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Retirement:
Glossary of commonly used terms

A-Day
6 April 2006, when pension legislation changed, is commonly referred to as A-Day.

Added years
Where additional benefits can be bought by employees by making voluntary contributions. Effectively the number of years service is increased, thus increasing the final scheme pension.

Additional voluntary contributions – AVCs
Few, if any, occupational schemes take the maximum level of contributions from the employees allowed by legislation. AVCs are additional contributions paid by employees to the scheme to increase their contributions up to this maximum. AVCs are individual pension contracts, usually run by an insurance company on behalf of an employer, or in defined benefit schemes it may be possible to buy 'added years'.

Alternatively Secured Pension (ASP)
This is available only after age 75. It is a form of income drawdown and a way of avoiding purchasing an annuity. There are tight limits on the level of income that can be drawn. On death the fund can be used by dependants and then passed as a pension to other members of the same pension scheme, or to charity tax-free.

Annual allowance
In order to obtain tax relief on pension contributions there is a maximum amount you can pay in a given tax year. This is the lower of the 'Annual Allowance' (£215,000 in 2006-2007) or 100% of salary for personal contributions, or the annual allowance for combined personal and employer contributions to obtain corporation tax relief assuming the employer contributions can be demonstrated to be a 'wholly and exclusive' business expense.

Annuity
An annuity is a contract between you and an insurance company which provides you with an annual sum over your lifetime in exchange for a lump sum investment.

Approved scheme
A pension scheme which meets specified criteria and is approved by HM Revenue & Customs qualifies for special tax reliefs. Most pension schemes are approved schemes.

Contracted out pension scheme
A scheme which receives the national insurance contributions you would otherwise have paid towards the additional state pension.

Contributory pension scheme
Where the employee contributes to a scheme provided by the employer (some employer schemes are funded solely by the employer, see below).

Controlling director
A director who along with his or her family is able to control 20% or more of the shares in the company.

Crystallisation
A time when an action is taken that requires the pension fund to be checked against the lifetime allowance. These are: when benefits are taken; death; reaching age 75, and transferring the pension overseas.

Death in service benefits
A lump sum paid to your beneficiaries if you die whilst an employee of the company. It is typically 2, 3 or 4 times your annual salary. It may be offered as part of an occupational pension scheme or as a separate benefit.

Enhanced Protection
A form of transitional protection where funds can be preserved from the tax penalties if they are greater than the lifetime allowances.

Executive pension scheme
A form of money purchase pension scheme provided by an employer.

Final salary or defined benefit scheme
A scheme where the benefits at retirement are based on a given formula based on the length of service and your salary at retirement. Only an occupational pension scheme can be a final salary scheme.

Free standing additional voluntary contributions - FSAVCs
These are AVCs available independently of your employer (they are not available for controlling directors).

Funded pension scheme
A pension scheme which is made up of contributions from the scheme members and/or their employer.

Group personal pension scheme
This is a collection of individual personal pensions for employees, usually of the same employer, (rather than a common fund) grouped together.

Unsecured pension (income drawdown or withdrawal)
An alternative to buying an annuity is income drawdown. You can defer purchasing an annuity until age 75 and instead draw an income from the pension fund directly. There are limits for the amount you can take each year based on the annuity you could otherwise have purchased.

Insured pension scheme
The pension funds are held centrally in insurance policies only.

Lifetime allowance
This is the maximum value a fund can accrue without attracting tax penalties. In 2006-2007 this is £1.5m, growing to £1.8m in 2010-2011.

Money purchase or defined contribution scheme
A scheme where the benefits at retirement depend on how much has been contributed to the scheme and on the investment performance of those funds. Although called a defined contribution scheme, the levels of the contributions can in fact be varied (subject to Inland Revenue limits) throughout the policy period up to retirement; they do not have to remain at the same level each year. It is applicable to occupational and personal pension schemes.

Net relevant earnings
If you are employed, your net relevant earnings are your gross remuneration including bonuses and benefits in kind, minus allowable business expenses if you have any such as professional subscriptions.
If you are self employed, your net relevant earnings are basically your gross earnings less any deductions which are made in calculating your business profits and gains.

Non-contributory pension scheme
An occupational scheme funded solely by the employer.

Occupational pension scheme
A scheme organised by an employer for their employees. There is generally one common pension fund for all employees.

Personal pension scheme
A scheme run by a provider, such as a life assurance company, bank or building society, for individuals.

Phased retirement
Instead of using your pension fund to buy one large annuity, you break it into a number of smaller contracts so you can buy a series of smaller annuities at different times. This gives you greater flexibility on retirement, particularly if annuity rates are low.

Primary protection
Another way of preserving funds from the lifetime allowance charge for funds that exceed the allowance. The fund had to be greater than £1.5m on 5/4/06.

Retirement annuity scheme
An old type of personal pension which has not been available since 1 July 1988, although people with a policy started before that date can continue to contribute to it.

Self administered pension scheme
The funds are held centrally in investments outside policies such as property or shares. They are classified as small if there are less than 12 members and large if there are more than 12 members.

Self invested Personal Pension
A Self-Invested Personal Pension (SIPP) is a form of money purchase personal pension which gives you the opportunity to decide on the investments to be held.

Small Self Administered Scheme
A small self administered pension scheme, or SSAS, is a pension scheme intended to provide pension benefits for the owner/directors of companies. A company can only have one SSAS.
The main advantage of a SSAS compared to the more usual employer pension schemes is the ability to control the investment decisions. The funds can be invested in company shares, government bonds, bank and building society accounts and commercial property. After an initial two years, plan holders can use up to 50% of their SSAS fund to invest in their own company. The fund can also make a loan to the company and purchase the business premises, leasing it back to the company on commercial terms.

Stakeholder pensions
A particular form of personal pension introduced from 6 April 2001 with low minimum contributions (£20 per month), low cost transfers to and from other schemes and a maximum annual administrative charges of 1.5% of the fund value for the first 10 years, and 1% thereafter. It used to be 1% from the outset and many schemes are still charged at that level.

Unfunded schemes
In an unfunded scheme the employer promises to provide an employee with benefits under the scheme but makes no advance funding in the scheme for those benefits. Benefits are paid directly ‘out of the till’ when they become due.

Wholly and exclusively
In order to obtain corporation tax relief on employer pension contributions, the local Inspector of Taxes must deem the contributions to be a valid business expense that is "wholly and exclusively" for the purpose of the business.

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