A-Z Pensions Glossary
Some pension terms can be a bit technical – or a bit vague. Don’t worry, we’re here to help...
A
Annuity
An annuity is a financial product usually designed to provide you with a guaranteed income for the rest of your life (this is known as a lifetime annuity). Annuities are available from insurance companies and are usually bought using the money you’ve built up in your pension plan.
Annual Allowance
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. In the tax year 2023-2024 the Annual Allowance is £60,000 for most people.
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.
If your taxable earnings in the year are over £100,000, you may find your annual allowance is gradually reduced or “tapered”.
Automatic enrolment
A government initiative whereby millions of employees are enrolled into workplace pension schemes. If you’re eligible, your employer will automatically put you in a scheme unless you opt out. They’ll pay money in to help you save for your retirement, and you contribute too.
B
Beneficiary
Someone who benefits from a will, a trust, a life insurance policy or death benefits from a pension or annuity.
C
Charges
There are certain charges you have to pay when you have a pension, which are usually taken straight from your pension pot. For example, you’ll normally have to pay a charge to your pension provider and you may also have to pay additional charges for investing in certain investment funds.
Contributions
When money gets paid into your pension, it’s often referred to as ‘making a contribution’ or ‘making a pension contribution’. You can make contributions yourself, and so can your employer if you’re in a workplace pension, or a personal pension that allows this.
D
Defined benefit pension
A type of pension that pays a guaranteed retirement income based on your salary and how long you’ve worked for your employer. Final salary pension schemes are probably the best-known type of defined benefit pension scheme – but many have now been closed and are generally now only available from public sector or older workplace pension schemes.
* We do not provide advice on Defined Benefit Pensions.
Defined contribution pension
With this type of pension, you build up a pension pot based on contributions from you and/or your employer, plus any investment returns. You then use this pension pot to provide benefits when you retire, normally through an annuity, income drawdown, cash withdrawals or a combination of these. The way your pension pot is invested means its value can go down as well as up and you may get back less than has been paid in.
E
Enhanced annuity
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.
You should check that your health and lifestyle information is being taken into account when obtaining quotes for an annuity. Your income will never go down as a result of the information you provide, but it could increase.
G
Guaranteed Annuity Rate (GAR)
A valuable guaranteed income offered by your own pension scheme or provider if you take a lifetime annuity with them. Likely to be hard to match by shopping around, and could see you lose out if you opt for flexi income drawdown (see income drawdown)
I
Income drawdown
Sometimes referred to as flexi-access drawdown (or simply ‘flexible income’), this is essentially a way of taking the money you’ve built up directly from your pension pot, as and when you need it. The income isn’t guaranteed for life but you have the flexibility to make changes to how much you take or to later switch your remaining pension pot to a more secure retirement income product. The money you haven’t yet taken out stays invested, so it has the potential to fall as well as rise in value. Overall you could get back more than money than you would from an annuity, but your money could also run out during your lifetime, leaving you with no further income. However, should you die with money still invested, this can be passed to your chosen beneficiary outside of your estate.
Investment funds
The money you pay into your pension is invested in one or more investment funds. Investment funds invest in a range of assets (such as shares, bonds and property) with the aim of achieving certain objectives, such as investment growth.
L
Lifetime Allowance
Lifetime Allowance used to be the highest value of pension savings that you could draw without paying tax. During the Spring Budget announcement of 2023, the Government has abolished the lifetime allowance and increased Pension tax limits. This measure was put in place to ensure that no-one has to face a Lifetime Allowance charge from April 2023 onwards.
M
Marginal tax rate
Your marginal tax rate is the highest rate of income tax you pay on each additional pound of income. Income tax rates are split into bands and if your income increases you could move into the next tax rate band. Find out more at: gov.uk/income-tax-rates.
Money Purchase Annual Allowance (MPAA)
If you start to take money from your defined contribution pension, this can trigger a lower Annual Allowance of £10,000 (2023/24) known as the Money Purchase Annual Allowance (MPAA). 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 entire pot as a lump sum or start to take ad-hoc lump sums from your pension pot
- if you put your pension pot money 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 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 pot into a flexi-access drawdown scheme but don’t take any income from it
- you cash in one or more small pension pots valued at less than £10,000. (Maximum of 3). The MPAA of £4,000 only applies to contributions to defined contribution pensions and not defined benefit pension schemes.
O
Open Market Option
If you are considering taking an income from your pension pot, then you don’t have to take it from your pension provider. You can shop around and move your pension pot to another provider. This is known as the ‘Open Market Option’. By shopping around you could get a higher income than your pension provider can offer or a type of income that is more suitable for your needs.
P
Pension Commencement Lump Sum (PCLS)
Many schemes allow you to take part of your pension as a lump sum. For defined contribution schemes, this is usually 25% of the pension pot and is tax-free. The provider of your scheme will tell you if this option is available.
Should you take any income or lump sums over this amount, the balance will be taxed as income at your marginal rate of tax.
It may also be possible to take tax-free cash from a defined benefit scheme, however this can impact the amount of annual pension income you receive.
Pension pot
Put simply, the total amount of money you have in your pension.
Pension tax relief
One of the biggest benefits of paying into a pension. For every 80p you pay in, the government gives an extra 20p in tax relief, boosting your contribution to £1. If you’re a higher or additional rate taxpayer, you may be able to claim even more tax relief through PAYE or your self-assessment tax return. If you’re paying into a workplace pension through ‘salary sacrifice’ or ‘salary exchange’ this will have a similar effect – the amount that goes straight into your pension won’t be taxed.
S
State Pension
A regular payment you can get from the government when you reach State Pension age. The amount you’ll get depends on your National Insurance record. You can find out how much you might get at gov.uk/check-state-pension.
State Pension age
The age at which you can start claiming your State Pension, if you're entitled to one. State Pension age can vary depending on your gender and when you were born. You can check yours at gov.uk/state-pension-age.
T
Tax-free cash sum
See Pension Commencement Lump Sum
U
Uncrystallised pension fund
A pension pot that hasn't been accessed for retirement income.
Uncrystallised funds pension lump sum (UFPLS)
One of the options available to individuals with a money purchase (defined contribution) pension pot.
You can take your pension pot as a one-off lump sum, or as a series of lump sums as and when you need. For each withdrawal the first 25% (a quarter) will be tax-free and the rest will be taxed at your highest tax rate.
Important note: As with all investments, the value of pensions can go down as well as up, and you may not get back as much as has been paid in. The information in this article is based on current tax rules, which can change. Your tax treatment depends on your individual circumstances.
