The world of pensions can be confusing and rife with terminology that can be quite complex.
As part of Pensions Awareness Week, this article aims to shed some light on key areas of your pension.
A is for Annual Allowance
This is the maximum amount you can contribute (personal and employer contributions) to your pension per tax year in order to receive tax relief. The Annual Allowance applies across all your pension savings, not per policy, and for 2021/22 is £40,000. If your adjusted income (annual income before tax plus all your pension contributions) is above £150,000, your Annual Allowance is gradually reduced. The amount you can contribute can also be lowered if you draw benefits from your pension (see Money Purchase Annual Allowance).
C is for Crystallised Pension Fund
A pension pot where funds have been drawn is called a Crystallised Pension Fund.
D is for Defined Benefit Pension
Also known as a Final Salary or Career Average Earnings Scheme, this type of pension pays income based on your salary and the number of years with the employer that the pension relates to. This type of pension is increasingly rare and typically only found within the public sector or older private sector pensions.
D is for Defined Contribution Pension
Also known as a Money Purchase Scheme, the majority of personal, stakeholder and workplace pensions are examples of this. Contributions, employer and personal, are invested and the resultant value at retirement forms the value of your pension. It is possible at retirement to use the policy to buy an annuity or to draw income over a number of years.
L is for Lifetime Allowance
The Lifetime Allowance is the maximum amount of pension savings you can draw without paying excess tax and for 2021/22 is £1,073,100. Whenever you make a withdrawal from your pension there is a test against your lifetime allowance. There is also a lifetime allowance test at age 75.
M is for Money Purchase Annual Allowance
This is a lower Annual Allowance that is triggered when you take benefits from a defined contribution pension. The Money Purchase Annual Allowance for 2021/22 is £4,000.
P is for Pension Commencement Lump Sum
Also known as tax-free lump sum or tax-free cash. This is the ability to take up to 25% of your lifetime allowance as a tax-free payment. This can be paid as a single lump sum or phased over a number of years.
U is for Uncrystallised Pension Fund
A pension pot where no benefits have been drawn.
U is for Uncrystallised Funds Pension Lump Sum (UFPLS)
The ability to draw a lump sum from the uncrystallised portion of pension. 25% of the withdrawal will be tax-free and the remainder will be taxed as income.