Pension jargon and terms explained
Cut through the jargon around pensions with our handy glossary for pension terms. From annual allowance to value protection, we've got easy-to-understand, plain language explanations to help you understand your pensions product.
This is the maximum amount you can save into a defined benefit pension and get tax relief on each tax year once you trigger the money purchase annual allowance (MPAA). The alternative annual allowance for most people is £50,000 but may be a lesser amount if the tapered annual allowance applies for the tax year concerned.
This is the maximum amount of pension savings you can get tax relief on each tax year – based on your own contributions, any employer contributions and any contributions made on your behalf by someone else. The annual allowance for most people is currently £60,000.
The annual allowance applies across all your pension savings, not per policy. If you exceed the annual allowance, a tax charge is made which takes back any tax relief that was given at source.
If your taxable earnings in the year are below the annual allowance, then pension contributions from all sources on which you can get tax relief is limited to 100% of your earnings or £3,600, whichever is higher.
Annual management charge
This is an ongoing fee paid to your pension provider for managing the funds your pension savings are invested in. It’s usually charged as a percentage of the value of your pension savings.
This is a type of retirement income product bought with the proceeds of a pension policy. It provides a regular income.
Someone who benefits from a Will, a trust, a life insurance policy or death benefits from a pension or annuity.
A block transfer is where two or more people transfer their benefits from one scheme to the same new scheme.
A block transfer is defined as:
- A transfer of the pension rights relating to an individual and at least one other pension scheme member
- The transfer is made as a single transaction
- The transfer represents all the pension rights under the scheme for all the members transferring as part of that single transaction, and
- Before the transfer the member has not been a member of the receiving scheme for more than 12 months.
The rules around block transfers are different for people with a protected pension age of 55 and 56 in a pension plan and then transfer these benefits. If you think this will affect you, you should speak to a financial adviser.
This is a type of retirement income product that was only available before 6 April 2015. It’s similar to a flexible retirement income product but there’s a cap on the maximum level of income that can be taken from the plan in a year. The limits are based on rates issued by the Government Actuaries Department.
If the amount of income taken is more than the capped drawdown limit, the money purchase annual allowance will be triggered restricting the amount of tax relief on savings made into a money purchase pension plan.
This is where you or your employer had the option to opt out of the State Second Pension (State Earnings Related Pension Scheme). In exchange, you paid lower National Insurance contributions and received higher pension contributions.
It’s not been possible to contract out of the State Pension since April 2016.
Also known as a final salary or career average earnings scheme.
The scheme pays a retirement income based on your salary and how long you have worked for your employer. Generally now only available from public sector or older workplace pension schemes.
Also known as a money purchase scheme. Includes most personal and stakeholder pensions, and those arranged through your employer.
Your contributions (and any employer contributions or contributions made on your behalf by someone else) are invested to build up your pension savings, and you choose how and when you want to use your savings. The amount in your pension at retirement is based on how much has been paid in and how well the investments have performed.
Someone who is financially dependent on you, usually a partner. Annuity providers often need proof of this - like a utility bill or joint mortgage/bank statement.
Also known as a joint life annuity. In the event of you dying, a surviving spouse, civil partner, dependant or named second life, will continue to get some or all of the income you were receiving. Because a joint life annuity pays an income to your chosen dependant if you die first, this option will cost more than an annuity that stops when you die, so will reduce the income you receive during your lifetime.
Normally you must decide at the time you buy the joint life annuity who’ll receive the continuing annuity payments on your death.
An enhanced annuity takes your health and lifestyle into account when working out the income you’ll receive.
With most other financial products, such as life assurance, you get penalised for being in poor health. But with annuities a medical condition or lifestyle factors, such as being a smoker, having high cholesterol or being overweight, could actually boost the amount of income you receive.
Escalation and inflation linking
This describes the way an annuity income can grow each year. You can choose:
- No increase (level annuity) – your annuity income will stay the same each year. It will provide you with a higher starting income, but the effects of inflation over time will reduce the amount you can buy.
- To increase your annuity income each year at a fixed rate.
- To increase your annuity income each year in line with the change in a measure of inflation, such as the Consumer Prices Index (CPI).
Also known as a defined benefit scheme.
Pays a retirement income based on your salary and how long you have worked for your employer. Generally now only available from public sector or older workplace pension schemes.
See 'Regulated financial adviser'.
Fixed protection maintains the lifetime allowance at a certain level which is above the current lifetime allowance. There are three different versions.
- Fixed protection 2012 maintains the lifetime allowance of £1.8 million.
- Fixed protection 2014 maintains the lifetime allowance of £1.5 million.
- Fixed protection 2016 maintains the lifetime allowance of £1.25 million.
Fixed protection applied for after 15 March 2023 can be lost by:
- Starting a new arrangement other than to accept a transfer of existing pension rights.
- Making further contributions (money purchase).
- Having further benefit accrual (defined benefit).
- Breaking the transfer restrictions.
It is now only possible to apply for fixed protection 2016.
Unlike individual protection there is no minimum benefit value needed to apply for fixed protection.
The lifetime allowance charge has been removed from 6 April 2023 and the lifetime allowance will be completely removed from 6 April 2024.
A retirement income product that guarantees a regular income for a fixed number of years and pays out a lump sum at the end.
At the end of the term you need to decide what to do with the rest of your pension savings. This could include taking a lump sum payment or buying a further income.
When you buy an annuity, the amount of income you get is based on the amount of pension savings you have and the annuity rate. A GAR is an annuity rate that was set in the terms and condition of your pension plan when you took it out. The GARs that apply to older pension plans are usually significantly higher than annuity rates currently available. This means that the level of annuity income is higher.
A GAR is normally lost if the pension savings are transferred to a new plan.
When buying an annuity you have the option to ensure that your income payments are paid for a set period of time, regardless of whether you die earlier. If you die during the annuity’s guarantee period, payments will continue to be paid to your dependant(s) for the remainder of the guarantee period.
See ‘Enhanced annuity’.
See ‘Pension drawdown’.
Income Tax is a tax you pay on your income. There are a number of allowances that mean you do not pay tax on income which falls within those allowances. The most common allowance is the Personal Allowance. This is the amount of income you can get before you pay income tax.
Income above the various allowances is then taxed. There are different rates of Income Tax, which apply to bands of earnings. If your income falls over one or more bands, only the income that falls within that band is taxed at the rate for that band.
Different rates of Income Tax apply in Scotland to those that apply in England, Northern Ireland and Wales.
You can see the latest rates of Income Tax on the government website (England, Northern Ireland and Wales) or Income Tax Rates & Allowances and Income Tax Rates & Allowances (Scotland).
Individual protection maintains the lifetime allowance at a certain level depending on what type the individual has. There are two different versions.
- Individual protection 2014 gives individuals a protected lifetime allowance equal to the value of their pension savings on 5 April 2014, subject to an overall maximum of £1.5 million.
- Individual protection 2016 gives individuals a protected lifetime allowance equal to the value of their pension savings on 5 April 2016, subject to an overall maximum of £1.25 million.
Pension contributions can continue to be paid. The value of any pension savings above the protected lifetime allowance will be liable to an income tax charge.
It is no longer possible to apply for individual protection 2014. It is still possible to apply for individual protection.
The lifetime allowance charge has been removed from 6 April 2023 and the lifetime allowance will be completely removed from 6 April 2024.
The increase in the general level of prices of goods and services. This results in a fall in the amount of good and services you can buy with the same amount of money.
A retirement income product that guarantees to pay out for life but not a set amount – payments will rise and fall in line with the value of the underlying investments. A minimum monthly income may be guaranteed if performance is weak.
Lifetime allowance was previously defined as a limit of pension benefits that could be built up without a lifetime allowance charge applying.
Before 6 April 2023, any benefits over the lifetime allowance had a lifetime allowance charge applied. The charge was 55% if the excess benefits were taken as a lump sum or 25% if the excess benefits were taken as a taxable income.
Since 6 April 2023 when any benefits over the lifetime allowance are taken the amount paid is added to the recipient’s income for that tax year and income tax is then deducted.
The lifetime allowance is currently £1,073,100.
It is proposed that the lifetime allowance will be abolished from 6 April 2024.
A retirement income product that guarantees to pay you a regular income for the rest of your life.
You can choose to add features to your annuity, such as providing an income for your spouse or partner if you die before them, or protecting your income against the effects of inflation. You will need to decide how important these features are to you as the choices you make will affect the amount of income you receive during your lifetime.
Some older pension schemes reward customers with a loyalty bonus after a set number of years. This could be paid by giving back some of your annual management charge (AMC) or as a lump sum when you come to take your pension savings, depending on the scheme. Normally if you choose to leave a pension scheme that has a loyalty bonus you’ll lose this benefit.
If you take an income from your defined contribution pension savings, this will trigger a lower annual allowance known as the money purchase annual allowance (MPAA). The MPAA is currently £10,000. This means you’ll normally only receive tax relief on pension contributions of up to 100% of your taxable earnings or £10,000, whichever is lower.
As a basic guide, the main situations when you’ll trigger the MPAA are:
- if you take your pension savings as a lump sum or start to take ad-hoc lump sums from your pension savings
- if you put your pension savings into a flexi-access drawdown scheme and start to take an income
- if you buy an investment-linked or flexible annuity where your income could decrease
- if you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the maximum income cap.
The MPAA won’t normally be triggered if:
- you take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life (that either stays level or increases)
- you take a tax-free cash lump sum and put your pension savings into a flexi-access drawdown scheme but don’t take any income
- you cash in one or more small pensions valued at less than £10,000.
The MPAA of £10,000 only applies to contributions to defined contribution pensions and not defined benefit pension schemes.
Also see annual Allowance.
A money purchase plan is a type of pension savings plan. They come in a variety of different types including personal pensions, stakeholder pensions, self-invested personal pensions and group pension plans.
The individual and/or employer make contributions to the plan. A personal account is set up for the individual members and the contributions are usually invested in unit linked or with profits funds.
The benefits payable on death or retirement are based on the value of the individual’s account.
Open market option
The open market option allows someone approaching retirement to ‘shop around’ annuity providers. This is so they can get the best annuity rate when they convert their pension savings into an income (annuity), rather than simply taking the default rate offered by their pension provider.
If a pension plan doesn’t offer income drawdown, it’s not possible to use an open market option to move the pension savings to a plan that does.
Age 55 (increasing to age 57 from 6 April 2028) is the earliest you can normally take your pension savings. Your selected pension age or normal retirement age will be later than this.
There were a number of occupations where a member could take their benefits from a personal pension or retirement annuity contract before the age of 50, which was the normal minimum pension age for these types of plans. Where this earlier age applies, this is known as a protected pension age.
There are still occupational pension schemes with a normal retirement age below age 55. These schemes relate to the Armed Forces, Police and Fire Brigade, and certain conditions apply.
It may be possible to take benefits before age 55 if you are in ill health.
You can normally take up to 25% of your pension savings as a tax-free lump sum, this is called a pension commencement lump sum (PCLS).It may also be called a tax-free lump sum or tax-free cash.
Also known as ‘income drawdown’ or ‘flexible retirement income product’. Using pension drawdown allows you to use your pension savings to provide a retirement income. The level of income isn’t guaranteed, but you have the flexibility to make changes to how much you take. You can use your remaining pension savings to provide a guaranteed retirement income by buying an annuity product.
The income is paid directly from the plan, which will reduce the plan’s value. Any investment growth on the remaining pension savings may not be enough to maintain the level of income payments you need for the rest of your life.
Tax-free cash (pension commencement lump sum) is the money you can take as a tax-free lump sum when you begin to take your pension savings. It’s usually 25% of the fund value.
Some members of older workplace (occupational) pension schemes may have a right to more than 25% tax-free cash. This higher amount may be lost if the member transfers their pension savings to another pension plan, unless it is part of a block transfer. A block transfer is where two or more people transfer their benefits from one scheme to the same new scheme.
See block transfer
A qualified professional who is authorised and regulated by the Financial Conduct Authority (FCA) and must follow their rules when giving financial advice. They will recommend financial products only after taking account of your overall financial and personal circumstances. If the advice they give you turns out to be unsuitable you can make a complaint and if necessary take your case to the Financial Ombudsman Service.
Independent financial advisers look at all financial product types and all providers. Financial advisers offering ‘restricted advice’ specialise in certain product types and/or restrict how many providers’ products they look at.
You should always check that to see that an adviser is on the Financial Conduct Authority’s Financial Services Register.
The annual allowance of £60,000 is reduced or ‘tapered’ if your total income is over £200,000.
This is complicated, so if your total annual taxable income, salary and investment returns, is around or above £200,000 you should speak to your financial adviser to find out whether tapered annual allowance applies to you. If it does, the annual allowance that applies to you could be reduced to as low as £10,000.
Similar tapering applies to the alternative annual allowance if you’re in a defined benefit pension.
Uncrystallised pension fund
Pension savings that have not paid out any tax-free cash or retirement income.
Uncrystallised funds pension lump sum (UFPLS)
One of the options available to individuals with a money purchase (defined contribution) pension savings.
You can take your pension savings as a one-off lump sum, or possibly as a series of lump sums when you need them. For each amount taken the first 25% (a quarter) will be tax-free and the rest will be taxed at your highest tax rate.
Value protection is an option you can choose when you buy an annuity.
On your death, the total amount of gross annuity payments made up to the date of death is deducted from the annuity purchase price. The difference is paid as a lump sum.
If you die before age 75, the lump sum is paid tax free, otherwise it’s taxed at the beneficiary’s highest rate.