Glossary.

The following terms have been used within this site and on statements that you may receive from us. If you are unclear of the meaning of a certain term, please click on the relevant item below.

 

Adjusted income

Broadly means the total income for the tax year on which a member is subject to income tax with a few adjustments. This will include salary, bonus, profits from self-employment, benefits in kind, pension income (including uncrystallised funds pension lump sums) and income from property, savings, dividends and taxable lump sum death benefits plus:

  • any excess pension scheme tax relief
  • any employee pension contributions deducted from gross salary (net pay arrangements) in the tax year the payment is made
  • the value of any employer pension inputs (which includes any employer contributions as a result of a salary sacrifice arrangement) for the tax year

less:

  • some allowances and reliefs, e.g. excess tax relief under net pay pension schemes (where full tax relief is not available through payroll), pension scheme tax relief upon making a claim, gifts to charities and trade losses
  • any lump sum death benefits received in the tax year which were taxable at their income tax rate.

A more detailed explanation of adjusted income can be found in HMRC’s online Pension Tax Manual via the following link: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm057100

AIM

Means the UK Alternative Investment Market

Annual Allowance
 

Currently £40,000 (from 2014/15)

This is the maximum amount of pension inputs in a tax year to all of a member's registered pension schemes that can benefit from tax relief. If it is exceeded an annual alllowance charge will apply to the excess.

This allowance reduced from £50,000 for tax year 2013/14.
After 6 April 2015, once retirement income has been drawn under flexi-access rules, the new Money Purchase Annual Allowance restrictions of £10,000 pa gross will apply. From 6 April 2017 this limit reduced to £4,000 pa.

For 2016/17 a tapered annual allowance will apply to individuals whose adjusted income exceeds £150,000 pa.

Annual Allowance charge

The tax charged on the amount by which an individual’s total pension inputs in pension input periods ending in a tax year exceed the individual’s available annual allowance (including any unused annual allowance that they are able to carry forward from the three immediately preceding tax years).

The charge is not fixed and could be at one or more rates on parts or all of the excess depending on how much taxable income the member has and the amount of the excess.

Administration

The process of looking after the SIPP on an ongoing basis. This includes, but is not limited to, collecting tax relief on contributions, completing investment applications, and general correspondence to ensure good ‘housekeeping’ of the scheme’s affairs.

Arrangements

Separate component parts of a member’s SIPP fund or share of a SSAS fund. A member will normally have one arrangement unless agreed otherwise.

Funds that relate to a pension that came into payment before 6 April 2006, or to a transfer of crystallised funds from another registered pension scheme on or after 6 April 2006, must be in separate arrangements.

Associated pension scheme

Is a scheme in which members representing at least 10% by value of the scheme are also members of the SIPP or SSAS.

Associated person

Includes the member, any connected person, any pension scheme relating to the member or a connected person and any associated pension scheme.

Authorised employer loan (SSAS only)

a loan from a SSAS to a sponsoring employer that satisfies all of the HMRC requirements for such a loan.

Authorised employer payment (SSAS only)

A payment specifically authorised under the pension tax legislation to or in respect of a sponsoring employer (e.g. an authorised loan to a sponsoring employer and purchase of assets from or sale of assets to a sponsoring employer on commercial terms).

Authorised member payment

An authorised member payment to, or in respect of, a member (e.g. pension commencement lump sum, drawdown pensions, pension and lump sum payments on the death of a member, recognised transfers between pension schemes and purchase of assets from or sale of assets to a member or connected person (other than a sponsoring employer, in the case of a SSAS) on commercial terms.)

Authorised payment

A payment specifically authorised under the pension tax legislation and will be either an authorised member payment or, in the case of a SSAS only, an authorised employer payment.

Beneficiary

Any person to whom the SIPP trustees may pay a retirement lump sum, pension income, or a death benefit lump sum or income. Any individual who is eligible to receive benefits from the scheme.

Beneficiary Nomination form

As part of the application process your client will have been asked to complete a Beneficiary Nomination form, outlining to whom they would like unpaid benefits from their pension fund to be paid on their death. The form can be updated at any time - please contact your dedicated Administration team.

Benefit crystallisation event (BCE)

A BCE is an event which requires a member’s benefits to be measured against their remaining lifetime allowance, for example, when the member crystallises funds in order to take retirement benefits and at age 75.

Capped Drawdown

This feature was permitted up to 5 April 2015 and remains an option if clients have existing Capped Drawdown for any unvested funds in the same arrangement. It is no longer available to new clients drawing benefits for the first time.

Capped Drawdown is a means of drawing income whilst retaining investment control of the pension capital. The pension income that can be taken under Capped Drawdown is limited (by reference to Government Actuary Department (GAD) tables) so the fund is not depleted too quickly. The income level is reviewable periodically dependent upon client age and will vary in line with investment performance, income withdrawals and gilt yields.

Carry Forward

A means of allowing a client to potentially increase their pension contributions above the current Annual Allowance by utilising any unused Annual Allowance from the previous three tax years.

Carry forward is only available from a tax year where the client was a member of a registered pension scheme.

Cash balance benefits

Any benefits where the amount available to provide the benefits is not calculated purely by reference to pension inputs made by a member or on their behalf.

Cater Allen bank account

This is the default SIPP bank account which is opened when your client's pension scheme is established and through which Dentons, as the Scheme Administrator, conducts the administration of the scheme.

Charity

Means a body of persons or trust established for charitable purposes only and has been recognised by HMRC as a charity for tax purposes.

CIS (Collective Investment Scheme)

A collective investment scheme that is either authorised (UK schemes) or recognised (overseas schemes) by the FCA.

Close company

This broadly means a company that is privately owned and controlled by five or fewer individuals.

Commercial property

Commercial property means land and commercial buildings in the UK. Examples include bare land, agricultural land, woodland, offices, shops, industrial units, warehouses, hotels and institutional care homes.

Commercial property transactions

Commercial property transactions means acquisitions including purchases and in specie transfers from other registered pension schemes, mortgages, occupational leases and tenancy agreements, lease assignments, deeds of surrender of lease, sales, in specie transfers to other registered pension schemes or QROPS, in specie transfer to a member or beneficiary as a lump sum benefit payment, rent reviews, rent reconciliations, insurance applications and renewals.

Connected person

A connected person is defined in Sections 993-995 of the Income Tax Act 2007 and Section 1122 of the Corporation Tax Act 2010)  and includes:

  • The member, the member’s spouse or civil partner, a direct relative (e.g. parents, grand-parents, great grandparents, brothers, sisters, children, grandchildren, great grandchildren) of the member or member’s spouse or civil partner, and the spouse or civil partner of a direct relative of the member or the member’s spouse or civil partner
  • A trustee of a settlement where the settlor of the settlement is the member or a connected person
  • A person (or that person’s spouse or civil partner) who is in partnership with the member or with a connected person
  • A company which is controlled by the member and or associated persons.

For HMRC reporting purposes, a connected person also includes close companies of which the member or a connected person is a director.

Contribution

A member, and/or their employer, may pay contributions in a tax year up to the basic amount or up to the Annual Allowance without having to produce a declaration that they are entitled to tax relief. Basic amount means a limit of £3600 pa (before deducting the basic rate of income tax in each Tax Year).

Employer’s contributions are allowed for tax relief at the discretion of the local Inspector of Taxes.

Control

Where a person excerises, is able to excercise, or is entitled to acquire direct or indiect control of the company's affairs. See Section 452 of the Corporation Tax Act 2010.

Controlling director

A controlling director includes a person who is:

  • occupying the position of director by whatever name called and any person in accordance with those directions or instructions the directors are accustomed to act, or is a manager of the company or otherwise concerned in the management of the company’s trade or business, and 
  • is either on his/her own or with one or more associated persons the beneficial owner of, or able, directly or through the medium of other companies, or by any other indirect means, to control not less than 20% of the ordinary share capital of the company.

The expression ‘with one or more associated persons’ means that a person treated as owning, or as the case may be, controlling, what any associated person owns or controls, even if he/she does not control share capital of his/her own.

See section 452 of the Corporation Tax Act 2010.

Crystallisation

Please also see vesting.

The point at which accrued savings are converted to a lump sum or pension income and at which time a test against the Lifetime Allowance is carried out.

Clients can start taking benefits at any time after age 55 irrespective of whether or not they remain in employment. However, tax considerations may apply if benefits are deferred beyond the age of 75.

Defined benefits (or final salary benefits)

These are typcially occupational pension scheme benefits that are calculated by reference to the member's earnings and length of service with their employer.

Dependants

Dependants mean:

  • the member’s spouse or civil partner at the time of the member’s death;
  • the member’s spouse or civil partner at the time the member became entitled to a pension under their SIPP or SSAS
  • any child of the member who is under 23 years of age, or in the opinion of the scheme administrator, was dependent on the member because of physical or mental impairment whatever the child’s age
  • any other person if, in the opinion of the scheme administrator, at the time of the member’s death, the person was financially dependent on the member, or the person and the member were financially dependent on each other, or the person was dependent on the member because of mental or physical impairment.
Drawdown

Known as Capped or Flexi-access Drawdown (or Flexible Drawdown prior to 5 April 2015). This is a flexible alternative to an annuity purchase that allows the member greater choice and control over the level of income drawn whilst retaining control of the pension assets.

Enhanced Protection

A method of protecting a client's pension savings, applicable only to schemes pre April 2009, where these are likely to exceed the Lifetime Allowance (LTA) in the future. It can also specify protection for the pension commencement lump sum. Where lump sum protection is not specified, a client's lump sum entitlement will not be protected post April 2012. However it may preserve the £1.8 million LTA but only 25% of £1.5 million may be paid as a maximum lump sum.

FCA

Means the UK Financial Conduct Authority.

Fixed Protection 2012 (FP12)

Gave a personal Lifetime Allowance (LTA) of £1.8 million even after 6 April 2014 when the LTA reduced to £1.25 million, and treats the Tax Free Cash Lump Sum (TCLS) as if LTA was £1.8 million. Benefit accrual must have stopped by 5 April 2012 or the Protection will be lost. This was available for people who did not have Enhanced or Primary Protection or who thought they would exceed £1.5 million pension savings with future investment growth.

Fixed Protection 2014 (FP14)

A form of protection against the Lifetime Allowance (LTA) tax charge. It will allow your clients to crystallise benefits up to £1.5 million without paying the LTA charge when the LTA was reduced to £1.25 million from 6 April 2014. No further contributions or benefit accrual will be allowed or the protection will be lost. This protection was not available if Primary Protection, Enhanced Protection or Fixed Protection 2012 is held.

Fixed Protection 2016 (FP16)

A form of protection against the Lifetime Allowance (LTA) tax charge. It will allow your clients to crystallise benefits up to £1.25 million without paying the LTA charge when the LTA reduced to £1 million from 6 April 2016. No further contributions or benefit accrual are allowed after this date or the protection will be lost. This protection is not available if Primary Protection, Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014 is held.

Flexi-access Drawdown

This feature was introduced with effect from 6 April 2015. Your clients will be permited to withdraw all their pension income from their fund with no upper annual limit. Tax will be paid on this income at your client's marginal rate of income tax in the year it is drawn. Drawing pension income using Flexi-access Drawdown will reduce your client's annual allowance from 6 April 2017 to £4,000 pa (previously £10,000pa).

Flexible drawdown

This entitles your client to drawdown any amount from their plan subject to meeting certain rules. The Pensioner must be able to demonstrate a secure income of at least £12,000 pa in payment in the year they opt for Flexible Drawdown. This feature has been superceded by Flexi-access Drawdown from 6 April 2015.

HMRC

HMRC means Her Majesty's Revenue and Customs.

In specie

In specie means to re-register or transfer the ownership of an asset in its current form without the need to convert an asset to cash to sell it.

Individual Protection 2014 (IP14)

This is another form of Lifetime Allowance (LTA) protection outlined by HMRC and was introduced on 6 April 2014. It is designed to protect individual’s whom have built up pension pots over £1.25 million as at 6 April 2014 for up to £1.5 million or the value of the fund at 6 April 2014, if lower. Contributions may be made after 6 April 2014 without losing protection.

Applications for this protection can continue until 5 April 2017. Individuals can hold Individual Protection with Fixed Protection 2012 or 2014 - but not Primary Protection.

Individual Protection 2016 (IP16)
 

This applies from 6 April 2016 and is designed to protect your client's whom have built up pension pots over £1 million on 5 April 2016. Contributions can continue after 6 April 2016 for protection up to £1.25 million or the fund value at 6 April 2016, if lower.

However your client will not be able to apply for this protection if they have Primary Protection or Individual Protection 2014.

From July 2016 applications for this protection must be made using the HMRC digital online service.

Lifetime Allowance (LTA)

The limit on pension benefits at retirement subject to the most beneficial tax treatment. Benefits paid in excess of the LTA are subject to an extra tax charge. From tax year 2016/17 this is £1 million. For tax years 2014/15 and 2015/16 the standard LTA is £1.25 million. This reduced from £1.5 million for tax year 2013/14.

Lifetime allowance excess is the amount by which a member's funds designated for crystallisation, or at age 75, exceed their remaining lifetime allowance.

Lifetime allowance charge means the amount of tax that the member would pay on any lifetime allowance excess.

Lifetime Allowance Protection

Please see Primary, Enhanced, Fixed Protection 2012, Fixed Protection 2014, Fixed Protection 2016, Individual Protection 2014 or Individual Protection 2016.
 

Lifetime annuity

Lifetime annuity means an annuity contract purchased under a money purchase arrangement from an insurance company of the member’s choosing that provides the member with an income for life and which meets the conditions imposed through paragraph 3, Schedule 28 to the Finance Act 2004.

Market value

Where an asset such as commercial property or unquoted company shares are to be bought from a member of connecter person, the market value must be confirmed by a suitably qualified independent professional.

Money purchase

Broadly means a pension fund built up from payments such as contributions and transfers from other pension schemes, and any associated investment growth. The amount of the benefits the member or a beneficiary will receive will depend on the value of the fund.

Money Purchase Annual Allowance (MPAA)

This was introduced from 6 April 2015 to prevent abuse of the new pension flexibility and choice. It is set at £10,000pa gross but from 6 April 2017 reduced to £4,000 pa. It will apply when:

- Income is taken from Capped Drawdown in excess of 150% of GAD
- Clients in Flexible Drawdown automatically move to Flexi-access Drawdown
- Income is taken from Flexi-access Drawdown, or
- An Uncrystallised Funds Pension Lump Sum (UFPLS) is received.

It does not apply where only tax-free cash is taken from Flexi-access Drawdown.

Nominee

Means an individual who is not a dependant of the member and who the member has nominated so that in the event of the member's death they can receive a drawdown pension and/or annuity payments. The scheme administrator may also nominate a nominee but only where the member had no surviving dependant or nominee and the member did not nominate a charity.

Non standard asset

In relation to a SIPP means any asset that is not a standard asset. Example of non standard assets include: any asset that cannot be accurately and fairly valued on an ongoing basis or realised within 30 days whenever required, including unbreakable bank account deposits with a term of more than 30 days; shares in and loans to unquoted companies and UCIS.

Occupational pension scheme

A pension scheme set up by an employer for its own employees and employees of any other employer. Such employers are known as sponsoring employers. If the scheme rules allow, individuals who are not employees of any employer associated with the scheme can also become members. A SSAS is a type of occupational pension scheme.

Pension commencement lump sum

Means a tax-free lump sum benefit paid to the member in connection with an arising entitlement to a pension benefit from uncrystallised funds.

Pension income

The income received from your client's pension savings from Capped or Flexible Drawdown (which was superceded by Flexi-access Drawdown on 6 April 2015) or by buying an annuity. Pension income is taxable at the member’s marginal rate of income tax.

Pension input period

Means for each of the member’s registered pension schemes, the period ending in a tax year for which the total pension inputs made in that period by or for the member to that scheme are tested against the annual allowance, the money purchase annual allowance and/or the tapered annual allowance. From 6 April 2016 all pension input periods are aligned with the tax year.

Pension sharing order

An order issued by the courts confirming how much of a member's pension benefits their ex-spouse or ex-civil partner will be allocated on their divorce.

Pension credit is the amount received from a member’s pension arrangements into the pension arrangements of the member’s ex-spouse or ex-civil partner following a pension sharing order on divorce.

Pension debit is the amount by which a member’s benefits are reduced following a pension sharing order on divorce and the subsequent payment of a pension credit to the pension arrangements of their ex-spouse or ex-civil partner.

Practitioner

(In relation to a SSAS) means someone whom a scheme administrator has authorised to deal with HMRC on their behalf.

Property

Property purchases, ie 'bricks and mortar' or land. Only commercial property can be accepted. Examples of acceptable commercial property include: offices, shops, warehouses, agricultural land or forestry, land for development and marine berths.

Primary Protection

This is the first form of protection introduced for a pension scheme member to safeguard against a Lifetime Allowance (LTA) tax charge if their pension rights were valued in excess of the LTA in place at the time of vesting.

There is no option for your client to revoke Primary Protection and therefore if this applies, the member cannot apply for Fixed, Enhanced Protection nor Individual Protection. However, your client can hold Enhanced Protection.

Tapered annual allowance

From 6 April 2016 the Government will reduce on a sliding scale the Annual Allowance for those with higher incomes over £150,000. For every £2 of 'adjusted income' over £150,000 the Annual Allowance will be reduced by £1 down to a minimum level of £10,000 pa. The maximum reduction in the Annual Allowance is £30,000 therefore anyone with an income of £210,000 or more will have an annual allowance of £10,000 pa.

Tax free cash

Also known as ‘Pension Commencement Lump Sum (PCLS)’ – a tax free lump sum of usually up to 25% of the fund (capped at 25% of the Lifetime Allowance (LTA)) can be paid to a member of a pension scheme when their benefits come into payment. The balance of the fund is then used to support your client's pension income. In some cases, LTA protection may allow more than 25% of the fund to be paid as tax free cash.

Transfer

The cash equivalent value of pension benefits from a previous pension scheme transferred to the SIPP either in cash or in-specie assets, or, the value or amount available to transfer to another registered pension scheme when your client's SIPP is wound up.

Uncrystallised Funds Pension Lump Sum (UFPLS)

This feature, introduced on 6 April 2015, permits your clients to draw a pension commencement lump sum and the remaining fund - all from the same date. Your client can select an amount to be paid or a lump sum of which 25% will be tax-free and the remainder taxable at their marginal rate of income tax. Your client can use this feature as often as they like until the fund is exhausted. Using this feature will trigger a reduction in the annual allowance to £10,000 pa and this can not be used for carry forward purposes.

Vesting

Vesting is a term meaning ‘conversion’ and is the conversion of a pension fund into pension benefits including potentially a lump sum and income. Taking benefits is often referred to as ‘vesting your pension’ or ‘benefit crystallisation’.