate that you can meet a Minimum Income Requirement (MIR). Currently, the MIR is £20,000.
FTSE100: The FTSE100 is an index of the 100 biggest companies in the UK listed on the London Stock Exchange.
Guaranteed Credit: Pension Credit has two parts: Savings Credit and Guaranteed Credit. If you are on a low income, you may qualify for Guaranteed Credit. This will bring your income up to the minimum the government believes you need to live on.
Health Benefits: Once you turn 60 you’re entitled to a whole range of free health benefits. These include free prescriptions, free eye sight tests and free NHS chiropody.
HMRC: The initials HMRC stand for Her Majesty’s Revenue & Custom. HMRC is responsible, among other things, for the collection of taxes (previously known as the Inland Revenue).
Home reversion scheme: This is a type of equity release scheme that allows you to sell part or all of your property to an equity release provider in return for either a lump sum or a regular income. You still retain the right to live in your property for the rest of your life.
Immediate needs annuity: This product is generally used to pay the costs of long term care. It works much like a conventional annuity. The key attraction of this approach is that you know how much you have to pay in advance, however long care may be required for, and the rest of your capital can be used as an inheritance for your family.
Impaired life annuities: If you suffer from a medical condition like cancer, diabetes or high blood pressure, for example, you can qualify for an impaired life annuity. This will usually pay you a higher income.
Income guarantee period: When you buy an annuity you can elect for the income payable to continue to be paid for a fixed period after your death. Commonly, people select either 5 or 10 years. This means if you choose a 10 year guaranteed period, and die 3 years after buying the annuity, the remaining 7 years payments would continue to be made. This is called the ‘income guarantee’ option.
Inheritance Tax: Inheritance Tax is paid on an estate when someone dies. The rate of Inheritance Tax is 40%, but it is only paid on estates worth more than £325,000. This limit is expected to rise over time, but has been kept at this level until the tax year 2017/2018. It is also possible for married couples and civil partners to transfer their allowances to each other when one dies. This means the limit is effectively £650,000.
Joint life option: When you buy an annuity, you will be offered the choice of ‘joint life’ or ‘single life’. If you choose ‘joint life’ part or all of your annuity payments can continue to be paid after your death to your spouse or partner.
Liquidity: The ease with which you can convert an asset into cash is called its ‘liquidity’. For example, money in a current account is easy to convert into cash – you just withdraw it when you need it. As such, cash is considered to be ‘highly liquid’. In contrast, if you buy property, this is considered a ‘highly illiquid’ investment as it can take several months to sell and therefore it may not be easy to access your money.
Lifetime Allowance: There is a limit on the amount of money you can build up in pension funds before tax penalties apply. That limit is called the Lifetime Allowance. The Lifetime Allowance is currently £1.5m (2013/14).
Lifetime mortgage: Lifetime mortgages are a popular way of releasing equity in your home without moving house. These products work in a similar fashion to a normal mortgage, with one major exception: You don’t have to pay anything back until you die, sell your home or move into a care home. This includes the interest, which is added to your loan, but not repaid regularly like a conventional mortgage. When your home is sold the original loan, plus the interest you owe, is payable to the lender.
Long term care: Long-term care is an expression that is used to describe the various services and support people may need, often in old age, when they are unable to look after themselves for a long period of time.
Lower Earnings Limit: This is the minimum level of earnings that an employee needs to qualify for benefits, such as State Pension benefits.
Lower Earnings Threshold: If you earn more than the Lower Earnings Limit, but less than the Lower Earnings Threshold, your entitlement to State pensions will be calculated as if you did earn as much as the Lower Earnings Threshold.
Minimum Income Requirement: Flexible drawdown allows you to take as much as you like from your fund, but you have to demonstrate that you can meet a Minimum Income Requirement (MIR). Currently, the MIR is £20,000. Not all income you may receive will qualify as MIR, but the following examples will qualify: State pension, most final salary pensions and most lifetime annuities.
National Insurance Contributions: You pay National Insurance contributions when your earnings reach a certain level. Your contributions build up your entitlement to benefits, including the State Pension. How much you will pay depends on how much you earn and whether you’re employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age.
National Insurance Credits: If you are unable to work, and therefore unable to pay National Insurance contributions, you could receive National Insurance weekly credits for the basic State Pension and the Second State Pension. To qualify you need to meet certain conditions.
Non pension savings: Increasingly, people are retiring with part of their income in retirement generated from savings and investments they’ve built up outside their pension savings. Alternatively, they may have taken the tax free cash from their pension and plan to invest some or all of this or they may have inherited wealth or use equity release to boost their income.
Whatever the original source, if this money isn’t part of a pension fund there is far more flexibility over how it can be invested.
Occupational Pension Scheme: An occupational pension scheme is basically a company pension plan set up by your company to provide you with pension and other benefits.
Passive management: ‘Passive’ funds are investment funds that attempt to track the performance of an index (like the FTSE100). In theory, these funds match the index by buying all of the shares in the index so that the performance should exactly mirror the performance of the index. In practice, there are sophisticated techniques and models that allow companies to track an index without directly holding all of the stock and shares in that index.
Payment frequency: Your annuity can be paid monthly, quarterly or annually.
Payment in advance or arrears: When you buy an annuity you can choose to have your income payable in advance or in arrears. For example, if you choose to have your income payable quarterly, would you like it paid at the beginning of each quarter or the end?
Pension Credit: Pension Credit is a means tested benefit introduced in 2003 to help pensioners on low incomes who have some savings. There are two elements to Pension Credit: Guaranteed Credit and Savings Credit.
Pension Savings: These are the savings you have made over the years in pension plans. Most people will have built up their pension savings through schemes run by the companies they’ve worked for, but some people may have paid into individual pension plans during their career.
Personal Allowance: Almost everyone in the UK qualifies for a personal allowance. This is the amount of income you can earn each year without having to pay any tax.
Personal Independence Payment: This is a tax-free benefit payable if you’re under 65 when you claim. You may qualify if you have a physical or mental disability (or both) and your disability is severe enough that you need help looking after yourself or getting about.
Postcode annuities: Postcode annuities pay more if you live in certain parts of the country.
Preserved benefits: These are benefits you are entitled to when you leave an occupational pension scheme before you retire. The benefits are held on your behalf and subsequently paid when you reach the scheme’s retirement date. You can also transfer the value of the benefits to another scheme.
Purchased Life Annuity: This is an annuity you can buy with your non pension savings. It can be a very tax efficient product. Each income payment is assumed to represent partly the return of your original capital (the amount you paid for the annuity) and partly the growth the insurance company make by investing your money. Only the latter is taxable.
Qualified Recognised Overseas Pension Scheme: A ‘QROPS’ (Qualified Recognised Overseas Pension Scheme) is a relatively new concept. A QROPS is a pension scheme set up outside the UK. It is regulated by the country in which it is established and must be recognised for tax purposes in the country in which it is established. You can transfer your pension savings into a QROPS if you plan to retire abroad. Your pension savings will then be subject to the tax regulations in the country you choose, rather than the UK tax regulations.
Retail Price Index: Like the Consumer Price Index (CPI), the Retail Price Index (RPI) tracks the change in the price of a basket of goods and services that a typical household might buy or use. However, there are differences between the two. For example, the RPI includes mortgage interest which is not included in the CPI.
Savings Credit: This is another element of Pension Credit. You can’t claim for Savings Credit until you are 65. Savings credit is payable if you have an income that is higher than the basic state pension or have modest savings.
Scheme pension: In this context, scheme pension is a bespoke arrangement. It’s a little like buying a made-to-measure suit. The amount of income you receive is based on your particular circumstances: your age and your health. These factors contribute to an assessment by a scheme trustee of how much income can be paid. This kind of bespoke arrangement only applies to members of a special type of pension scheme called a SSAS or SSIP. It’s not generally available.
Senior Railcard: A Senior Railcard saves you a 1/3 off Standard and First Class rail fares across Britain for a year. What’s more, the discount also applies to Advance fares and Gatwick Express tickets – providing they’re booked before you travel. You can apply if you are 60 or over.
Single life option: If you choose a single life option when you buy an annuity the income payments will not continue to be paid for the life of any spouse or partner after your death.
State Earnings Related Pension Scheme: As well as the basic State Pension, you may qualify for an additional pension from the State. Any additional pension is payable from a scheme called the State Second Pension. This was introduced in April 2002. Before that it was known as the State Earnings Related Pension Scheme.
State Pension Age: This is the age at which you can begin to receive the basic State Pension.
State Second Pension: As well as the basic State Pension, you may qualify for an additional pension from the State. Any additional pension is payable from a scheme called the State Second Pension.
Tax free cash sum: You have the right to take a proportion of the pension funds you’ve built up as a tax free lump sum after age 55. This will be limited to 25% of the total fund (though it may be less than this if the total fund exceeds the Lifetime Allowance). If you’re in a defined benefit scheme the formula is different.
Transfer value: If you want to move the value of your retirement benefits from one pension scheme to another, the scheme you are moving your benefits away from will quote you a transfer value. This is their estimate of the cash equivalent of the value of the benefits you built up during your membership of the scheme.
Triviality: If the total value of all your pension fund savings is below a certain level (currently £18,000), you can take the whole amount as cash. Only 25% of it is tax free.
Unit linked annuities: With a unit linked annuity your income in retirement will be linked to the investment performance of the fund you’ve chosen. This means your fund value can rise and fall in line with the underlying value of the investments in your fund. Some of these products will provide some form of guarantee so you know, whatever happens to your investments, your income can never fall below a minimum level.
Upper Earnings Limit: The maximum amount of earnings on which National Insurance contributions are payable by employees at the main rate.
Value protection: It’s possible to arrange your annuity so that whenever you die your estate will receive all of your original investment, less the payments made to the date of your death. This feature is known as ‘value protection’ (be aware that the payment will be subject to a 55% tax charge).
Variable annuities: These products offer a number of features, but usually pay a guaranteed income (commonly around 4% of your capital at age 65) and still allow you to invest in a mix of equities and other investments. However, please note that the construction of these products does vary considerably from one insurance company to another.
Winter Fuel Payment: Winter Fuel Payment is paid if you are in receipt of the basic State Pension and can help towards the extra costs of heating your home in the cold weather. Exactly how much you will receive depends on the age of the people living there and your circumstances. The benefit for 2012/13 was between £100 and £300.
With profit annuities: With profits annuities are invested in the company’s with profits fund. With profits funds generally invest in a mix of assets (including equities). To try and avoid sharp increases or decreases in the value of the fund, one of the distinctive features of with profits is ‘smoothing’. This simply means the insurance company will hold back some of the gains from investment returns in the good years to subsidise returns when investments perform poorly. Like all lifetime annuities, these products will pay you an income for life.
With/without proportion: When you buy an annuity, if you select the payment in arrears option, and opt for ‘with proportion’, when you die your estate will receive the proportion still owed to you to the date of your death. In other words, if you’re paid monthly, and you die in the middle of the month, half a month’s income would be paid to your estate.