Pension terms explained: What does jargon like MPAA, UFPLS and ‘benefit crystallisation’ mean?

Are you still saving or drawing up your pension, but are you baffled by the jargon?

What the heck do ‘UFPLS’, ‘decumulation’, ‘MPAA’ or ‘flexi-access drawdown’ mean – and why should you learn all these things to get your hands on your own retirement savings.

Research has shown that while savers warmly welcomed the retirement liberties introduced in April 2015, they feel baffled and overwhelmed when faced with the new choices being made for people over 55 to spend, save and invest their retirement savings.

Savers feel the pressure to use new retirement liberties right away, while it’s often best to do nothing with their money for the time being, especially if they’ve reached 55 but are still working or don’t need extra cash at the time.

And a major stumbling block is the widespread lack of understanding of financial jargon – from “annuity” to “marginal tax rate” to even more outlandish terms – that people either have to learn from scratch, or risk wasting their wealth.

FIND BELOW AN EXPLANATION OF ‘UFPLS’ AND OTHER HORROR JARGON

So what does “UFPLS” and other horror jargon mean?

This is Money decodes some of the jargon, from the more mundane to the exotic, that you might encounter when exploring your retirement options.

Defined contribution pension: Also known as “money purchase” pensions, these plans take contributions from both you and your employer and invest them to provide a pot of money upon retirement. Individual savers bear the investment risks.

Defined pension: The industry-preferred description for a traditional final pay plan. These provide guaranteed income after retirement, which is inflation-linked (sometimes capped) and which usually continue to pay out to spouses after your death.

They are often referred to as “gilded” for their generosity compared to stingier and riskier defined contribution plans. They are mostly extinct in the private sector, but are still often available to those who work in the public sector.

Retirement liberties are not open to people in these schemes unless they move their money elsewhere, but it is normally not beneficial to do so.

Annuity: An insurance product that provides a guaranteed lifetime income. They are unpopular and widely condemned for being restrictive and offering little value, but interest rate hikes have recently made annuities more attractive again.

However, many people don’t look for the best deal, or accidentally buy inappropriate products that don’t consider their health or take care of their spouse after death.

Sales plummeted after savers were given new options after pension freedom, but are now starting to rise again.

Improved annuity: A form of annuity that gives a higher guaranteed income if you are in poor health.

Joint annuity: Another version that gives a partner a recurring income if the annuity holder dies first.

If you buy a single annuity, not a joint annuity, there is nothing for your spouse if you die first, so you should consider what they will have to live on and discuss this with them before making a decision.

Many widows and widowers discover that their partner’s choice of annuity means that they no longer have an income after their death, forcing them to live on a meager benefit.

Level annuity: Not inflation linked. If you’re healthy, the best rates for single annuities are ‘level’ annuities, but the current cost of living crisis shows how important it is to get some protection against rising prices.

Annuity ‘guarantee period’: This protects you against the loss of (the majority of) your purchase money if you die shortly after buying an annuity.

Marginal Tax Rate: This is the tax bracket you will be pushed into once all income, including withdrawals from your retirement, has been counted.

As with people of working age, people over retirement age have a personal deduction, which is the amount of income allowed before tax is due.

Anything above that will be taxed at 20 percent, 40 percent or 45 percent, depending on your income. Read here about the current tax rates and surcharges.

Income withdrawal: A retirement income plan that allows you to withdraw amounts from your pension pot while the rest remains invested in stocks, government and corporate bonds and other assets.

Only wealthy people were allowed to use them before retirement, but they are much more popular now, although they can be complicated and take investment risks in your old age.

Read our 12 step starters guide to investing and living off your retirement when you retire.

UFPLS: It stands for ‘uncrystallized pension fund’, which doesn’t make things any clearer. It is also, to make matters even more confusing, also referred to as ‘uncrystallized pension fund at once’.

It really is atrocious official retirement savings jargon that is in a retirement plan and not yet used to buy an annuity or invest in an income withdrawal plan.

Savers with defined-contribution pension investments aren’t limited to just one chance to take a tax-free lump sum of 25 percent of their pots — instead, they can take advantage of tax-free chunks across multiple withdrawals.

However, you lose the tax-free benefit if you commit your entire pot to an annuity or income deduction scheme.

So, in order to withdraw your 25 percent incrementally, you need to make sure that most of your retirement money stays in an ‘uncrystallized’ arrangement, with your current pension provider or elsewhere where you transfer it.

Taking a tax-free amount from your retirement pot up front is a popular retirement benefit, but it can be worth applying delay tactics in today’s volatile markets and slowing down, as described above.

This strategy gives you the chance to avoid holding onto recent losses in the financial markets, wait for your investments to recover and when your pot grows again, you will have more tax-free money available to withdraw in the longer term.

decumulation: When you save for your retirement, you build up money. After you start spending your savings on retirement, you decumulate your money. Decumulation also refers to the process of converting a pension fund into an income that aims to help you through your retirement.

Advantage crystallization event: You take a lump sum from your pension, buy an annuity, transfer your savings to a reduction scheme, move to a foreign pension scheme or die before you turn 75.

By activating a ‘BCE’, the tax authorities check whether you have used up your ‘lifelong allowance’ or MJA. This is the maximum that you can save for retirement without additional tax being levied. The lifetime allowance is currently £1,073,100.

Flexi admission admission: This means that you withdraw amounts from your pension pot while the rest remains invested. You can withdraw an unlimited amount, even the entire lot.

The ‘flexi’ bit also refers to the fact that you can take different sums each time and do so on an irregular basis. Some people find this more convenient than always taking the same amount or withdrawing money regularly.

Please note that your pension scheme or income deduction provider may incur additional costs if you want to take maximum advantage of their ‘flexi-access’ options.

Varying the timing and amount of withdrawals can also help with tax planning if you’re concerned about moving into a higher tax bracket. The tax rules explained above under ‘UFPLS’ apply here.

Once you start withdrawing, your ‘annual allowance’ – the maximum you can save for retirement in a tax-free year – drops to £4,000.

MPAA: This stands for Cash Purchase Annual Allowance, and refers to the reduced annual allowance of 4,000 as explained above, which takes effect after you start taking a little more than your 25 percent lump sum from your pension.