Pensions Glossary

The pensions landscape is constantly changing, with new regulation being introduced every year, and lots of jargon to contend with. To help you navigate this, we've compiled a glossary of terms.

The maximum an individual can pay into all of their pension plans in any one tax year and receive tax relief. The standard Annual Allowance is £40,000, however some people with earnings over £110,000 will have a reduced Annual Allowance.

Since April 2016 anyone with earnings over £150,000 will see their Annual Allowance reduced by £1 for every £2 of earnings over £150,000 they have; the minimum Annual Allowance will be £10,000. The definition of earnings for this purpose includes any pension contributions you or your employer make.

The annual fee that is deducted from a fund to cover the costs of managing it. It is typically expressed as a percentage of the value of the fund.

When you retire you can use your pension fund to buy an annuity from an insurance company. This means exchanging all or part of your pension fund for a regular, guaranteed income. The income is usually paid for life, but you can opt to buy short term annuities. For more information about annuities read our Knowledge Article

In order to ensure people are saving for their retirement the government has introduced automatic enrolment. This means employers must enrol workers into a pension scheme if they:

  • Are aged between 22 and State Pension age
  • Earn more than £10,000 a year
  • Work in the UK

You can opt-out of your employers scheme, but you may give up the contributions they are making on your behalf by doing so.

The regular payment from the government that you get when you reach State Pension Age. The most you can currently get is £119.30 per week (if State pension age reached before 6/4/2016) or £155.65 (if State pension age reached after 5/4/2016).

It will increase every year by whichever is the highest from the following:

  • Earnings – the average % growth in wages
  • Prices – the % growth in prices measured by the Consumer Prices Index (CPI)
  • 2.5%

You currently need have 30 years of National Insurance contributions (or credits) to qualify for the full Basic State Pension, but this increases to 35 years from April 2019.

The Basic State Pension is subject to political change, so you should ensure you have other savings to help you in retirement.

You need to nominate a beneficiary for your pension plan. This is the person or persons you would like to receive your fund in the event of your death. This is usually done by completing an Expression of Wish form.

This means the money you draw out of your pension, either as a lump sum or a regular income. The process if often referred to as drawing benefits.

If you haven’t used your full Annual Allowance in previous years, you can carry forward the unused amount to the next tax year. You can carry forward up to 3 previous years’ unused allowance. In order to receive tax relief on your total contribution it cannot exceed your gross annual earnings.

Here’s an example of how this works:

Josh has made the following pension contributions over the last tax years:

Year Contribution Annual Allowance Amount Carried Forward
2013/14 £40,000 £50,000 £10,000
2014/15 £30,000 £50,000 £20,000
2015/16 £50,000 £50,000 £0

From April 2011 to April 2015, the Annual Allowance was £50,000. From 6th April 2015 it reduced to £40,000, but you can carry forward unused contributions based on the Annual Allowance that prevailed at the time.

Josh has £30,000 of carried forward annual allowance plus his 2016/17 allowance of £40,000. He can therefore contribute up to £70,000. He decides to contribute £50,000 in order to use the carried forward allowance from 2013/14 before it is lost. As his earnings are £90,000 he receives tax relief on this amount.

That part of a pension fund from which benefits have been, or are being taken. If you take tax free cash or any income from your fund it is referred to as crystallised.

The pension you receive from a Defined Benefit (DB) scheme is not linked to the contributions or the fund value, but is based on a proportion of your salary. This type of scheme is often called a Final Salary pension. It’s not usually a good idea to transfer your benefits from a DB scheme as you are unlikely to achieve the same amount of pension income.

The pension you receive from a Defined Contribution scheme depend on the contributions you make and the value of your fund when you retire. Also called a money purchase scheme.

Entitlement to more than 25% of your fund as a tax free lump sum. If you have this benefit you should seek full advice before proceeding with a transfer.

This is a type of Occupational Money Purchase Pension set up by an employer before 2006, normally for Directors or Senior Executives. If you have this type of pension you should seek full advice before proceeding.

You use this to let your pension provider know who you would like to receive your pension fund if you die

See Defined Benefit Scheme

A way to take a lump sum and / or an income directly from a pension fund, whilst leaving the balance of the fund invested. Prior to April 2015, you could only set amounts out of your pension each year using Income Drawdown. This no longer applies, so once you reach age 55 you can withdraw as much as you like from your pension. 25% of the fund can be taken as a tax free lump sum, but the rest is taxable. If you take a large withdrawal you could therefore pay a significant amount in tax. Aside from tax, it’s important to remember that your pension is supposed to provide income throughout your life. For a list of things to consider before taking money out of your pension click here (link to 10 things to consider before cashing in your pension)

If you make a personal contribution to your pension, the government will boost your contribution by giving you tax relief. The net contribution is the amount you pay to the pension provider. The government adds another 20%. The combined amount is the gross contribution.

If you pay tax at 40% or 45% you can claim additional tax relief when you complete your annual Self-Assessment Tax Return.

Here’s an example of how this works:

Jenny earns £25,000 every year and decides to save into a pension plan.

  • Her net contribution is £80 each month via direct debit
  • The pension company claim an additional £20 each month from the government
  • The gross contribution is £100 each month

Clare earns £80,000 every year and also decides to save into a pension plan.

  • Her net contribution is £150 each month
  • The pension company claim an additional £37.50 each month from the government
  • The gross contribution is £187.50
  • Clare is a Higher Rate Taxpayer so she can claim an extra 20% tax relief on her annual contribution
  • The annual gross contribution is £2,250 (12 x £187.50)
  • She therefore reduces her tax payment by £450 (£2,250 x 20%)

A collection of personal pension plans provided by an employer for their employees

A policy that converts your pension fund into an income that is paid for the rest of your life. The payments available from a Guaranteed Annuity rate is often much higher than you would currently get on the open market, so you should seek advice before transferring these policies. The guaranteed benefits are lost once the fund is moved.

If you were contracted out of the State Second Pension through a final salary pension scheme, some of your benefits will be Guaranteed Minimum Pension. This is the right to a certain level of income which is revalued at pre-agreed rates. The revaluation increases the value of the benefit every year, which makes these pensions valuable in retirement.

You cannot transfer GMP rights to SimplyEQ and you should seek advice before proceeding with any pension transfer.

Taking an income from your pension, whilst leaving the balance invested of the fund invested. Prior to the introduction of Pension Freedoms there were limits on the amount if income you could draw each year. These no longer apply, but if your contract was set up prior to April 2015 you may need to switch to a Flex-Access Drawdown Plan if you want to take out more money. For more information about Income Drawdown read our Knowledge Article.

Contributions automatically increase each year by a fixed percentage or in line with an index e.g. National Average Earnings or Retail Price Index.

A 40% tax on the assets you leave to anyone other than your spouse or civil partner above a certain level (currently £325,000). In most circumstances pensions are exempt from Inheritance Tax. This makes pensions a good way to save.

A way of investing that automatically moves your money out of shares into government or corporate bonds and cash as you get towards retirement. This is done to try to ensure your pension is less affected by sudden movements in the stockmarket immediately before you retire.

This is the maximum amount of tax advantaged pension fund you can accumulate over your life. It is currently £1million. If you exceed this amount you will pay a tax charge.

If you think you might exceed the Lifetime Allowance you should speak to an adviser, as you might be able to claim protection against a Lifetime Allowance charge. For more information about this see our Knowledge Article

Your marginal rate of Income Tax is the highest rate you will personally pay. For example, if you earn £40,000 a year you will usually only pay Basic Rate Tax (20%). But if you made a taxable withdrawal of £20,000 from your pension fund, you would pay Higher Rate Tax on most of this. Your marginal rate of tax would therefore be 40%.

A pension that provides benefits based on the contributions made and the investment returns achieved.

A reduced annual allowance that applies to individuals who have flexibly accessed their pension benefits. If you have taken Flexible Benefits from your pension you will only be able to contribute £10,000 rather than £40,000.

This is a term for a scheme set up by an employer under a trust. These schemes are less common now as employers now typically set up Group Pensions where every member has their own fund. If you would like to transfer an Occupational Scheme you will need full advice.

This reflects the overall cost involved in running an investment, and shows the drag on performance caused by operational expenses associated with a fund. It is essentially the percentage of your investment holdings that will disappear in costs every year.

The tax free lump sum you can take from your pension fund. Typically, the maximum is 25% of the total pension fund. Some older pension contracts allow you to take more than 25% tax free cash. You should always check this before going ahead with a transfer.

A type of insurance that ensures regular contributions will continue to be credited to a pension if the policy holder is unable to work due to sickness or injury.

This is a type of defined contribution plan which is set up on an individual basis. The income you are able to draw from this plan in retirement will depend on the value of the funds at retirement.

You can take your pension benefits from age 55. You will be asked to state a nominated retirement age, but you are not committed to this. It just means the provider will send you the forms at the age you stated.

This means giving up some of your salary in exchange for a pension contribution made by your employer. Because you don’t pay any tax or National Insurance Contributions on the amount you give up, you can usually contribute more to your pension whilst still receiving the same after tax income.

This is a type of personal pension that allows you to invest in a more flexible range of investments. SIPPs can offer the freedom to manage your own investments but this flexibility can lead to higher charges.

This is an occupational scheme which is set up under trust with fewer than 12 members. The majority of schemes are set up for the executives of director controlled companies.

These are low cost pension plans with low minimum contribution levels designed to encourage retirement savings. It is quite common for employers to set up group stakeholder plans.

The State Earnings-Related Pension Scheme (SERPs) was the earnings linked additional state pension paid for through National Insurance Contributions. After 2002 its name was changed to the State Second Pension. Between 1988 and 2012 you could ‘contract out’ of SERPs so the additional National Insurance was paid to the Personal Pension of your choice.

These accumulated contributions used to be known as Protected Rights to distinguish them from your own or your employer’s contributions (Non Protected Rights). There were some differences in the way your spouse could inherit the benefits from Protected Rights. These have now been abolished. If you were contracted out through a Final Salary Scheme you accumulated Guaranteed Minimum Pension.

From 2016 the State Second Pension will be abolished in favour of a flat rate Basic State Pension.

The state pension age has historically been 60 for women and 65 for men. To ensure equality, the state pension age for women will increase to 65 between 2012 and 2018. It will subsequently rise to 66 by 2020 for both men and women, and then 67 between 2026 and 2028.

This represents the total you will pay for services including the OCF.

Much like the OCF, it provides a more complete picture of the total annual costs involved in running an investment. Total costs may include various fees (purchase, redemption, auditing) and other expenses.

These are purchased for individuals by the trustees of an occupational scheme when the scheme is being closed (wound up)

That part of a pension fund from which no benefits have been taken.

A new way to access your pension fund as a single or series of lump sum payments (part tax-free, part taxable).

With Profit funds were designed to provide consistent returns to investors over the long term. They did this through the addition of an annual bonuses paid from the profit made by the fund managers. Once added, the bonus cannot be returned. Returns would be ‘smoothed’ by retaining profits made in good investment years to pay bonuses in poor years.

This worked well in the 1980’s and 1990’s and the bonuses paid were generous. However, when stockmarkets fell in the early part of this century fund managers found they could no longer pay bonuses at previous levels. The difficulties were compounded by the guarantees made to some policy holders in the form of guaranteed annuities or rates of return. In order to meet their obligations managers moved from risky equity investments to more secure government and corporate bonds. This further depressed returns.

When With Profit policyholders encash their investments they may find they are subject to a Market Value Adjustment. This is put in place to ensure the quoted value of the fund does not exceed the underlying value of their share of the fund’s assets and can be in the form of a bonus or reduction to the fund value.
Some With Profits funds have not paid any bonus at all for many years. If this is the case, your pension’s value is effectively being eroded by inflation each year. If you hold a With Profits fund you should receive full advice before transferring to ensure you are not disadvantaged.

The average investment charge of a portfolio given the relative weighting (allocation) of the underlying investment holdings.

For example, Rav has split his pension equally across four funds:

Fund Charge % Allocation Weighted Charge
UK Equity Fund 1.00% 25% 0.25%
UK Corporate Bond Fund 0.85% 25% 0.2125%
UK Property Fund 1.50% 25% 0.375%
International Equity Fund 1.20% 25% 0.300%
Total     1.1375%

The total weighted charge of his pension fund is therefore 1.1375% each year