Do you know your pension lingo?
ADDITIONAL VOLUNTARY CONTRIBUTION - These are extra contributions paid by an occupational pension scheme member to provide additional benefits; however, the total amount must not exceed 15% of total taxable earnings, including any existing scheme contributions.
DEFINED BENEFIT - The final pension amount that you receive is based on your salary or your final salary when you retire, and on the number of years you have worked.
DEFINED CONTRIBUTION - Also referred to as 'money purchase' pensions, these are now far more common than the popular defined benefit or final salary schemes. It depends on your contributions and your employer's contributions, as well as on how well your investments have performed.
SALARY SACRIFICE - To increase a pension pot's size, you can give up existing salary or pay increases and instead opt for additional company contributions.
STATE PENSION SCHEME - Everyone is eligible for the basic state pension but how much they receive will vary depending on their national insurance contributions.
STAKEHOLDER - These are low-cost vehicles launched in 2001 to encourage those with little pension savings to start a pension. Contributions are as little as £20 a month and charges mustn't exceed 1.5%, although the fund choice is limited compared with a personal pension.
SIPPs - Self-invested personal pensions were originally designed for people with large pension pots running into the hundreds of thousands of pounds, giving them access to more funds and other asset classes, such as commercial property and investment trusts. Low-cost SIPPs, however, are now popular for investors wanting to call their own shots.
WITH-PROFITS PENSIONS - Contributions are used to buy shares, on the understanding that you will eventually make this money back with profit on top. This works by holding back some profit in the good years to even out the bad ones. Poor stockmarket performance, however, means you aren't guaranteed to get your money back, and there are often restrictions or penalties for trying to leave a plan early.
NEST - The National Employment Savings Trust scheme is the new workplace pension scheme that will automatically enrol all workers in the scheme unless they choose to opt out. The idea behind it is to ensure everyone is saving into a pension of some sort, and it will come into effect from spring 2011.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
The National Employment Savings Trust
NEST is a government organisation that aims to provide a simple and low-cost pension scheme designed to give its members an easy way of building up retirement savings. You have one NEST retirement pot for life, whether you change jobs, work for more than one employer at the same time, or leave employment. A NEST scheme won’t allow transfers in and out. From 2012, all employees will be obliged to join workplace pension schemes unless they actively opt out and NEST will be the default fund for those employers who do not create comparable alternative arrangements. It will be phased in from 2012 and all employers will be required to contribute 3% by 2017.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.