The world of finance, and pensions in particular, is complicated enough without the use of complex jargon. Let us help! Our Jargon Buster is designed to provide a simple introduction to some of the terms you will come across on our website and in the everyday world of pensions.
Please note that the list is not exhaustive, the descriptions are only a brief guideline and should not be interpreted as financial advice.
|Additional State Pension
|Also known as the State Second Pension (S2P) and the State Earnings Related Pension Scheme (SERPS). Paid, in addition to the Basic State Pension, to those who reached State Pension Age before 6 April 2016 and who have paid the necessary National Insurance contributions.
|Additional Voluntary Contributions (AVCs)
|Additional contributions permitted by the Rules of a Defined Benefit Scheme, to provide extra benefits.
|Annual Allowance (AA)
|The limit on the contributions you can pay in a year, or your pension can grow in a year, before being subject to a tax called the 'Annual Allowance Charge'. As at 6 April 2016, the standard limit set by the Government is £40,000 a year, however there are circumstances where an individual can have an AA as low as £4,000 a year. See also Money Purchase Annual Allowance and Tapered Annual Allowance, below.
|A person with a DC pension pot can typically take 25% tax free and use the remainder to buy an income for their lifetime – this income is called an Annuity. Various types of lifetime annuity are available, such as increasing or non-increasing, or ones which may continue to be paid to a dependent. Government legislation also permits the purchasing of more flexible annuities which may not necessarily be paid for life.
|In October 2012, the Government introduced a new law intended to make it easier for people to save for their retirement. It requires all employers to enrol their workers into a qualifying workplace scheme if they are not already in one. The law is being introduced gradually. Coats have successfully complied with their Auto-Enrolment duties since February 2014.
|Basic State Pension
|Paid to those who reached State Pension Age before 6 April 2016 and who have paid the necessary National Insurance contributions.
|Benefit Crystallisation Event (BCE)
|The Government has set a lifetime limit on the tax advantaged savings a person is permitted to have, called the Lifetime Allowance limit (LTA). When pension benefits are tested against the LTA to make sure they are still within the limit, this is called a Benefit Crystallisation Event (BCE). If a BCE occurs and there isn’t enough LTA available, then a tax called the 'Lifetime Allowance Charge' becomes payable.
There are various types of BCE, the most common one occurs when a person begins to receive their pension benefits for the first time.
|Cash Equivalent Transfer Value (CETV)
|The cash value of your pension rights for the purposes of transferring out of the Scheme, including on divorce or dissolution of a civil partnership.
|Consumer Price Index (CPI)
|A measure of the cost of living reflecting changes in the general price level (excluding housing costs).
|Contract Based Scheme
|When an employer engages in an agreement with a Financial Services provider to arrange a pension scheme for their employees.
|Between 6 April 1978 and 5 April 2016 it was possible for a person to pay lower National Insurance contributions where they were a member of a pension scheme which met certain minimum requirements. The Additional State Pension was not earned during any time a person was contracted-out.
|Defined Benefit (DB) Scheme
|A pension scheme where the level of benefits that you’re entitled to is known in advance. The value of the benefits are linked to your salary, either throughout your career (Career Average) or at the time of leaving (Final Salary). A defined benefits scheme will automatically begin paying you an income when you retire, rather than providing you with a pot of money to purchase an income separately. The Coats UK Pension Scheme is a Trust based DB Scheme, governed by the Coats Pensions Office.
|Defined Contribution (DC) Scheme
|Also called Money Purchase pension schemes, these provide retirement benefits based on the amount of money paid in and investment growth on this money. The final value of your pension pot is dependent on the success of the investment minus any charges. All personal pension schemes, including stakeholder schemes, are DC schemes. The Coats DC Scheme – for active employees only – is a contract based DC scheme administered by Standard Life.
|A flexible type of benefit available from some DC arrangements. Typically, 25% of the pension pot is paid free of tax and the remainder is left invested. Further sums taken are subject to Income Tax. It is also possible to buy an annuity with the sum left invested.
|Guaranteed Minimum Pension (GMP)
|A minimum amount of pension that the Scheme must provide as one of the conditions of contracting-out of the earnings-related part of the State scheme between 1978 and 1997.
|Her Majesty's Revenue & Customs (formerly Inland Revenue). The UK's customs and tax department.
|Independent Financial Advisor (IFA)
|A firm or person authorised and regulated by the Financial Conduct Authority (FCA) to give you advice and recommend suitable pensions products and investment options.
|Lifetime Allowance (LTA)
|The overall limit on the pension savings that will qualify for Tax Relief. A tax charge will normally apply if pension savings exceed this limit. Applies to all of the pension benefits you build up over your entire working life. Since 6 April 2020, the current limit set by the Government is £1.073 million.
|Lifetime Allowance Protection
|The standard limit since 6 April 2020 is £1,073,000, however a higher Lifetime Allowance may apply if a person was eligible for, and applied for, one or more of the various types of protection from the effects of this limit.
|Money Purchase Annual Allowance (MPAA)
|When a person goes into Drawdown, takes an Uncrystallised Funds Pension Lump Sum (UFPLS) or purchases certain flexible types of annuity then future DC pension saving may be restricted to £4,000 a year.
|Pension Input Period (PIP)
|The value of all pension savings is measured over a period of time called the pension input period (PIP). This period is aligned with tax years (6 April to 5 April).
|Pension Input Value (PIV)
|The amount by which a Defined Benefit pension is deemed to have grown during a PIP, and the contributions paid to a Defined Contribution Scheme during a PIP. The total is valued against the Annual Allowance limit.
|When an individual personally enters into an agreement with a Financial Services provider to save into a pension.
|Qualifying Recognised Overseas Pension Scheme (QROPS)
|An overseas pension scheme that meets certain requirements set by Her Majesty's Revenue and Customs (HMRC). An overseas scheme must be a QROPS to receive a transfer of pension benefits. Tax charges may apply in respect of some transfers.
|Retail Price Index (RPI)
|The index published monthly by the Government by which the rate of inflation on the price of standard goods and services (all items) is measured.
|From 6 April 2016 this is a single tier pension (though a person's entitlement may be reduced if they do not qualify for the full amount).
|Tapered Annual Allowance (TAA)
|When a person earns more than £240,000 a year from all sources then their Annual Allowance may be reduced by £1 for every £2 of income over that limit, down to a minimum of £4,000.
|Moving pension savings from one pension scheme to another. For DB schemes, there may be age limits and financial advice requirements.
|The process of exchanging a small pension in return for a one-off lump sum is known as ‘commuting your pension’. This option is limited by complex government legislation, including a requirement that the value of pension rights must be under a certain limit.
|Trust Based Scheme
|When an employer's pension scheme is overseen by an independent Trustee Board.
|Uncrystallised Funds Pension Lump Sum (UFPLS)
|A flexible type of benefit available from some DC arrangements where a lump sum can be taken from a pension pot. Typically, the first 25% is paid tax free, and the rest is subject to Income Tax. Any money left in the DC pension pot remains invested in the usual manner.