Pension Jargon Buster

Do you know your annuities from your elbow? If you don’t, you’re not alone… Annual allowance - This is the maximum amount that you can pay into your pension each year before you have to pay tax. The current annual allowance is £40,000, or 100% of your earnings – whichever is lower. Your annual allowance may reduce in certain circumstances, for example if you earn over £200,000 a year, or if your income plus any pension contributions totals £240,000 or more. Annuity - An annuity provides you with a guaranteed income in retirement. You hand over some or all of your pension to an insurance company and in return they agree to pay you a set amount each year. Auto-enrolment - In 2012, the government introduced auto-enrolment, a process by which employees are automatically enrolled into their company pension scheme once they start work. Under current rules, enrolment is automatic for anyone aged 22 or over earning a minimum of £10,000 from a single job. Drawdown - Drawdown is a way of taking an income from your pension in retirement. Guaranteed annuity rate - Some older definedcontribution or money-purchase pension policies, usually those sold before the late 1980s or early 1990s, promised to pay a ‘guaranteed annuity rate’ at retirement. This means they must provide you with an income at a set rate for the remainder of your life. Index-linked annuity - When you use your pension pot to buy an annuity, you’re essentially buying a guaranteed regular income. An index-linked annuity ensures that this income will increase in line with living costs. Lifetime allowance - This is the maximum you can hold in your pensions without having to pay extra tax when you take money out of them. It’s not a small amount of tax either – any amount above the allowance that you take as a lump sum is taxed at a hefty 55%. The lifetime allowance is currently £1,073,100. Normal retirement age - Although the minimum age you can access your retirement savings is 55, most workplace pensions set a normal retirement age when you’re expected to take your pension. If you have a personal pension, you can choose your retirement date. State pension and state pension age - The state pension is a weekly payment that the government makes once you reach state pension age. The amount you get depends on your age and your National Insurance contributions record. The current full state pension in the 2022/23 tax year is £185.15, but to get this you’ll need to have at least 35 qualifying years of National Insurance contributions. State pension age is worked out based on your date of birth. To check your state pension age, visit www. gov.uk/state-pension-age. Tax relief - Tax relief essentially means you get money back from the taxman on your pension contributions, which can make it a very cost-effective way of saving for retirement provided you stay within the annual limits. If you’re a basic rate taxpayer, a £100 contribution into your pension will only cost you £80.

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