Glossary

Annual limit

The maximum a member can contribute to their pension scheme in a tax year as set by the treasury in order to gain tax relief. This is 100% of the member’s net relevant earnings.

Alternatively Secured Pension

(ASP)

At age 75, a member can purchase an annuity or choose to go in alternatively secured pension (ASP). This allows a pension to be taken between a maximum and minimum level.

Annual allowance

This is the maximum contribution that can be paid using personal or employer contributions, where tax relief is payable.

Annual allowance charge

If the maximum contributions exceed the annual allowance, then the member will incur a 40% tax charge levied through their self-assessment, which is called the annual allowance charge.

Annuity Protection Lump Sum Death Benefit

Where the member is receiving an annuity or scheme pension and then dies, this is the subsequent lump sum that is paid out, usually the purchase price minus payments made. There is also a ‘special lump sum death benefits charge’ which is a tax charge of 35%.

Appropriate Personal Pension Plan

A personal pension scheme set up (and authorised) to receive contracted out National Insurance contributions.

Authorised employer payment

If a payment is being made to an employer, it needs to fall into one of the categories below to ensure that it does not incur any unauthorised payment charges:

• authorised employer loans
• authorised surplus payments
• public service scheme payments
• compensation payments (a payment is a compensation payment if it is made in respect of a member’s liability to a sponsoring employer in respect of a criminal, fraudulent or negligent act or omission by the member)
• scheme administration employer payments, and
• any other payment prescribed by Regulations

Authorised member payment

If a payment is being made to a member, it needs to fall into one of the categories below to ensure that it does not incur any unauthorised payment charges:

 

• recognised transfers
• lump sums or lump sum death benefits
• pensions or pension death benefits
• scheme administration member payments
• payments in accordance with a pension share order or provision, and
• any other payment prescribed by Regulations

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Benefit Crystallisation

(Income Drawdown / Phased Drawdown)

When a member takes benefits from a pension scheme, this is classed as ‘crystallising benefits’, previously known as vesting or opening segments. The member does not have to take all of their benefits at the same time and phase their benefits over a period of time. The fund value is checked against the current lifetime allowance (LTA), which is called a benefit crystallisation event (BCE). If the fund is above the LTA, tax charges could apply.

Benefit Crystallisation Event

(BCE)

The time when benefits within a pension scheme (including death benefits) become payable, as defined by HMRC. This includes a check of the fund value against the lifetime allowance.

Block Transfer

(Bulk transfer)

If an occupational scheme is winding up and more than one member is transferring all of their benefits out of the pension scheme at the same time, then their tax free lump sum can be protected on transfer.

Borrowing

A scheme can borrow up to 50% of its net asset value (less any existing liabilities) for any purpose.

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Chargeable Amount

If a member’s fund exceeds the lifetime allowance when they take benefits, the excess, subject to the lifetime allowance charge, is called the ‘chargeable amount’.

Charity Lump Sum Death Benefit

This can only be paid from a pension scheme where the member died whilst taking alternatively secured pension and where there were no dependents. The fund can be paid to a nominated charity free of tax.

Contracting out

A member of an occupational scheme can choose to leave the earnings related state second pension (S2P previously called SERPS). As a result, National Insurance contributions are reduced. The second pension will then come from the occupational scheme rather than from the state. An individual may also choose to leave the second pension scheme and have their national insurance contributions directed to an appropriate personal pension plan.

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Defined Benefit Scheme

(Final Salary Scheme)

A type of occupational scheme where benefits payable to members are predefined within the rules of the scheme. Generally, it is the employer’s responsibility to contribute sufficient funds to realise the quoted benefits, although member contributions are generally compulsory.

Defined Contribution Scheme

(Money Purchase Scheme)

A type of pension scheme where benefits payable to members depend upon the value of contributions made to the scheme and the level of investment returns.

Dependent

This is classed as one of the following:

• spouse at date of death or retirement
• child under the age of 23, or over the age of 23 and mentally or physically dependent
• not a spouse or child, but financially dependent or in a financial relationship of mutual dependence or mentally or physically dependent

Dependent’s unsecured pension

When the member dies whilst taking benefits and their dependent is under the age of 75 and wishes to continue receiving income from the pension scheme, they will receive an unsecured pension or an alternatively secured pension based on their age.

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Enhanced protection

A means by which members with a pension fund value as at 5 April 2006 can protect all of their funds from tax charges levied against excess funds above the lifetime allowance. There are strict rules that must be adhered to so as not to revoke the enhanced protection.

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Guarantee period

The period during which a pension annuity (or alternatively secured pension) will be paid even if the member dies.

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Ill-health condition

Where the member requires benefits due to ill-health, it is possible for them to take these before age 50/55 provided that sufficient medical evidence, from a medical practitioner, is submitted to the scheme administrator to confirm that the member is incapable of carrying out their job and has therefore ceased their employment.

In specie contribution

A non-cash contribution made to a pension scheme (eg property or shares).

In specie transfer

A non-cash transfer of assets made from one pension scheme to another.

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Lifetime allowance

(LTA)

This is the maximum value up to which a member’s pension funds may accrue without incurring any lifetime allowance charges. Exceeding this value could incur the tax charges if the fund has not been protected by enhanced protection or primary protection. The lifetime allowance increases annually and is set for five tax years.

Lifetime allowance charge

If the member has funds in excess of the lifetime allowance and neither enhanced protection or primary protection in place, the excess will subject to tax charges of 55% if the excess is taken as a lump sum or 25% if the excess is taken as a pension.

Lifetime annuity

(Annuity)

Benefits are secured by purchasing an annuity which is a contract that provides an income for the member.

Loanback

Borrowing from scheme assets by a sponsoring employer (SSAS only). Strict limitations apply to the loan taken. Loans can also be made from SIPPs, but only to non-connected parties.

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Member

An individual who satisfies one or more of the following:

• currently has accrued benefits within a pension scheme
• is currently receiving pension benefits
• is a deferred member of a pension scheme

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Pension Commencement

(PCLS / Tax-free Cash / Tax-free cash lump sum)

Lump Sum

This the new name for tax-free cash and is usually 25% of the member’s pension fund, unless primary protection or enhanced protection have been applied for.

Pension Input Period

(PIP)

The period during which the total contributions to a scheme are measured against the relevant annual allowance.

Primary Protection

Members who had pension fund assets of £1.5m or more as at 5 April 2006 can apply for primary protection which will protect their funds from tax charges levied against excess funds above the lifetime allowance. If the members fund grows in line with (or at a lower rate) than the LTA, 100% of the fund will be protected. If funds grow at a higher rate than the LTA, the portion of funds representing the excess growth will become subject to an annual allowance charge. This is measured when a BCE occurs. Members have until 5 April 2009 to register their applications for primary protection.

Protected Rights

Benefits accumulated from contracted out pension contributions.

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Qualifying recognised overseas

(QROPS)

pension scheme

A qualifying recognised overseas pension scheme is a pension scheme set up outside the UK that:

• is regulated as a pension scheme in the country in which it was established, and
• must be recognised for tax purposes (i.e. benefits in payment must be subject to taxation).

'Quarter-up' value

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Recognised transfer

(Transfer from an approved pension scheme)

A transfer between registered pension schemes or a qualifying recognised overseas pension scheme (QROPS).

Registered Pension Scheme

(Approved Pension Scheme)

A pension scheme that is registered with HM Revenue & Customs. This registration allows the scheme to benefit from all available tax privileges. Schemes set up before 6 April 2006 will normally be automatically registered.

Relevant UK Earnings

(Net Relevant Earnings / NRE)

Definition of these is as follows:

• employment income
• income which is chargeable under Schedule D and is immediately defined from the carrying on or exercise of a trade, profession or vocation (whether individually or as a partner acting personally in a partnership), and
• income to which section 529 of the Income and Corporation Taxes Act 1988 (ICTA) (patent income of an individual in respect of investments) applies.

Relevant UK Individual

An individual is a relevant UK individual for a tax year if:

• the individual has
relevant earnings chargeable to income tax for that year
• the individual is resident in the United Kingdom at some point during that year
• the individual was resident in the United Kingdom but at some time during the five tax years immediately before that year and when the individual became a member of the pension scheme, or
• the individual, or the individual’s spouse, has for the tax year general earnings from overseas Crown employment subject to UK tax.

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Scheme Administrator

The person(s) or company appointed to be responsible for carrying out the administrative tasks as dictated by the Finance Act 2004.

Scheme Pension

This is a secured pension that can be paid after the member has refused an offer of purchasing an annuity. There are strict guidelines that have to be adhered to with regard to its payment.

Scheme sanction charge

In the event of an unauthorised member payment or unauthorised employer payment, the scheme is charged 40% of the value of the payment. This is reduced to 15% where the unauthorised payment charge has been paid. Also refer to unauthorised payment charge and unauthorised payment surcharge.

Serious ill-health

If a member is seriously ill, it is possible to commute their pension fund to pay a lump sum regardless of age. In order to do this, the scheme administrator must be provided with medical evidence confirming that the life expectancy of the member is less than one year. If the benefits being paid are less than the lifetime allowance, they will be tax free.

Stamp duty

A tax payable upon the purchase or disposal of certain assets (ie property and shares). The amount payable is determined by the asset type and total consideration (ie value of asset being bought or sold).

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Tax relief

Where a client has paid net rate tax on their earnings, this tax can be reclaimed from HMRC for any contributions made to a pension scheme. Once reclaimed, the tax is paid into the scheme. Higher rate tax payers reclaim the additional tax via their Self-Assessment tax returns.

Trivial commutation

If a member’s accrued pension fund is less than 1% of the lifetime allowance at the time of payment, this could be paid out as a lump sum provided that:

• the rules allow it
• no previous trivial lump sum paid more than 12 months ago
• all of the benefits under the scheme have to be taken at the same time
• the member has some standard
lifetime allowance available
• the member is aged between 60 and 75
• after the payment the member has no rights left in the scheme
• 25% of the lump sum will be tax free; the balance to be taxed at the client’s marginal rate

Trivial commutation lump sum death benefit

If a deceased member’s accrued pension fund is less than 1% of the lifetime allowance, this can be paid out to the dependent provided that it is taxed as earned income and the deceased was under the age of 75 at the date of death.

Trustee

An individual or company with the legal responsibility to manage assets in the best interests of, or for, the benefit of the scheme member or dependents, if applicable.

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Unauthorised employer payment

A payment being made to an employer, not on the list of authorised employer payments, which will incur unauthorised payment charges.

Unauthorised member payment

A payment made from a scheme to a member that is not an authorised payment.

Unauthorised payment charge

In the event of an unauthorised employer payment or unauthorised member payment, the recipient (employer or member) is charged 40% of the value of the payment. Also refer to unauthorised payment surcharge and scheme sanction charge.

Unauthorised payment surcharge

In the event of an unauthorised employer payment or unauthorised member payment, the recipient (employer or member) is charged 15% of the value of the payment where the total payment in a given period of 12 months is 25% or more of the pension rights. Also refer to unauthorised payment charge and scheme sanction charge.

Uncrystallised funds lump sum death benefit 

(Return of fund)

Where a member has not taken benefits from their pension scheme and dies before the age of 75, the fund may be paid out tax free if it is below the relevant lifetime allowance.

Unsecured Pension

(Pension / Income)

Pension paid from a pension scheme where the member is under the age of 75.

Unsecured pension fund

The fund used to provide an unsecured pension for a member under the age of 75 who has taken benefits from part or all of their pension scheme.

Unsecured pension fund lump sum death benefit 

(Return of fund minus 35%)

Where a member has taken benefits from their pension scheme and dies before the age of 75, the fund may be paid out as a lump sum minus 35%.

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Value Shifting

Value may be shifted from its original owner to a new owner by either increasing or decreasing the value without actually creating a payment. For example, a property is purchased for £100k by the scheme and is transferred out to the sponsoring employer for the same price 5 years later with no account taken of the up to date value. The sponsoring employer would be in receipt of a property that is worth more than £100k in value without having paid the difference. In this case, it would be an unauthorised employer payment on the difference and the unauthorised payment charges would apply. All transactions must be entered into on a commercial basis.

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