A Complete Guide to Pension Jargon

Are you new to Pensions and Annuities?

If your answer is yes, then the chances are high that you may get bombarded with arcane technical terms or financial jargon by your fund manager, which will sound like gobbledygook at best.

Here’s our guide that will help you unravel the mystery behind most commonly used terms by Pension managers.

  1. Pension: A universal term that is used commonly to describe a tax-free long-term retirement savings plan as well as the income that you may receive from it.
  2. Annuity: A contract between you and an insurance company, where you exchange a large part of your pension pot in exchange for a fixed monthly income, which will be paid until your death. Some types of annuities can provide your dependent spouse or children with an income after your death.
  3. Defined Contribution Pension Scheme/Money Purchase Scheme: A type of pension scheme into which you and your employer will make periodic contributions. The retirement income will be based on the amount of money accumulated, the investment returns on the fund and the annuity rates prevalent at that time. The scheme must be run either by an insurance company or maybe a customized scheme set up by your employer.
  4. Defined Benefit Scheme/Final Salary Pensions: A type of pension plan where the retirement income is based purely on the basis of contributions made and the length of time that you were a member of the scheme. The final salary is the determining factor in most cases.
  5. Cash Balance Pension: A type of pension plan in which your employer promises to pay you a specified pension pot amount, calculated on the basis of a proportion of your yearly salary. You will know beforehand the pension pot amount but there is no guarantee about the amount of pension you will be able to take or buy from this pot.
  6. Cash Lump Sum/Tax-Free Lump Sum: An amount of your pension pot (Usually 25%) that you can take as tax-free cash at the time of retirement.
  7. Drawdown/Income Drawdown: A plan under which you can derive an income from your pension scheme while keeping the original pot invested.
  8. Flexi Access Drawdown: As per new rules, it has replaced the existing Capped Drawdown and Flexible Drawdown from April 2015. In this plan, you can withdraw any amount of money from your pension scheme without interfering with the original pot.
  9. Guaranteed Annuity Rates (GAR): A guaranteed minimum rate offered by some pension providers, at which the pension pot will be exchanged for an income. The benefit of a GAR is that you can be assured that your income will not go below a certain guaranteed level.
  10. Guaranteed Drawdown: A type of scheme that gives you the benefit of a guaranteed income combined with the flexibility of a drawdown.
  11. Market Value Reduction: A practice used by pension providers in which an exit penalty is applied if you surrender the policy before maturity or even after it.
  12. State Pension: A fixed monthly income paid by the Government once you reach SPA (State Pension Age). Both, the qualifying age for State Pension and the amount to be paid per week are set to change in the years to come.
  13. Stakeholder Pension: A type of personal pension plan that is known for its low annual charges. Most stakeholder pension plans have limited fund options for investment.
  14. SIPP: A type of personal pension plan which gives you more flexibility and control over your investments. You will decide how your pension funds are invested rather than a fund manager and hence, the risk associated with an SIPP is considerably higher. They may also have higher charges.
  15. Transfer Value: The actual amount that you will receive after deducting penalties and charges if you decide to transfer your funds elsewhere.
  16. Additional Voluntary Contributions: Voluntary top-ups to a company pension scheme which you can make. This is in addition to the minimum required contributions.
  17. Free Standing Additional Voluntary Contributions: Voluntary top-ups made to a personal pension plan.

While these may not be the only terms you hear, we have tried to cover the frequently used ones.

For more information about pensions, visit our Complete Pensions FAQ page.