Pensions jargon buster

Transcription

1 Pensions jargon buster For employees

2 Active member A member who has been admitted to the scheme and will remain an active member until the earlier date of the following: (a) the member s employer no longer participates in the Scheme; (b) the member notifies the employer and the trust manager that they no longer wish to be an active member and contributions in respect of the member cease; or (c) the member leaves employment with the employer, or (d) when the balance in all member accounts in respect of the member falls to zero. Annuity A payout from an investment for a set period of time or more usually for pensions, for the rest of their life. Typically these refer to a pension pot being used to provide a retirement income. There are different types of annuity to choose from, and usually savers can shop around to choose which provider to buy their annuity from. Annual allowance There is a limit to how much money invested in pensions each year will qualify for tax relief. 7 40, ,000 Auto enrolment October The shortened description of automatic enrolment which requires employers to put certain workers into a pension scheme without first getting their permission. Since 2012 employers in the UK have had to automatically enrol workers into a qualifying workplace pension scheme if they meet certain requirements. AVC Additional Voluntary Contribution, an amount over and above the usual expected contribution from a member. Pension jargon buster for employees 2

3 @nowpensions Banded earnings This is used to work out how much contributions should be. Banded or band earnings (also known as qualifying earnings) refers to how much a person earns between the statutory minimum (lower band) and maximum (upper band) limits set by the Department for Work and Pensions as part of the auto enrolment legislation. For the 2017 / 18 tax year the lower band is 5,876 and the upper band is 45,000. This means that the first 5,876 of an employee s earnings does not count for the purposes of auto enrolment and anything above 45,000 isn t included either. Click here for more information The not so trifling matter of qualifying earnings Qualifying earnings The band of earnings on which auto enrolment minimum contributions are calculated. The first 5,824 of an employee s earnings does not count for the purposes of auto enrolment and anything above 43,000 isn t included either. 4,176 (3.4%) 9,176 (4.9%) 14,176 (5.7%) 21,176 (6.3%) 5,824 43, ,000 does not qualify 5,824 does not qualify The effect of qualifying earnings on auto enrolment contributions based on an 8% total contribution: Part time workers, shop staff, waiters / waitresses 10,000 Call centre agents, gardeners, cleaners, care home workers 15,000 Bus drivers, construction workers, clerical workers 20,000 Estate agents, nurses, prison officers, HGV drivers 27,000 Train drivers, pharmacists, police sergeants, teachers 40,000 Dentists, healthcare professionals, managerial positions 50,000 Solicitors, pilots, IT directors 60,000 Pensionable earnings in bold and auto enrolment contribution taking into account the impact of qualifying earnings in (brackets). 34,176 (6.9%) 36,561 (5.9%) 36,561 (5.0%) If an employee earns 20,000 their qualifying earnings would be only 14,176 and the effect is even more disproportionate for people on lower incomes. So for someone on 10,000 a year, only 4,176 of their earnings are pensionable, and for them, 8% of qualifying earnings actually means just 3.4% of their total salary is being contributed. Part time workers with more than one job are particularly affected because the qualifying earnings deduction applies to each job. Basic pay Basic pay means earnings disregarding the amount of any commission, bonuses, overtime, shift pay or similar payments, before any tax is calculated. Some employers might calculate contributions on basic pay instead of banded earnings. Contracted out This used to be available before April 2016 and means that instead of building up extra pension saving with the government (called the State Second Pension) a person could choose for this part of their national insurance contribution to go into their own scheme. Default fund All pension providers must offer a fund that meets the needs of most people and this is where contributions will be automatically invested if a member doesn t make an active investment decision. This also means no investment fund choices are needed before being able to start saving into a pension. Deferred member Defined benefit pension scheme A scheme member for whom no further contributions will be received but still has a pension pot with a provider. This type of scheme promises to pay a pension at retirement which is based on a percentage of the members annual earnings. There are two main types of defined benefit pension scheme, final salary and career average and both pay benefits based on salary. These are generally very valuable to members and likewise can be expensive for employers to fund. Pension jargon buster for employees 3

4 Defined contribution pension scheme These are sometimes referred to as money purchase schemes as the amount in your pension pot at retirement depends on how much money has been paid in and how the investments purchased, have performed. The benefits paid out by a defined contribution pension scheme are based on how much the pension fund is worth. Often contributions buy units in investment funds and the performance of those funds over time determine what the value of the pension pot is worth. Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec For example: 10 each month is paid in and this buys investment units, how many are purchased depends on the unit price at the time of purchase, those units form a pension pot. Any charges are deducted from the value of the pension pot and at retirement the total value of all the units are added together to give the total pension pot value which can be used to either buy a pension or take cash according to whatever rules the government have in place at the point of retirement, cash payments may be subject to tax. Eligible jobholders A worker eligible for automatic enrolment. A UK worker who is aged between 22 and state pension age who also earns more than 10,000* a year. These workers must be enrolled into a qualifying workplace pension scheme automatically by their employer. *Amount correct for the 2017/2018 tax year and is subject to review. Entitled workers A UK worker who is aged between 16 and 74 who earns less than 5,876* a year. These workers can ask to join the scheme but the employer does not have to contribute. The pension scheme does not need to be a qualifying pension scheme. *Amount correct for the 2017/18 tax year and is subject to review. Pension jargon buster for employees 4

5 Expression of wish form A form which any scheme member can complete and return to the scheme to tell the trustees who they would like any death benefits to be paid to. Group personal pension (GPP) A set of individual personal pension arrangements for workers at one organisation, which is contributed to by employees and/or their employer. Investment performance A measure of the change in value of an investment over a specified time period, such as 3 years or 5 years Fund Where pension contributions are invested on behalf of the members. Funds are made up of investments such as shares and other financial products. Further details on the specific funds are always available to members. Fund manager Can mean an individual or organisation, that is responsible for the day to day management and running of an investment fund. Hybrid scheme A pension scheme which provides a defined benefit basis for some members and a defined contribution basis for others. They may also provide some members with both types of pension. Investment risk The different financial products which make up a pension scheme s investments carry different levels and types of risks. More risk means that there is greater potential for profit and a higher eventual retirement fund, but there is also a greater potential for loss. Financial products which carry less risk may be more secure and less likely to fall in value but this can come with lower returns. Pension jargon buster for employees 5

6 Income drawdown Also known as income withdrawal, it s a type of retirement benefit which involves taking an income directly from the pension fund rather than using it to buy a regular retirement income (an annuity). The pension fund stays invested, so its value can go up and down. Part of the drawdown can usually be taken tax free (25%) but the rest is taxed as earned income subject to the rules in force at the time of taking the benefits from the pot. Jobholder A UK worker who is aged between 16 and 74 and earns at least 5,876 per annum would be assessed as either an eligible or non eligible jobholder. Jobholders not yet in a pension scheme have the right to ask to join the scheme and the employer must contribute as well. If a jobholder changes their mind about being in the scheme they have 1 month to opt out and have a full refund from their employer. Full details of when the opt out period ends and how to opt out must be provided in the enrolment letter which the employer must ensure is issued. Lifestyle period The period leading up to retirement when the members fund is gradually switched into different investments which are more suitable for that stage of their life. At NOW: Pensions we call this the glidepath to retirement. Lifetime allowance The lifetime allowance is the limit on the amount of pension savings for an individual without triggering an extra tax charge. From April limit is still 1 million per individual and it s checked at the time of taking any pension benefits. Master trust A master trust is a multi-employer occupational scheme where each employer has its own division within the master arrangement. There is one legal trust and therefore one trustee board. The Trustee retains decision making independence for each division on things such as investment and service providers under a trust wide governance structure. A well-managed master trust offers employers the benefit of a governance function but with generally lower operating costs and greater simplicity and expediency than a single employer scheme. Pension jargon buster for employees 6

7 Minimum contributions The minimum amount that must be paid into a member s retirement pot. This usually requires both employee and employer contributions and under auto enrolment rules there is a minimum total contribution and a minimum that the employer MUST contribute. The minimums increase in April 2018 and April 2019 until the minimum total contribution is 8% of qualifying earnings with the employer paying at least 3%. Net pay A net pay scheme takes contributions from pay before tax is calculated and deducted, this means that as long as tax is due, tax relief is given at the highest rate applicable, immediately. For example a 10 pension contribution would be taken from pay before tax was calculated and that 10 would be paid to the pension provider. Employer contributions Tax relief Your contributions Non eligible jobholder A UK worker who either: Earns 10,000* and above but is aged 16 to 21, or between state pension age and 74 or Is aged between 16 and state pension age but earns between 5,876 and 10,000 per annum *Amounts correct for the 2017/18 tax year and is subject to review. Although employers are not required to auto enrol these workers, they can opt in to the qualifying workplace pension scheme and employers must make contributions on their behalf if they do so. Opt in Also referred to as a request to join the scheme, when a worker asks their employer to enrol them in to their work-based pension scheme if they are not already enrolled. Opt out Jobholders who have been auto enrolled have the right to leave the pension scheme within one month of the beginning of their membership and their employer must refund all employee contributions. After the one month opt out window members can still ask to stop contributing to the scheme. Pension jargon buster for employees 7

8 Opt out notice The notice given by a member who wishes to opt out of their pension scheme. Pension An income in retirement. Sometimes the word pension is also used to describe the savings which are invested to provide money for retirement. The government sets the rules around when employees can access their pension. Pension wise Was set up by government to provide free, impartial guidance to employees aged 50 and over with a defined contribution pension. They provide tailored guidance which highlights options available but cannot recommend specific products or providers. For more information visit: Phasing The gradual increase of minimum contributions into member s retirement pots. Minimum contributions start at a total of 2% and increase on 6th April 2018 and 6th April 2019 until the contributions are a total of 8% of qualifying earnings. Postponement A period of up to 3 months when an employer can delay automatic enrolment but still allow any worker who wants to join a pension scheme to opt in. 2% 8% Qualifying earnings The earnings used to calculate minimum contributions to a pension scheme. For the 2016/17 tax year qualifying earnings are those between 5,876 and 45,000. Employers can choose to calculate contributions on another definition of earnings. Pension jargon buster for employees 8

9 Qualifying pension scheme A workplace pension scheme which meets or exceeds certain standards and satisfies minimum requirements as set out by The Pensions Regulator for auto enrolment. Re-enrolment An employer has to choose a re-enrolment date every three years and on that date any eligible jobholders who have opted out of an auto enrolment pension scheme are reassessed and if still an eligible jobholder based on current earnings and age they will be auto enrolled back into the pension scheme. Employees who still don t want to be in the pension scheme can decide to opt out again. 3 yrs Relief at source A relief at source scheme takes contributions from pay after tax is calculated and deducted, the pension provider then reclaims basic rate tax relief from HMRC and any higher tax rate payers have to claim personally with HMRC for the additional tax relief. This means that non taxpayers get tax relief. Retirement income The money an individual receives after retiring, of which the individual s pension may form a substantial part = For example: A 10 pension contribution would be taken as 8.00 from pay after tax and that 8 would be paid to the pension provider who would claim 2 from HMRC so the final employee pension contribution would total Salary sacrifice Also known as salary exchange, it s an arrangement between employee and employer where part of pay is given up and the employer pays this amount into the pension pot instead. There are advantages and disadvantages to this and employers cannot force employees to use salary sacrifice. Pension jargon buster for employees 9

10 Selected Pension age The age when the pension scheme thinks you will retire, this is normally State Pension age but the member or their employer may have chosen a different date. Members can usually change their selected retirement age. State pension The state pension is a regular payment from the government once state pension age is reached and is based on National Insurance contributions. Entitlement to the State pension can be checked on the government website uk/check-state-pension. Please bear in mind that state pensions are not guaranteed and it is important to save independently for retirement. State pension age The age when state pension becomes available. State pension ages are changing and are reviewed by the government at least every 5 years. The pension age for women is rising gradually and will be 65 by 2018, the same as the state pension age for men. From December 2018 the state pension age for both men and women is planned to increase gradually to age 66 by October State pension ages can be checked on the government website: Please bear in mind that state pension ages are not guaranteed and could be changed by future governments. Tax relief The government takes tax from earnings, this can be seen on a pay slip. To encourage saving for retirement the government gives tax relief on pension contributions. This means that some money that would have gone to the government as tax will instead go into an employee s pension pot. There are two main types of tax relief which are explained in this guide: Net pay Relief at source Tax free cash Part of a pension pot that can be taken as a cash lump sum without any tax being payable. Usually 25%, but is subject to the rules in force at the time of taking the benefits from the pot. Transfer value The value of a pension pot which is available for transfer to another pension scheme. Not all schemes will allow the full value of the pension pot to transfer and some schemes may not allow a transfer to another scheme at all. It is wise to seek independent financial advice before transferring pension benefits. Pension jargon buster for employees 10

11 Trust A legal relationship where assets are placed under the control of trustees for the benefit of beneficiaries. Trustee An individual or company appointed to oversee that the running of a pension scheme is performed in accordance with the trust deed and general principles of trust law. Trustees have a legal duty to make sure that the trust rules are followed and to act in the best interests of their beneficiaries. Unit price Contributions are used to buy individual units in the investment fund, as the value of the fund changes so does the unit price. This is the way that a member can own part of a large fund. Workplace pension A workplace pension is where membership to a pension is via an employer. It is also used to describe the pensions being introduced for automatic enrolment. Pension jargon buster for employees 11

12 We hope this guide has simply explained the most common pension terms. More technical information can be found in our help centre at nowpensions.com and if you are looking for more generic technical information you may find the following websites useful: Technical auto enrolment information Information for employees on pensions and state benefits Information for members and guidance for members approaching retirement Information and guidance for members categories/pensions-and-retirement Information on pensions Pension jargon buster for employees 12

13 Information correct as at November 2017 GM /6 NOW: Pensions is a UK occupational pension plan. This is written as a general guide only. It should not be relied upon as a substitute for specific professional advice. Registered office: 2nd Floor, 25 Christopher Street, London, EC2A 2BS Registration number: Registered in England and Wales NOW: Pensions 2nd Floor 25 Christopher Street London EC2A 2BS Tel: +44 (0) nowpensions.com