While we all try to be as clear as possible, sometimes it can feel like pension providers are speaking a different language.

We’ve simplified this site as best we can, but if you get stuck, this jargon buster should help explain the most commonly used terms.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Annual allowance

This is an upper limit on the total value of contributions that can be paid to your pension scheme(s) in any one year and benefit from tax relief. HM Revenue & Customs has set the limit for the 2016/2017 tax year as £40,000, which includes your employer’s contributions as well as your own personal contributions. Your Annual Allowance will reduce to £10,000 if you’ve flexibly accessed any of your pension benefits.  This is known as the Money Purchase Annual Allowance. Your pension provider(s) will confirm if the Money Purchase Annual Allowance applies to you.

Additionally, if you earn more than £150,000, your Annual Allowance will reduce by £1 for every £2 that you earn over £150,000. The maximum reduction is £30,000, which means your Annual Allowance cannot be less than £10,000.

Tax charges may arise if you exceed your Annual Allowance.

Annuity*

A type of retirement income that provides you with a regular payment, usually for life.

Cash lump sum

See Tax-free cash sum.

Defined Benefit Pension*

Pays a retirement income based on your salary and how long you have worked for your employer. Defined benefit pensions include ‘final salary’ and ‘career average’ pension schemes. Generally only available from public sector or older workplace pension schemes.

Defined Contribution Pension

Builds up a pot to pay you a retirement income based on contributions from you and/or your employer, or a third party. Includes workplace, personal and stakeholder pensions.

Enhanced pension annuity

A higher income given on pension annuity plans where you or your partner have certain lifestyle health risks, or have been diagnosed with a more serious medical condition(s) that meets our enhanced requirements.

To be considered for an enhanced rate you’ll need to answer some questions about your health and we may also contact your doctor to request a report about your medical condition(s). The medical conditions and lifestyle health risks considered for enhanced Pension Annuities are different for different providers. So, even if you do or don't qualify for extra income with us another provider could offer you more.

Final Salary Pension

See Defined Benefit Pension.

Flexi Access Drawdown (or ‘flexible income drawdown’)*

Allows you to use your pension pot to provide regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. Replaced flexible drawdown and capped drawdown from April 2015, though existing users of capped drawdown can continue in that plan.

Guaranteed Annuity Rate (GAR)*

A competitive guaranteed income offered by some pension schemes if you take a lifetime annuity out with them – often hard to match if shopping around.

Highest tax rate

See Marginal rate of tax.

Back to top

Inflation

The rate of increase in prices for goods and services. There are a number of different measures of inflation in use but the most frequently quoted and most significant ones are the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The inflation rates are expressed as percentages for example, if CPI is 3%, this means that on average, the price of products and services we buy is 3% higher than a year earlier.

Income drawdown

Allows you to draw an income from your pension scheme while leaving the pot invested. Referred to as flexi access drawdown under new rules from April 2015.

Back to top

Lifetime Allowance

There are no restrictions on how much income you can receive. However, if the total value of your pension savings exceeds your ‘Lifetime Allowance’, as set by the Government, the excess will be subject to an additional charge payable to HMRC. For the tax year 2016-2017 the Lifetime Allowance is £1 million.

If you exceed the Lifetime Allowance you pay a charge on the excess amount at 55% if taking the pension as a lump sum or at 25% if you take it as income. The same savings aren’t assessed twice – so if you put £2 million into drawdown this will have been tested and the excess taxed at that time and no further Lifetime Allowance charge is due.

If you die leaving untouched pension savings that exceed the Lifetime Allowance – and they have not already been assessed against it – then your nominated beneficiary will be liable for the extra charges on the amount that exceeds the Lifetime Allowance.

The tax you pay depends on your individual circumstances and may change.

Marginal rate of tax (also referred to as your highest rate of tax)

Income tax is split into marginal bands and you pay different rates (20%, 40% and 45%) on earnings that fall into each band. For the tax year 2016-2017 any earnings below £11,000 attract no tax; earnings between £11,000 and £43,000 you pay 20%; earnings between £43,001 and £150,000 you pay 40% and earnings over £150,000 you pay 45%.

The example below, based on an example from The Money Advice Service, shows how pension income can push you into a new tax bracket when added to your other earnings. It assumes earnings of £30,000 and a taxable pension income of £15,000. Therefore total taxable income (earnings + pension) is £45,000.

HOW THE TAX IS BROKEN DOWN AND CALCULATED
First £11,000 No tax
  • First part of the £30,000 (non-pension) earnings 
Next £32,000 taxed at 20% £6,400
  • £19,000 comes from the remaining non-pension earnings (£30,000 less £11,000 = £19,000)
  • The remaining £13,000 comes from part of the £15,000 taxable pension income
Final £2,000 taxed at 40%  £800
  •  Comes from the remaining taxable pension pot income (£15,000 less £13,000)
 Total tax paid  £7,200  
THE TAX PAID ON THE PENSION INCOME PART OF TOTAL TAXABLE INCOME  
£13,000 taxed at 20%  £2,600
£2,000 taxed at 40%  £800
Total tax on pension income  £3,400

 
The tax you pay depends on your individual circumstances and may change.

Money Purchase Pension

See Defined Contribution Pension.

Back to top

Pension Credits**

Pension Credit is an income-related benefit intended to top up any State Pension you may be getting. Guarantee Credit tops up your weekly income if it's below £151.20 (for single people) or £230.85 (for couples). Use the Pension Credit calculator to work out how much you might get. More information is available on GOV.UK

State Pension

This is a regular payment from the Government that is paid to men at 65 and women between 60 and 65. The amount payable depends on when you retire and the number of years of qualifying National Insurance Contributions (NICs) you have paid or been credited.

Tax-free cash sum*

An amount of cash set by law that you can take at retirement free of tax. It’s usually up to a quarter (25%) of your pension pot. Sometimes simply referred to as ‘tax-free cash’ or ‘cash lump sum’.

Back to top

*Source: Money Advice Service: Your pension: it’s time to choose.

**Source: GOV.UK

Your next steps

Or move on to the next section

Need to know which looks at the important questions you will need to have considered before making any decisions