Pensions are complicated, and discussing them can leave many people confused. The source of such confusion comes from the language and terms used to describe pensions and the various elements that make up or contribute to a pension pot. However, to ensure your pension is performing well and remaining on track towards your retirement goals, you need to understand what each of these terms mean.
Read on for a straightforward explanation of twelve of the most common terms used when discussing pensions:
An annuity is a product you can exchange for the amount of savings in your pension pot. Annuities provide a guaranteed regular income and usually offer this for life.
A proportion of your pension investment is likely to consist of bonds, which are loans to large corporations or the government. As your money is being lent, there is interest applied to the loaned amount. This interest is what provides the growth for your pension funds. Bonds are generally low-risk, so the interest will be low, as will the amount of growth your fund can achieve.
3. Death Benefit
In the event of your death before the age of seventy-five, your next-of-kin or beneficiary can receive your pension fund as a tax-free lump sum. If your death occurs after you are seventy-five, your pension will still get paid to the next-of-kin or beneficiary, but it will be subject to income tax at a marginal rate.
Equities are investments in stock market shares to grow the value of your pension fund. As the value of the stock increases, so too will the value of your pension. Although equities provide the most significant potential for growing your fund, they are also among the greatest sources of risk. Therefore, you should be aware of the level of risk involved in such investments.
5. Fees and Charges
You need to pay charges and fees to have your pension administered and managed. These charges are often referred to as annual management charges (AMCs), and they may vary according to your pension provider.
6. Final-Salary Scheme
This type of pension, also known as defined benefit schemes, is based on the salary you received when working on the amount of time you spent in that pension scheme. Final salary pension schemes provide you with a guaranteed income for your retirement.
7. Pension Drawdown
From the age of fifty-five, you can receive some of your pension funds while the remaining funds continue to be invested. This practice is called pension drawdown, although it is often referred to as income drawdown or FAD (Flexi-Access Drawdown). When you first start to take a drawdown on your pension, you can receive up to 25% of the fund’s value as a tax-free lump sum.
8. Pension Freedoms
If you are over the age of fifty-five, you can choose when to take your pension savings and how you take them. These freedoms only apply to qualifying pensions.
9. Pension Release
Pension release allows you to access your pension funds when you reach the age of fifty-five, even if this is before your retirement age. If you opt for pension release, 25% of the amount is tax-free, so long as you are not already drawing down on your pension.
10. Risk Attitude
Your attitude to risk refers to how much risk you are prepared to accept with the money invested in your pension. Your attitude to risk will fall into three broad categories: low, medium, or high.
11. SPA (State Pension Age)
The SPA is the age at which you start receiving your State Pension. Currently, the SPA is 65, and this is set to rise to 67 years by 2028.
12. Tax-Free Cash
Tax-free cash is the amount of money you can take from your pension pot from the age of fifty-five without paying any tax.
Hopefully, this brief article will help you better-understand your pension discussions and help ensure a more financially-sound retirement. When thinking about your pension, consider speaking to a regulated financial adviser such as Portafina or, view the information at The Money Advice Service.