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.
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 2017/2018 tax year as £40,000, which includes your employer’s contributions as well as your own personal contributions. Your Annual Allowance will reduce 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 £150,000, your Annual Allowance will reduce by £1 for every £2 you earn over £150,000. the maximum reduction is £30,000.
You may have to pay tax charges if you exceed your Annual Allowance.
A type of retirement income that provides you with a regular income, either for life or for a set period.
See Tax-free cash sum.
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.
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.
See Defined Benefit Pension.
Flexi Access Drawdown (or ‘flexible income drawdown’)*
Referred to as 'flexible retirement income' in the Money Advice Service booklet. Allows you to use your pension pot to provide a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. The income isn't guaranteed for life but you have the flexibility to make changes to how much you take or to later switch to more secure retirement income products.
Replaced flexible drawdown and capped drawdown from April 2015, though existing user of capped drawdown can continue in that plan.
A valuable guaranteed income often offered by your own pension scheme or provider if you take a lifetime annuity with them. Hard to match by shopping around.
Guaranteed minimum payment 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.
See 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 example below shows the practical effect for the 2017-18 tax year. The income tax rates and bands for Scottish residents may be different
|Taxable income||Value of tax band||Tax rate for most people*|
|Up to £11,500||£11,500||No income tax payable (Personal Allowance)|
|Between £11,500 and £45,000||£33,500||20%|
|Between £45,001 and £150,000||£105,000||40%|
|Above £150,000||Unlimited 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 allowance is zero if your income is £123,000 or above.
The tax you pay depends on your individual circumstances and may change.
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.
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.
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 2017-18 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.
You could combine an income which has a guaranteed minimum payment period with an income payable to your dependant on death. In this case, you can choose whether their income starts as soon as you die (known as 'with overlap') or when the guaranteed minimum payment period ends (known as 'without overlap'). If you choose 'with overlap' your starting level of income will be lower.
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 £159.35 (for single people) or £243.25 (for couples). Use the Pension Credit calculator to work out how much you might get. More information is available on GOV.UK
If we pay your income in arrears rather than in advance, we can pay your income either; with proportion, which means when you die we'll pay an amount to cover the period from the previous payment to the date of death. If you choose 'with proportion' your starting level of income will be lower; or without proportion, which means that we won't make a payment to cover the period from the last payment to the date of death.
This is a regular payment from the Government that is paid when you reach State Pension Age. 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.
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’.
*Source: Money Advice Service: Your pension: it’s time to choose.
Pension Guidance and Advice
We strongly recommend that you seek guidance from the Government’s free and impartial service Pension Wise.
Find out more about guidance or advice
Remember, it’s important to shop around and get as much guidance and advice as you need before you make any decisions on what is best for you. Other providers may have more appropriate products or be able to offer a higher level of retirement income.