With many financial products, there’s often a lot of jargon and specialist terms associated with them that can be tough to understand for the average person.
One such product is your pension.
Not being able to fully understand the terms, metrics and language used to talk about your pension can put people off from engaging with this crucial financial service. In fact, research suggests 70% of young people don’t understand their pension, and this contributes to around 24% of those under 35 not having any pension savings at all.
It’s important to get on top of your pensions while you’re still young and have your full potential earning years ahead of you.
Here’s a list of common phrases and jargon within the pension industry explained to help you better understand this financial service.
The types of pension
Before going in-depth on some key terms and pieces of pension jargon, it’s wise to first understand the three main kinds of pensions available in the UK.
1. State Pension
You’ll receive this pension as long as you’ve paid your national insurance contributions over the years. Once you reach the state pension age, which is currently 66 but set to rise to 67 by 2028, you’ll be able to start claiming weekly payments from the government.
If you get the full amount of your state pension, you’ll receive £9,627 a year.
2. Workplace Pension
Every employer needs to put staff that are eligible into a workplace pension. A workplace pension is a pot of money your employer will help you fill-up. When under a workplace pension, you’ll pay a small percentage of your wages into it, and your employer should add more.
The amount they add will depend on your scheme. Some will match your contribution, whereas others may pay even more than this.
With some workplace pensions, your pot will be invested to grow over time. Depending on when you joined the scheme, you can access your workplace pension at either age 55 or 57.
3. Personal Pension
This is similar to a workplace pension and functions the same way. You pay a certain amount from your wages each month. However, instead of being set up by your employer, you do it yourself.
You can put in as much or as little each month with this pension type, making it a flexible pension option.
Additional voluntary contributions
Any additional money you pay into your pension beyond what’s required from your pension plan. So if you’re paying 5% into a workplace pension and decide one month to pay in 10%, that extra 5% is an additional voluntary contribution.
This is the maximum amount of your pension savings you can get tax relief on each year. This is based on your contributions, anything your employer has put in, and contributions made by someone else.
The current annual allowance is £40,000. If you exceed this amount, a tax charge is made that takes back any tax relief.
This is a regular income you can buy with your pension savings. Getting an annuity will ensure you get an income for the rest of your life. Some annuities may also continue to pay your spouse or children in the event of your death.
Your pension savings should support you until your death. Once you no longer need your pension, you can pass on what’s left behind to a beneficiary – someone or something that you want to receive the money.
A beneficiary can be a person, a group of people, a charity, a company, and more.
Cash Balance Pension:
A type of pension plan where your employer agrees to pay a specified pension pot amount, which is calculated based on your yearly salary, plus interest. This is usually a set percentage.
The benefit of this type of pension is that the contribution limits will increase with age.
This is where you opt out of your state pension. By doing this, it means you won’t have to pay as much national insurance and could instead use the amount saved to put into a personal or workplace pension. This is only available in Final Salary schemes, where your retirement income is based on your salary and how long you’ve worked at your employer.
This is someone who is financially dependent on you, such as a marriage partner. You may need to provide proof of this dependency when setting up an annuity.
This is an option when taking out an annuity.
This guarantee period is a timeframe for when your income payments will be paid for a set period of time, even if you die before this period. If you do die during the guarantee period, your dependent or beneficiary will get your payments until this period is over.
Pension Commencement Lump Sum
This is the maximum amount you can take out of your pension and is currently tax-free. This is up to 25% of your total pension fund, and you can do what you see fit with it.
A SIPP is a type of personal pension where you have control over where you want your pensions to be invested and how much. This is different to other pensions because usually, a fund manager will invest your pension on your behalf.
Using a SIPP means that the risks are much higher as you’re responsible for all your investments, even if they go wrong. A SIPP may also have higher charges.
This is the amount of money you will receive deducting fees and charges if you decide to transfer your pension funds elsewhere.