16 important pension terms British expats need to know explained in plain English

Ever sat in a meeting with a financial adviser to discuss your pensions or retirement plans and wondered what he was talking about?

Don’t fret, with the help of Stewart Massey from AES International, we’ve collated 16 of the most common pension terms which most expats will come across, and explained them in plain English.

Annuity

This is a financial product sold by insurance companies which, when purchased, will provide you with a guaranteed income for the rest of your life. The income you receive will depend on a number of factors including interest rates at the time, how much your pension pot is worth, your age, health, smoker status and where you live. Building in dependents benefits in the event of your death will reduce the initial income level, as will arranging an annuity that increases each year.

Until this year, it was compulsory for many people with a UK pension to purchase an annuity to receive an income from their pension, something which is no longer the case.

Basic State Pension

This is a weekly pension payment which is received by pensioners, whether they live in the UK or not. In the current tax year (2014/15) this payment is £113.10 per week.

Capped Income Drawdown

This is an alternative way of receiving an income from your pension, without purchasing an annuity. With a capped income drawdown, your pension remains invested and you draw your income directly from the pension, according to rules defined by the government.

Defined Benefit Pension Schemes

Often referred to as Final Salary Pension Schemes, these pension schemes pay you an income directly which will typically be a proportion of salary you received while you were working.

Defined Contribution Pension Schemes

These are pension schemes where you (and maybe your employer) pay money into a pension scheme which is then invested, with the primary intention of growing your pension pot. Your pension pot can then be converted into income when you retire.

The investments made will be in accordance with your risk profile, established when you chose your pension, although this may be limited to three or four generic profiles.

Final Salary Pension Schemes

See Defined Benefit Pension Schemes

Flat-rate Pension

The UK Government is introducing the flat-rate pension in April 2016 and this will replace the state pension.

Flexible Drawdown

Flexible drawdown allows you to take your entire pension as you choose, even in one go. Currently you need to have an annual pension income of £12,000 in place before using this type of drawdown, although from April 2015 everybody will be able to access their pension in this way. You will usually be able to take 25% of the pension pot without any liability to income tax. Care needs to be taken when considering taking the entire pension fund, as anything above the maximum tax free amount will be subject to your highest rate of income tax and may even push you into a higher tax rate band for that tax year.

Occupational Pensions

An occupational pension is a pension scheme which you pay into through your employer and is normally either contributory (where you make a contribution as well as your employer) or non-contributory where your employer makes all of the contributions. This could be defined benefit or defined contribution.

Pension Commencement Lump Sum (PCLS)

Often incorrectly referred to as the “tax-free lump sum,” the pension commencement lump sum is a lump sum of money you receive when you retire, usually tax-free.

Private Pensions

A private pension is a scheme which you have set up, and pay into yourself. Typically this is via a life insurance company or other investment house.

Public Sector Pensions

A public sector pension scheme is one provided for civil servants in the UK by the government.

Qualifying Recognised Overseas Pension Schemes

A Qualifying Recognised Overseas Pension Scheme, or QROPS, is a pension scheme which is recognised by the HMRC and a legitimate option for non-UK residents who wish to transfer their pension away from UK jurisdiction. There are many different QROPS jurisdictions and it’s important to select the one that best suits your future plans, as this can affect your income tax levels – either in the place you are living when you are taking the pension, or in the jurisdiction that is paying the pension. Some QROPS jurisdictions tax income at source, some use double taxation agreements (DTA’s) and some are tax neutral. Someone receiving income from a QROPS vehicle will usually declare the income in the jurisdiction where they are living, and may pay tax there. Care is needed if using a QROPS jurisdiction that uses DTA’s as if none exists with the jurisdiction where you live, you may end up paying income tax in both places without the ability to offset one bill against the other.

Risk Profile

Your risk profile is an essential element which should be taken into consideration when receiving financial advice. Your risk profile takes into account a number of factors about your life and personal objectives and identifies the levels of financial risk of an investment which would be suitable for you. This is one of the considerations in assessing the viability of transferring existing pension benefits into UK SIPPS or offshore QROPS (making sure that expectations are realistic).

Self-Assessment

This is a form of tax return which the HMRC may require you to complete once you start drawing a pension. It identifies your income, gains and losses and declares how much tax you owe, or are owed.

Self-Invested Personal Pensions

A self-invested personal pension, or SIPP, is a pension scheme where you have greater options in terms of how your money is invested, compared to other types of UK personal pension. In the past, only highly experienced and financially aware individuals took this route, although this type of personal pension is more widely accessible these days. An independent financial adviser would be able to offer advice to help you make sound decisions about your pension.