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SIPP Terms explained

Pensions and SIPPs in particular often come with a lot of technical language and financial jargon. We know this can make understanding your pension feel more complicated than it needs to be.

To help, we have put together a plain-English guide to some of the most common terms you may come across when holding or using a SIPP. The aim is to explain what these terms mean in practice, and how they relate to your retirement planning, without unnecessary complexity.

All explanations are based on our understanding of current UK legislation and HMRC guidance at the time of writing.

Term	What it means
Annual Allowance	The maximum contribution which can normally be paid to all pension schemes in respect of a member and receive tax relief in one tax year, is known as the annual allowance. In the current tax year this is £60,000 A member may have a reduced annual allowance of £10,000 per annum if they have triggered the money purchase annual allowance. With effect from 6 April 2016, high earners may be subject to a tapered annual allowance on a sliding scale dependent on their annual income.
Basic Rate Tax	Income tax which does not take into account any personal allowance. This is currently 20%.
Capped Drawdown	Capped Drawdown is only available for those already using it from prior to 6 April 2015, ie if you are taking pension benefit for the 1st time you will need to consider Flexi-Access Drawdown (FAD). Capped drawdown is a type of pension which can be withdrawn from the Scheme. The amount of pension that can be taken via capped drawdown is between 0% and 150% of the amount of annuity that could be provided using the Government Actuary’s Department’s annuity rate (GAD rate) applicable for the member at the time they take benefits. This is calculated by the Actuaries and the level of capped drawdown must be reviewed at least every three years and annually after age 75.
Crystallisation	The use of all or part of a fund to provide benefits is known as a crystallisation. NB: Taking an Uncrystallised Funds Pension Lump Sum (UFPLS) does not crystallise your remaining pension fund.
Crystallised Funds	Funds which have been designated under the arrangement as available for the payment of pension income.
Defined Contribution Scheme	A scheme where a member‘s entitlement is determined by the size of their accrued interest in their pension pot ie fund. This will be based on contributions, transfers of other benefits and investment return. A defined contribution scheme is also known as a money purchase scheme.
FCA Regulated Adviser	A firm or an individual who advises you on what options best meet your requirements for pension benefit. They must be regulated by the Financial Conduct Authority (FCA) for giving pensions advice. The FCA register can be found at https://register.fca.org.uk/s/ and the adviser should hold ‘Advising on investments (except Pension Transfers and Pension Opt Outs) and if giving you advice on transferring a pension with safeguarded benefits attached, should hold ‘Advising on Pension Transfers and Pension Opt Outs’.
Flexi-Access Drawdown (FAD)	From 6 April 2015, income may be taken from a member’s fund as Flexi-Access Drawdown (FAD). There are no restrictions on the level of income that can be taken under FAD, but all payments are subject to taxation at the member’s marginal income tax rate and will trigger the money purchase annual allowance.
Investment Pathways	The FCA has put in place funds to help you make a well informed decision to meet your retirement objectives if you are not taking advice and wish to drawdown your pension. Whether you would like to start taking your pension savings as a flexible income (drawdown) now, or just want to access you tax-free cash for now, you will need to make an investment choice for the money that you’re not taking as tax-free cash. To learn more about investment pathways, you can use the Investment Pathways Comparison Tool hosted by MoneyHelper. Please note: Alltrust does not offer our own Investment Pathways – you must choose your own.
Lump Sum Protection (scheme specific)	Scheme specific lump sum protection is available where a member’s lump sum rights at 5 April 2006 exceeded 25% of their pension fund in a specific scheme. Scheme specific lump sum protection is completed through the Scheme Administrator. This is different to tax-free lump sum protection.
Marginal Income Tax Rate	After any tax-free allowances and allowable expenses have been taken into account, the amount of tax you pay on your income is calculated on a series of tax bands, using different tax rates. The highest rate you pay is known as your marginal income tax rate. Your income can include, for example, earnings from employment, pension income, investment income etc.
Money Purchase Scheme	A scheme where a member‘s entitlement is determined by the size of their accrued interest in the scheme. This will be based on contributions, transfers of other benefits and investment return. A money purchase scheme is also known as a defined contribution scheme.
Money Purchase Annual Allowance (MPAA)	From 6 April 2023, tax-relievable contributions to a member’s defined contribution scheme are limited to a Money Purchase Annual Alowance (MPAA) of £10,000 per annum, if certain ‘trigger’ events occur. Trigger events include: income received from flexi-access drawdown; being in receipt of an uncrystallised funds pension lump sum; drawing income in excess of the maximum permitted from capped drawdown (a type of income drawdown available prior to 6 April 2015); and being in receipt of flexible drawdown benefits before 6 April 2015. The MPAA will only be triggered when a member first flexibly accesses their funds in their own right. Any income received as a recipient of death benefits will not trigger the MPAA.
Normal Minimum Pension Age	Normal minimum pension age is the youngest age at which a member of a registered pension scheme can take benefits. This is currently when the member reaches age 55 (age 57 from 6 April 2028). Prior to 6 April 2010 it was age 50
PAYE	This stands for Pay As You Earn and the tax on your chosen pension income will be deducted through this system prior to you receiving it (much like your salary in any employed job you had). Please note that in most cases, this will result in tax being deducted using an Emergency Code on a Month 1 basis. Where future regular income is being paid, HMRC will issue a tax code to Alltrust which we will operate against future payments to ensure the correct tax deductions are made.
Pension Commencement Lump Sum (PCLS)	A tax free lump sum payment made from a drawdown crystallisation event subject to the following criteria: the member becomes entitled to PCLS when they become entitled to a relevant pension; it is usually 25% of the fund but can be higher if there is a protected lump sum; it is paid when all or part of the member’s lump sum allowance is available; all or part is paid within the period of three months beginning with the day on which the member becomes entitled to it; it is paid when the member has attained the normal minimum pension age of 55 (or ill health condition is satisfied, or they have a protected earlier retirement age); it is not an excluded lump sum. Any payment which does not meet these requirements will be treated as an unauthorised payment. PCLS must be paid in full within the period of 12 months beginning with the day on which the member becomes entitled to it (i.e. the date of the relevant benefit crystallisation event).
Protection	Various forms of protection were introduced by HMRC when various reductions in the Lifetime Allowance (LTA) occurred. On 6th April 2024 the LTA was abolished and replaced by the Lump Sum Allowance (LSA) and Lump Sum Death Benefit Allowance (LSDBA). These protections have been amended to protect your LSA and LSDBA as follows: Type of Protection Lump Sum Allowance Enhanced Protection An individual with an entitlement to tax-free cash of more than 25% of the fund on 6 April 2006 could retain their tax free cash entitlement which would have been shown as a % on their enhanced protection certificate. Since 6 April 2023 their tax free cash is still based on this percentage. However, the percentage is applied to their total benefits value since 6 April 2023. Scheme specific tax free cash protection may apply. An individual with an entitlement to tax free cash of more than 25% of their benefits value on 6 April 2006 but less than £375,000 couldn’t protect the tax free cash amount using enhanced protection. Where there is no protected tax free cash, the lump sum allowance is £375,000. Primary Protection If pre- 6 April 2006 tax free cash was less than £375,000 (25% of the LTA on 6 April 2006) the amount payable is the lesser of: 25% of the benefit value; and 25% of £1.5 million. The tax free cash is protected as a monetary amount if it exceeded 25% of the LTA on 5 April 2006. Since 6 April 2012 the amount payable is the tax free cash available on 5 April 2006 increased by 20%. Their maximum tax-free cash entitlement is shown as a monetary amount on their primary protection certificate. Fixed Protection 2012 £450,000 Fixed Protection 2014 £375,000 Fixed Protection 2016 £312,500 Individual Protection 2014 25% of protected amount Individual protection 2016 25% of protected amount
Relevant Benefit Crystallisation Event (RBCE)	The former name of Benefit Crystallisation Events (BCEs) prior to 6th April 2024. These are occasions specified in pensions legislation when a lump sum being paid to a member must be checked against their available lump sum allowance or lump sum & death benefit allowance.
Small Pension Pot Lump Sum	Some small pension pots can be withdrawn as a lump sum payment providing 100% of the members total fund value does not exceed £10,000. For non-occupational schemes, a member is restricted to receiving a maximum of three separate small pension pot lump sums and payment must extinguish all of the member’s pension savings held under the Scheme. 25% of uncrystallised funds may be paid tax-free with the remaining funds subject to tax at basic rate. Taking a small pension pot lump sum does not represent a relevant benefit crystallisation event so payment is not subject to the lump sum allowance test and will not trigger the money purchase annual allowance.
State Benefits	These are the pensions and other benefits that are payable to you from the Government and include state pension, child benefit, bereavement benefits, winter fuel allowance etc.
Tax-Free Lump Sum Protection	Tax-free lump sum protection with enhanced protection or primary protection was available where a member’s total lump sum rights at 5 April 2006 exceeded £375,000. Application had to be made to HMRC before 5 April 2009 in conjunction with enhanced or primary protection.
Unauthorised Payment	HMRC rules allow pensions to pay certain benefits, but if the payment is outside of these parameters or exceeds an allowance limit then they may charge an unauthorised payment charge.
Uncrystallised Funds	Funds which have not been designated under the arrangement as available for the payment of income drawdown.
Uncrystallised Funds Pension Lump Sum (UFPLS)	From 6 April 2015, uncrystallised funds in a money purchase scheme may be withdrawn as an Uncrystallised Funds Pension Lump Sum (UFPLS). This is different from Flexi-Access Drawdown, as all funds are paid at once. 25% of an UFPLS may be paid tax-free with the remaining 75% subject to tax at the member’s marginal income tax rate. Members can elect to take all or part of their uncrystallised fund as an UFPLS, but it cannot be taken from funds which are already crystallised.