Pensions terminology explained

Last updated: 11 Nov 2019

With its technical terms and acronyms, the pensions world can seem daunting. But fear not – our list aims to help you understand the key pension terms you are likely to encounter.

Key terms workplace pensions

Annual Allowance

The annual limit (tax year since 2016/17) of pension contributions or growth for the purposes of limiting pension tax relief. The current standard allowance is £40,000. A Tapered Annual Allowance is applicable for high earners. Contributions from employees in defined contribution schemes are assessed against the allowance. Defined benefit pension growth is assessed against the allowance.

Automatic enrolment

This is a government policy that compels all employers to enrol all qualifying employees into a pension scheme. Employees are free to opt out and have to be enrolled again every three years.

Defined benefit (DB)

Where the amount you’re paid is based on how many years you’ve worked for your employer, the salary you’ve earned and a pre-agreed accrual rate (this is a fraction of your salary, historically a 1/60 or 1/80, that is multiplied by the number of years you worked to determine your pension). This type of pension pays out a secure income for life, which increases each year.

Defined contribution/money purchase

Where your monthly pension contributions buy units in a fund, which fluctuates daily, the final amount is not guaranteed. The accumulation of these units is commonly referred to as your pension pot.

At retirement age, members traditionally exchange this for an income for life by buying an annuity. Draw down is also available to access funds from the pension pot from minimum pension age.

Independent Financial Adviser (IFA)

Financial advice is a regulated activity under the Financial Services and Markets Act 2000. Independent financial advisers who are authorised and regulated by the Financial Conduct Authority are permitted to provide personalised financial advice.

Lifetime Allowance (LTA)

The lifetime limit individuals are allowed in pension savings with the purpose of limiting pension tax relief. The 2018/19 LTA is £1,030,000.

Pensions tax relief

Payments to pensions and pension growth are tax exempt, within certain limits. Pension contributions paid via payroll receive tax relief via net pay (workplace pensions). Contributions paid directly into a pension scheme receive relief at source (personal pensions).