Jargon Buster

Understand the words and phrases you might hear

When you’re arranging your annuity income, you are likely to be confronted with all kinds of jargon. At Retirement Line, we like to keep things simple and use ordinary words that everyone understands. But to help you with anything that you may have come across which you may not quite understand, our Jargon Buster explains what all these words and phrases mean.

A

Accrual Rate - The rate at which a final salary pension is earned. For example an accrual rate of 1/60ths means that for each year of service you earn 1/60th of your final pensionable earnings as a pension. Someone with 30 years' service will therefore earn 30/60ths (or one-half) of their final earnings as a pension.

Actuary - A professional person appointed by the Trustees of an occupational pension scheme to carry out valuations of the pension scheme and advise on funding issues.

Actuarial Reduction - A reduction applied to a pension, usually when the pension starts before the member’s normal retirement date, to reflect the fact that the pension is likely to be paid for a longer time.

Actuarial Valuation - A valuation of an occupational pension scheme by the scheme Actuary. These are usually carried out every three years.

Added Years - Additional years of pensionable service used in the calculation of a defined benefit pension or final salary scheme. These are usually provided for by the payment of Additional Voluntary Contributions.

Additional Voluntary Contributions (AVC) - Contributions you make to your occupational pension scheme over and above those you are required to make under the scheme rules in order to provide you with additional benefits.

Annual Allowance - The maximum contribution you can make into a pension arrangement in a particular year without incurring an additional tax charge.

Annuity - An insurance contract purchased with your pension fund to provide you with an income for life. (See also 'Purchased Life Annuity')

Annuity Rate - The annuity rate is what determines how much income you will receive from your pension savings when buying an annuity. The higher the rate, the more income you’ll receive from your annuity. The rate is a percentage and calculated by dividing the yearly annuity income by the funds used to purchase the annuity. It is influenced by the individual annuity provider’s base rate, your postcode and health and lifestyle factors, as well as any death benefits you choose.

Annuity Calculator - An annuity calculator is a tool that provides an estimate for how much income you could receive from your pension savings if you buy an annuity. In Retirement Line’s free annuity calculator, simply enter your age and pension pot size for an instant estimate of your potential annuity income.

Annuity Quote - An annuity quote is an offer from an annuity provider showing how much income they’ll pay from your pension pot. Unlike a calculator that can only estimate your income, a quote is precise and is tailored to your individual circumstances, including your location, health and lifestyle, product choices and so on. You have the right to shop around for the best quote before committing to an annuity.

Annuity Provider - An annuity provider is a company, typically an insurance firm, that offers annuities. They convert your pension savings into a regular income for life or a fixed period. Different providers offer different rates and products, so it’s important to compare annuities from leading providers before choosing one.

B

Basic State Pension - The basic level of pension you receive from the State, depending on the number of years in which you have made qualifying National Insurance contributions.

Benefit Crystallisation Event (BCE) - The point at which you use up part of your Lifetime Allowance. This could be when you take your tax free cash or start receiving an income from an annuity.

Blended Solution - You do not have to pick just one retirement solution with your pension fund. You could choose a combination of lifetime annuity, fixed term annuity, drawdown or UFPLS (see below).

C

Cash Equivalent Transfer Value (CETV) - The amount offered to a member of an occupational pension scheme who wants to transfer to another pension scheme.

Civil Partner - Those in a relationship who have entered into a Civil Partnership in accordance with the Civil Partnership Act 2004.

Commutation - The giving up of some of your pension in return for a lump sum (usually tax-free).

Contracting Out - The process whereby you forego entitlement to benefits from the Additional State Pension in return for lower National Insurance contributions, or your National Insurance contributions are redirected into your pension plan by the State.

Conventional Annuity - An insurance contract purchased with your pension fund to pay a known and guaranteed income for life.

D

Deferred Member - An occupational pension scheme member who has left service with a deferred pension.

Deferred Pension - The benefit awarded to a defined benefit, or final salary, scheme member who has left service early.

Defined Benefit - A type of occupational pension scheme, also known as a final salary scheme. The value of the pension is guaranteed and is defined as a percentage of your final salary. If your employer does not have enough in the pension pot to issue your full pension, perhaps due to poorly performing investments, they have to make up the difference.

Defined Contribution - A type of occupational pension scheme, also known as a money purchase plan. You and/or your employer contribute to the scheme, which is then invested. The value of the pension is based on the contributions paid and how well the investments have performed. Your pension value is not guaranteed as it partly depends on investment performance.

Drawdown Pension – Also known as 'Income Drawdown'. See 'Flexi-Access Drawdown' for description.

E

Early Retirement - A term used to describe the payment of pension and lump sum to a member before the member has reached normal retirement age.

Enhanced Annuity - Also referred to as an impaired annuity. An annuity paid on enhanced terms if you are in poor health or are taking medication to control various medical conditions. Conditions include, but are not exclusive to, high blood pressure, diabetes, heart condition, kidney failure, certain types of cancer, multiple sclerosis and chronic asthma. Lifestyle factors are also taken into including smoking, weight and even post code.

Escalating Annuity - With an escalating annuity, you will receive a lower starting annuity, but your income will increase every year by a fixed percentage e.g. 3% or 5% to help combat the effects of inflation. Alternatively, you can choose to have your annuity increase each year in line with the Retail Price Index (RPI).

Expression of Wish - A current or former scheme member can choose whom they would like to receive any death benefits payable from the Scheme.

F

Final Salary Scheme - A type of occupational pension scheme, also known as a defined benefit scheme. The value of the pension is guaranteed and is defined as a percentage of your final salary. If your employer does not have enough in the pension pot to issue your full pension, perhaps due to poorly performing investments, they have to make up the difference.

Free Standing Additional Voluntary Contributions (FSAVC) - This is a scheme that can be contributed to by a pension scheme member in addition and independent from your occupational pension scheme (i.e. the contributions are made to an outside pension provider, not in-house like AVCs).

Financial Ombudsman Service (FOS) - A public body set up by Parliament that considers complaints between consumers and financial firms.

Financial Conduct Authority (FCA) - An regulatory body formed as one of the successors to the Financial Services Authority (FSA) that is funded by and regulates the financial services business in the UK.

Financial Services Compensation Scheme (FSCS) - The FSCS is an independent body set up under the Financial Services and Markets Act 2000. It is the UK's compensation fund of last resort for customers of authorised financial services firms. They may pay compensation if a firm is unable, or likely to be unable, to pay claims against it, usually because it has stopped trading or has been declared in default.

Fixed Term Annuity - A temporary annuity that runs for a fixed term and allows an individual to draw an income directly from their pension fund, whilst deferring the purchase of a lifetime annuity.

Flexi-Access Drawdown - Also called drawdown pension or an unsecured pension. This allows you to draw a taxable income directly from your pension fund, enabling you to delay purchasing an annuity. You can also unlock the tax free cash from your pension plans without drawing any income. You retain ownership of the funds which continue to be invested in accordance with your wishes. This is considered a higher risk alternative to an annuity and usually to be considered by those with at least £50,000 of pension funds.

G

Government Actuaries Department (GAD) - A government department that provides actuarial advice and guidance to the government and public sector schemes.

Guaranteed Annuity Rate (GAR) - The option to buy an annuity from your existing pension provider at a pre-defined rate. This often applies to pension schemes written in the 1960s to mid-1980s.

Guaranteed Minimum Pension (GMP) - The benefit built up in a defined benefit scheme as a result of being contracted out of the Additional State Pension. GMP is the minimum amount that an occupational scheme has to provide for employees who were contracted out of the Additional State Pension between 6th April 1978 and 5th April 1997.

Guarantee Period - A period of up to 30 years running from the start date of the annuity, which ensures your annuity payments will continue in the event of your death up to the end of the guarantee period. For example, if you choose a five year guarantee and die after three years, your income will be paid to your estate for the remaining two years. Read more about Guarantee Period

H

HM Revenue And Customs (HMRC) -  A government department that handles the tax approval of pension schemes and taxation of contributions and benefits.

I

Immediate Vesting Personal Pension (IVPP) - Where one of more of your pension funds are transferred into a personal pension with your chosen annuity provider and is immediately used to purchase your annuity.

Impaired Life Annuity - Also referred to as an enhanced annuity. An annuity paid on enhanced terms if you are in poor health or are taking medication to control various medical conditions. Conditions include, but are not exclusive to, high blood pressure, diabetes, heart condition, kidney failure, certain types of cancer, multiple sclerosis and chronic asthma. Lifestyle factors are also taken into including smoking, weight and even post code.

Investment Linked Annuity - A pension annuity which pays an income for life whilst providing the potential to benefit from investment returns. The income payable can go down as well as up.

J

Joint Life Annuity - With a joint life annuity, you can choose for a percentage of your annuity to be paid to your spouse, civil partner or partner for the rest of their life, after your death. Depending on the chosen annuity provider, you can choose a joint life benefit of any amount up to 100% of your own income. The higher the percentage you choose, the lower your annuity income will be. Read more about Joint Life Annuities

L

Late Retirement - The payment of retirement benefits from a pension scheme after a member's normal retirement date.

Level Annuity - A level annuity will pay you a fixed income that will stay the same for the rest of your life as opposed to an escalating annuity that starts lower but increases each year to combat the effects of inflation.

Lifetime Allowance (LTA) - The maximum value of a pension fund that a scheme member can accumulate during their lifetime without incurring a tax charge.

Lump Sum (also known as Pension Commencement Lump Sum) - A tax-free lump sum paid to a member of a pension scheme when their benefits come into payment.

M

Market Value Adjustment (MVR) - An adjustment made to an insurance policy or transfer value from a pension scheme to reflect the current market conditions when benefits are paid out earlier than originally planned.

Money Purchase Annual Allowance (MPAA) - Everyone has an annual allowance, which is a limit on the amount of money you can pay into your pension and get tax relief on your contributions. It is currently £60,000 for the tax year 2024/25. The MPAA is a reduced allowance which is triggered once you take income from your pension. However, buying a lifetime annuity with any of your pension funds does not trigger the MPAA.

Money Purchase Scheme - A type of occupational pension scheme, also known as a defined contribution scheme. You and/or your employer contribute to the scheme, which is then invested. The value of the pension is based on the contributions paid and how well the investments have performed. Your pension value is not guaranteed as it partly depends on investment performance. (This is the same definition used above for a defined contribution scheme).

N

Non-Advised Basis - This is where a particular service or product is offered by providing information only or facts and figures, where no personal recommendation is made. Clients can then make their own informed decisions and, if they wish, they can apply for these products or services without any advice being given.

Non-Protected Rights - Also known as 'Ordinary Rights', this is the value of benefits from contributions you or your employer have made directly to the pension fund.

Normal Retirement Age (NRA) - The age from which retirement benefits are paid from a pension scheme.

O

Occupational Pension Scheme - A scheme set up by an employer to provide retirement and/or death benefits to employees.

Open Market Option (OMO) - The right to buy an annuity from a provider other than your current pension scheme provider. This is often referred to as 'shopping around' for an annuity.

Ordinary Rights - Also known as 'Non-Protected Rights', this is the value of benefits from contributions you or your employer have made directly to the pension fund.

P

Payment Frequency & Timing - Your retirement income can be paid monthly, quarterly, half-yearly or yearly. You can also choose whether you want to be paid in arrears or in advance. If you choose to be paid monthly in arrears, you will receive your first payment one month after your annuity has been set up. If you choose to be paid monthly in advance, you would receive your first payment immediately. The payment option you choose will affect the level of annuity you receive i.e. being paid in arrears will give you a slightly higher annuity than being paid in advance.

Personal Pension Plan - A regular savings scheme managed by a financial services company. Although you set up the plan, your employer can also contribute to it. Most people will benefit from tax relief on contributions to this type of scheme, including non-tax payers.

Pension Commencement Lump Sum (PCLS) - Also known as ‘tax free cash’, this is the tax-free lump sum paid to a member of a pension scheme when their benefits come into payment. This is usually up to 25% of the total pension fund.

Pension Sharing - Provides a spouse with a share of a pension scheme member's retirement benefits on divorce. A spouse is given a credit to put towards their own retirement benefits.

Proportion - An annuity can be set up "with" or "without proportion". If your annuity is payable "annually in arrears" and you die halfway through the year, then half of the annuity payment would be paid to your estate. "Without proportion", no further payment would be made.

Protected Rights (PR) - Benefits built up in your pension fund as a result of redirecting your National Insurance contributions to 'contract out' of the State Earnings Related Pension Scheme (SERPS) or Second State Pension. From 6th April 2012, protected rights were abolished and automatically converted to ordinary rights.

Purchased Life Annuity - A purchased life annuity is a single premium life plan which pays an income for life or a fixed period. The income is treated as a combination of a return of capital and interest on the capital. Income tax is only payable on the interest part. This type of annuity is usually purchased with the policy holders own funds as opposed to funds coming from a registered pension plan.

R

Registered Pension Scheme -  A pension scheme approved by HM Revenue & Customs under the Finance Act 2004.

Retirement Annuity Contract (RAC) -  The predecessor of the personal pension plan. This product was available before April 1988 to the self-employed and those in employment who did not have access to an occupational pension scheme.

S

Self-Invested Personal Pension (SIPP) - This type of pension allows you to make your own investment decisions and offers more investment choice. With a traditional pension plan your investment comprises the choice of funds offered by the pension provider. Through a SIPP, you can also invest directly in shares or, for example, in commercial property. Although you receive similar tax benefits to normal personal pensions SIPPs generally have much higher charges.

Short Term Annuity - A temporary annuity that runs for no longer than five years that allows you to draw an income directly from your pension fund, whilst deferring the purchase of a lifetime annuity.

Single Life Annuity - A single life annuity will continue for the rest of your life and payments will stop when you die.

State Earnings Related Pension Scheme (SERPS) - An earnings related top up to the Basic State Pension that operated from 1978 to 1997.

State Second Pension (S2P) - The replacement for SERPS, providing a top up to the Basic State Pension.

Stakeholder Pension Scheme - A type of personal pension plan, offering a low-cost and flexible alternative but usually with more restricted choice of investment funds and which must comply with requirements laid down in legislation.

T

Tax Free Cash Sum - A lump sum usually up to 25% of the value of your pension fund that you are entitled to receive when you start taking your retirement benefits. It is also referred to as a Pension Commencement Lump Sum (PCLS).

Transfer Value - The value of a member's benefits paid when transferring to a new scheme.

U

Unauthorised Payment - Payments made by a registered pension scheme that do not comply with the definition of an authorised payment. Unauthorised payments trigger an income tax charge at a rate of 40%. A further income tax charge of 15% - the unauthorised payments surcharge - will be due if the amount of unauthorised payments go above a set limit.

Uncrystallised Funds Pension Lump Sum (UFPLS) - An option to access your pension directly from your pension provider. Each provider will have different rules in terms of minimum withdrawals and frequencies. However, each withdrawal you make consists of 25% tax free cash and 75% taxed as income at your marginal rate. Using UFPLS will trigger the money purchase annual allowance (MPAA).

Unsecured Pension - Also known as pension drawdown or income withdrawal. Allows a pension scheme member to continue to invest a fund whilst drawing a limited income.

V

Value Protection - A benefit that you can include when setting up your annuity. In the event of death, this is the amount of your pension fund minus the total income already received, that would be paid to your estate or beneficiary, tax free if death before age 75, but subject to tax at the recipients marginal rate if death after age 75.

Update – October 2024 Autumn Budget: 

In the Budget of 30 October 2024, the government announced that pension savings will be considered part of someone’s estate and liable to inheritance tax (IHT) from April 2027. This will be within existing IHT rules: IHT is not payable by a person’s spouse or civil partner, and is only typically payable on estates over relevant IHT thresholds.

Another aspect of inherited pensions is income tax. Currently, if you pass away before age 75 any pension funds or annuity income your beneficiaries receive is free of income tax, whereas they are liable for income tax at their marginal rate if you die after age 75. Retirement Line’s understanding is that beneficiaries may still be liable for income tax on inherited pension income from April 2027, although it isn’t clear whether the ‘age 75’ rule will remain.

More information will be available following a government consultation period that will run until early 2025. We are monitoring this issue and will report on it once the matter is clarified. Please see our Budget report for more information: Budget 2024 – pensions brought into inheritance tax from 2027.

W

With Profits Annuity - Also known as an 'Investment Linked Annuity'. A pension annuity which pays an income for life whilst providing the potential to benefit from an increased income dependent upon investment returns. The income payable can go down as well as up.