Pensions jargon busted: Your guide to the experts’ complex lingo

Six months on from the landmark pensions changes, and one thing hasn't changed: Pensions jargon is as complex as ever.

From benefit crystallisation events to annuities and LTAs, here is our simple guide to the experts’ language.

Annuity

An annuity is an insurance product, purchased to ensure a guaranteed income from retirement until death. However, unless you buy an inflation-linked annuity (which are more expensive), annuity holders could find that their purchasing power decreases over time. New rules brought in by the government mean that you are no longer required to buy an annuity with your pension savings.

Drawdown

“Drawdown means withdrawing money directly from your invested pension savings,” says Nick Hungerford, chief executive of Nutmeg. “You are generally allowed to do this from the age of 55 onwards, depending on what type of pension you have. You can usually access up to 25 per cent of your money tax-free, with the rest subject to normal income tax.”

Defined Benefit

These were standard workplace pensions in the past, but not anymore. Defined benefit pension schemes pay a guaranteed monthly income based on your earnings history, seniority and length of service. With life expectancy increasing, these schemes have become very costly, and most employers don’t offer them anymore.

Defined Contribution

Also known as Money Purchase schemes, you and your employer put money into a pension pot which is invested in whichever assets you choose. The performance of these investments will hopefully increase the size of your pot over time, giving you the choice to buy an annuity or enter into drawdown.

Lifetime allowance (LTA)

The limit on the total size of your pension pot which can be saved without incurring tax charges. Any contributions or investment growth which pushes you over this limit will typically be taxed at 55 per cent. The standard lifetime allowance currently stands at £1.25m, but will fall to £1m from 6 April 2016.

Benefit Crystallisation Event (BCE)

BCEs are instances when your pension funds are measured against your LTA. When you want to start taking an income through drawdown or an annuity, your pension pot is “crystallised” or calculated, and if it’s above the limit, tax is payable. This also happens when you die and a lump sum is being paid to an heir.

Pension input period

“Your pension input period is the length of time you have available to fill your annual allowance,” explains Hungerford. “This is calculated over one year, but doesn’t necessarily follow the tax year. For example, in the chancellor’s Summer Budget this year, pension input periods were restarted in July on top of the allowance from the start of the tax year, effectively extending the input period by an extra three months.”