Jargon buster

While we all try to be as clear as possible, sometimes it can feel like financial services in particular are speaking a different language.

So while we've simplified this site as best we can, if you do get stuck, this jargon buster should help explain the most commonly used terms.

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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 2020/21 tax year as £40,000, which includes your personal contributions, any contributions by your employer and any tax relief on those contributions, across all of your pension savings. Your Annual Allowance will go down to £4,000 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.

If you haven't accessed your benefits flexibly and earn more than £240,000, your Annual Allowance will reduce by £1 for every £2 you earn over £240,000. The maximum reduction is £36,000.

You may have to pay tax charges if you exceed your Annual Allowance.

Annuity

A retirement product that provides you with a regular, guaranteed income, either for life or for a set period.

Cash-Out Retirement Plan

A fixed-term contract that pays a fixed regular income over a term of between 3 and 25 years.

Defined benefit pension

This pays a retirement income based on your salary and how long you have worked for your employer. They include ‘final salary’ and ‘career average’ pension schemes, and are generally only available from public sector or older workplace pension schemes.

Defined contribution pension

A pension savings product that builds up a pot of money to use for your retirement. It can be based on contributions from you and/or your employer, or a third party. Includes workplace, personal and stakeholder pensions.

Enhanced income

If you have certain medical conditions or lifestyle factors, then it could mean that you qualify for enhanced income; this means you could get more income from your annuity every year.

To be considered for enhanced income, you’ll need to answer some questions about your health. We may contact your doctor to request a report about your medical condition(s). The conditions for enhanced income vary between different providers. If one provider doesn't offer an enhancement, don't assume that will be the case for all providers.

Final salary pension

Please see Defined benefit pension.

Financially dependent

To rely, either fully or partially, on another person's finances. An unmarried partner must prove financial dependence before they receive a dependant's pension (if this option was selected when buying the annuity).

Fixed Term Retirement Plan

A fixed-term contract that pays a fixed regular income over a term of between 3 and 25 years, with a lump sum at the end.

Guaranteed Annuity Rate (GAR)

A valuable guaranteed income often offered by your own pension scheme or provider if you take a lifetime annuity with them; it’s usually at a competitive rate which may be hard to match by shopping around.

Guaranteed Minimum Payment Period or Guaranteed Period

A lifetime annuity will pay you your income for as long as you live. However, you can choose to guarantee that your income is paid for a minimum period from the date your annuity starts. This means that if you die during your chosen period, we’ll continue to pay your income to your estate or any other person you specify until the end of your chosen period.

Income tax rates and bands

Income Tax is split into bands and you pay different rates (20%, 40% and 45%) based on these bands. Your pension income is added to your other earnings and then taxed according to which tax band it falls into. If it pushes your overall income into a new tax band, you may pay tax on it at more than one rate.

The table below shows the tax rates and bands for the 2020/21 tax year. Tax treatment depends on each individual's circumstances and may change in the future.

If you live in Scotland or Wales you may have a different income tax rate or band.

Income tax rates 2018/19
Taxable income Tax rate for most people
Up to £12,500 No income tax payable (Personal Allowance)
Between £12,501 to £50,000 20%
Between £50,001 to £150,000 40%
Above £150,000 45%

Where your total income is more than £100,000, your Personal Allowance goes down by £1 for every £2 that your income is above £100,000. This means your Personal Allowance is zero if your income is £125,000 or above.

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.

Joint life annuity

Some annuities will give you the option to choose an income for life just for you, or an income for life that continues to make payments to a nominated dependant or beneficiary after you die. This is called a joint life annuity. Choosing this option may reduce the income that you receive.

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 2020/21 the Lifetime Allowance is £1,073,100

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.

Lifetime annuity

A lifetime annuity is a way of using your pension pot to provide regular income that is guaranteed to continue for the rest of your life.

Depending on the provider and the product you choose, there may be different features that you can select. The choices you make will affect how much income you get.

Money purchase pension

Please see Defined contribution pension.

Pension Annuity

A lifetime annuity that will pay you a regular income for the rest of your life.

Proportion

A partial income payment for the period between the latest pension instalment and death of the annuitant, for annuities paid in arrears. 'With proportion' means that this partial payment will be made, 'without proportion' means it will not.

Tax-free lump sum

The amount of cash that you can take at retirement tax-free. It's usually up to 25% of your pension pot, and is also known as 'tax-free cash', 'pension commencement lump sum' or 'cash lump sum'.