5 useful pension terms your clients might want to know

It is highly likely that your clients’ pensions will form a key part of their eventual retirement income.

However, the industry is rife with complicated jargon that could make it difficult for your clients to gain a firm understanding of the opportunities available to them.

FTAdviser reports that one-third of UK savers lack pension knowledge and either don’t know where to go for relevant retirement information or won’t accept support.

If they have a strong grasp of retirement terminology, your clients could make better and more well-informed decisions. 

Here are five simple pension-related terms they might want to know.

1. The Annual Allowance

The Annual Allowance refers to the amount your clients can contribute to their private or workplace pension schemes in any given tax year before additional tax charges are levied. 

Income Tax relief is typically available at the basic rate of 20% at the point of contribution, while higher- and additional-rate taxpayers can apply for further relief through self-assessment.

The Annual Allowance is set at £60,000 in the 2023/24 tax year and your clients can carry forward any unused allowance from up to three previous tax years. 

If their adjusted income exceeds £260,000 each year, their Annual Allowance may be reduced through a process known as “tapering”.

2. The Lifetime Allowance

The Lifetime Allowance (LTA) was previously defined as the upper limit on the amount your clients could save into their pension pots over the course of their lifetime without being subjected to additional tax charges. This was previously set at £1,073,100.

However, the government’s spring Budget removed the LTA tax charges in the 2023/24 tax year, and the chancellor has outlined plans to abolish the LTA altogether in a future Finance Bill.

This offers a highly beneficial opportunity – especially for higher- and additional-rate taxpayers – to save more into their pension scheme and continue to benefit from Income Tax relief.

Read more: The Lifetime Allowance – why the latest news might be really good for your clients

3. Defined contribution and defined benefit pension schemes

The two main categories that private or workplace pension schemes typically fall under are defined contribution (DC) and defined benefit (DB) pensions. 

DB pensions are slowly being phased out, although your clients may still have access to one. DB schemes, also known as “final salary pensions”, pay out a retirement income based on:

• Your clients’ salary at the time of retirement or in the years before retirement
• How long they’ve worked for their employer
• An “accrual rate” – a fraction such as 1/60th or 1/80th.

Your clients’ DB pension is then paid out to them at their retirement age as a guaranteed regular income throughout retirement.

Meanwhile, a DC pension involves a pot accrued over your clients’ working life and made up of:

• Contributions, from your client and, in the case of a workplace scheme, their employer
• Tax relief
• Investment returns achieved over time.

With a DC pension, your client is likely to have greater freedom to choose how they withdraw their funds once they reach pension age. However, their income will likely be dependent on the size of their eventual pot.

4. Pension crystallisation

Once your clients start to generate a retirement income from their DC pension through pension drawdown or by using their pot to purchase an annuity, it becomes known as a “crystallised pension”.

Read more: How to benefit from rising annuity rates – here’s everything your clients need to know

When your clients opt to crystalise their pension, they could choose to take a pension commencement lump sum (PCLS), which is a tax-free lump sum of up to 25% of their overall savings.

They could take their pension pot as a single lump sum or alternatively as a series of smaller payments. For each withdrawal the first 25% is typically tax-free, while the rest will normally be taxed at your clients’ respective rate of Income Tax.

5. Pension consolidation

Pension consolidation occurs when your clients opt to combine multiple DC pension pots into a single scheme. This could allow them to access all their retirement savings in one place and may help them reduce fees and charges related to managing multiple accounts.

It could also help them simplify their retirement plan and save them valuable time in not having to oversee a variety of pots across multiple providers.

The process might also be a useful step if your clients have located old, previously misplaced, workplace or private pension schemes and wish to combine what might be a smaller amount with their larger central fund.

Read more: 1 in 6 adults have tried to trace a lost pension — here’s what your clients need to know

Pension consolidation comes with its own set of pros and cons, so it’s important your clients make sure it’s the right move for them before opting to transfer any funds. 

For additional information, they might want to refer to our handy guide on the subject or set up a meeting with Delaunay Wealth to discuss things further. 

Get in touch

There is an abundant glossary of terms your clients will likely want to familiarise themselves with, including many we haven’t mentioned here – such as State Pension credits or the Money Purchase Annual Allowance.

If your clients want to gain a greater understanding of their pension options and receive advice on what course of action might best suit their retirement needs, they should get in touch with us by email at mail@delaunaywealth.com or by calling 0345 505 3500.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.