Pension terms explained: What does jargon like MPAA, UFPLS and ‘benefit crystallisation’ mean?

Decoding pension terms: Are you keen to use pension freedoms but mystified by the jargon?

Are you still saving or getting ready to draw your pension, but mystified by the jargon involved? 

Just what on earth do ‘UFPLS’, ‘decumulation’, ‘MPAA’ or ‘flexi-access drawdown’ mean – and why should you have to learn all this stuff just to get your hands on your own retirement savings.

Research has shown that while savers heartily welcomed pension freedoms launched in April 2015, they feel baffled and overwhelmed when dealing with the new choices opened up to over-55s of spending, saving and investing their retirement pot. 

Savers feel pressure to use new pension freedoms immediately when the best course of action is often to do nothing with their money for now, especially if they have hit 55 but are still working or don’t need extra cash at that stage.

And a big stumbling block is the widespread lack of understanding of financial jargon – from ‘annuity’ to ‘marginal tax rate’ to even more outlandish terms – which people either have to learn from scratch, or risk squandering their wealth.

FIND AN EXPLANATION OF ‘UFPLS’ AND OTHER HORROR JARGON BELOW 

 So what does ‘UFPLS’ and other horror jargon mean?

This is Money decodes some of the jargon, from the more commonplace to the exotic, that you might come across when exploring your pension options.

Defined contribution pension: Also known as ‘money purchase’ pensions, these schemes take contributions from both you and your employer and invest them to provide a pot of money at retirement. Individual savers bear the investment risks.

What is pension freedom? 

Pension freedom reforms gave over-55s greater power over how they spend, save or invest their retirement pots.

Key changes from April 2015 included removing the need to buy an annuity to provide income until you die, giving access to invest-and-drawdown schemes previously restricted to wealthier savers, and the axing of a 55 per cent ‘death tax’ on pension pots left invested.

The changes apply to people with ‘defined contribution’ or ‘money purchase’ pension schemes, which take contributions from both employer and employee and invest them to provide a pot of money at retirement.

They don’t apply to those with more generous gold-plated final salary or ‘defined benefit’ pensions which provide a guaranteed income after retirement.

However, those still saving into such schemes can transfer to DC schemes, provided they get financial advice if their pot is worth £30,000-plus.

Defined benefit pension: The description favoured by the industry for a traditional final salary pension scheme. These provide a guaranteed income after retirement, which is inflation linked (this is sometimes subject to a cap) and usually continue paying out to spouses after you die.

Often referred to as ‘gold-plated’ due to their generosity compared with stingier and riskier defined contribution schemes, they have mostly died out in the private sector but are still often available to those working in the public sector.

Pension freedoms aren’t open to people in these schemes unless they move their money elsewhere, but it is not normally advantageous to do so. 

Annuity: An insurance product that provides a guaranteed income for life. They are unpopular and widely condemned for being restrictive and offering poor value, but interest rate rises mean annuities have started to become more attractive again lately.

However, many people don’t shop around for the best deal, or mistakenly buy unsuitable products that don’t take account of their health or provide for their spouse after death. 

Sales plummeted after savers were given new options following pension freedom, but are now starting to creep up again. 

Enhanced annuity: A type of annuity which provides a higher guaranteed income if you are in poor health. 

Joint life annuity: Another version that provides a partner with ongoing income if the annuity holder dies first.

If you buy a single not a joint life annuity there will be nothing for your spouse if you die first, so you should consider what they will have to live on and discuss it with them before making a decision.

Many widows and widowers discover their partner’s annuity choice has left them with no income after their bereavement, forcing them to live on meagre state benefits.

Level annuity: Not inflation linked. If you are healthy the best rates are on single life, ‘level’ annuities, but the current cost of living crisis highlights how important it is to get some protection against rising prices.

Annuity ‘guarantee period’: This protects against the loss of all or most of your purchase money if you die shortly after buying an annuity. 

Marginal tax rate: This is whatever tax band you are pushed into once all income, including withdrawals from your pension, has been counted.

As with working age people, those above retirement age have a personal allowance, which is the amount of income allowed before tax is payable.

On anything above that, you are taxed at 20 per cent, 40 per cent or 45 per cent, depending on the size of your income. Read about current tax rates and allowances here.

Income drawdown: A retirement income scheme which allows you to take sums out of your pension pot while the rest remains invested in stocks, government and corporate bonds, and other assets.

Only wealthy people were allowed to use them before pension freedom, but they are now far more popular although they can be complicated and involve taking investment risks in your old age.

Read our 12-step starters’ guide to investing your pension and living off it in retirement.  

UFPLS: It stands for ‘uncrystallised funds pension lump sum’, which doesn’t make things any clearer. It is also, just to make it more confusing, sometimes referred to as ‘uncrystallised pension funds lump sum’.

It’s truly horrific official jargon for retirement savings sitting in a pension scheme and not yet used to buy an annuity or invested in an income drawdown scheme.

Savers with investments in defined contributon pensions are not limited to just one chance to take a tax-free lump sum worth 25 per cent of their pots – instead they can benefit from untaxed chunks over multiple withdrawals.

However, you lose the tax-free perk if you tie up your entire pot in an annuity or income drawdown scheme.

To take your 25 per cent in gradual chunks, you therefore need to ensure that the bulk of your pension cash remains in an ‘uncrystallised’ arrangement, with either your current pension provider or anywhere else that you transfer it.

Taking a tax-free sum from your pension pot upfront is a popular perk at retirement, but it might be worth adopting delaying tactics in current volatile markets, and taking it more slowly as described above.

This strategy gives you the chance to avoid locking in recent financial market losses, wait for your investments to recover, and if your pot grows again have more tax-free cash available to take in the longer run.

Decumulation: When you save for retirement you accumulate money. After you start spending your savings in retirement you decumulate your money. Decumulation also refers to the process of converting a pension fund into an income aimed at seeing you through retirement.

Benefit crystallisation event: You take a lump sum from your pension, buy an annuity, transfer your savings to an income drawdown scheme, move them to an overseas pension scheme, or die before the age of 75.

Confounded? You're not alone as a string of studies show the majority of savers are baffled by pension jargon when they retire

Confounded? You’re not alone as a string of studies show the majority of savers are baffled by pension jargon when they retire

Triggering a ‘BCE’ means the taxman will check up on whether you have used up your ‘lifetime allowance’ or LTA, which is the maximum you can save into a pension without extra tax charges being levied. The lifetime allowance is currently £1,073,100.

Flexi-access drawdown: This means withdrawing sums from your pension pot while the rest remains invested. You can withdraw an unlimited amount, even the whole lot.

The ‘flexi’ bit also refers to the fact you can take differing sums each time, and do it on an irregular basis. Some people find this more convenient than always taking the same amount, or making regular withdrawals.

Beware that your pension scheme or income drawdown provider might impose extra charges if you want to take maximum advantage of their ‘flexi-access’ options.

Varying the timing and amount of withdrawals can also help with tax planning if you are worried about being pushed into a higher tax bracket. The tax rules explained above under ‘UFPLS’ apply here.

Once you start making withdrawals, your ‘annual allowance’ – the maximum you can save into a pension in a year without tax being levied – will drop to £4,000.

MPAA: This stands for Money Purchase Annual Allowance, and refers to the reduced annual allowance of 4,000 explained just above, which kicks in after you start drawing anything beyond your 25 per cent lump sum from your pension.

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