An A-Z glossary of the technical terms used in pensions.
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The appointed day for implementation of a specific set of changes to be made to a scheme.
Annual Benefit Statements. Annual estimate of the likely level of retirement benefits at normal pension age.
Within the NHS Pension Scheme, the method of restricting the amount of pension NHS pensioners can secure if they return to NHS employment. NHS Pension Scheme abatement rules set a maximum threshold of pension and re-employment earnings for re-employed NHS pensioners. This uses the pensionable pay figure at retirement which is compared with the pension and re-employment earnings. If pension and re-employment earnings exceed pensionable pay at retirement, then the pension is reduced pound for pound.
The method of building pension benefits. In the NHS Pension Scheme the current accrual rate is 1/80 of pensionable pay for each year of membership.
A calculation or method agreed by a qualified actuary.
The adjustment made to a pension where it is expected to be paid for a longer or shorter time than normal. The most common actuarial adjustment is a reduction when a member retires before a pension scheme’s normal pension age (NPA), to allow for the fact that the pension will be paid for longer than expected.
Extra pension where retirement happens after the NPA.
A reduction to retirement benefits which are paid before the normal pension age. In the NHS Pension Scheme, from the age of 50 in the 1995 section and 55 in the 2008 section, members can apply for the early payment of retirement benefits; this is described as voluntary early retirement (VER). Where benefits are paid early they are ‘actuarially reduced’ to reflect the fact that they will be paid longer than planned for. The factors used in working out the reduction are produced by the Government Actuary’s Department (GAD) and mean that currently benefits paid from age 50/55 will reduce by around 5% a year. For example, VER at 50 means a member will retain around 60% of the pension and 75% of the lump sum that would have been paid at 60.
Additional voluntary contributions (AVCs)
Extra payments of scheme contributions, to buy years and days of membership or to invest in pension arrangements outside the main occupational pension scheme in order to top up retirement benefits.
Additional years of scheme membership for current pension purposes bought by paying extra contributions.
Treating someone differently because of their age.
Age discrimination legislation
From 1 October 2006, the Employment Equality (Age) Regulations made it unlawful to discriminate against workers, employees, job seekers and trainees because of their age.
Agreed voluntary early retirements (AVERs)
The employer pays for the pension to be taken early but without enhancement.
Insurance contract that guarantees to pay annual amounts for a fixed period. For example, some defined contribution pension schemes provide a pension for members by buying an annuity for them when they retire.
The policy of buying scheme members a deferred annuity to secure pension rights that have been built up in a scheme.
Career average revalued earnings. Retirement benefits are built up on an annual basis and revalued typically in line with either national average earnings (NAE) or the retail price index (RPI).
Career average scheme
A defined benefit scheme which pays a pension based on the average of a member’s pensionable earnings throughout their whole career. For example, the NHS Pension Scheme does this for self-employed members of the scheme such as GPs.
This is the actual length of scheme membership.
Giving up part of the pension in exchange for a lump sum, i.e. scheme members ‘commute’ part of their pension. Many occupational schemes have a single accrual rate with rules which specify how much lump sum can be given up. For example, if the commutation factor was 12:1, members would get £12 cash in the lump sum payment for every £1 per year of pension given up in exchange.
Simultaneous active membership of both a personal pension scheme and an occupational pension scheme.
The group of NHS Scheme members who have special retirement rights. These were withdrawn from 6 March 1995 for new entrants. Those with special retirement rights are described as a ‘closed group’ because no new members were included after the closure date.
Pension scheme benefits which have been earned in a scheme, but which have not yet been paid. For example, people who have been members of the NHS Pension Scheme but leave the NHS before retirement, will normally have deferred benefits which are paid when the person reaches Normal Pension Age.
Defined benefit (DB) scheme
A pension scheme where the scheme rules define the level of benefits payable rather than the level of contributions and the scheme’s investment returns.
Defined contribution pension scheme (DC)
A pension scheme where the benefits are determined by the level of contributions to the scheme and their subsequent investment growth. Defined contribution schemes also usually provide a pension by buying an annuity for members when they retire.
Non-NHS employers who the Secretary of State has directed can operate the NHS Pension Scheme for eligible employees. For example, charities that indirectly support the wider NHS by providing palliative care or care in the community may be direction employers.
The method of building pension benefits for NHS Pension Scheme contractors (general medical and dental practitioners). Benefits are based on pensionable earnings throughout their whole career which is brought up to a current value. The factors used are based on the average estimated increase in GP contractor pay.
The maximum annual level of pensionable earnings that may count towards calculation of retirement benefits. It does not apply to people who joined a pension scheme before 1989.
The method of increasing pension benefits. For example, in the NHS Pension Scheme, retirement benefits paid on the ground of ill health may be ‘enhanced’ to increase membership to the amount the member would have secured had they been able to work to the normal pension age. Retirement benefits may also be enhanced where they are taken later than at the normal pension age.
Employing authority (EA)
Employers who operate the NHS Pension Scheme, i.e. NHS Trusts/Strategic or Special Health Authorities, GPs and Direction employers.
The level of earnings in a period close to retirement, used to calculate retirement benefits in a final salary scheme.
Financial Services Authority (FSA)
The independent regulator for financial services business.
The facility for people to phase in the transition from work to retirement, for example the ability to draw down pension or to step down to a job that carries less responsibility.
Group personal pension
An arrangement for employees of a particular employer to participate in a personal pension scheme, usually on common terms and conditions with an employer’s contribution.
An annuity where payments are guaranteed to continue for an agreed period of up to ten years even if the person dies before the end of the period.
The estimated likely length of life at a particular age. May be based on the general population or take account of individual factors such as lifestyle and illness.
Lifetime allowance (LTA)
The amount on which the Inland Revenue will allow tax relief on a scheme member's contributions. Current proposals allow a lifetime allowance of up to £1.25million (correct as at June 2014).
A tax-free one-off payment at retirement.
The rate of income tax that would apply to an additional pound of income; normally the same as an individual’s highest rate of income tax.
An employee who is a member of a pension scheme.
Mental Health Officer (MHO)
A person who qualified for the special retirement rights granted to specified NHS staff who worked in the mental health field. MHO status includes accelerated accrual of benefits after 20 years in this type of employment, i.e. two years’ membership for every year actually worked, and a normal pension age of 55. These special retirement rights were withdrawn for new entrants after 6 March 1995.
Minimum pension age
The youngest age at which pension benefits may be taken. This is currently at the age of 50 in the 1995 scetion and 55 in the 2008 section, except for retirement on the grounds of ill-health which can apply at any age.
Money purchase (MP)
Contributions made by a member to secure pension benefits in a defined contribution scheme. Contributions are invested and the returns from the investments used to buy an annuity at retirement. Some defined benefit schemes also provide a money purchase facility to allow members to buy additional pension rights in this way. In the NHS Pension Scheme, in-house money purchase facilities are available from Equitable Life Assurance Society, Standard Life and the Prudential.
Within the NHS Pension Scheme, the principle whereby all scheme members and employers join together to fund a package of pension benefits for a defined contribution rate. This acts like an insurance scheme where benefits such as ill-health retirement are available but may not be needed by all members.
National average earnings (NAE)
The average growth in national earnings across the UK.
Net pay arrangement
The arrangement by which employers deduct pension contributions from employees’ pay before applying income tax so that employees receive tax relief on pension contributions at their marginal rate.
Normal pension age (NPA)
The age at which a pension scheme assumes its members will normally apply for a retirement pension. Most schemes allow members to retire earlier or later if they wish.
Notional whole time pay (NWT Pay)
The equivalent pensionable pay that a part-time worker would receive if they were working full-time.
Occupational pension scheme
A pension scheme for staff working for a particular employer or related employers.
The group of active NHS Pension Scheme members which excludes those who have left the scheme with a deferred pension and NHS pensioners.
Someone who you are married to, have entered into a Civil Partnership with, or with whom you have an exclusive and long-term committed relationship in which you are financially dependent or inter-dependent.
Years of membership of a pension scheme built up by a part-time worker. In the NHS Pension Scheme, the amount of part-time membership is converted to the equivalent amount of full-time membership in order to calculate retirement benefits. For example, members working half the normal number of full-time hours would be credited with six months’ membership for each full year worked.
The regular payment made by a pension scheme to its retired members.
The value of an NHS pension is the total of pension and any lump sum payable.
This is the pay which is used by a pension scheme to determine contributions to the scheme and pay-related benefits from the scheme. In the current NHS Pension Scheme pensionable pay can be less than actual pay because overtime payments and some allowances are not normally pensionable.
Pension-sharing on divorce
An arrangement whereby pension rights are shared between both parties to the divorce under a pension-sharing order, an agreement or equivalent provision in accordance with the Welfare Reform and Pensions Act 1999.
Personal pension scheme
A pension scheme, membership of which is not dependent upon a contract of employment. For example, several insurance companies run personal pension schemes. Some members of occupational pension schemes also take out a personal pension to top up their retirement pension.
The preservation of benefits for members who leave a pension scheme before retiring can also be referred to as deferment. Benefits are index linked so they keep pace with inflation. Some schemes set a minimum period of membership before pension rights are preserved.
Rights to continue to receive benefits from a pension scheme irrespective of future changes to the scheme. For example, part of a person’s pension which is funded by a rebate of National Insurance contributions in return for forgoing part of the state earnings related pension (SERPS) or the second state pension (S2P), is protected.
Refund of contributions
The NHS Pension Scheme offers the option of a refund of contributions for membership of less than two years.The contributions that the member has paid to the Scheme are returned less a tax payment and a deduction to buy the member back into the state pension scheme. As an alternative to a refund of contributions the NHS Scheme may be able to transfer pension rights to another pension provider for membership of less than two years, as long as time limits are met.
Retirement benefits deriving from an earlier period of employment or self-employment, which have not been transferred.
Retail Prices Index (RPI)
An indicator which provides an economic tool to monitor inflation. The RPI figures focus on the rate of change in prices. NHS Pensions are currently increased each year in line with the RPI.
Each member of the NHS Pension Scheme is allocated a Superannuation Department number. This number is prefixed SD followed by the year of the member’s birth. This SD Number or the National Insurance number can be used to trace individual membership records.
Serious ill-health commutation
The facility for members with severely reduced life expectancy to withdraw the full value of their pension benefits as a lump sum.
Special Class Status
NHS Pension Scheme members who have special retirement rights. These members include nurses, midwives, health visitors and physiotherapists in post before 6 March 1995 who have a normal pension age of 55 and mental health officers (MHOs after achieving 20 years).
Special retirement rights
See Special classes.
A type of personal pension scheme which meets set criteria, including a ceiling on charges and flexibility.
To move to a job that is less onerous or with less responsibility, this normally means a reduction in pensionable pay.
A pension payable to a partner.
Tax-free lump sum
Scheme benefits which can be taken as a cash payment, which is not subject to income tax. See also lump sum.
The transfer of membership from one pension scheme to another. There are strict conditions that determine when and how this can be done. In the case of the NHS Pension Scheme, transfers into the scheme must be made within 12 months of joining or rejoining the scheme.
Transition (related to the redundancy review)
Arrangements for moving from the old to the new system of redundancy compensation.
Transition (related to pension scheme review & ill health review)
Arrangements for moving from the old to the new system of benefit calculation.
The facility for people to convert small amounts of pension into a lump sum payment by commutation.
A guaranteed level of benefits for staff during transition.
Unfunded unapproved retirement benefit scheme (UURBS)
A retirement benefits scheme that is not approved by the Inland Revenue and does not attract tax relief. Such a scheme may be useful alongside a normal pension scheme where members exceed the earnings cap, but still wish to save for their retirement. The NHS Pension Scheme does not currently operate an UURBS.
The creation of rights to draw benefits from a pension scheme. In the NHS Pension Scheme vesting occurs after two years’ membership. Before this point, no benefits are paid but there may be a refund of contributions. After this point members have rights in the scheme which may be transferred to another scheme or taken as benefits when they retire.
Voluntary early retirement (VER)
The application for retirement benefits before the normal pension age.
To wind down to final retirement normally means that a member may reduce his or her hours for a period before final retirement. In the NHS Pension Scheme this would typically involve members moving from full-time to part-time employment.