Pensions glossary

You may have come across some words and terms which you're not familiar with when reading about pensions.  We hope our glossary below can shed some light on this sometimes complicated topic.

Click here to read our Equity Release Glossary

Accrual rate The rate at which an individual builds up pension benefits, and is usually expressed as a percentage or a fraction.

Additional Voluntary Contributions (AVCs) Members of defined benefits pension schemes are able to pay more into their scheme via AVCs, and can gain greater benefits in return

Advice We recommend that everyone seeks financial advice before they make any major financial commitment. Advice differs from 'guidance' or 'information', because it's tailored to an individual, it may recommend a specific product, and is regulated by the FCA. To find an adviser, visit our Find an Adviser page.

Adviser charge A charge payable to an adviser when seeking financial advice. This can be paid directly to those dispensing advice, or may be deducted directly from a pension plan, if due notice is given.

Annual allowance The maximum amount a person can contribute to their pension scheme in a tax year, but still obtain full income tax relief.

Annuity An insurance contract that pays out a regular income, until that person passes away, or over a set period of time. It is usually bought with money from a pension fund. Read more about our Guaranteed Annuity

Annuity rate The rate of return from an annuity, usually measured on an annual basis.

Automatic enrolment The compulsory government scheme for employers which decrees that they automatically enrol all eligible workers into a pension scheme; the scheme is gradually being rolled out, starting with the largest employers in the UK. All organisations must also pay money into these agreements.

Basic-rate tax One of the rates at which income tax is charged in the UK. It currently stands at 20% (2015-16 tax year).

Basic State Pension A government payment made to all British citizens over the State Pension age, so long as they have met minimum National Insurance contribution requirements over their lifetime. The payment is usually made every four weeks.

Beneficiary A person, group of people or named entity who receives a payment or pension benefits once the original policyholder dies.

Bonds (or "gilts") Loans to a government or company. These are often given over a set time period, and those who own the bonds are given interest payments on a regular, fixed basis. Those issued by companies are often referred to as "corporate bonds", while bonds issued by the British government are called "gilts".

Consumer Price Index (CPI) This measures a basket of retail goods and services, but does not take into account the costs such as mortgage interest, council tax, house depreciation or building insurance (these are, however, included in the Retail Price Index, or RPI). It is published on a monthly basis by the Office for National Statistics (ONS).

Defined benefits pension scheme An employer-sponsored scheme where retirement income is based on length of employment, lifetime earnings, and the scheme's accrual rate.

Defined contribution pension scheme (or "money purchase scheme") A pension plan where the final agreed retirement income is based on the amount of money paid in, as well as the rate the money has grown within the pot. There are several varieties of this scheme, such as company, stakeholder, personal, and group personal pension plans.

Dependant A policyholder's spouse, named partner, or someone who is financially dependent on them, such as a child.

Drawdown An investment made with a portion of a pension that allows a person to benefit from an uncapped income, accessible at any time it is requested. Money from a drawdown is taxed in the same way as a standard income, and can be taken instead of, or alongside, a fixed income from an annuity.

Equity Part ownership of a company; often referred to as stocks, shares or a stake.

Final salary pension scheme A pension that is paid to workers in the public sector and some larger companies; they are based on their salary at the point of retirement, an accrual rate, and the number of years a person has been involved with a scheme. These schemes were once abundant, but are now being phased out due to the high cost of their maintenance (also known as Defined Benefit Scheme).

Financial Ombudsman Service An organisation established by the government to remedy any consumer issues caused by banks and financial organisations, such as insurance, loans, mortgages, pensions, the PPI scandal and other money-related complaints.

Financial Services Compensation Scheme (FSCS) A scheme that was created to compensate investors when a firm is unable to pay claims levied against it.

Fund A pool of money from investors that is then invested into equities, bonds, property or other securities. A "fund" may also be used to describe the overall amount in an individual's pension. Read more about our investment funds.

Group personal pension scheme A collection of personal pension plans given to employees by a single employer. Contributions are usually deducted through wages, and employers often make contributions on behalf of their employees.

Guaranteed period This defined length of time (e.g. five or ten years) guarantees an annuity will be paid, even if the named recipient dies during this term.

Inflation The increase in the prices of goods and services over a set of time. When relating to pensions and other saved assets, inflation can erode their value.

Inheritance Tax (IHT) A tax created by the British government where 40% of an estate must be paid if it passes a specific level (£325,000 in tax year 2016-17). In most circumstances, pension funds are exempt from inheritance tax.

Lifetime allowance The maximum value of pension benefits that can be built up before tax is paid upon retirement. If a pension's value exceeds the lifetime allowance, they will pay tax on whatever goes over this level as soon as they start receiving pension benefits.

Open market option The opportunity to buy an annuity with money in a pension fund from any provider upon retirement.

Pension Commencement Lump Sum (PCLS; often "tax-free cash") A tax-free lump sum that can be taken out of a pension pot upon retirement. This is usually limited to 25% of the final amount.

Pension freedoms The opportunity for anyone over the age of 55 to take the whole amount of their pension as a lump sum, and receiving tax-free benefits on the first 25%; the rest is taxed at their income tax rate. The initiative was announced in 2014 by the British government, and became available from the 2015-16 tax year. Read our blog article Six Steps to Retirement Freedom to read about the new flexibilities

Personal allowance The amount of income a person can receive each year before they are required to pay tax.

Risk profile The evaluation made in regards to an individual or organisation's inclination to take risks. This measure also concerns the threats they may be exposed to.

Retail Price Index (RPI) An inflation measure that considers the change to the costs of retail goods and services, including housing. It is published on a monthly basis by the Office for National Statistics (ONS).

Tax relief Freedom from paying tax on a percentage, or even an entire amount, of a financial commitment; it can change depending on circumstances, and its value depends on individual situations. For example, in a personal pension, a person will pay a net rate of basic rate tax, and if they are a higher or additional rate taxpayer, extra can be claimed back on a tax return.

Tax year The British tax year, as set by HM Revenue & Customs (HMRC), runs from the April 6th of any given year to April 5th of the following year.

Transfer value The value of a pension if it is being transferred to another pension plan.

State Earnings-Related Pension Scheme (SERPS) A state benefit paid in addition to the Basic State Pension. Entitlement to this scheme is based on a person's earnings during their working life. Entitlement is built up between the working years of 1978 and 1997.

Self-Invested Personal Pension (SIPP) A personal pension that can be invested into a wider range of assets, such as shares and commercial property.

Stakeholder pension scheme An option for individuals to build up retirement income benefits and also benefit from tax relief, or other advantages.

State Pension age The earliest age that an individual can claim a State Pension. In 2016, this stands at 65 for men and 62 for women, though the given age depends on when a person was born. The State Pension ages are scheduled for ongoing changes in line with equality legislation, and will rise to 65 for women between 2010 and 2018; both men and women's qualification ages will rise to 66 by 2020.

Unit(s) Investment funds are broken down into a large number of equal parts called 'units'. These can be bought by investors.

Unit price The price of a unit in an investment fund; it tends to be calculated on a daily basis by analysing the value of any assets that the fund invests in.