Pensions jargon buster

If you’re a higher earner, you'll have a tapered annual allowance. Your adjusted income is one of the measures used to work out this allowance. It’s your income (from employment, property, investments, etc) adjusted to include any money you or your employer have added to your pension pot minus any taxed lump sums or death benefits you’ve received.

The amount you can build up in your pension pots in a tax year before you have to pay tax on your pension contributions.

The charge taken to cover costs within your pension plan. It’s shown as a percentage (%) of your pension pot paid each year. 

An annuity is a financial product that gives you a guaranteed income for the rest of your life and can provide an income for someone when you die. Available from insurance companies, you would normally use the money you've built up in your pension plan to buy an annuity.

A government initiative whereby millions of employees are enrolled into workplace pension schemes. If you’re eligible, your employer will automatically put you in a scheme unless you opt out. They’ll pay money in to help you save for your retirement, and you contribute too.

This lets you roll over your unused annual allowance for up to three tax years as long as you are in a UK pension scheme during those years.  This only protects you from the annual allowance charge. For contributions not paid by an employer, tax relief is limited to your earnings in the tax year the contribution is paid - there is no carry forward available for tax relief. You can't carry forward any unused money purchase annual allowance (MPAA) between tax years. See below for our explanation of MPAA.

There are certain charges you have to pay when you have a pension, which are usually taken straight from your pension pot. For example, you’ll normally have to pay a charge to your pension provider and you may also have to pay additional charges for investing in certain investment funds.

This is the money paid into your pension. You can make contributions, and so can your employer if you’re in a workplace pension or a personal pension that allows this.

Taking benefits from a pension scheme crystallises them. Normally, you’re entitled to take 25% of the amount you're crystallising as a tax-free cash sum. The rest of the amount you're crystallising (usually 75%) becomes crystallised pension benefits. You could take that as a single taxable payment alongside your tax-free lump sum or you can leave the crystallised funds in drawdown to give you a taxable income at a time you choose.

A lump sum taken from crystallised funds. The whole amount would be taxable as income.

The limit HMRC places on the value of tax-free lump sums which can be paid from pension schemes on your death. The remaining lump sum and death benefit available reduces each time you receive tax-free benefits during your lifetime, and with each tax-free lump sum paid following your death. Income tax is payable on amounts above that limit. Your personal lump sum death benefit allowance may be higher than the standard if you received one of the relevant forms of protection from HMRC. If this limit is likely to affect your beneficiaries, we recommend you or they get financial advice. You can find more information on these allowances at: gov.uk.

A type of pension that pays a guaranteed retirement income based on your salary and how long you’ve worked for your employer. It may also give you a lump sum when you retire. This may be on top of the income or may reduce it. Final salary pension schemes are probably the best-known type of defined benefit pension scheme – but many have now been closed.

Another type of defined benefit pension is the career average or career average earnings pension. This is based on your earnings over time with that employer rather than your salary at the time of your retirement.

Part of your pension benefit - lump sum and or taxable income - that you are required to pay to an ex-spouse or civil partner when you take your benefits. An earmarking order (also known as a pension attachment order) can be made as part of a settlement on divorce or dissolution of a civil partnership. These orders have mostly been replaced by pension sharing orders.

A tax code applied to the payment of benefits when HMRC has not provided an actual tax code. In most cases, this will lead to you paying too much tax. If you don't send the relevant form to reclaim the amount you're owed shortly after you receive your taxable payment, HMRC will eventually contact you to correct the position.

The individual or company that makes the decisions about where to invest money held within a fund.

Some pension plans had a guaranteed annuity rate written into the terms and conditions when they were set up. It sets the rate at which your pension pot will be converted into an annuity income, payable for the rest of your life. It could give a higher yearly income than today's rates. It is classed as a safeguarded benefit.

The income your workplace pension must pay you because some of your National Insurance contributions were paid into the scheme for a particular period, rather than to the government. This is usually for a defined benefit pension scheme (also known as a final salary scheme). This is classed as a safeguarded benefit. If you want to transfer this type of pension to us, we can only accept the equivalent cash value.

The money you pay into your pension is invested in one or more investment funds. These invest in a range of assets (such as shares, bonds and property) with the aim of achieving certain objectives, such as investment growth.

The value of investments can go down as well as up and you may get back less than invested.

This is how the value of an investment changes over time. Investments can increase in value to show positive returns or decrease in value which shows negative returns.

This is the possibility of an investment falling in value. As a rule, investments with the potential to deliver a higher rate of return carry a higher level of risk because they are also more likely to fall in value.

A letter that provides an adviser or another pension scheme your permission to receive details of your pension benefits. The letter will often name which pension plan to provide details on and who should receive the information.

The limit HMRC places on the amount of tax-free benefits you can take from pension schemes during your lifetime. Your allowance reduces each time you take tax-free benefits. Income tax is payable on amounts above that limit. Your personal lump sum allowance may be higher than the standard if you had one of the relevant forms of protection from HMRC. If this limit is likely to affect you, we recommend you get financial advice. You can find more information on these allowances at: gov.uk.

Your marginal tax rate is the highest rate of income tax you pay on each additional pound of income. Income tax rates are split into bands and if your income increases you could move into the next tax rate band. Find out more at: gov.uk.

The least amount you and your employer pay in to be a member of a workplace pension scheme. Your employer will let you know what contributions you and your employer will be paying when you join or they automatically enrol you.

A reduced annual allowance on the amount you can pay into your pension while still receiving tax relief. It kicks in when you take taxable money out of your pension pot for the first time. Everyone has an allowance that limits how much you can pay into your pension pot each year. But once you’ve started to take taxable money out of your pension, with a few exceptions, this allowance is replaced by the MPAA. Your pension provider will tell you if this applies to you. To find out more about the MPAA and pension tax relief, read our article.

The person, people, or organisation that you would like to receive your pension benefits should you die before taking them all.

Currently, you must be aged 55 or over to start taking money from your pension. Called the normal minimum pension age (NMPA), it’s set by the government. This will change to age 57 from 6 April 2028. The NMPA isn’t the same as your selected retirement age, which is the age you’ve chosen to retire. This can be any age later than the NMPA. To find out more about the NMPA, read our article all about it.

When you take your benefits, your pension scheme may allow you to cash in your pension pot and take all or part of it as a lump sum. You can take 25% of the lump sum tax free and you will pay tax on the rest at your marginal rate of tax. Your scheme provider will tell you if this option is available. You may be subject to a money purchase annual allowance if you take a lump sum payment. Your provider will tell you if this applies to you and what it means. Use our calculator to find out how much tax you'll pay when you withdraw a lump sum.

The total amount of money you have in your pension. You may have more than one pension pot.

An instruction from the courts that directs a pension scheme to transfer a portion of a person’s pension to the pension of an ex-spouse on divorce or your former civil partner following the dissolution of the civil partnership. In England, Wales and Northern Ireland, the amount is given as a percentage. In Scotland, it may also be a monetary amount. Once the order is carried out, the remaining pension benefits belong solely to the original pension plan owner. Pension sharing orders have largely replaced earmarking orders and pension attachment orders which create the earmarked pension we mention above.

One of the biggest benefits of paying into a pension. For every 80p you pay in, the government gives an extra 20p in tax relief, boosting your contribution to £1. If you’re a higher or additional rate taxpayer, you may be able to claim even more tax relief through PAYE or your self-assessment tax return. If you’re paying into a workplace pension through ‘salary sacrifice’ or ‘salary exchange’ this will have a similar effect – the amount that goes straight into your pension won’t be taxed. If you’d like to learn more, read our article on pension tax relief here. 

This is where you move your pension from one provider to another. If you have a defined contribution pension where you’ve built up some money, let’s say your last employer’s workplace pension or a personal pension, you can usually move it to another provider. If your pension is a defined benefit pension you can still transfer it, but you must take regulated advice.

If you’re not employed and don’t have a workplace pension, you can set up your own pension. As a type of defined contribution pension, a personal pension is a tax-efficient way to save for retirement. You might be enrolled into a workplace personal pension while employed. This will belong to you too, but your employer will pay into it.

A statement based on various assumptions showing what your pension could be worth at a date in the future.

A right to take pension benefits earlier than the normal minimum pension age (currently age 55, but rising to age 57 from 6 April 2028).

Sometimes known as salary exchange, salary sacrifice is an arrangement between you and your employer in which you agree to a reduction in your salary or bonus in return for a benefit - such as a pension contribution from your employer - which matches the salary/bonus you gave up.

A personal pension that normally offers you a wide range of investment options.

The age at which you can start claiming your State Pension, if you're entitled to one. State Pension age can vary depending on your gender and when you were born. You can check yours at gov.uk.

Each year, there’s a limit to how much you and your employer can pay into your pension before having to pay a tax charge. It may go down if you earn more than the threshold income. This is called the tapered annual allowance. To find out how to work out how this affects you, visit gov.uk.

Each time you take your retirement benefits, you can usually take up to 25% of the amount of your uncrystallised pension you are taking as a tax-free lump sum. You'll pay tax at your marginal rate on any other retirement income, whether from an annuity, income drawdown or cash withdrawals. It may also be possible to take tax-free cash from a defined benefit scheme. This is based on current tax rules, which can change. 

This is a way of taking all or part of your pension fund as a single payment. You'll get the first 25% tax free but you'll pay tax on the remaining 75% at your marginal rate of income tax.

Pension savings are uncrystallised as you build them up. They stay like this until you decide how to take them - whether as a lump sum or as income - and they are converted into your chosen form of benefits.

Some pensions have valuable benefits that don’t generally exist in more modern pension schemes. These can include guarantees or an entitlement to take more than 25% of your pension tax free. Other benefits could include loyalty bonuses, death benefits, or earlier access to your pension. If your existing pension has benefits or guarantees that you’re relying on, you may lose these if you transfer to a different pension.

An investment fund that is managed to smooth returns over time. The fund will usually pay yearly bonuses based on the returns of the underlying investments and may also pay a final bonus. Typically, a with-profits fund will include guarantees (which may be subject to certain conditions), such as a guarantee that bonuses once added can’t be lost. With-profits funds may also include guaranteed minimum growth rates or annuity rates. Many with-profits funds are closed to new joiners.

A pension provided by an employer for their employees. An employer will usually pay pension contributions into the scheme for each employee.