Pension Glossary

What's a pension fund?

This might be one of the most straightforward questions yet slightly complex to answer than you might think.

Slice through the jargon around pension plans with this pensions jargon buster. From terms like crystallized funds, pension lump sums to the marginal tax rate here’s easy to understand, standard explanations and convenient guide to the pensions glossary to help you navigate through the world of pension products effortlessly.

Accrual Rate 

Accrual rate is the interest rate that’s applied to a financial obligation like bonds, mortgages, and credit cards. In simpler terms, it’s the interest accrued, and it’s often a daily process for credit cards. However, when it comes to pensions, it’s the rate at which you build up pension benefits1. It works by multiplying your earnings to figure out the amount of cash you’ll ultimately be qualified for. 

It’s expressed as a fraction, and the more substantial the fraction, the more pension benefits you’ll be entitled to. Therefore, a 1/65th rate – as the government proposed for the public sector workers – would produce more benefits for you than the current typical accrual rate of 1/80th.

Adjusted Income

The adjusted income consists of your gross annual income and the total value of the pension contributions – including any employer contributions.

To equate this:

Adjusted income= Gross annual income + Total value of (pension contributions + employer contributions)

So, if you take Sera for instance, if she earns €200,000 every year and paid €10,000 into her pension pot while her employer put in €6,000, her adjusted income would total to €216,000.

Annual Allowance

The annual allowance also referred to as the annual pension contribution limit, is a cap on the amount you save into your pension pot, tax-free, every year.

It’s currently set at €40,000 per annum, and any personal contributions you make are capped at 100% of your salary. The pension provider will charge you income tax on any pension contributions you earn above the annual allowance.

The annual allowance applies across the amount you have in your pension pot, and not per pension plan. Also, if your adjusted income exceeds €240,000, the provider might reduce your annual allowance. Be sure to check out the yearly tapered allowance2 and the carry-forward rule. 

Alternative Annual Allowance

The alternative annual allowance is the maximum amount you put into your defined benefits pension scheme and get tax relief every tax year when you trigger the money purchase annual allowance.

The total amount of alternative annual allowance that almost 50% of pensioners get is €36,000, but it might be less if the yearly tapered allowance applies for the tax year concerned.

Take out the defined benefits pension plan, and you exceed the alternative annual allowance, where it applies. The pension provider will include a tax charge that typically claws back any tax relief given on the additional pension savings.

Moreover, if your adjusted income is over €150,000, the alternative annual allowance is decreased by €1 for every €2 that your income exceeds €150,000 – it’s up to a maximum reduction of €30,000.

Annual Management Charge

The annual management charges (AMC), also referred to as the annual management fee and is the yearly cost you pay your pension provider for managing your savings.

The plan provider takes the AMC as a flat fee or a proportion of the value of your pension pot. You should check out your annual pension statement to find details of your AMC.

Annuity

When you retire, you can decide to cash in your pension to purchase an annuity 3 which will ultimately pay you a guaranteed income, either for a fixed term or for the rest of your life.

AVC

It means Additional Voluntary Contributions, and it’s where a member chooses to pay extra money into a pension scheme in exchange for additional DB or DC benefits. Typically, a money-purchase AVC is used to get more defined contributions benefits, whereas an Added Years AVC is used to buy other DB benefits.

Auto-Enrolment

According to UK law, your employer must automatically enrol you onto his/her workplace pension scheme. Besides, the Auto-Enrolment requires you to pay at least 5% of your qualifying earnings into your workplace pension, and your boss should pay in at least 3%.

The qualifying earnings are typically what you usually earn, between €6,500 and €50,000. To qualify for the auto-enrolment, you need to meet specific requirements which include:

  • You have to be working in the UK
  • You’re aged between 22 and the state pension age
  • You earn over £10,000
  • You’re a registered member of any suitable workplace pension scheme

Beneficiary

According to the pensions terminology, a beneficiary is a person that benefits from your Will4, Trust, Life Insurance Policy, or Death Benefits from a pension or annuity.

Carry Forward Rule

The pension carry forward rule enables you to make your pension contributions above the annual allowance set, €40,000, and still get tax relief, through carrying forward any un-utilized allowance from the previous three years.

When pension contributions are concerned, you can carry forward the unused allowance up to the total value of your annual income. Any contributions you make over this amount are subject to income tax.

Contribution Charge

Contribution charges are a percentage fee that’s taken from your pension savings or your contributions every time you put funds into your pot.

Crystallized Pension

When you cash in the personal pension with drawdowns or annuity, it becomes a crystallized pension.

Crystallized Funds Pension Lump Sum

It’s also referred to as a pension commencement lump sum (PCLS) or tax-free capital. When you crystallize your pension income, you can opt to take 25 of your savings as a tax-free lump sum.

DWP

DWP stands for the Department for Work and Pensions. It’s a branch of the government that handles welfare, pensions, and the child maintenance policy in the UK.

Defined Benefit Pension Scheme

The defined benefits pension scheme (DB), or as commonly referred to as final salary schemes, are a form of workplace pension that pays you a retirement income that’s dependent on your salary and how long you’ve toiled for your firm.

Defined Contribution Pension Scheme

The defined contribution pensions (DC), or as commonly referred to as money purchase pensions, are the most popular type of workplace pensions and personal pensions. The amount of retirement income you receive depends on the amount you’ve saved into your defined contribution pension pot and the ultimate performance of your investments.

Dependent

As per the pensions glossary UK, a dependent is a person that financially depends on you, usually a partner or children, Annuity providers often require proof of this – like say a joint utility bill, mortgage5, or bank statement.

Dependent’s Pension Annuity

It’s also referred to as a joint-life annuity. When you pass on, the surviving spouse, civil partner, or child will continue to receive some or all of the income you were receiving. Since the joint-life annuity pays a salary according to your chosen dependent when you die, it’ll reduce the income you get during your lifetime.

Drawdown

The income drawdown, also referred to as the flexible retirement income product or pension drawdown, enables you to leave your pension savings capitalized and also allows you to take the funds as and when you need it during your retirement.

Emergency Tax Code

If HMRC doesn’t have up-to-date details of your income, then they might apply the emergency tax code temporarily.

HMRC can also place an emergency tax code on you if you start taking the taxable 75% of your pension. It may ultimately result in an overpayment of income tax on your retirement – you can always claim it back from HMRC.

Fund

A pension fund is a financial plan that helps you invest your retirement savings, including your employer contributions and the tax relief you earn on your savings.

Fund Manager

A fund manager manages pension funds, or as commonly referred, a money manager. Pension fund managers make specific investment decisions about your pension pot within the fund. They help you determine the firms you can invest in and where these investments are located globally.

Guaranteed Minimum Pension (GMP)

The guaranteed minimum pension (GMP) was a workplace pension scheme that the government offered to the public sector staff on defined benefit pensions. It was aimed at employees that were contracted out of the State Earnings-Related Pension Scheme (SERPS) between April 6, 1978, and April 5, 1997.

It was mainly set up to match the SERPS pension that you’d have received as an employee if you weren’t contracted out.

If you were placed into the GMP plan between 1988 and 1997, then you’d receive inflation-linked increases of up to 3%.  If you, however, were enrolled before 1988, you wouldn’t be qualified for any inflation-linked increases.

Since April 2016, with the state pension reforms in place, inflation-linked increases were scraped off, and you’re no longer eligible for any, regardless of the year, received your GMP. Instead, your current state pension eligibility is calculated based on the amount of pension you built up using the old systems.

Guaranteed Annuity Rate (GAR)

The annuity rate determines the amount of retirement income you can buy with your pension pot. Some pension plans provide you with a guaranteed annuity rate.

Therefore, it’s worth checking to see how a GAR will compare with the rates offered on the market, and if it comes with terms and conditions – like a definite retirement date, that may otherwise have an impact on your retirement plans.

Guaranteed Drawdown

The guaranteed drawdown leaves your pension income savings invested after you retire, like with income drawdown, while it also offers you a guaranteed income, like with the pension annuity.

HMRC

HMRC stands for Her Majesty’s Revenue and Customs. It handles all responsibilities involved with collecting tax in the UK and offers you tax relief on pension contributions.

Investment

An investment is where you pay cash into an investment fund like a pension scheme. You use it to purchase shares, bonds, estates, land, and stocks, among others. To make the right investment, you need to be vigilant with the financial markets and ensure you monitor investment performance and value fluctuations.

Investment Fund

It’s a financial product that’s controlled by a fund manager who makes specific decisions about the finances in the fund.

Investment Returns

It’s basically how the worth of investments vary over a specified period. They can either increase in value, indicating positive returns, or decrease, thus indicating negative returns.

Investment Risk

Like all other financial products, investments come with an element of risk. However, the level of risk can either be higher or lower, depending on the form of venture you make.

Higher risks tend to offer more opportunities for investments to increase in value, but they can also double the possibility of a decrease in value. Lower risks, on the other hand, provide you with better security against a fall in value, but they can also offer you fewer returns.

Letter of Authority (LOA)

It permits your pension provider to contact your other financial service providers so that they can share documents and information directly between providers. An LOA is necessary if you want to transfer a pension more efficiently.

Lifetime Allowance

It’s the limit on the amount of cash you can withdraw from your pension plan before you trigger an additional tax charge from the HMRC. Today, (2020/21), the set lifetime allowance is £1,073,100, and it applies across all pension schemes apart from the state pension6.  

Marginal Tax Rate

Also referred to as the highest tax rate, the marginal tax rate shows you the income tax band you fall into and the amount of income tax you need to pay on your pension withdrawals.

Here are just a few of the income tax rates in various countries in Europe: Wales, England, and Northern Ireland in 2020/21.

Income Tax BandYour incomeIncome Tax rate
Your allowanceUp to £12,5000%
Basic Rate£12,500 – £50,00020%
Higher Rate£50,000 – £150,00040%
Additional RateOver £150,00045%

Minimum Contributions

They’re typically the minimum amount of money you have to pay into your pension pot every month. Work pensions require you to make minimum contributions of 5% of qualifying earnings for employees and 3% for employers. Some personal pension plans need you to make minimum contributions.

Money Purchase Annual Allowance (MPAA)

It’s the limit on the amount of cash you can save into your defined contributions pension, tax-free after you’ve started withdrawing an income from your pension pot.

In the current UK financial market, the set MPAA is £4,000. The MPAA only applies when you’re drawing the taxable part of your pension. You’ll pay income tax (according to HMRC’s policies) if you make any contributions over the set limit.

Nominated Beneficiary

A nominated beneficiary is someone, group, trust, charity, or a society that you choose/nominate to get your pension savings after you pass on.

Origo

Origo is a secure and efficient electronic transfer process that allows regulated, vetted, and safe financial service lenders to transfer pension policies electronically, where possible, within an approved standard transfer time of 12 working days.

Pension

It’s a long-term financial plan that’s designed to assist you in saving for your later life. It offers you the freedom to enjoy your retirement and allows you to support yourself financially when you reach your golden years successfully.

Pension Plan

A pension plan is an investment that allows you to save for your later years. Various pension plans take different approaches to investment options, and the type of assets your finances will be invested in.

Personal Pension

Also referred to as a private pension, a personal pension plan is a long-term investment product that allows you to save for retirement effectively. It’s different from a workplace pension that’s usually set up by your employer.

Projection

It’s an estimate of how an investment will perform in the future, depending on the current financial market and trends. Nonetheless, a projection doesn’t necessarily guarantee future performance.

Protected Rights Pension

It’s a form of traditional personal pension. In the past, if you made National Insurance (NI) Contributions above the amount set for the basic state pension, the government compensated these extra NI Contributions into a protected rights pension.

 It means that if you were contracted out of SERPS, your additional National Insurance Contributions were paid into a protected rights pension scheme. Today, however, there’s no significant difference between protected rights and non-protected rights pensions, or even how you can access your pension pot.  

Reference Scheme Test (RST)

It replaced the Guaranteed Minimum Pensions on April 6, 1997. Instead of the GMP, pensioners who contracted out of SERPS were signed up onto a pension scheme that features benefits that are equal to the value of a ‘reference scheme.’

The reference scheme, and the criteria the government used to pass the match test, is clearly outlined in the law. You also check out Guaranteed Minimum Pension (GMP) and the State Earnings-Related Pension Scheme (SERPS).

Salary Sacrifice

Your boss can decide to offer salary sacrifice as part of your workplace pension plan. Salary Sacrifice typically gives up a percentage of your monthly income, which is paid into your pension pot by your employer, together with the employer contribution. It enables you, and your boss to pay lower National Insurance Contributions through lowering your qualifying income amount.

There are two types of salary sacrifice, namely:

  • Simple or ‘Standard’ Salary Sacrifice – it lowers your gross income, which can increase your net profit or take-home pay, by decreasing the amount of tax you need to pay based on your salary.
  • SMART (Save More and Reduce Tax) Salary Sacrifice – it lowers your monthly income by the amount you’d pay into your pension pot, thus attaining the same amount of take-home pay. Doing this saves more into your pension scheme by paying less tax on pension contributions.

Shariah Compliant

Shariah-compliant pension plans are pensions that put in funds per the Islamic codes on finance—for instance, Shariah-compliant pensions limit or disregard investments in particular companies like tobacco, alcohol or arms.  

Self-Invested Personal Pension (SIPP)

A self-invested personal pension (SIPP) is a form of defined contributions pension plan that allows you to choose how to invest your finances.  You can either opt to manage your investments yourself or appoint a fund manager to make investment decisions on your behalf.

State Earnings-Related Pension Scheme (SERPS)

Also referred to as the additional state pension, SERPS was a policy put in place between 1978 and 2002. It provided pensioners with a top-up on their basic state pension.

80% of those who signed up for SERPS opted out, meaning that the government paid their excess National Insurance Contributions into a personal pension called a protected rights pension.

If you opted out the SERPS plan, it means that you’ll have paid lower NI contributions than those who paid into the SERPS plan. Therefore, you’ll be eligible for a smaller state pension amount. If you’re, however, qualified for the SERPS, you’ll receive it upon your state pension age, which is set at 65.

State Pension

State Pension a standard payment that you can receive from the government when you reach your state pension age. The amount you’re entitled to depend on your National Insurance record, and if you’ve been making NI Contributions in your active years – working life.

State Pension Age

It’s the age when you can receive your state pension. The current state pension age is set at 65 years and above. The state pension age differs from the retirement age for personal and workplace pension, which is currently age 55.

Tapered Annual Allowance

Tapered Annual Allowance is when you have an adjusted income of over £240,000, thus resulting in the reduction of your annual allowance. If the yearly stipend is, however, below, €240,000, then tapered-reduction doesn’t apply.

So, for every £2 of income over £240,000, the annual allowance drops by £1. The maximum reduction is usually £36,000. Thus a tapered-annual-allowance can’t be lower than £4,000. Tapered allowance also applies to the Alternative Annual Allowance if you’re an active member of a defined benefits pension plan.

Tax- Free Lump Sum

When you take out your pension savings when you retire, you have the option of either withdrawing a part or all of your pot as a cash lump sum. The first 25% of the withdrawal is tax-free. Thus, you’ll have to pay income tax on the remaining 75%.

Tax Relief

Almost all UK taxpayers receive tax relief on their pension contributions. HMRC adds a 25% tax top up onto the standard rate taxpayers’ contributions, which amounts to an additional £25 for every £100 you pay in. If you’re a higher or supplementary rate taxpayer, you can claim further tax relief through the Assessment Tax Return.

Uncrystallized Pension

The personal pension scheme stays uncrystallized until you start taking retirement earnings from it using a drawdown or an annuity.

Uncrystallized Funds Pension Lump Sum (UFPLS)

You can opt to take an Uncrystallized Funds Pension Lump Sum (UFPLS) if you don’t plan on purchasing an annuity or take your pension with drawdown.

When you take the UFPLS plan, it means that 25% of each payment you withdraw from your pot will be tax-free, and income tax will be charged on the remaining 75%.

Workplace Pension

A workplace pension is a long-term financial product that allows you to save up for your later life. It’s different from the personal pension plan since its set up by your boss. You’re required to pay at least 5% of your qualifying earnings into your pension pot, while your employer has to pay in at least 3%.

Common Questions

What’s the Glossary of a Pension?
What are the Benefits of a Pension Plan?
What’s an Accrued Pension?
What’s DB in a Pension?

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