Pension glossary

Annual Allowance: An upper limit placed on the total value of contributions that can be paid into your pension scheme in any one year and benefit from tax relief. The limit for the tax year 2017/18, set by HMRC, is £40K and includes your employer’s contributions as well as your own personal contributions. It may be tapered down to maximum of £10K for higher earners.

Annuity: Can be bought with the funds from your pension scheme. The annuity provider agrees to pay you a pension income for the rest of your life.

Contributions: Payments made by an individual or their employer to a pension scheme, to build up the pension rights or funds of an individual.

Defined Benefit (DB) Scheme or Final Salary Pension: A pension scheme where benefits are based on length of service and pensionable earnings in the years leading up to retirement. These schemes are established by employers and are often referred to as defined benefit schemes.

Defined Contribution (DC) Scheme or Money Purchase Scheme: A scheme in which a member’s benefits are determined by the value of the pension fund at retirement. The fund, in turn, is determined by the contributions paid into it in respect of that member, and any investment returns.

Death Benefits: The amount paid from the pension plan to the member’s beneficiaries upon death.

Dependent: A family member who relies on another for financial support, ie a spouse or children under age 21.

Enhanced Rates: Improved rates offered to a customer on the purchase of an annuity on the basis of reduced life expectancy in the opinion of the provider.

Financial Adviser: An individual or company authorised by the Financial Conduct Authority (FCA) to provide advice on financial products and services in the UK. An independent financial adviser (IFA) is authorised to provide advice for all products and services on the market, while a tied agent may only provide advice on the products and services of the company which he or she works for.

Financial Conduct Authority (FCA): The Financial Conduct Authority is responsible for regulating the financial services industry in the UK. The FCA website provides information and advice for consumers for a range of financial products and services, including pension annuities.

Flexible Access Drawdown: A form of drawdown which allows you to take an unlimited amount of income or lump sums from a pension fund, while continuing to benefit from any investment growth on the remaining fund.

Group Personal Pension: An arrangement made for an organisation’s employees to participate in personal pension schemes with the same pension provider. Each member has a separate pension policy contract with the pension provider.

Her Majesty’s Revenue & Customs (HMRC): The part of the UK Government responsible for collecting tax.

Income Drawdown: An alternative to buying an annuity, where you receive income directly from your pension fund.

Lifetime Allowance (LTA): An upper limit placed on individuals’ maximum retirement benefits by HMRC. Benefits that exceed the allowance will incur a tax charge. The lifetime allowance for the tax year 2017/18 is £1m.

Personal Pension: A type of defined-contribution pension launched in 1998 to encourage more people to save for their retirement, including self-employed people.

Plan Retirement Date: The retirement date as shown in your retirement illustration. Also known as NRD – normal retirement date.

Retail Prices Index (RPI): The primary measure of inflation in the UK, compiled by the Office of National Statistics. The index tracks the prices of a representative ‘basket’ of (retail) goods and services on a monthly basis.

Self-Invested Personal Pensions (SIPP): A type of personal pension which allows more flexibility with the choice of investments. Via an SIPP you can invest in a large range of investments, including commercial properties, unquoted shares, futures and options.

Stakeholder Pension: A type of personal pension scheme where management charges can’t be more than 1.5% of the fund’s value for the first 10 years and 1% after that.

Tax-Free Lump Sum: A sum of money available to pension scheme members at retirement in exchange for a reduction in pension payments. It is currently paid free of tax.

Transfer Value: The amount of money which a scheme will pay to another pension arrangement in lieu of benefits which have accrued to a member. Sometimes referred to as a CETV (cash equivalent transfer value).

Workplace Pension: A pension scheme set up by an employer to provide his employees with retirement benefits. With the auto-enrolment regulation, all employers must provide a workplace pension into which they will contribute.