Pensions jargon buster
The government wants everyone to take control of their pension and have greater freedom over it, but how are we expected to do that when politicians and the pensions industry continues to talk in Penglish (that's pensions-English to you)?
Are you accumulating, decumulating? Are you uncrystallised or in flexi-access? The pension industry just loves to confuse you. So here's a short guide highlighting some of the words you may have heard or seen lately.
Annuities: this is the traditional way people would turn their pension pot into an income and it is essentially an insurance contract against living too long as it pays out a guaranteed income until your die. You can get more income if you're ill or old (annuities given to people who are likely to die earlier are often called 'enhanced' or 'impaired life' annuities).
Accumulation: this word is usually followed by the word 'phase' and just means the time in your life when you accumulate, or save, money into your pension. In other words, it means your working life.
Decumulation: again this is followed by 'phase' and means the opposite of accumulation. This is the period in your life when you want to access you pension money – your retirement – and start using your savings to live on.
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Drawdown: a way to turn your pension into an income without buying an annuity, which is now open to all whereas previously it was the preserve of the wealthy. Going into drawdown means you leave your pension pot invested and take an income or lump sums from it to pay for your retirement. This gives you more flexibility than an annuity but is much riskier as there is no guarantee your investment, and therefore income, won't fall.
Flexi-access: this is one of the two types of drawdown that will be offered from next April. If your money goes into flexi-access drawdown you can take it out as your want. The first 25% will be tax free and everything after is taxed at your income tax rate. Any money left in the pot is known as 'crystallised' and subject to a 'death tax' – currently 55% but reducing to 45% and then again next year – if you die after 75. The money escapes the death tax entirely if you die before age 75.
Phased retirement: as people live longer but realise they haven't saved enough for retirement, or don't want to spend years weeding in the garden, more are choosing to work part-time or move into a consultancy role. Doing this is 'phasing in' your retirement so you don't go from full-time to pensioner in one day.
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Trivial commutation: one of the worst offenders on the Penglish list as it doesn't even give an inkling as to what it might be. Trivial commutation rules allow those with a pension of £10,000 or less to take it as cash without going into drawdown. You can take three pots of £10,000 in this way.
Uncrystallised fund pension lump sum (UFPLS): even the acronym is difficult to get right! This is a brand new way to take your pension. It shares similarities with flexi-access drawdown in that it lets you take your pension however you like but the taxation is different. Every time you take a chunk of money the first 25% of it is tax-free and the rest is taxed as income, meaning you pay income tax from the start. This means your pension remains 'uncrystallised' or untouched, escaping the death tax entirely.
Read more:
130-000 Brits to raid their pension early
Pension changes 2015: confused into taking poor deals
Pension liberation brings anything but freedom
