To help you understand some of the key words and phrases for annuities here is a list of common annuity terms explained:
Additional state pension
A pension paid on top of your basic state pension. It used to be called SERPS but is now called the State Second Pension. Self-employed people cannot build up an additional State pension.
Alteratively secured pension
On your 75th birthday, a way of getting an income from your pension fund without buying an annuity. This income is taxable.
Annuity rate
The amount of monthly income you get for your pension fund, which is dependant on several factors such as your age, sex, state of health and the type of annuity you want.
Annuity Calculator
A software program that takes personal details and pension fund information to produce you an annuity quote.
AVCs – Additional Voluntary Contributions
A pension top-up policy for an occupational pension. You pay contributions into a scheme run by your employer to boost your main pension.
Commutation
Taking your pension benefits as cash if they do not exceed a certain level. This level changes each tax year. This is sometimes known as ‘triviality’
FSAVCs – free-standing additional voluntary contributions
A pension top-up policy for an occupational pension, but separate from your employer’s pension scheme and normally run by an insurance firm.
Inflation
This happens when prices go up throughout an economy. The effect of inflation on your money means that it will buy less each year.
Lifetime annuity
An investment that converts your pension fund into pension income that is paid to you for life. The income is taxable.
Market value reduction
A reduction to your pension that could apply if you want to cash in your with-profits policy before or after its maturity date or other date(s) specified in the policy.
Open market option
Your right to shop around and buy your annuity from the company offering the best deal for you.
Retirement annuity contract (RAC)
An RAC is similar to a personal pension, but was sold before 1988 when personal pensions first became available.
S32 policy (buy-out bond)
Used by members of occupational pension schemes when they leave service or the scheme is wound up. A way of securing scheme benefits in the name of the employee.
Tax-free lump sum
An amount of cash set by HMRC which you can take at retirement free of tax. Individual pension schemes may have different rules on the amount of tax free cash you can take
Whole of market adviser
An adviser who offers advice on products from the whole market.
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