Jargon buster

A term that could appear in your pension statement and, in this context, means the proportional amount of pensionable earnings you will receive from your final salary scheme (defined benefit scheme) for each year of service - often described as 1/60th or 1/80th.

Alternatively secured pensions were abolished from 6 April 2011. They were a type of drawdown pension applicable to those aged over 75.

There’s currently no limit on the amount of money that you can contribute into a pension each tax year, and you can normally receive tax relief on contributions up to 100% of your earnings.But if your contributions are more than £60,000  a year, tax charges apply that effectively recoup the tax relief you receive on contributions over this amount. This is called your annual allowance and includes all contributions made by other people, such as your employer.

An annuity is a product which pays a regular income in exchange for a lump sum.

Annuity protection (also known as Value protection) is an option you can choose when you take out your annuity. It allows you to protect a percentage of your pension savings up to 100% so that if you die before receiving the full value of your pension fund, a lump sum will be paid to your beneficiaries.

The amount paid is calculated as the value of your protected pension savings less the total gross annuity income already paid to you. From a tax perspective, any lump sum paid is usually tax-free if you die before age 75. If you die on or after age 75, the payment will be taxed at your beneficiary’s marginal rate.

Any value protection payment also counts towards your lump sum and death benefit allowance, which is normally £1,073,100 (though it may be higher if you have lifetime allowance protection). If the payment exceeds this allowance, the amount above the limit will be taxed at the recipient’s marginal rate.

However, with effect from 6 April 2027, the tax rules are changing  which means that annuity protection/value protection lump sums will form part of your estate for Inheritance Tax (IHT) purposes.

Annual percentage rate - an indication of how much interest will be charged on a loan including known charges associated with taking out the loan. APR rates can be used to compare similar types of credit, over similar periods.

Someone who benefits from a will, a trust, a life insurance policy or death benefits from an annuity or pension. 

A capped drawdown pension is a type of income drawdown pension that was available to savers before 6 April 2015. While it is no longer open to new investors, those who already had capped drawdown could use it to withdraw a tax-free lump sum up to 25% of their pension’s value, receive taxable payments within the allowable limit and keep the rest of their savings invested.

You or your employer were given the option to opt out of the State Second Pension (formerly the State Earnings Related Pension Scheme) in exchange for lower National Insurance contributions (and higher pension contributions) or a rebate into your pension. From 6th April 2012, this was only available in Defined Benefit (Final Salary) schemes. Contracting out was abolished from 6 April 2016

The Data Protection Act 2018, UK General Data Protection Regulation (UK GDPR) is a UK law which safeguards personal data. It requires anyone who handles personal data to comply with a number of important rules and gives individuals advanced rights over how their personal data is processed. 

With this type of pension, the amount of retirement income an employee gets is set in advance. The amount of income they get is usually based on the number of years they have been a member of the scheme, an accrual rate and their earnings.

This is a term given to a pension which can be either a personal pension or an occupational pension. Under an occupational defined contribution pension both the employer—and often the employee—will make a contribution into the pension fund. Regardless, the value of the fund at date of retirement consists of contributions paid into it, plus the investment returns, minus administration charges. As a result, the end fund is not set and may carry investment risk.

Someone who is financially dependent on you, typically a partner. Annuity providers often require proof of this - such as a joint utility bill or mortgage/bank statement. Pension schemes and providers may have different definitions of a dependant so you should check with them.

An option when buying an annuity that means, in the event of death, your annuity income may continue to be paid to a surviving spouse, civil partner, or dependant. If you choose for your annuity to be paid to a dependant, they may be asked to prove that they are financially dependent upon you.

Drawdown in lifetime mortgage terms is the process of taking an additional cash advance from your pre-agreed cash facility. This is done after the initial advance is paid. Only when a drawdown is taken does the interest start being charged on that amount.

A type of retirement income product that allows you to draw an income directly from your pension fund. Also known as income drawdown.

A legal document giving the attorney the power to make decisions on behalf of someone else, which continues should that person lose their mental or physical capacity in the future. If they become mentally incapacitated, this document needs to be registered with the court of protection. In October 2007, EPAs were replaced by Lasting Powers of Attorney (LPA), however existing EPAs continue to be valid.

An enhanced annuity is an annuity that pays a higher income to an individual if aspects of their lifestyle (such as smoking and drinking alcohol) or medical history may shorten life expectancy.

Equity is the value of your home minus any outstanding mortgage or other debts secured against it.

This describes the way in which an annuity income can increase each year - you may choose to have no increase (level annuity) or increase your annuity each year at a fixed rate (say 3% per year) or in line with the change in a measure of inflation, such as the Retail Prices Index (RPI) for example.

Your estate is the name for everything you own, including your home, possessions and any savings or investments.

The Financial Conduct Authority - the UK's financial regulator set up by the government to regulate financial services and protect your rights. This means they set standards that financial services firms have to meet and take action if they don't.

Also known as a defined benefit scheme, they are offered by employers. With this type of pension, the amount of retirement income is set in advance and guaranteed. The amount of income you get is based on the number of years you have been a member of the scheme and your salary.

Fixed Term Annuities are a type of drawdown arrangement, which gives you an opportunity to keep your options open in case your circumstances change later in retirement.

In return for investing in a pension fund from an existing pension scheme, a fixed term annuity pays a fixed level income for a specific period of time – typically about five years. After that point in time, you can usually choose to reinvest remaining funds in an alternative product.

An annuity income is payable for as long as the annuitant - the person receiving the annuity - lives. They can choose a guarantee period (anything up to 30 years), which means that, if they die within that guarantee period, the annuity will continue to be paid for the remainder of that period. Annuitants can nominate anyone to receive the income from their guarantee period.

This is the part of pension benefit built up in defined benefit schemes, which relates to contracting out between 1978 and 1997 and is roughly equivalent to the amount of State Earnings Related Pension Scheme (SERPS) which would have been paid for that period. This is the minimum pension payable under the scheme. As GMP is a replacement of a state benefit, certain restrictions apply to the income you receive from it.

Historically, GMP provided slightly different benefits for men and women. Following a 2018 High Court judgement, schemes are required to equalise GMP to ensure that nobody receives less benefit than a person of the opposite gender would, in the same position.

His Majesty’s Revenue & Customs (HMRC) is responsible for the collection and administration of the main forms of UK taxes.

An impaired annuity is an annuity that pays a higher income than a standard / conventional annuity for those who have significantly lower life expectancy due to an existing medical condition.

In the event of your death, your annuity income may continue to be paid to a surviving spouse, civil partner or dependant if you have selected a joint life annuity. If you choose this option, the dependant may be asked to prove that they are financially dependent on you.

The lifetime allowance was abolished on 6 April 2024. It was the maximum amount of pension savings you were allowed to build up before you had to pay a tax charge.

Prior to its abolition, the annual allowance was £1,073,100 (for tax year 2023/24). A different lifetime allowance may have applied if you had applied for transitional protection from the lifetime allowance.

The lump sum allowance was introduced on 6 April 2024 and is a limit on the amount of tax-free lump sums that can be taken from pension funds. This limit is £268,275, however it could be higher if you have protection from the Lifetime Allowance. Tax-free lump sums taken prior to 5 April 2024 also count towards the lump sum allowance and there is a ‘standard calculation’ to convert your lifetime allowance percentage into this new figure.

The Lump Sum and Death Benefit Allowance was introduced on 6 April 2024 and is a limit on the amount of tax-free lump sums that can be taken from pension funds in addition to tax-free lump sum death benefits. Any death benefit lump sums from pensions you took before 6 April 2024 do not count towards this allowance. This allowance is normally £1,073,100, however If you have lifetime allowance protection, this allowance may be higher.

If you've flexibly accessed your benefits, the Money Purchase Annual Allowance (MPAA) is the amount that can be paid in one year to your money purchase arrangements without a tax charge applying. For the 2026/27 tax year, the MPAA is £10,000.

Money purchase schemes are also known as defined contribution pension schemes. They provide benefits on retirement based on

• the amount of money that has been paid in to the scheme
• how long this money has been invested
• the level of charges
• and investment returns over this period.

Money purchase schemes cover a wide range of different pension plans. Some are provided by employers—employer-sponsored schemes—and others are personal, or individual, schemes.

The ability for you to shop around and buy an annuity from any annuity provider, not just the company that provides your pension. This option enables you to search for the best annuity rate for you.

A pension annuity is an annuity purchased with the proceeds of a pension plan, which pays a guaranteed, regular income for life. The income payable from this type of annuity is not linked to the performance of investments.

You can normally take up to 25% of your pension fund as a lump sum, which is currently tax-free. This is now known as a Pension Commencement Lump Sum, but may also be referred to as a tax-free lump sum or tax-free cash. 

There is a limit to how much you can take in tax-free lump sums called the lump sum allowance. This limit is £268,275, but it may be higher if you have protection from the lifetime allowance.

Proportion is only relevant if you choose to receive your annuity income payments in arrears. If you choose with proportion, a final proportionate payment will be made to cover the period between your last payment and the date of your death. If you choose without proportion, your final annuity income payment will be the last normal payment before you die.

The age you have to reach to be entitled to draw your state pension. This is currently undergoing a phased increase from 66 to age 67. There are further plans to increase the State Pension age to 68 for those born from 6 April 1978 onwards. Please visit gov.uk/state-pension-age to calculate your state pension age.

You can normally take up to 25% of your pension fund as a lump sum, which is currently tax-free. This is now known as a Pension Commencement Lump Sum (PCLS), but may also be referred to as a tax-free lump sum or tax-free cash.

There is a limit to how much you can take in tax-free lump sums called the lump sum allowance. This limit is £268,275, but it may be higher if you have protection from the lifetime allowance.

The Equity Release Council is the industry body for the equity release sector. Each member of the Council that provides equity release products is signed up to the Equity Release Council’s Statement of Principles which puts in place a number of safeguards and guarantees for consumers. Prior to May 2012 this organisation was known as Safe Home Income Plans (SHIP).

Value protection (also known as Annuity protection) is an option you can choose when you take out your annuity. It allows you to protect a percentage of your pension savings up to 100% so that if you die before receiving the full value of your pension fund, a lump sum will be paid to your beneficiaries.

The amount paid is calculated as the value of your protected pension savings less the total gross annuity income already paid to you. From a tax perspective, any lump sum paid is usually tax-free if you die before age 75. If you die on or after age 75, the payment will be taxed at your beneficiary’s marginal rate.

Any value protection payment also counts towards your lump sum and death benefit allowance, which is normally £1,073,100 (though it may be higher if you have lifetime allowance protection). If the payment exceeds this allowance, the amount above the limit will be taxed at the recipient’s marginal rate.

However, with effect from 6 April 2027, the tax rules are changing  which means that annuity protection/value protection lump sums will form part of your estate for Inheritance Tax (IHT) purposes.