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.


Guide to Annuity Jargon

If you find yourself at your wit’s end trying to figure out the meaning of certain ‘terms’ in your pension manager’s sales pitch, you are not alone.

A lot of retirees face the problem of having to deal with an abundance of technical jargon when they first speak to insurance experts.

Unless you work in an insurance company or are a qualified financial adviser or have read about these things, it is normal to be confused.

Here’s our guide that should help debunk these arcane terms about annuities.

  1. Annuitant: The annuitant is the person who purchases the annuity
  2. Escalating Annuity: A type of annuity in which your income increases by a set percentage every year which can be specified by you. The higher the percentage you select, the lower your monthly payout will be initially.
  3. Index-Linked Annuity: A type of annuity in which your income will rise in line with rising prices (inflation). Either the Retail Prices Index (RPI) or the Consumer Prices Index (CPI) is used as a reference.
  4. Compulsory Purchase Annuity: It was compulsory for every citizen to purchase an annuity before the age of 75. This rule was changed in April 2006. Hence, the term Compulsory Purchase Annuity is an obsolete one.
  5. Capital Protected Annuity: A type of annuity in which your entire pension pot will be returned to a nominated beneficiary in the event of your death before a set time period. The returned amount will be subject to 35% tax.
  6. Enhanced annuity: A type of annuity with higher rates offered to retirees who may have a shorter life expectancy due to certain medical conditions or lifestyle-related conditions. For example, people with cholesterol, cancer, those who smoke or those who have recently quit smoking may be eligible for it.
  7. Guaranteed Time Period: A specified time period (5 or 10 years) for which, your annuity payment will be paid even in the event of your death. You can choose whether you want the remaining payment to be paid as a lump sum or as a regular income.
  8. Investment Linked Annuity: A type of annuity in which one part of your pension pot will be used to provide you with a low minimum guaranteed payment. The remainder will be invested in funds and the further income provided will be variable.
  9. Joint Life Annuity: A type of annuity in which your dependent spouse, civil partner or children will continue to receive the annuity payment for the rest of their life or a set time period, in the event of your death.
  10. Single Life Annuity: An annuity in which you will be the only annuitant who will receive the annuity payments for life. The payments will stop upon your death. If you have selected a guarantee period, then the payment will continue till that period.
  11. Level/Fixed Annuity: An annuity where the income will remain fixed for your lifetime.
  12.  In advance: The type of payment frequency you select in advance. For example, if you select a payment frequency of quarterly in advance, you will receive your payments at the completion of three months.
  13. OMO (Open Market Option): An annuitant’s right to shop around to find the best annuity rate by seeking quotes from multiple annuity providers
  14. Payment Frequency: The frequency at which you receive your payments. Can be monthly, quarterly, half-yearly or yearly.
  15. Postcode Annuity: A specialized type of annuity which is offered on the basis of the area where you live. A postcode annuity is based on the thought that people living in poorer areas may have a shorter life expectancy and people living in a richer locality may have a longer life expectancy.
  16. Purchased Life Annuity: A type of annuity that is not purchased using the money in your pension pot. You can use your pension commencement lump sum or any other funds that you may have saved.

RELATED: Types of Annuities