Pension jargon buster
Updated on 6 April 2023
Pensioners
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.
| 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 |
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. It is also known as the state second pension. 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, often for life. The annuity may stay the same or may increase over time – for example, in line with inflation. It can be in one name, or in joint names so that it can continue for the lifetime of your partner. |
| Auto-enrolment | Government rules that mean 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 in our employment section. |
| 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 at How do I cash in my small pension?. |
| Contracted out | This no longer applies 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 or perhaps to another dependant (a dependant’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. Also known as a money purchase scheme. |
| Final salary scheme | A type of defined benefit scheme. |
| Flexi-access | See flexible drawdown below. |
| Flexible drawdown | A scheme in which 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 £1,073,100 for 2022/23. 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 annual allowance | See Reduced annual allowance |
| Money purchase scheme | |
| National Insurance contributions (NIC) | NIC are paid on earned income up to state pension age, whether employed or self-employed, provided that earnings are of a certain level. These NIC 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 NIC. Read more about NIC in our tax basics section. See also What National Insurance do I pay after retirement?. |
| 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, sometimes a regular amount, paid to an individual from their pension scheme. Can also refer to the pension scheme itself. |
| 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. Usually 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/or 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. See our flexible pensions guidance for more information. |
| Relief at source scheme | A pension scheme where an individual’s pension pot automatically receives UK basic rate (20%) tax relief when they make a contribution out of taxed income (so, for example, a net contribution of £80 increases your pension pot by gross £100). The relief is also available for individuals who do not have enough income to pay tax, for gross contributions of up to £3,600 a year. |
| 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. The minimum age is set to increase from 55 to 57 in 2028. Retirement age is not the same as the state pension age, which you can read more about 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 government’s Moneyhelper website provides information on how to spot a pension 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. Also known as S2P, or the additional state pension. 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 is usually up to 25% of the value of the pension pot. Separate limits apply to defined benefit schemes and retirement annuities. |
| Tax relief | In the context of making a contribution into your pension scheme, tax relief can take many forms. For a contribution you make personally into a defined contribution scheme, this can either be under relief at source or a 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. See also: 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 or otherwise being treated as crystallised (for example on reaching age 75). |
| Uncrystallised Funds Pension Lump Sum (UFPLS) | The lump sum able to be taken from a pension scheme when no other benefits have yet been drawn. Up to 25% of such lump sums can be paid tax free. |
| Widow or widower's pension |
A pension paid to the bereaved spouse, civil partner or, possibly, unmarried partner of a pension scheme member. It can also refer to a former state benefit, which was replaced by Bereavement Allowance and then Bereavement Support Payment. If your spouse or civil partner died as a result of their service in the armed forces, you may be eligible for a War Widow(er) Pension. |
| Workplace pension | A pension scheme put in place by an employer. |
Tax guides
Introduction to the tax system How do I work out my tax? What income is taxable? What tax allowances am I entitled to? What tax rates apply to me? How is my tax collected? What if I cannot pay my tax bill? Do I need to complete a tax return? Self Assessment: understanding the basics What is Simple Assessment? How do I claim tax back? How do I claim back tax I have overpaid through PAYE on wages or pensions? How do I claim back tax if I complete a tax return? How do I claim back tax if I am taxed under the Construction Industry Scheme (CIS)? How do I claim back tax on savings income? How do I claim a marriage allowance refund? How do I claim back tax on a payment protection insurance (PPI) pay-out? Should I use a tax refund company? What is National Insurance? How do I get a National Insurance number? What are Specified Adult Childcare credits? What is Scottish income tax? What is devolution? Do I have to pay Scottish income tax? How does Scottish income tax work? What is Welsh income tax? Do I have to pay Welsh income tax? Do I have to join a pension scheme? Tax relief on your pension contributions HMRC digital services Enquiries, penalties, appeals, complaints and debt Enquiries How to survive an enquiry by HMRC Tax penalties Tax appeals Alternative Dispute Resolution How do I complain to HMRC? What if I cannot pay my tax bill? What if I have a tax credits overpayment?
Am I employed, self-employed, both or neither? Working through a limited company What is the national minimum wage? How do I work out my tax? What income is taxable? What tax allowances am I entitled to? What tax rates apply to me? How is my tax collected? How is tax collected on taxable state benefits? How do I check my coding notice? Do I need to complete a tax return? What tax do I pay on redundancy payments?Employment benefits and expenses What are benefits-in-kind? What payments and benefits are non taxable? What if I incur expenses in relation to my job? What travel expenses can I claim? What if I use my own car for business purposes? Payroll giving Allowances and expenses paid to armed forces personnel and deductions from their income Pensions and employees What is automatic enrolment for employees? What National Insurance do I pay as an employee? How do I repay my student loan? What if I do not pay enough tax? What if I pay too much tax? What if I work abroad temporarily? What if I am in the armed forces and work overseas? First time workers Apprenticeships
Am I employed, self-employed, both, or neither? How do I register for tax and National Insurance? What business records should I keep? Working out profits, losses and capital allowances When do I make Self Assessment payments and file my tax return? How do I pay tax on self-employed income? What tax allowances am I entitled to? What is the trading allowance? What National Insurance do I pay if I am self-employed? What is the Construction Industry Scheme (CIS)? Tax checks for taxi, private hire and scrap metal licences How do I work out my profits for universal credit? Do I have to pay VAT if I am self-employed? What is Making Tax Digital for VAT? Pensions and self-employment How do I repay my student loan if I am self-employed? Introduction to enquiries
Pension jargon buster Approaching retirement What is income? How do I work out my tax? What income is taxable? What tax allowances am I entitled to? What tax rates apply to me? How is my tax collected? How do I check my coding notice? Tax code problems on retirement What should I do if I have not paid enough tax? What tax do I pay on savings and dividend income? How do I claim any tax back? Do I need to complete a tax return? What National Insurance do I pay after retirement? What happens if I retire abroad? What is the tax position when I take money from my pension flexibly? How do I cash in my small pension? What tax do I pay on my state pension lump sum? What is state pension deferral?
Taxes on death: overview Dealing with the deceased's own tax affairs Tax on income and gains after death Death of a spouse or civil partner Joint property on death Pension and life assurance policies on death Income from a deceased's person's estate Inheritance tax reliefs and exemptions State benefits on death Getting help with bereavement and inheritance tax Bereavement jargon buster
