Pension jargon buster

Updated on 7 February 2019

Pensioners

Below we set out some of the words and phrases commonly used in connection with pensions and our explanation of what each term means. You can obtain further information about pensions on the websites of Pension Wise and the Pensions Regulator.

Accumulation

The period during which no withdrawals are taken from a pension fund. It is possible that contributions are no longer being paid, but this is the period during which the fund should be building up.

Active member

A term used to describe an individual who is still contributing to a pension scheme, often one set up by their employer.

Additional state pension

As its name implies, this is extra money that might be paid to individuals along with their state pension, depending on the National Insurance contributions they paid. It is only applicable to men born before 6 April 1951 and women born before 6 April 1953. It is paid automatically if it is due. You can read more about it on GOV.UK.

Additional voluntary contributions (AVCs) Extra contributions, above the minimum amount, made to a workplace pension scheme. See also FSAVCs. The pension arising must be taken at the same time as the main pension.
Administrator The person or company that looks after the day to day running of a pension scheme. The administrator is employed by the trustees of the scheme and reports to the members of the scheme.
Annual allowance This is the maximum amount an individual may save into a pension tax-efficiently in a year. You can read more about it on GOV.UK. You should also read the section on tax relief.
Annuity A product that gives you a guaranteed income for life. The annuity may stay the same or may increase over time, for example in line with inflation. It can also be in one name or joint so that it can continue for the lifetime of your partner.
Auto enrolment A government initiative that means you automatically join a pension scheme set up by your employer unless you opt out (decide not to join). Both you and your employer are required to make contributions to the scheme. There are minimum levels of contribution. You can read more about this on the website of the Pensions Advisory Service.
Commutation

This is giving up part or all of your pension in return for an immediate lump sum, part of which will be taxable. You can read more about commutation on our website. Only small workplace pension pots may now be commuted.

Contracted out This no longer applied from 6 April 2016. Before that members of company pension schemes could pay lower National Insurance contributions. This was called contracting out and resulted in no additional state pension being payable.
Contributions The amounts paid into the pension scheme. Contributions may be paid by an individual or their employer, for example, or both. Often employees pay them at a set percentage of their salary.
Decumulation The opposite of accumulation. The time when funds are being taken out of a pension scheme.
Death benefits The amounts that may be paid when a scheme member dies. This may include a lump sum death benefit and/or a pension to the individual’s spouse or partner (commonly called a widow’s pension) or perhaps to another dependent (a dependent’s pension). Some benefits may be tax-free whereas others will be liable to tax.
Deferred member A term used to describe an individual who is no longer an active member of the scheme, normally because they have left employment with the employer who set up that particular pension scheme.
Deferred state pension See state pension deferral.
Defined benefit scheme A pension scheme that pays a pension based on the number of years the employee was a member of the scheme and their salary (possibly averaged over a number of years) earned while they were an active member of the scheme.
Defined contribution scheme A pension scheme whose value, and therefore the amount it can eventually pay to you, is determined by the sums paid into it, whether by you, your employer or someone else and the subsequent investment value.
Final salary scheme A type of defined benefit scheme.
Flexi-access See flexible drawdown below.
Flexible drawdown A scheme whereby the proceeds of a pension pot are invested and the pensioner draws an income from the fund as desired.
FSAVCs Free Standing Additional Voluntary Contributions. These extra contributions are made to a money purchase scheme that is not part of the workplace pension scheme.
Lifetime allowance This is the maximum value of funds that may be accumulated as pension savings. For most people this is £1,030,000 for 2018/19. You can read more about it on GOV.UK
Lump sum A single payment of money. See also Tax free lump sum and Uncrystallised Fund Pension Lump Sum and Pension Commencement Lump Sum.
Member An individual who has rights under a pension scheme. They may be an active member, a deferred member or a pensioner.
Money purchase scheme A type of pension scheme where the pension that can be paid out is determined by contributions paid into the scheme and any investment growth.
National Insurance contributions (NIC) NICs are paid on earned income up to state pension age, whether employed or self-employed, provided that earnings are of a certain level. These NICs provide access to certain state benefits, most notably the state pension. The receipt of certain benefits, for example child benefit, may give National Insurance credits to the recipient so that it appears they have paid NICs. Read more about NIC in our Tax Basics section.
Net pay scheme A system where an individual’s tax on employment income is calculated after deducting pension contributions from income. This means the individual does not pay income tax on the money contributed to the pension.
Pension A sum of money, often regular, paid to an individual from their pension scheme.
Pensioner An individual who receives a pension.
Pension Commencement Lump Sum (PCLS) The lump sum able to be taken from a pension pot when a pension starts to be paid. Often 25% of the fund may be taken tax free.
Pension credit An income-related state benefit that is paid to qualifying people over state pension age. You can read more about it on GOV.UK.
Pension pot The value of the funds held on an individual’s behalf in a pension scheme. An individual may have more than one pension pot.
Pensions provider The company that holds your pension funds and pays your pension.
Personal pension A pension scheme to which an individual contributes, usually provided by an insurance company. A type of money purchase scheme.
Pension scheme A type of savings plan that helps you save money for later life. It benefits from favourable tax treatment.
Reduced annual allowance After withdrawing funds from a pension scheme, whether a lump sum, annuity, flexi-access or otherwise, there is a restriction on the amount that may be saved into a pension scheme in the future. You can read more on GOV.UK.
Relief at source scheme A pension scheme where an individual’s pension pot automatically receives UK basic rate tax relief at source when they make a contribution out of taxed income.
Retirement age The earliest age at which a pension may be paid to an individual. This can vary between different pension schemes, but is not normally before age 55 except in the case of ill-health or certain occupations such as deep-sea divers and ballet dancers. You can read about the state pension age on GOV.UK.
Retirement annuity A pension scheme to which an individual contributes. No new retirement annuity contracts were available after 1 July 1988. A type of money purchase scheme.
Scam

A scheme to trick an individual out of some of their money. The Financial Conduct Authority provides four things that might alert you to a scam in relation to your pension / steps you can take to protect yourself against scams:

  1. A contact is made without you requesting it. For example, a cold call or an unexpected letter or email.

  2. Check the credentials of the firm that is offering you advice on the Financial Conduct Authority website. If the firm is not authorised by the FCA, you may have no protection if things go wrong.

  3. If you are being pressured to make a decision quickly, that can point towards a scam.

  4. Make sure you take impartial advice. Remember if you use an adviser recommended by them, that may be part of the scam.

Self-invested personal pension (SIPP) This is a type of personal pension where the individual may choose the investments in which their funds are held, subject to them qualifying to be held in a pension scheme.
SERPS State Earnings Related Pension Scheme. An additional amount of state pension payable automatically if an individual reached state pension age before 6 April 2016 and was not a member of a contracted out pension scheme for the relevant dates (1978 to 2002). Later replaced by the State Second Pension.
Small Self Administered Scheme (SSAS) A type of workplace pension, often set up for senior employees of a company. It is a type of money purchase scheme.
State pension A weekly amount due when an individual, who has paid or been credited with sufficient National Insurance contributions, reaches state pension age. It has to be claimed or it is assumed that payment is to be deferred (delayed). The state pension is taxable.
State pension age The age at which an individual becomes entitled to the state pension. This can be checked on GOV.UK.
State pension deferral If state pension is not claimed immediately, it is assumed to be deferred (delayed). For individuals who reached state pension age before 6 April 2016 it was possible to receive either extra state pension when the pension started to be paid or instead to receive a lump sum payment. For individuals who reach state pension age after 5 April 2016, once the deferral period stops, it is only possible to receive an increased state pension.
State second pension An additional amount of state pension automatically payable to those who reached state pension age before 6 April 2016 and who were neither self-employed nor contracted out. It replaced SERPS.
Tax free lump sum A lump sum paid from a pension scheme that is not liable to tax. For a money purchase arrangement, this can be up to 25% of the value of the pension pot. Separate limits apply to defined benefit schemes and retirement annuities.
Tax relief The system whereby any tax already deducted from contributions to a pension scheme is repaid into the scheme (relief at source) or contributions are made before deduction of tax (net pay arrangement).
Transfer value The amount of money that an existing pension scheme administrator agrees to pay to a new pension scheme so that the first pension scheme now has no responsibility for paying a pension.  Make sure that the people advising on the transfer are reputable and qualified in pension transfers. Read also the section on scams.
Trustee

The person(s) responsible for looking after the pension scheme, ensuring it invests money appropriately, and operates within the pension scheme rules. They may delegate the day-to-day working of the scheme to an administrator.

Uncrystallised

A pension scheme that has not yet had any withdrawals.

Uncrystallised Funds Pension Lump Sum The lump sum able to be taken from a pension scheme when no other benefits have yet been drawn.
Widow's pension

A pension paid to the bereaved spouse, civil partner or, possibly, unmarried partner of a pension scheme member.

Workplace pension A pension scheme put in place by an employer.


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