Glossary
Annuity
A contract to provide a regular retirement income which is bought using the money accumulated in a pension fund. The annuity is guaranteed for the rest of the pension holder’s life, and in some cases even longer.
Annuity payments
Regular payments made to a person who has bought an annuity. The size of the payments depends on the amount of money in the pension fund, the type of annuity selected, the age, gender, and health of the pension holder, and any additional benefits to be included in the annuity.
Benefit Crystallisation Event (BCE)
A benefit crystallisation event (BCE) occurs when you become entitled to get a benefit from your pension fund, for example, when you retire. The total pension funds you take (or "crystallise") will be measured against your remaining lifetime allowance and taxed if it’s exceeded.
Conventional annuity
A conventional annuity is the most common type retirement income annuity and quite simply provides an income for life. The payments are not subject to investment or mortality risks and income will continue to be paid out until the death of the annuity holder.
Defined Benefit Scheme
A type of pension scheme that is established by an employer for its staff. In Defined Benefit Schemes, the benefits that you’ll receive from the scheme are defined at outset. The benefits are normally expressed as a fraction of your length of service and salary. This type of scheme is sometimes referred to as a ‘Final Salary Scheme’.
Defined Contribution Scheme
This is a type of pension scheme where the benefits are not defined at outset. Instead, the amount of income you’ll receive depends entirely on how much is paid into the scheme, the investment returns and annuity rates when benefits are taken. These types of scheme are sometimes referred to as ‘Money Purchase Schemes’. All Personal Pensions and some Occupational Pension Schemes are Defined Contribution Schemes.
Enhanced Annuity
Enhanced annuities give the pension holder a higher income because their medical history or lifestyle choices are likely to shorten life expectancy - for example things like diabetes, high blood pressure, high cholesterol, and habits such as smoking and drinking.
Guarantee period
Pension holders often worry that they will have wasted their money if they were to die very shortly after retiring. So it is possible to get a guarantee that the annuity income will continue to be paid for a minimum period of time even if they die earlier.
Guaranteed Annuity Rate (GAR)
Some older style private pension contracts have a ‘guaranteed annuity rate’ at retirement. Because annuity rates were much higher when these pensions were originally set up, their GAR could in some cases give significantly more retirement income than the best annuity on today’s open market. So before using the open market option it’s vital to check if your pension has a GAR included.
Guaranteed Minimum Pension (GMP)
The minimum benefit that a defined benefit scheme must provide, as a result of being contracted out of the state additional pension before 6 April 1997.
Investment-linked Annuities
With investment-linked annuities, including with-profits and unit-linked annuities, the value of the fund is linked to the performance of investments. The value of these can fluctuate. So, when investments perform well, the income can increase. However, if investment returns are poor, then the annuity income may fall.
Joint Life Annuity (or dependants annuity)
With a joint life annuity the buyer can arrange for the annuity income or a proportion of it to be transferred to a named dependant in the event of their death.
Lifetime Allowance
The maximum value of fund you can build up in all your pension schemes without incurring an additional tax charge when you take your benefits. Currently this is £1.8 million but is reducing to £1.5 million in April 2012.
Market Value Reduction (MVR)
This is a penalty sometimes applied to with-profits funds which are surrendered or transferred out either before or after a member’s retirement date. If you have either a with profits personal pension or retirement annuity (the old style personal pension) then you should be aware that currently certain companies might still be operating MVRs on with-profits funds. It is important to take advice on this aspect before taking pension benefits
Occupational Pension Scheme
This is a pension made available through your employers and run by the pension scheme trustees. These may operate on either a Defined Benefit or Defined Contribution basis
Open market option
The open market option makes it possible for the annuity buyer to purchase an annuity from any provider. You can shop around and use your pension fund to get the best and most appropriate rate
Overlap
If the holder of a joint life pension annuity with a guarantee period dies during the guarantee period, "with overlap" will ensure the dependants’ payments begin immediately. On the other hand, "without overlap" means that the payments will start after the guarantee period has ended.
Personal Pension Plan
A Defined Contribution pension, owned by you, into which you and/or your employer make contributions.
Payment frequency
Annuity buyers can arrange for their annuity to be paid monthly, quarterly, half-yearly, or on an annual basis. Most people prefer to have their income paid monthly but the frequency will depend on their circumstances.
Protected Rights
The part of your pension fund that has been built up in a Defined Contribution pension scheme as a result of contracting out of the State Second Pension or State Earnings Related Pension Scheme.
Purchased Life Annuity (PLA)
These are annuities that are purchased using you own personal non-pension assets