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 that returns a lump sum to your beneficiaries if you die without receiving the full value of your pension savings. You can protect a percentage of your pension savings – up to 100% – so that when you die, your beneficiaries will receive the value of your protected pension savings less the total gross income paid to you already as an annuity income.

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 have capped drawdown can 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 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. 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.

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. In a landmark decision which will impact most defined benefit (DB) pension schemes, the High Court held on 26 October 2018 that pension schemes must equalise for the effect of GMPs providing different benefits for men and women. 

In 2005, the Inland Revenue and Her Majesty's Customs and Excise merged to form Her Majesty's Revenue & Customs.

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 is the maximum amount of pension savings you can build up without having to pay a tax charge. The amount is set by the government and is currently £1,073,100 for the 2023/24 tax year.

Whenever you draw benefits from a pension scheme, these are tested against the lifetime allowance and your pension provider will tell you the percentage of the lifetime allowance you have used.

The government has announced that they intend to abolish the LTA at the end of the 2023/24 tax year.

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 2023/24 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. 

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 65 for men and women. For those born after 5 April 1960, there will be a phased increase in State Pension age to 67, and eventually 68. 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.

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).

Sometimes known as annuity protection or capital protection, value protection is an option that returns a lump sum (minus total gross payments made and tax), if the annuitant dies without having received the full value of their pension fund, giving the ability to protect up to 100% of the original pension fund.