Decoding pension terms: Interested in using pension freedoms but baffled by the jargon?
Are you still saving or preparing to collect your pension, but are bewildered by the jargon involved?
What exactly do ‘UFPLS’, ‘decumulation’, ‘MPAA’ or ‘flexible access drawdown’ mean, and why should you have to learn all of this just to get your hands on your own retirement savings?
Research has shown that while savers enthusiastically welcomed the pension freedoms launched in April 2015, they are left bewildered and overwhelmed when faced with the new options open to over-55s to spend, save and invest. your retirement fund.
Savers feel pressured to use new pension freedoms straight away when the best course of action is often to do nothing with their money for now, especially if they have turned 55 but are still working or don’t need extra money at that stage.
And a big obstacle is the widespread lack of understanding of financial jargon—from “annuity” to “marginal tax rate” and even more outlandish terms—that people have to learn from scratch or risk squandering their wealth.
FIND AN EXPLANATION OF ‘UFPLS’ AND OTHER HORROR JARGO BELOW
So what does ‘UFPLS’ and other horror slang mean?
This is Money decodes some of the jargon, from the common to the exotic, that you may encounter when exploring your pension options.
Defined contribution pension: Also known as “money purchase” pensions, these plans take contributions from both you and your employer and invest them to provide a pot of money at retirement. Individual savers assume the investment risks.
Defined benefit pension: The industry’s preferred description for a traditional final salary pension system. These provide a guaranteed income after retirement, which is linked to inflation (although sometimes capped) and usually continue to be paid to spouses after their death.
Often referred to as “golden” because of their generosity compared to stingier and riskier defined contribution schemes, they have mostly disappeared in the private sector but are often still available to those working in the public sector.
Pension freedoms are not open to people in these plans unless they move their money elsewhere, but it is usually not advantageous to do so.
Annuity: An insurance product that provides a guaranteed income for life. They are unpopular and widely condemned for being restrictive and offering little value, but rising interest rates mean annuities have become more attractive again.
However, many people do not shop around for the best deal or mistakenly purchase inappropriate products that do not take into account their health or care for their spouse after death.
Sales plummeted after savers were offered new options following pension freedom, but are now starting to rise again.
Enhanced Annuity: A type of annuity that provides a higher guaranteed income if you are in poor health.
Joint annuity: Another version that provides the member with ongoing income if the annuitant dies first.
If you buy a single annuity rather than a joint annuity, there will be nothing for your spouse if you die first, so you should consider what you will have to live on and discuss it with your spouse before making a decision.
Many widows and widowers find that their partner’s annuity option has left them with no income after their loss, forcing them to live on meager state benefits.
Annuity level: Not linked to inflation. If you’re healthy, the best rates are ‘level’ single life annuities, but the current cost of living crisis highlights how important it is to get some protection against rising prices.
Annuity ‘guarantee period’: This protects you against losing all or most of your purchase money if you die shortly after purchasing an annuity.
Marginal tax rate: This is any tax band you are pushed into once all income, including withdrawals from your pension, has been counted.
Like people of working age, those above retirement age have a personal allowance, which is the amount of income allowed before paying taxes.
Above that, you are taxed at 20 percent, 40 percent or 45 percent, depending on the size of your income. Read about current tax rates and reliefs here.
Income reduction: A retirement income plan that allows you to withdraw sums from your pension fund while the remainder remains invested in stocks, government and corporate bonds, and other assets.
Before pension freedom, only wealthy people were allowed to use them, but they are now much more popular, although they can be complicated and involve taking on investment risks in old age.
UFPLS: It means “lump sum of pensions from non-crystallized funds”, which doesn’t clarify things. Also, to make it more confusing, it is sometimes called “uncrystallized pension fund lump sum.”
That’s really horrible official jargon for retirement savings that are sitting in a pension plan and haven’t yet been used to purchase an annuity or invested in an income drawdown plan.
Savers with defined contribution pension investments are not limited to a single opportunity to receive a tax-free lump sum equal to 25 per cent of their funds; instead, they can benefit from tax-free portions through multiple withdrawals.
However, if you want to do this, you should be careful about tying up your entire pot in an annuity or income reduction plan.
Stunned? You’re not alone, as a number of studies show that most savers are bewildered by pension jargon when they retire.
Therefore, to receive your 25 per cent in graduated installments, you need to ensure that the majority of your pension cash remains in a “non-crystalised” arrangement, either with your current pension provider or anywhere else you go. transfer it.
Receiving a tax-free sum from your pension up front is a popular benefit at retirement, but it might be worth adopting delaying tactics if markets are volatile and taking it more slowly, as described above.
This strategy gives you the opportunity to avoid getting stuck in recent losses in the financial market, wait for your investments to recover, and, if your fund grows again, have more tax-free cash available to take over the long term.
Decumulation: When you save for retirement you accumulate money. After you start spending your savings in retirement, you deaccumulate your money. Decumulation also refers to the process of converting a pension fund into income intended to see you through until retirement.
Flexible access reduction: This means withdrawing sums from your pension fund while the rest remains invested. You can withdraw an unlimited amount, even the entire lot.
The ‘flexi’ part also refers to the fact that you can take different sums each time and do so irregularly. Some people find this more convenient than always taking the same amount or making regular withdrawals.
Please note that your pension scheme or income reduction provider may impose additional charges if you want to make the most of your ‘flexible access’ options.
Varying the timing and amount of withdrawals can also help with tax planning if you’re worried about being pushed into a higher tax bracket. The tax rules explained previously in ‘UFPLS’ apply here.
Once you start making withdrawals, your ‘annual allowance’ (the maximum £60,000 you can save into a pension in a year tax-free) will be reduced to £10,000.
MPAA: This stands for Annual Money Purchase Allowance and refers to the reduced annual allowance of £10,000 explained above, which kicks in after you start withdrawing something beyond your 25 per cent lump sum of your pension.
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