Jargon buster
7th February 2020
Terms used in the financial world can be confusing. This guide will help you understand what you’re dealing with.
For more advice over pensions, speak to your employer or adviser. You can also get free guidance from the government service pensionwise.gov.uk
Types of adviser
Independent financial adviser
An independent financial adviser can advise across all investment and pension matters relevant to their clients.
FOCUSED INDEPENDENT FINANCIAL ADVISER
Focuses on specific investment and pension matters. Within these areas of advice, the adviser is in no way limited in the products they can recommend.
RESTRICTEd FINANCIAL ADVISER
Can advise across a limited set of investment and pension products. This limitation may enable them to offer an improved service and lower fees, but you should consider how other products compare.
Product restrictions are often because the adviser can only recommend products provided by the company they work for, but this is not always the case. It is important to ask the adviser about any restrictions on the advice they can offer and how this can affect you.
WHOLE OF MARKET MORTGAGE ADVISER
Can advise across a range of available mortgage products. Ask whether they check lenders’ direct-only deals (ie, those available only directly to consumers from the lender, without going through an adviser).
LIMITED MORTGAGE ADVISER
Can advise across a limited set of mortgages. This limitation might enable them to offer an improved service and lower fees – but do also consider how other products compare.
Product restrictions are often because the adviser can only recommend products provided by the company they work for, but this is not always the case. It is important to ask the adviser about any restrictions on the advice they can offer and how this can affect you.
Pensions
final salary/defined benefits scheme
This is a workplace scheme where the retirement income is based on how long you’ve been a member of the scheme and your salary (not on investment performance). This type is now uncommon. Remaining schemes are found mostly in public sector jobs.
income drawdown
With this, you can take money out of your pension when you need it. The remainder stays invested. This provides more flexibility than an annuity (see below), but there are risks, such as the fund falling in value, meaning your needs may not be met. If you’re considering drawdown, advice is a must.
Auto-enrolment
This is a government initiative where employees automatically join a pension scheme set up by their employer, unless they actively opt out. Both employees and employers are required to make contributions and you get tax relief on the percentage of your salary that you pay in.
money purchase scheme/defined contribution pension
With this type of plan, eventual retirement income is based on money paid in and investment performance over the life of the pension. When you retire, you can purchase an annuity or income drawdown to turn your pension into an income. The different types include personal, stakeholder and those arranged through your employer. Most work pensions are defined contribution schemes now.
self-invested personal pension (SIPP)
A personal pension is where the individual is the sole investor and doesn’t rely on additional support from employers. It’s a prime solution for the self-employed, who do not receive company pensions. Flexible and portable, SIPPs are good if you want to consolidate various pension pots. You can choose where to invest or delegate to have it managed. Set-up and management fees will apply, so get advice first.
state pension
With a state pension, a regular payment is provided by the government when you reach a certain age (currently set at 65 for both men and women, this will go up to 66 from October). It is unlikely to be enough on its own, but it may be useful to top up the income from private pensions. The amount you get depends on your National Insurance record. You can check what the state will give you by requesting a forecast from gov.uk.
annuity
A type of retirement income product, an annuity is bought from an insurance company with the money from your pension fund. It will pay out a guaranteed income for a set period – usually until you die – at regular intervals. The income it provides will depend on a host of factors, such as your age when you purchase it, annuity rates at the time and whether you’re a smoker. It’s crucial to shop around to get the best value.
annual allowance
The most you can pay into a pension tax-efficiently in a year, based on your own and your employer’s contributions, plus any someone else makes on your behalf. This tax year’s allowance is £40,000 or all of your salary, whichever is lower.