Glossary of
UK Pension terms
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A
Annuity
If you have any form of personal or money purchase
pension you have to buy an annuity before age 75.
An annuity is an income paid to you for life by an
insurance company in return for your pension pot.
Once you have bought an annuity you cannot usually
change your mind and switch to a different one at a
later stage. Nor can you get your money back if
you die the day after buying one because annuities work
by a system of cross subsidy - those who die early
subsidise those who live to a ripe old age. The
advantage is that they will pay you an income no matter
how long you live.
Approved New Zealand Superannuation Fund
Registered superannuation schemes that are
subject to the New Zealand Superannuation Schemes Act 1989 and
Securities Act 1978.
AVC (Additional
voluntary contributions scheme)
You can supplement your pension contributions to build
up an even larger retirement fund. AVC's attract
tax relief on the premiums, but the final benefits are
taxed as income. AVC's are better for basic rate
taxpayers and Peps are better for higher rate taxpayers
as a way of supplementing pension income.
Employees are allowed to save up to 15%of your taxable
earnings into a pension plan. When you retire the
company is not allowed to pay out a cash lump sum.
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F
Final salary or
defined benefit schemes
This gives the employee a fraction of their salary on
retirement for each year they have worked.
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I
Investment trust
pensions
These are pooled equity investments allowing you to pay
pension contributions and enjoy the tax advantages.
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ISA (Individual savings
accounts)
Individual Savings Accounts (ISAs) were introduced
on 6th April
1999 which replaced PEPs and TESSAs. ISAs are not an
investment in their own right. They are a tax-free
wrapper in which you can shelter investments.
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People over the age of
18 living in the UK can invest a maximum of £7,000
per year in each tax year. 16 and 17 year olds can
invest up to £3,000 in a mini cash ISA.
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Investment may be made
in two components: equities and cash. There are
strict limits on how much you can put in each
component, and the limits depend in part on whether
you use a 'maxi ISA' or a number of mini ISAs.
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Until 5th April 2004
ISAs benefited from a 10% tax credit on UK equities.
Stock and share investments which can be held in an
ISA include unit trusts, open ended investment
companies (OEICs), investment trusts, ordinary
shares, preference shares and fixed interest
corporate bonds.
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PEPs
in existence at 6th April 1999 may continue to be
held outside an ISA with the same tax advantages.
TESSAs in existence at 6th April 1999 are allowed to
run their full five year term.
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Income from ISA
investments is tax free and you don't have to report
it on your tax return. Capital gains are also exempt
from CGT.
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M
Money-Purchase or
defined benefit schemes
This is where the employee and employer have contributed
a set percentage of the employee's salary into the
scheme. At retirement an annuity is paid out.
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P
PEPS (Personal Equity
Plans)
It is no longer possible to start a new PEP or add
to an older one. Personal Equity Plans
(PEPS) are investments that are totally tax exempt, both
on the capital and income side.
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S
SIPPS (Self-invested
personal pensions)
Sipps offer greater flexibility than ordinary personal
and occupational pensions. You can have many types
of investment in them, including British and foreign
stocks, unit trusts, investment trusts, managed life
funds, unit linked funds and commercial property.
They have the same tax relief as ordinary personal
pensions.
SERPS (State
Earnings Related Pension Schemes)
Part of the National Insurance
contributions goes towards your SERP which is paid out
on top of your state pension when you retire.
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T
TESSA ( Tax Exempt
Special Savings Account)
These lasted for
five years and you were allowed to invest up to £9,000
over the life of each account. You got all your interest
tax-free and once your five years were up you could
either take your money or put your money into a new
TESSA account (and continue to receive tax-free
interest).
The last day you could open one was 5 April 1999, so
there aren't any TESSAs in existence any more. But you
were allowed to roll a TESSA that matured between 6
April 1999 and 5 April 2004 into what is known as a
TESSA-Only ISA (or TOISA for short) so that you could
continue to receive tax-free interest.
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