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a

Active management

Actively managed funds are investment funds managed by a specialist investment manager or a team of specialists who, within certain limits, have the freedom to choose which companies to invest in and how much to invest in each company. In this way, they attempt to use their knowledge and experience to beat the returns you could achieve by simply investing in an index, like the FTSE100.

 
Additional State Pension

Before 6 April 2016, as well as the basic State Pension, people reaching their State Pension age may have qualified for an additional pension from the State. This increased the overall amount they received from the State when they retired. A new universal State Pension replaced the basic State Pension and Additional State Pension for individuals reaching State Pension age from 6 April 2016. More information can be found here.

 
Annual allowance

The annual allowance is a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension schemes each year, for tax relief purposes. The annual allowance applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all of the contributions that you or your employer pay or anyone else who pays on your behalf.

The annual allowance is currently £40,000 although a lower limit may apply if:


1. You have already started taking flexible benefits – see Money purchase annual allowance; or

2. You have earnings in excess of £150,000. The government is restricting the annual allowance for pension savers with ‘adjusted incomes’ over £150,000. From April 2016, if you have an ‘adjusted income’ of over £150,000 for a tax year, you will have your annual allowance reduced by £1 for every £2 of income you receive over £150,000, subject to a maximum reduction of £30,000. If your ‘adjusted income’ is £210,000 or over, your annual allowance will be reduced to £10,000. If your ‘adjusted income’ is between £150,000 and £210,000 your annual allowance will be between £40,000 and £10,000. ‘Adjusted income’ is your taxable income, plus the value of any pension contributions paid by you or your employer during the tax year to any pension schemes you are in. This ‘adjusted income’ includes pension contributions if you have made these through salary sacrifice/exchange arrangements entered into on or after 9 July 2015. In practice, this means that anyone with a taxable income of below £110,000 will not be affected by the new taper. For example, if you had taxable income of £110,000 and you maximised your tax-relievable pension contributions for the tax year at £40,000, your ‘adjusted income’ would total £150,000. You would not be affected by the new taper. If you had taxable earnings above £110,000 in this example, then the new taper rules would apply.

 
Annuities

An annuity is a product offered by insurance companies. Basically, you give the insurance company the balance of your pension savings, after you’ve taken any tax free cash, and the insurance company will pay you an income for the rest of your life however long you live. This is called a 'pension annuity'. There are also other types of annuity (see Purchased Life Annuity).

 
Asset allocation

Asset allocation is about ‘diversifying’ your savings. Put more simply, it means spreading your money across different types of investments.  For example, you may choose to invest 40% of your money in equities, 30% in bonds and the rest in cash. It refers to the proportion of your money you hold in each investment category.

 
Attendance Allowance

This is an allowance which is paid tax free to people, aged 65 or over, who need personal care because of an illness or disability.

 
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B

Bank Base Rate

The Bank of England sets the bank interest rate, known as the Bank Base Rate each month.  It is the rate at which the Bank of England lends to other financial institutions and is set by the Monetary Policy Committee in response to economic conditions.

 
Basic State Pension

The basic State Pension is a regular income that most people receive if they reached their State Pension age before 6 April 2016. The amount payable is based on the number of years they had been paying National Insurance contributions (or received National Insurance credits) over their working life. A new universal State Pension replaces the basic State Pension and Additional State Pension for people reaching State Pension age from 6 April 2016. More information can be found here.

 
Benefit crystallisation event

This is a defined event or occurrence that triggers a test of your benefits against the available lifetime allowance.

Bonds

Sometimes referred to as fixed interest investments, these are effectively loans to companies and governments. Just like paying off a mortgage, the companies and governments pay interest on the loan and must repay the loan at the end of the term.

 
BR19

An application form you complete to receive a forecast of your pension benefits from the State. The forecast will tell you how much you are entitled to based on the amount you’ve paid in National Insurance contributions so far, plus how much you should receive when you reach your State Pension Age.

 
Bus pass

One of the benefits of getting older is that you can qualify for free off-peak travel on local buses. The precise terms differ depending on where you live in the UK.

 
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C

Capital Gains Tax

A tax on the increase in the value of things you own (like a second home or shares for example) during the time you have owned them. Any tax is due when you ‘dispose’ of them (usually by selling them or giving them away). The rate of tax you pay depends on your personal tax position. Basic rate taxpayers pay a rate of 18%, while higher and 45% rate taxpayers pay a rate of 28%. Tax is only payable on gains in excess of the annual allowance of £11,000 (2014/15).

Capped drawdown

Capped drawdown is a form of income drawdown which was common before 6 April 2015. It allows you to take an income, or to choose not to take an income, without ever buying an annuity. However the maximum income you can receive is limited to roughly 150% of a notional annuity income decided by the government. No new capped drawdown arrangements can be set up after 6 April 2015 unless you already have one and want to add more pension savings to it.

Cash

In an investment sense, this doesn’t literally mean cash, but usually money held on deposit. This is generally considered very secure, but historically the returns are much lower than other investment classes.

Cold Weather Benefit

If you receive Pension Credit (or certain other benefits),you should automatically qualify for an extra payment called the Cold Weather Payment. This is paid for each week that the weather is exceptionally cold between 1 November and 31 March, based upon where in the UK you live.

Commutation rate

This is the rate at which you can exchange pension for tax free cash in a defined benefit scheme. For example, if your pension scheme offers you a commutation rate of 15:1 that means for every £15 of cash you take you’ll lose a £1 of pension.

Consolidation

If you have two or more pension pots it can make sense to bring them together into one pension pot. For example, you could get a better annuity because your total pension pot is higher.

Consumer Price Index (CPI)

Tracks the change in the price of a basket of goods and services that a typical household might buy or use. The CPI is the key measure of inflation for the UK and is used by the Bank of England in making interest rate decisions.

Contracted in

This refers to schemes that did not offer the contracting out option. (See Contracted out)

Contracted out

This refers to a feature of pension savings that no longer exists. It allowed pension schemes to provide an element of pension benefit in place of the Additional State Pension in return for the member and their employer paying reduced National Insurance contributions. This option was finally abolished from 6 April 2016.

Conventional annuities

A conventional annuity pays a guaranteed income for life that can never fall below the amount payable initially.

Council Tax Support

Can be claimed by people on a low income. Normally it is paid by reducing the amount of Council Tax you have to pay. In some cases, people may qualify to have all of their Council Tax paid. Others may qualify for a reduction in the amount they pay.

Crystallised funds

Crystallised funds are the amount of your pension savings that have been used to provide you with, or allocated to provide you with, authorised benefits from a registered pension scheme. When a benefit crystallisation event occurs, the amount of pension savings that have been used to provide the benefit (the crystallised funds) are measured against the lifetime allowance. If the amount of crystallised funds exceed your available lifetime allowance, you will be liable for a tax charge on the value of the crystallised funds that exceed the lifetime allowance.

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D

Deferred Payment Scheme

If you need long term care and the value of your assets, leaving aside the value of your property, is more than a specified amount (and you don’t want to sell your home), you can ask your local Social Services department if they will allow you to defer payment. This way, you don’t have to incur any of the costs of your care and you repay the amount when the property is eventually sold.

Defined benefit scheme

These schemes are often called 'final salary' pensions. This is because they commonly provide a proportion of your earnings close to retirement. For example, they may pay 1/60th or 1/80th for each year of service. Some plans calculate benefits based on the average salary you receive over the time you worked for the employer.

Defined contribution scheme

These schemes are often called 'money purchase' plans. Money is usually paid into the plan by you and/or your employer. At the point of retirement, you will have a pot of money, based on how much has been paid in, plus any growth on the money (less the costs of running the scheme).

Dependant

Someone who relies on another person to support them financially. There is a precise definition of who qualifies as a dependant for the purposes of receiving a pension or lump sum on your death.

Drawdown funds

This is the amount of your pension savings that you have designated (or allocated) to income drawdown. You can choose to take an income payment from your drawdown funds while leaving the remaining fund invested within your pension scheme. Alternatively, you can defer taking an income from your drawdown funds until you need it.

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E

Enhanced annuities

Sometimes called lifestyle annuities, these annuities usually pay a higher income each year if your lifestyle is likely to shorten your life expectancy. For example, smoking or poor diet.


Equities

These are shares in publically quoted companies. Equities have historically produced high returns when compared with many other investments, but also carry greater risk of loss.


Equity release

A way of releasing equity from your home without moving or taking in lodgers. You can take a lump sum or a regular income and you don’t need to repay any of the money until after you die.


Equity Release Council

A voluntary trade organisation established in 1991 dedicated to the protection of equity release clients and the promotion of safe home income and equity release plans. All participating equity release companies that produce products for releasing equity in the home must comply with certain conditions that protect customers buying these products.


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F

Fixed or increasing annuity

When you buy a conventional annuity, you will be asked to choose between a fixed annuity and an increasing annuity. A fixed annuity will pay you the same amount every year. An increasing annuity, as the name suggests, will increase each year usually by a percentage (say 3% or 5%), or in line with the movement in an index like the Retail Prices Index (RPI).

 
Fixed term annuity

These products are a form of annuity. They pay an income, but only for a limited number of years – not for life. Usually, they are sold for periods of 5 or 10 years. At the end of the fixed period, an amount of money is payable (called the maturity value), that can be used to buy an annuity that pays an income for life or, alternatively, to buy another fixed term annuity or, depending on your circumstances, you could choose one of the drawdown options.

 
Flexi-access drawdown

This is a form of income drawdown that became available from 6 April 2015. It allows you to keep your pension fund invested while drawing an income. You can normally decide how much income to take, at what frequency and for how long. It is similar to capped drawdown but there is no limit to the amount of income that you can take from a flexi-access drawdown fund.

Flexible annuities

Before 6 April 2015, a flexible annuity was effectively a form of investment linked annuity. That means your money can be invested in a mix of assets including equities, but while this gives potential for growth, the income you are paid each year can fall (though some of these products offer a guarantee that your income can’t fall below a certain level). Since 6 April 2015, flexible annuities can also refer to a new form of annuity that includes more flexible options such as having an unlimited guarantee period, or being able to stop, re-start or reduce in payment.

 
Flexible drawdown

This was a form of income drawdown that was available until 6 April 2015. It allowed you to take as much as you like from your fund, but you had to demonstrate that you had a certain guaranteed minimum income. Any flexible drawdown arrangements that existed on 5 April 2015 automatically became flexi-access drawdown funds on 6 April 2015.

 
FTSE100

An index of the 100 biggest companies in the UK listed on the London Stock Exchange.

 
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G

Guarantee period

When you buy an annuity you can elect for the income payable to continue to be paid for a fixed period after your death. Commonly, people select either 5 or 10 years. This means if you choose a 10 year guarantee period, and die 3 years after buying the annuity, the remaining 7 years payments would continue to be made. This is called the guarantee option.

Group personal pension scheme

This is a type of pension scheme usually made available to employees by their employer. The group personal pension scheme will usually be set up by an Insurance Company. Employers will become members of the scheme and will receive benefits from the normal minimum pension age. The employer and members will usually be expected to contribute to the scheme at a certain rate.

 
Group stakeholder pension plan

Pension Credit has two parts: Savings Credit and Guarantee Credit. If you are on a low income, you may qualify for Guarantee Credit. This will bring your income up to the minimum the government believes you need to live on.

 
Guarantee Credit

Pension Credit has two parts: Savings Credit and Guarantee Credit. If you are on a low income, you may qualify for Guarantee Credit. This will bring your income up to the minimum the government believes you need to live on.

 
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H

Health Benefits

Once you turn 60 you’re entitled to a whole range of free health benefits. These include free prescriptions, free eye sight tests and free NHS chiropody.


HMRC

Her Majesty’s Revenue & Customs. HMRC is responsible, among other things, for the collection of taxes (previously known as the Inland Revenue).


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I

Immediate needs annuity

This product is generally used to pay the costs of long term care. It works much like a conventional annuity. The key attraction of this approach is that you know how much you have to pay in advance, however long care may be required for, and the rest of your capital can be used as an inheritance for your family.

Impaired life annuities

If you suffer from a medical condition like cancer, diabetes or high blood pressure, for example, you can qualify for an impaired life annuity. This will usually pay you a higher income.

Income drawdown

Income drawdown is one of the authorised benefits you can take from a registered pension scheme. There are different types of income drawdown – capped drawdown, flexible drawdown, and since 6 April 2015 flexi-access drawdown funds. Income drawdown is an alternative to using your pension fund to buy an annuity. It allows you to keep your pension fund invested while drawing an income. There are specific rules that apply to each type of income drawdown benefit and you will usually find an explanation of the key rules in the Key Features document and Policy Conditions you will be given when you take an income drawdown benefit.

Income guarantee period

When you buy an annuity you can elect for the income payable to continue to be paid for a fixed period after your death. Commonly, people select either 5 or 10 years. This means if you choose a 10 year guaranteed period, and die 3 years after buying the annuity, the remaining 7 years payments would continue to be made. This is called the ‘income guarantee’ option.

Inheritance Tax

Paid on an estate when someone dies. The rate of Inheritance Tax is 40%, but it is only paid on estates worth more than £325,000. This limit is expected to rise over time, but has been kept at this level until the tax year 2017/2018. It is also possible for married couples and civil partners to transfer their allowances to each other when one dies. This means the limit is effectively £650,000.

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J

Joint life option

When you buy an annuity, you will be offered the choice of ‘joint life’ or ‘single life’. If you choose ‘joint life’ part or all of your annuity payments can continue to be paid after your death to your spouse or partner.


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L

Lifetime allowance

There is a limit on the amount of money you can build up in pension funds before tax penalties apply. That limit is called the lifetime allowance. The lifetime allowance is £1.million (2016/17). Further details can be found here.

 
Lifetime mortgage

Lifetime mortgages are a popular way of releasing equity in your home without moving house. These products work in a similar fashion to a normal mortgage, with one major exception: You don’t have to pay anything back until you die, sell your home or move into a care home. This includes the interest, which is added to your loan, but not repaid regularly like a conventional mortgage. When your home is sold the original loan, plus the interest you owe, is payable to the lender.

 
Liquidity

The ease with which you can convert an asset into cash is called its ‘liquidity’.  For example, money in a current account is easy to convert into cash – you just withdraw it when you need it.  As such, cash is considered to be ‘highly liquid’. In contrast, if you buy property, this is considered a ‘highly illiquid’ investment as it can take several months to sell and therefore it may not be easy to access your money.

 
Long-term care

An expression that is used to describe the various services and support people may need, often in old age, when they are unable to look after themselves for a long period of time.

 
Lower Earnings Limit

This is the minimum level of earnings that an employee needs to receive before they pay National Insurance contributions.

 
Lower Earnings Threshold

If you earn more than the Lower Earnings Limit, but less than the Lower Earnings Threshold, your entitlement to State pensions will be calculated as if you did earn as much as the Lower Earnings Threshold.

 
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M

Marginal rate

This rather confusing term basically means the tax payable on your last pound of income. For practical purposes it could be thought of as the highest rate of tax you'll pay on your income. This isn't strictly true if your income in one year is over £100,000 but for the most part this definition should work.

 
Minimum Income Requirement

Flexible drawdown allows you to take as much as you like from your fund, but you have to demonstrate that you can meet a Minimum Income Requirement (MIR). Currently, the MIR is £12,000. Not all income you may receive will qualify as MIR, but the following examples will qualify: State pension, most final salary pensions and most lifetime annuities. This requirement will no longer apply from April 2015.

 
Money purchase annual allowance*

If you have taken flexible benefits which include income, such as an uncrystallised funds pension lump sum (UFPLS) or flexible drawdown with income, and you want to continue paying contributions to a defined contribution pension scheme, you will have a reduced annual allowance of £10,000* towards your defined contribution benefits. The reduced amount is known as the money purchase annual allowance (MPAA) and includes both your own contribution and any other contribution paid on your behalf, such as an employer or a third party. You cannot bring forward any unused annual allowances from the previous three tax years, to justify higher contributions than £10,000 towards your defined contribution benefits.

The money purchase annual allowance will only start to apply from the day after you have taken flexible benefits and so any previous savings are not affected.

 

*Following the announcement in the Autumn Statement there is currently a consultation process under way which is looking at reducing this figure to £4,000, possibly as early as the next tax year. Further details will be published by the Government in due course.

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N

National Insurance contributions

You pay National Insurance contributions when your earnings reach a certain level. Your contributions build up your entitlement to benefits, including the State Pension. How much you will pay depends on how much you earn and whether you're employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age.

 
National Insurance credits

If you are unable to work, and therefore unable to pay National Insurance contributions, you could receive National Insurance weekly credits for the basic State Pension and the State Second Pension. To qualify you need to meet certain conditions.

 
New State Pension

The new State Pension is a regular payment from the government that you can claim if you reach State Pension age on or after 6 April 2016. More information can be found here.

You can get the new State Pension if you’re eligible and:

 - a man born on or after 6 April 1951

 - woman born on or after 6 April 1953

If you reached State Pension age before 6 April 2016, you’ll get the State Pension under the old rules instead. Please see basic State Pension and Additional State Pension.

Non pension savings

Increasingly, people are retiring with part of their income in retirement generated from savings and investments they’ve built up outside their pension savings. Alternatively, they may have taken the tax free cash from their pension and plan to invest some or all of this or they may have inherited wealth or use equity release to boost their income.

Whatever the original source, if this money isn’t part of a pension fund there is far more flexibility over how it can be invested.

 
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O

Occupational Pension Scheme

A company pension plan set up by your company to provide you with pension and other benefits.


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P

Passive management

‘Passive’ funds are investment funds that attempt to track the performance of an index (like the FTSE100. In theory, these funds match the index by buying all of the shares in the index so that the performance should exactly mirror the performance of the index. In practice, there are sophisticated techniques and models that allow companies to track an index without directly holding all of the stock and shares in that index.

Payment frequency

Your annuity or regular income can be set up to be paid monthly, quarterly or annually.

Payment in advance or arrears

When you buy an annuity you can choose to have your income payable in advance or in arrears. For example, if you choose to have your income payable quarterly, would you like it paid at the beginning of each quarter or the end?

Pension commencement lump sum (PCLS)

This is one of the authorised benefits you can take from a registered pension scheme. It is a cash sum which, under current legislation, can be paid to you tax free. You become entitled to a PCLS in two circumstances – when you buy an annuity or when you designate (or allocate) funds into income drawdown. The amount of PCLS you can have is limited to one third of the funds you use to buy an annuity or designate to income drawdown. So if you have a pension fund of £100,000, you could designate £75,000 to income drawdown and have a PCLS of £25,000.

Pension Credit

A means tested benefit introduced in 2003 to help pensioners on low incomes who have some savings. There are two elements to Pension Credit: Guarantee Credit and Savings Credit. From 6 April 2016 changes are being made to Savings Credit which mean that most people who reach State Pension age from this will not receive Savings Credit unless they are part of a couple and their partner reach State Pension age before 6 April 2016.

Pension input period

The annual allowance applies to the total pension contributions made to your scheme(s) and/or benefits built up over a period called the pension input period that coincides with the tax year.

Pension savings

These are the savings you have made over the years in pension plans. Most people will have built up their pension savings through schemes run by the companies they’ve worked for, but some people may have paid into individual pension plans during their career.

Personal allowance

Almost everyone in the UK qualifies for a personal allowance. This is the amount of income you can earn each year without having to pay any tax.

Personal Independence Payment

This is a tax-free benefit payable if you’re under 65 when you claim. You may qualify if you have a physical or mental disability (or both) and your disability is severe enough that you need help looking after yourself or getting about.

Postcode annuities

These pay more if you live in certain parts of the country.

Preserved benefits

These are benefits you are entitled to when you leave an occupational pension scheme before you retire. The benefits are held on your behalf and subsequently paid when you reach the scheme’s retirement date. You can also transfer the value of the benefits to another scheme.

Purchased Life Annuity

This is an annuity you can buy with your non pension savings. It can be a very tax efficient product. Each income payment is assumed to represent partly the return of your original capital (the amount you paid for the annuity) and partly the growth the insurance company make by investing your money. Only the latter is taxable.

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Q

Qualified Recognised Overseas Pension Scheme (QROPS)

A QROPS is a pension scheme set up outside the UK. It is regulated by the country in which it is established and must be recognised for tax purposes in the country in which it is established. You can transfer your pension savings into a QROPS if you plan to retire abroad. Your pension savings will then be subject to the tax regulations in the country you choose, rather than the UK tax regulations (although UK tax charges may still apply if benefits taken do not match UK rules).

 
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R

Retail Price Index

Like the Consumer Price Index (CPI), the Retail Price Index (RPI) tracks the change in the price of a basket of goods and services that a typical household might buy or use. However, there are differences between the two. For example, the RPI includes mortgage interest which is not included in the CPI.


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S

Savings Credit

Pension Credit has two parts: Savings Credit and Guarantee Credit.

 
Scheme pension

A scheme pension is a pension paid by a defined benefit pension scheme.

 
Senior Railcard

A Senior Railcard saves you a 1/3 off Standard and First Class rail fares across Britain for a year. What’s more, the discount also applies to Advance fares and Gatwick Express tickets – providing they’re booked before you travel. You can apply if you are 60 or over.

 
Single life option

If you choose a single life option when you buy an annuity the income payments will not continue to be paid for the life of any spouse or partner after your death.

 

As well as the basic State Pension, you may qualify for an additional pension from the State. Any additional pension is payable from a scheme called the State Second Pension. This was introduced in April 2002. Before that it was known as the State Earnings Related Pension Scheme.

 
State Pension

The State Pension is a regular payment from the government that you can claim if you reach State Pension age on or after 6 April 2016. More information can be found here.

You can get the State Pension if you’re eligible and:

 - a man born on or after 6 April 1951

 - woman born on or after 6 April 1953

If you reached State Pension age before 6 April 2016, you’ll get the State Pension under the old rules instead. Please see basic State Pension and Additional State Pension.

 
State Pension age

This is the age at which you can begin to receive the basic State Pension.

 
State Second Pension

Before 6 April 2016, as well as the basic State Pension, people reaching their State Pension age may have qualified for an additional pension from the State. This increased the overall amount they received from the State when they retired. A new universal State Pension replaced the basic State Pension and Additional State Pension for individuals reaching State Pension age from 6 April 2016. More information can be found here.

 
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T

Tax free cash sum

This is a common name for the pension commencement lump sum described here.

 
Transfer value

If you want to move the value of your retirement benefits from one pension scheme to another, the scheme you are moving your benefits away from will quote you a transfer value. This is their estimate of the cash equivalent of the value of the benefits you built up during your membership of the scheme.

 
Triviality

If the total value of all your pension savings across all registered pension schemes is below a certain level (currently £30,000), you can take the whole value of any defined benefits you hold as a trivial lump sum. Only 25% of it is tax free. This option is not available from a defined contribution scheme.

 
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U

Uncrystallised funds

This is the amount of your pension fund savings that you have not yet taken any benefits from.

Unit linked annuities

With a unit linked annuity your income in retirement will be linked to the investment performance of the fund you’ve chosen. This means your fund value can rise and fall in line with the underlying value of the investments in your fund. Some of these products will provide some form of guarantee so you know, whatever happens to your investments, your income can never fall below a minimum level.

Upper Earnings Limit

The maximum amount of earnings on which National Insurance contributions are payable by employees at the main rate.

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V

Value protection

It's possible to arrange your annuity so that whenever you die your estate will receive all of your original investment, less the payments made to the date of your death. This feature is known as ‘value protection'.


Variable annuities

These products offer a number of features, but usually pay a guaranteed income (commonly around 4% of your capital at age 65) and still allow you to invest in a mix of equities and other investments. However, please note that the construction of these products does vary considerably from one insurance company to another.


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W

Winter Fuel Payment

This is paid if you are in receipt of the basic State Pension and can help towards the extra costs of heating your home in the cold weather. Exactly how much you will receive depends on the age of the people living there and your circumstances.


With profit annuities

These are invested in the company's with profits fund. With profits funds generally invest in a mix of assets (including equities). To try and avoid sharp increases or decreases in the value of the fund, one of the distinctive features of with profits is 'smoothing'. This simply means the insurance company will hold back some of the gains from investment returns in the good years to subsidise returns when investments perform poorly. Like all lifetime annuities, these products will pay you an income for life.


With/without proportion

When you buy an annuity, if you select the payment in arrears option, and opt for 'with proportion', when you die your estate will receive the proportion still owed to you to the date of your death. In other words, if you're paid monthly, and you die in the middle of the month, half a month's income would be paid to your estate.



Contact

If you are a member of a pension plan administered by BlackRock, then please contact us at


0345 601 7720

blackrock.pensionsuk@blackrock.com