Pensions are crucial to everyone’s financial planning nowadays but they are often the most confusing part. There are many different types of pension as well as a whole host of pensions-related jargon to wade through.

Here is some of the "need to know" terminology explained:

Basic state retirement pension:

Currently paid to men from age 65, and women from 60 (although women’s pension age will gradually rise to 65 between 2010 and 2020), who have made a sufficient number of National Insurance Contributions. To get the full basic state pension of £82.50 per week (for 2005-06), contributions must have been paid for 90% of a person’s working life.

SERPS (state earnings related pension scheme):

Between 1978 and 1988 all employees had to contribute to this additional state pension. After 1988 it became possible to opt out and in 2002 it was replaced by the state second pension. Serps was originally intended to provide an extra pension equivalent to 25 per cent of your earnings (within certain limits) during the 20 best years of your working life, but it was later reduced to 20 per cent of these earnings averaged over your whole working life.

State second pension:

The state second pension (S2P) replaced SERPS in April 2002, it is very similar to SERPS but provides more generous benefits to low earners.

Stakeholder pensions:

Introduced by the government in 2001 to make pensions cheaper and more accessible, stakeholder pensions can be taken out direct or through an employer. The minimum investment is £20 per month and there are no penalties for stopping contributions or transferring the fund to another pension company. Charges are capped at 1.5 per cent a year. The amount of pension you get will depend on the size of your pension fund and annuity rates when you retire.

Self Invested Personal Pensions:

These are pension plans which enable investors to choose their own investments, typically from a range of insurance funds, unit trusts, investment trusts and shares. They can also be used to buy commercial property and various other investments. Click here for more on Sipps.

Final salary occupational pension scheme:

Provided by an employer, this type of scheme (also referred to as a defined benefit scheme) promises a pension at retirement which is a fixed proportion of an employee’s salary. Employees must contribute but employers must pay the rest. For many companies the cost of these schemes has become too great in recent years and a large number of final salary schemes have closed down.

Money purchase occupational pension scheme:

A more common type of company pension scheme thesedays (also referred to as a defined contribution scheme) which is funded by fixed contributions from employees and employers. The amount of pension provided at retirement depends on the size of the employee’s ‘pot’ and annuity rates at the time.

Jargon buster

A-Day – Refers to the introduction of simplified pension rules on 6 April 2006, such as easier-to-understand annual pension contribution limits.

Annuity – An income for life provided by an insurance company in exchange for a lump sum.

AVC – Additional Voluntary Contributions: extra contributions made by members of company pension schemes.

Drawdown – A facility to take a regular income from a pension fund without buying an annuity.

Lifetime Allowance – After April 6, 2006, there will be a maximum limit on an individual’s pension fund of £1.5m (for 2005-06).

Open Market Option – With a money purchase pension (such as a stakeholder or SIPP) the ability to shop around at retirement for the best annuity rates.

Pension credits – Additional means-tested state benefits for pensioners on low incomes.

Pension sharing – Also known as pension splitting - an arrangement where pension benefits are divided between spouses on divorce.

Phased retirement – Gradually turning parts of your pension policy into annuities, leaving the remainder invested until required.

Tax free cash – The lump sum that can be taken from a pension at retirement in lieu of regular income. From April 6, 2006, the limit for all types of pensions will be 25 per cent of the individual’s fund.

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