Glossary of Terms
Benefits – Any payments made to a beneficiary, including tax-free lump sums, pension payments and death benefits.
Defined benefit scheme – A scheme in which the benefits are defined in the scheme rules and accrue independently of the contributions payable and investment returns. Most commonly, the benefits are related to members’ earnings when leaving the scheme or retiring, and the length of pensionable service. Also known as ‘final salary’ or ‘salary-related’ scheme.
Defined contribution scheme – A scheme in which a member’s benefits are determined by the value of the pension fund at retirement. The fund, in turn, is determined by the contributions paid into it in respect of that member, and any investment returns. Also known as ‘money purchase’ scheme.
Dependant – A person who is financially dependent on a member or pensioner or was so at the time of death or retirement of the member or pensioner. Scheme rules will define a dependant precisely, e.g. age at which children cease to be dependants.
CETV – Nearly all defined benefit schemes allow you to transfer what is known as the cash equivalent transfer value, which represents the value in cash terms of your existing benefits.
Indexing – The annual increase in the value of your pension or income, linked to inflation. This means that your money will grow at the same rate as the cost of living.
Lifetime allowance – You usually pay tax on anyprivate pension savings above the lifetime allowance.This is currently £1.25m but is set to be reduced to £1m from April 2016.
Marginal tax rate – The percentage of tax applied to your income for each tax bracket to which you qualifyIn essence, the marginal tax rate is the percentage taken from your next pound of taxable income above a pre-defined income threshold.
PCLS – Pension commencement lump sum. The lump sum of money you can withdraw from your pension pot when you retire.
Trustee – The ‘owner’ of your pension. All pension arrangements must be administered by a trustee,either in the UK, or abroad in the case of a QROPS.The trustees set the access and taxation parameters as per local pension legislation.
Pension crystallisation – When members take benefits from registered pension schemes.