Definitions to all those mind-boggling pension terms
The day-to-day running of a pension scheme, eg collection of contributions, payment of benefits, record-keeping.
See Financial adviser
The maximum amount of pension savings that can be built up in any one tax year before liability to an annual allowance charge, which is a tax charge levied by HMRC.
annual management charge
Investment managers are generally remunerated through receipt of an Annual Management Charge (AMC). The AMC is normally a percentage of the assets, but other pricing options can be used, such as a fixed fee, although this is relatively rare.
A series of payments, which may be subject to increases, made at stated intervals until the end of the agreed period or the life of the annuitant. This is often achieved by means of an insurance policy underpinned by guarantees.
Items such as equities, gilts, property and cash.
assets under management
The amount of investor money that an investment firm manages, either in total or in a particular asset class – eg UK equity.
Employers have legal duties to enrol eligible jobholders into a qualifying workplace pension scheme and make contributions towards it. The jobholder cannot be required to take any action in order to become an active member of the scheme. A jobholder who has been automatically enrolled is free to opt out and get a refund of the contributions they have paid.
This is the interest rate at which the Bank of England lends money overnight to other banks in return for high quality collateral. The Bank of England moderates the supply of money to banks, and hence the economy, by raising or lowering the base rate. Short term interest rates for high quality borrowers typically remain close to this rate.
basic state pension
The flat rate (not earnings related) state pension paid to all who have met the minimum NI contribution requirements, their spouses, subject to certain conditions, and widow(er)s.
A member of a pension scheme who is entitled to a benefit from the scheme or a dependant who will become entitled on the death of the member.
Any payments made to a beneficiary, including tax-free lump sums, pension payments and death benefits.
A schedule prepared by the administrators listing all scheme members (including dependants in receipt of benefits), and the benefits to which they are entitled. Usually drawn up when the administration is changing hands (eg when a scheme is being transferred to the PPF).
A statement or estimate of benefits payable in respect of an individual's membership of a pension scheme, eg annually during employment, on retirement, in the event of wind up.
The risk that an investor may lose all or part of the amount invested.
Cash or Money Market Funds are very low risk and invested predominantly in deposits with leading institutions, money market instruments and short dated fixed income securities.
The amount of actual money being received and spent. In the case of a pension scheme, the amount of money being received into the scheme in contributions and investment returns and the amount of money being paid out by the scheme.
A pension scheme which does not admit new members. Contributions may or may not continue and benefits may or may not be provided for future service.
The asset class comprising a range of physical goods. Examples include foodstuffs such as wheat, metals such as copper as well as energy sources such as oil.
the action or process of combining a number of things into a single more effective or coherent whole.
Consumer Prices Index (CPI)
An index of UK price inflation. It is the UK’s version of the Harmonised Index of Consumer Prices (HICP), which is a Europe-wide standardised measure of inflation.
Commonly used to describe a scheme which is not contracted out of the State Second Pension (S2P, previously SERPS) – ie where the members continue to be entitled to S2P.
Commonly used to describe a scheme which provides benefits in place of the State Second Pension (S2P, previously SERPS). Currently these benefits from the scheme are paid for by means of a rebate of the relevant NI contributions.
A scheme which requires contributions from active members.
A bond with a fixed interest rate issued by a company for a fixed period of time.
Data Protection Act
The Act that controls how your personal information is used by organisations, businesses or the government.
Defined Benefit scheme. A scheme in which the benefits are defined in the scheme rules and accrue independently of the contributions payable and investment returns. Most commonly, the benefits are related to members' earnings when leaving the scheme or retiring, and the length of pensionable service. Also known as 'final salary' or 'salary-related' scheme.
Defined contribution scheme. This is the category into which Workplace pensions/auto enrolment falls. A scheme in which a member's benefits are determined by the value of the pension fund at retirement. The fund, in turn, is determined by the contributions paid into it in respect of that member, and any investment returns. Also known as 'money purchase' scheme.
death in service (DIS)
Death which occurs while a member of a pension scheme is still employed by the sponsoring employer. Benefits may be payable to dependants.
default investment strategy
In the context of a DC pension scheme, a default investment strategy is the fund or mix of funds in which contributions will automatically be invested in the absence of any explicit fund choices by that member.
A person who is financially dependent on a member or pensioner or was so at the time of death or retirement of the member or pensioner. Scheme rules will define a dependant precisely, eg age at which children cease to be dependants.
A distribution of profits made by a company to its shareholders, usually half-yearly. The company usually has total discretion as to the size of the dividend and even whether or not to pay a dividend.
The process of investing in a number of different asset classes, and individual investments within those asset classes, so as to limit exposure to any single source of risk.
Diversified Growth Fund (DGF)
Diversified Growth Funds (DGFs) are pooled investment funds that invest in a wide range of asset classes, with the allocations to those asset classes often being managed on an active basis as market conditions change.
Where an investment has two prices – a higher price (offer price) at which investors can buy, and a lower price (bid price) at which investors can sell.
A DC scheme where all the benefits are secured by an insurance policy. Under the umbrella of the policy, each member accumulates an individual (earmarked) pension fund.
The application of a court order made when a member of a pension scheme divorces, directing the trustees to pay some or all of the member's benefits to the ex-spouse at the time they would otherwise have become payable to the member. Civil partners are treated in the same way.
The date at which the liabilities and assets of the scheme are measured for the purposes of a valuation.
expression of wish
A means by which a member can indicate to the trustees a preference as to the recipient of any lump sum death benefit.
Advises individual members about the options that are best for them and how they should organise their investments. Advises the trustees of small schemes, who are often directors of the sponsoring employer, especially when the scheme is being set up.
Financial Conduct Authority (FCA)
On 1 April 2013 the Financial Services Authority (FSA) split into two regulatory bodies - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The FCA is responsible for regulating the standards of conduct in retail and wholesale, financial markets and for supervising the infrastructure that supports those markets. The FCA also has responsibility for the prudential regulation of firms that are not regulated by the PRA.
Financial Services Authority (FSA)
On 1 April 2013 the Financial Services Authority (FSA) split into two regulatory bodies - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
A generic term covering all investments which pay interest at a pre-agreed rate for a fixed term, including corporate bonds, gilts and index-linked gilts.
front end loading
The practice of levying higher annual charges on contributions made at the beginning of a contract than are charged on contributions paid later on in the life of the contract. These higher annual charges on early contributions are maintained throughout the life of the contract.
The Financial Services Compensation Scheme is an independent body, established under the Financial Services and Markets Act 2000 as the UK’s statutory compensation fund of last resort, for customers of financial services firms authorised by the FCA.
Financial Times Stock Exchange indices that show the movement of share prices of the companies which are included in any particular index.
An individual (or company) to whom the trustees delegate the management of all or part of the scheme's assets. Also known as investment manager.
Bonds issued by the UK Government, which have a fixed interest rate. If they are index-linked, the value of the gilts increases each year with inflation, which has the effect of increasing the amount of the interest paid.
Group Personal Pension (GPP)
An arrangement made for the employees of a particular employer, to participate in personal pension schemes with the same pension provider. Each member has a separate pension policy (contract) with the pension provider, although contributions are collected by the employer who then pays them to the provider. Because of the contractual arrangements, a group personal pension scheme is referred to as a contract-based scheme, rather than a trust-based scheme, and there is no board of trustees.
Performance returns that are quoted before the deduction of investment management fees.
Fund managers who invest in shareholdings which they expect to increase in value, almost regardless of the dividends paid. They tend, therefore, to favour shares with a high price/earnings ratio (expensive shares). Growth managers are more likely to do well in rising markets when this type of share tends to perform strongly.
Guaranteed annuity rate
A guaranteed annuity rate could mean that a higher level of income could be achieved by purchasing an annuity at retirement through the original pension provider. The last guaranteed annuity rates were issued around 2005.
Guidance issued by the Pensions Regulator to help improve understanding of work-based pension schemes and to promote good practice.
HM Revenue and Customs. Formed in April 2005, following the merger of Inland Revenue and HM Customs and Excise Departments, HMRC determines the tax environment within which pension schemes operate.
An independent financial adviser.
An asset is said to be illiquid if it cannot be traded quickly and easily (eg, a property).
Bonds issued by the UK Government for a fixed term, which have a fixed interest rate. Because they are index-linked, the value of the gilts increases each year with inflation, which has the effect of increasing the amount of the interest paid. Often known as inflation-linked gilts.
The process of replicating the returns on a given index. Also known as passive management.
Show the average movement of the value of a compilation of assets. Different indices apply to different assets, eg shares in smaller companies, shares in larger companies, property, gilts and corporate bonds. Overseas assets have their own indices, eg the Dow Jones and the Nasdaq in the US.
This is a measure of the change in the general level of prices of goods. In the UK it is measured chiefly by the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Pension payments are often linked to inflation.
The risk that inflation, or the expectation for future inflation, increases, thereby increasing the value of inflation-linked liabilities. This can be managed by investing in inflation-linked assets, for example index-linked gilts or inflation swaps.
The transfer of assets from one fund or portfolio to another in the form of actual securities (eg company shares) rather than cash.
An individual or company authorised by the FCA to advise on and arrange any general insurance policy, such a policy to cover death in service benefits, trustee indemnity insurance etc.
Effectively, the amount paid by a borrower to a lender to borrow money. The interest rate can be fixed or variable and can be set for a very short (eg overnight) or for a very long (eg 50 years) period of time. It is normally expressed as a percentage of the amount borrowed, or this amount increased in line with some agreed measure.
In a DC scheme the trustees are responsible for setting the scheme’s default strategy and, on the advice of suitably qualified advisers, must select investment options for their scheme. Investment consultants advise on all aspects of investment strategy, including investment manager selection, asset allocation and performance measurement. In DC schemes, investment consultants typically advise on the design of the default strategy and its underlying funds, as well as the selection of alternative funds for members who choose their own investment strategy.
investment management agreement
The document agreed between a fund manager and the trustees of a scheme setting out the basis upon which the fund manager will manage a portfolio of investments for the trustees. See also fund manager.
See fund manager.
A collection of assets owned by a particular person, people or organisation, eg a trustee board
The use of borrowed money in the context of alternative investments which allows for the purchase of more of a given asset than would otherwise be possible. Because of the greater size of holding, the risk is increased; while gains are potentially correspondingly higher, so are losses. If the investment is via a pooled fund, any losses can be limited to the size of the actual investment.
Amounts which a pension scheme has an obligation to pay now or in the future. The value of liabilities payable in the future cannot be accurately determined, and will be dependent on the use of assumptions.
London Interbank Offered Rate (LIBOR). A benchmark for short term interest rates between banks worldwide, which is published daily.
life cover/pension term assurance
Pension Term Assurance can provide protection in the same way as a traditional level term assurance policy. However, with the added benefit of tax relief on contributions. Transferring a pension with this attaching will mean that this benefit is lost and is unlikely to be replaced on the same terms and certainly not within a modern pension.
Lifestyling involves investing in riskier assets when you have a long period before drawing your retirement benefits. As you get closer to your retirement date, typically 5 to 10 years before, switching from these riskier assets into less risky ones, such as cash or fixed interests, that aren't as likely to be affected if the investment markets were to fall sharply, helps to keep the investment growth, during the period up to your retirement. Lifestyling may be suitable for you if you're intending to purchase an annuity when you retire, to provide you with an income for the rest of your life. It's unlikely to be suitable if you intend to keep your retirement pot invested and to use income drawdown to provide you with an income in retirement. This is because moving your pension fund to lower risk assets is likely to reduce the investment returns that you will receive.
The overall ceiling on the amount of tax-privileged savings that any one individual can draw.
An asset which is relatively easy and quick to buy or sell, eg equities, fixed interest investments.
Limited price indexation. The minimum annual rate of indexation which must be applied to pensions in payment or deferred pensions, where they relate to service after 5 April 1997. LPI is the lesser of the actual rate of inflation and either 5% or 2.5% depending upon the date when the service was accrued and whether the pension is in payment or deferred. However, schemes can make increases in pension payments over and above LPI if they wish and the rules allow.
Describes a product designed to give the same return regardless of market conditions. The return should not rise or fall in line with UK equities, but will often offer a fixed percentage above bank rates, inflation or other objective measure.
market value reduction (MVR)
A market value reduction is sometimes applied to a with-profits policy if the policy is cashed-in before the maturity date. It reduces the value of the policy. Also known as: market value adjustment.
A person who has been admitted to membership of a pension scheme and is entitled to benefit under that scheme. Sometimes narrowly used to refer only to an active member.
This is the price, often halfway, between the offer price at which an investor can buy an asset and the bid price at which the investor can sell an asset.
money purchase scheme
See DC scheme.
A fund which has a remit to invest across a range of asset classes, such as equities and bonds.
National Employment Savings Trust (NEST)
NEST is the name for the personal accounts scheme that was established following the Pensions Commission’s review of the UK pensions system. It is run by NEST Corporation, which is a public body accountable to the government. NEST will be the default pension scheme for those employees whose employer does not offer an appropriate alternative arrangement.
Performance returns that are quoted after the deduction of investment management fees.
A scheme which does not require contributions from its active members.
Normally used to describe the short-term risk of missing out on the return on a market whilst not being invested in that market. For example, during a UK equity asset transfer between two managers, some or all of the funds transferred may effectively be held in cash for a few days while settlement proceeds are awaited from the outgoing manager. If the UK equity market rises in this time, then an out of market loss will be incurred
passive fund management
The management of assets, eg equities, gilts, by holding an exact replica of a given index, eg FTSE100, FTSE350, with the result that the assets in question move exactly in line with the chosen index.
A person who is currently receiving a pension from a pension scheme.
pensions in payment
Pensions that have been accessed and the benefits are/have been paid.
May be the manager of a pensions administration area, or may act as the secretary to the trustees, or may even be the chief executive of the pension scheme.
In the context of a defined contribution pension scheme, a platform is an investment structure established by a pension provider (eg an insurance company) which offers a wide range of investment funds. The platform provider is the firm that administers the platform.
Also known as pooled arrangement. A fund in which large numbers of investors hold units, as part of a 'pool'. The underlying assets are managed by a fund manager and not directly owned by the investors.
A collection of securities (eg UK equities / shares) or asset classes (eg Global equities, UK bonds, and UK property).
Benefits arising on an individual ceasing to be an active member of an occupational pension scheme, payable at a later date (eg a member who leaves that employment before retirement date).
price earnings ratio
P/E ratios show how a company's shares are priced in relation to its historical earnings. A high P/E ratio shows that the market expects the company's earnings to grow fast in the future (ie an expensive share). The opposite applies to shares with a low P/E ratio.
Protected Pension Age
Usually, the minimum age you may take benefits from your pension is age 55. It’s possible, if your older pensions were set up before 6th April 2006, that those benefits could be available earlier. This protection can be lost if the pension is transferred to a new provision.
Prudential Regulation Authority (PRA)
On 1 April 2013 the Financial Services Authority (FSA) split into two regulatory bodies - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA is responsible for the authorisation, in conjunction with the FCA, and prudential supervision of individual deposit takers (including banks, building societies and credit unions), insurers (including friendly societies) and certain designated investment firms.
Qualifying earnings are gross earnings, including sick pay, statutory maternity pay and paternity and adoption pay between a lower and upper limit called a 'qualifying earnings band'.
A company which has its shares listed on an exchange (eg the London Stock Exchange, the New York Stock Exchange, etc.).
The difference between the rate of return of an investment and a selected measure of inflation (eg RPI) over the same period.
Adjusting a portfolio to bring it back into line with the benchmark or with the investment strategy.
The amount by which an investor benefits from owning an asset (interest, dividends and any change in value less any charges levied).
In broad terms, this is the chance that the actual outcome is different from what was expected. For example, one definition of risk is the chance that an investment will return less than anticipated. In general, financial markets offer a risk / reward balance, whereby the greater the potential reward, the greater the level of risk that must be assumed.
The level of risk that a member or set of trustees is willing to take. A member is said to have a high risk appetite if they wish to invest more in risky investments.
Retail Prices Index. The index of retail prices (for all items) published by the Office of National Statistics, which is used to determine the rate of inflation over the previous 12 months. Increase to state pensions and index-linked gilts are equal to the rate of change in the RPI, while increases to private pensions in payment are dependent on the rate of change in the RPI.
A written agreement between the employer and employee whereby the employee forgoes part of his/her future earnings in return for a corresponding contribution by the employer to a pension scheme. This is not the same as an AVC, which is paid by the employee.
schedule of contributions
Specifies the contributions payable by the employer over a given period of years, and includes any special contributions paid under a recovery plan.
This is the name for the individual units of equity in a company. Often referred to in the plural, shares may also be referred to as stock or equity.
Someone who owns shares in a company.
Single pricing means that there is only one price for units of a fund. Therefore, buyers and sellers of units trade at the same price. However, that single price may swing between a bid price or an offer price, depending on volumes of sales or purchases on any given day.
In DC schemes, this is typically the employer who sets up and/or assumes responsibility for the running of the scheme and meets the expenses.
Socially responsible investment. Investments that comply with any social, environmental and ethical principles which may be adopted by the trustees.
The tax paid on the acquisition of certain assets, eg property, equities etc., with a value above a certain threshold determined by the treasury.
The Pensions Regulator’s objectives, set out in legislation, to protect pension scheme members, enhance compliance, reduce risk and promote a better understanding of work-based pensions.
A marketplace in which equities / stocks / shares are traded. Its purpose is to ensure fair and orderly trading as well as efficient distribution of price information for any securities trading on that exchange.
A particular absolute return agreed between the trustees and the fund manager.
tax free cash
At retirement, a modern workplace pension will allow you to take 25% of your fund value tax free. The tax-free lump sum doesn’t affect your Personal Allowance. Tax is taken off the remaining amount before you get it.
The bonus paid when a with profits insurance policy matures. Such a bonus is customary but not guaranteed.
This is the process of moving the transfer value of your pension, to an alternative pension provider, in lieu of your benefits in the scheme.
The amount of money which a scheme will pay to another pension arrangement in lieu of benefits which have accrued to a member.
total expense ratio
The Total Expense Ratio (TER - sometimes known as ‘ongoing charges’) is another way of expressing the costs and charges that apply to an investment fund or pension scheme. The TER will always include the AMC but it is worked out on a historic basis for the previous year and is therefore also able to include other fees and charges such as legal and audit costs, custodial fees and investment administration fees which have been applied. Despite the name, the TER does not include all the costs that an investor has been charged. For example, it does not include the transaction costs incurred when buying and selling investments or the taxes associated with those transactions, nor does the TER capture other costs such as those associated with entering or exiting from a fund or a scheme. Not all pension providers publish a TER.
An individual or company appointed to carry out the purposes of a trust in accordance with the provisions of the trust instrument and general principles of trust law.
A type of asset which should achieve high income returns in relation to price. This type of asset should do relatively well in falling markets as it is expected to hold its value better than other assets, eg growth assets.
This is a measure of the variability of the returns an investment generates. The greater an asset’s volatility, the greater the expected changes (up and down) in price, and the greater the uncertainty the investor will have as to the value of the investment in future. Volatility is measured using statistical measures such as standard deviation.
Waiver of Premium
A waiver of premium refers to a provision or clause in an insurance policy that relieves the policyholder of their obligation to pay any further premiums under certain conditions.
White labelling is the practice of applying a 'wrapper' to a fund or collection of funds within a DC scheme, often giving the white label fund a simple name (eg 'UK equity fund') which may describe the fund’s objective. This enables trustees or employers to change the underlying funds more easily, and without extensive member communication, and the fund is not associated with or tied to a particular investment manager.
In the case of a DC scheme wind up is usually achieved by transferring members' funds to a new pension arrangement.
With Profits Fund
A with-profits policy is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company.
With Profits Annuity
An annuity purchased through a with profits insurance policy. In the early years income may be smaller than a normal annuity, with the expectation that it will increase over time with investment returns.
A measure of the annual income earned on an investment. For shares this is normally the annual value of the dividends expressed as a percentage of the market price of the share. For bonds, the yield will be the annual interest rate divided by the price paid for the bond, which may be more or less than the nominal value. In the case of inflation-linked gilts the value of the gilt will increase with inflation, leading to increased yield.
A service that enables individuals to transfer and consolidate (hence ‘zip’) their pensions (‘Zip-pen’) all in one place, delivering convenience, financial advantage, or both.
Our friendly transfer calculation analysis system.
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