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.

A

Alternative annual allowance

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. The alternative annual allowance for most people is £50,000 but may be less than this if the tapered annual allowance applies for the tax year concerned.

Annual allowance

This is the maximum amount of pension savings an individual can make each year without a tax charge. This is based on their own contributions, any employer contributions and any contributions made on the individual’s behalf by someone else. The annual allowance for most people is currently £60,000.

The annual allowance applies across all an individual’s pension savings, not per plan. If they exceed the annual allowance, a tax charge is made which takes back any tax relief that was given at source.

If an individual’s taxable earnings in the year are below the annual allowance, then the tax relief on any personal pension contributions or pension contributions made on their behalf by somebody other than their employer is limited to 100% of earnings or £3,600, whichever is higher.

Annual management charge

This is an ongoing fee paid to a pension provider for managing the funds an individual’s pension savings are invested in. It’s usually charged as a percentage of the value of the pension savings.

Annuity

This is a type of retirement income product bought with the proceeds of a pension plan. It provides a regular income.

B

Beneficiary

Someone who benefits from a Will, a trust, a life insurance policy or death benefits from a pension or annuity.

Block transfer

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 individuals transferring as part of that single transaction, and
Before the transfer the individual 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.

C

Capped drawdown

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 pension contributions made into a money purchase pension plan before incurring a tax charge.

Contracting out

This is where an individual or their employer had the option to opt out of the State Second Pension (State Earnings Related Pension Scheme). In exchange, the individual 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.

D

Defined benefit pension

Also known as a final salary or career average earnings scheme.

The scheme pays a retirement income based on their salary and how long they have worked for their employer. Generally now only available from public sector or older workplace pension schemes.

Defined contribution Pension

Also known as a money purchase scheme. Includes most personal and stakeholder pensions, including group personal pensions. The individual’s contributions (and any employer contributions or contributions made on the individual’s behalf by someone else) are invested to build up pension savings. The individual can choose how and when they want to use their savings. The amount in their pension at retirement is based on how much has been paid in and how well the investments have performed.

Dependant

Someone who is financially dependent on the individual with the pension savings, usually a partner or child. Annuity providers often need proof of this - like a utility bill or joint mortgage/bank statement.

Dependant's pension annuity

Also known as a joint life annuity. In the event of the individual receiving an annuity dying, their surviving spouse, civil partner, dependant or named second life, will continue to get some or all of the income they were receiving. Because a joint life annuity pays an income to the chosen dependant if the individual receiving an annuity dies first, this option will cost more than an annuity that stops when the individual with the pension savings dies, so will reduce the income they receive during their lifetime.

Normally an individual must decide at the time they buy the joint life annuity who’ll receive the continuing annuity payments on their death.

E

Enhanced annuity

An enhanced annuity takes health and lifestyle into account when working out the income an individual will 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 an individual can receive.

Escalation and inflation linking

This describes the way an annuity income can grow each year. The options are:

No increase (level annuity) – the annuity income will stay the same each year. It will provide a higher starting income, but the effects of inflation over time will reduce the amount that can be bought.
To increase the annuity income each year at a fixed rate.
To increase the annuity income each year in line with the change in a measure of inflation, such as the Consumer Prices Index (CPI).

F

Final salary scheme

Also known as a defined benefit scheme.

Pays a retirement income based on an individual’s salary and how long they have worked for their employer. Generally now only available from public sector or older workplace pension schemes.

Financial adviser

See 'Regulated financial adviser'.

Fixed protection

Fixed protection maintains a protected lump sum and death benefit allowance at a certain level which is above the current lifetime allowance. There are three different versions.

Fixed protection 2012 maintains a protected lump sum and death benefit allowance of £1.8 million.
Fixed protection 2014 maintains a protected lump sum and death benefit allowance of £1.5 million.
Fixed protection 2016 maintains a protected lump sum and death benefit 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. The deadline for applying for fixed protection 2016 is 5 April 2025.

Unlike individual protection there is no minimum benefit value needed to apply for fixed protection.

Fixed term annuity

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.

G

Guaranteed annuity rate (GAR)

When somebody buys an annuity, the amount of income is based on the amount of pension savings and the annuity rate. Some older plans may have had a GAR. A GAR is an annuity rate that was set in the terms and condition of the pension plan when it was taken out. The GARs that apply to older pension plans are usually significantly higher than annuity rates currently available. This means the level of annuity income is higher. Often there are restrictions on the way the annuity can be taken.

A GAR is normally lost if the pension savings are transferred to a new plan.

Guarantee period

When buying an annuity there may be an option to ensure the income payments are paid for a set period of time. If the individual dies during the annuity’s guarantee period, payments will continue to be paid to the dependant(s) for the remainder of the guarantee period.

I

Impaired annuity

See ‘Enhanced annuity’.

Income drawdown

See ‘Pension drawdown’.

Income Tax rates

Income Tax is a tax paid 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 a person can get before they 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 a person’s 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

Individual protection maintains a protected lump sum and death benefit allowance at a certain level depending on what type the individual has. There are two different versions.

Individual protection 2014 gives individuals a protected lump sum and death benefit 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 lump sum and death benefit 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 lump sum and death benefit 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 2016, the deadline is 5 April 2025.

Inflation

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.

Investment linked annuity

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.

J

Joint life annuity

See ‘Dependant's pension annuity’

L

Lifetime allowance

Lifetime allowance was a limit of pension benefits that could be built up without a lifetime allowance charge applying for benefits taken before 6 April 2024.

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.

Between 6 April 2023 and 5 April 2024 when any benefits over the lifetime allowance were taken the amount paid was added to the recipient’s income for that tax year and income tax was then deducted.

The lifetime allowance was £1,073,100 and was abolished on 6 April 2024.

Lifetime annuity

A retirement income product that guarantees to pay a regular income for the rest of somebody’s life.

An individual may be able to choose to add features to their annuity, such as providing an income for their spouse or partner if they die before them or protecting their income against the effects of inflation. An individual needs to decide how important these features are to them as the choices they make will affect the amount of income they receive during their lifetime.

Loyalty bonus

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 their annual management charge (AMC) or as a lump sum when they come to take their pension savings, depending on the scheme. Normally if an individual chooses to leave a pension scheme that has a loyalty bonus they’ll lose this benefit.

Lump sum allowance

Under pension rules, the lump sum allowance limits the amount of tax-free cash an individual can access from their pension plan. Normally 25% of the benefits can be paid tax-free, with an overall maximum limit of £268,275. Payments above this are subject to tax at the individual’s marginal rate of income tax. An individual may have protection that allows them to take more than this.

Lump sum and death benefit allowance

The total of all tax-free lump sums, including tax-free lump sum death benefits and serious ill-health benefits, will be tested against a lifetime limit, set at £1,073,100. Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax. 

M

Money purchase annual allowance (MPAA)

If somebody takes an income from their 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 they'll only be able to make pension contributions of up to £10,000 a year before incurring a tax charge.

As a basic guide, the main situations when somebody will trigger the MPAA are:

if pension savings are taken as an uncrystallised fund lump sum or as ad-hoc lump sums
if pension savings are put into a flexi-access drawdown scheme and start to take an income
if an investment-linked or flexible annuity is bought where the income could decrease
if somebody with a pre-April 2015 capped drawdown plan takes payments that exceed their maximum income cap

The MPAA won’t normally be triggered if:

somebody takes a tax-free cash lump sum and buys a lifetime annuity that provides a guaranteed income for life (that either stays level or increases)
a tax-free cash lump sum is taken and the remaining pension savings are invested in a flexi-access drawdown scheme and no income is taken
one or more small pensions valued at less than £10,000 are taken

The MPAA of £10,000 only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

Also see annual Allowance.

Money purchase pension

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 or somebody else on behalf of the individual make contributions to the plan. A plan is set up for the individual 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 plan.

O

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.

Overseas transfer allowance

The overseas transfer allowance is a limit set by HM Revenue & Customs on the value of pension benefits that can be transferred overseas to a qualifying recognised overseas pension scheme. Where the total of an individual’s transfers from UK registered pension schemes to qualifying recognised overseas pension scheme exceeds their overseas transfer allowance, the excess will be subject to a 25% overseas transfer charge. For most people, their overseas transfer allowance is £1,073,100.

P

Pension age

Age 55 (increasing to age 57 from 6 April 2028) is the earliest you can normally take your pension savings.

Some individuals may still be able to take their benefits before age 55 after the pension age increases to 57. Before 6 April 2006 there were several occupations where an individual could take their benefits from a personal pension or retirement annuity contracts before the age of 50. Fifty was the normal minimum pension age at that time for these types of plans.

Details of these occupations can be found in HM Revenue & Customs pension tax manual. There are still occupational pension schemes that have a normal retirement age below age 55, these schemes relate to the Armed Forces, Police and Fire Brigade. Certain conditions do apply. They are not affected by the increase in pension age.

Individuals taking their benefits due to ill health, severe ill-health and serious ill-health can do this before they reach age 55 or 57 from 6 April 2028, but there are conditions for doing so.

Pension commencement lump sum

Normally an individual can take up to 25% of their 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.

Pension drawdown

Also known as ‘income drawdown’ or ‘flexible retirement income product’. Using pension drawdown allows somebody to use their pension savings to provide a retirement income. The level of income isn’t guaranteed, but they have the flexibility to make changes to how much they take. An individual can use their 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 an individual needs for the rest of their life.

Protected tax-free cash

Tax-free cash (pension commencement lump sum) is the money somebody can take as a tax-free lump sum when they begin to take their pension savings. It’s usually 25% of the fund value.

Some individuals in older workplace (occupational) pension schemes may have a right to more than 25% tax-free cash.  This higher amount may be lost if the individual 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

R

Regulated financial adviser

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 an individual’s overall financial and personal circumstances. If the advice they give turns out to be unsuitable an individual can make a complaint and if necessary, take their 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.

Individuals should always check that to see that an adviser is on the Financial Conduct Authority’s Financial Services Register.

S

State Pension age

The age a person has to reach to be able to take their State Pension. It’s possible for somebody to check their state pension age by using the government's State Pension age tool.

T

Tapered annual allowance

The annual allowance of £60,000 is reduced or ‘tapered’ if an individual’s total income is over £200,000.

This is complicated, so if total annual taxable income, salary and investment returns, is around or above £200,000 an individual should speak to their financial adviser to find out whether tapered annual allowance applies to them.  If it does, the annual allowance that applies 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.

Tax-free cash

See ‘Pension commencement lump sum’

U

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 usually be paid tax-free and the rest will be taxed at your highest tax rate.

V

Value protection

Value protection is an option somebody can choose when they buy an annuity.

On 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 somebody dies before age 75, the lump sum is paid tax free, otherwise it’s taxed at the beneficiary’s highest rate.

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