Annual allowance

The maximum amount allowed to go into your pension each tax year without having to pay extra tax on it. The maximum amount most people can pay into their pensions each tax year is typically £60,000 or 100% of their salary - whichever is lowest. Read more here

Annuity

An annuity is a product you can buy which pays out a guaranteed, regular stream of income. They are most often purchased by retirees to convert their retirement savings into annual income packages. This is an alternative to pension drawdown, where you withdraw cash from your pension at your own discretion.

Auto-Enrolment

A government scheme introduced in 2012 that requires UK employers to automatically enrol eligible workers into a workplace pension. Eligible employees are aged 22 and over and earn more than £10,000 per year. The minimum total contribution is 8% of qualifying earners, made up of 5% from the employee (including tax relief) and 3% from the employer.

Beneficiary

A beneficiary is an individual who receives money or assets, usually as part of a deceased person's will, pension or life insurance policy. You can usually nominate your chosen beneficiary or beneficiaries, but unless specified otherwise, your spouse, civil partner and/or next of kin are typically treated as your beneficiaries by default.

Cash Balance Scheme

Cash Balance Scheme is a type of retirement plan that combines Defined Benefit and Defined Contribution plans. In this plan, the employer promises to build up a specific cash balance in your account, but at retirement, this is shown as a pot of money you can use flexibly. Cash balance schemes are relatively rare in the UK.

Defined benefit/final salary

Defined benefit/final salary is a type of workplace pension that promises to pay you a guaranteed income for life when you retire. The amount you get is usually based on your salary, how long you’ve worked for the employer, and is linked to inflation. This type of pension is now quite rare outside of the public sector.

Defined contribution

Defined contribution is when an employer pays contributions to a pension that is invested in the stock market. The returns on the investment are then paid into the employee’s account.

Drawdown

Drawdown is a method of accessing your pension which involves taking out money when you want to, as opposed to in regular intervals like with an annuity. Flexi-access drawdown is a type of drawdown that gives you the flexibility to withdraw as and when you choose while leaving the rest of your pension invested. Capped drawdown is less common but involves having a maximum amount you can withdraw from your pot each year.

Enhanced Annuity

Also called 'Impaired', enhanced annuity is aimed at those diagnosed with an illness or health problem that could reduce your life expectancy. This may mean the amount in of income you receive from your pension will increase.

Fixed-term Annuity

Fixed-term Annuity pays a guaranteed income for a set period of time. It also ensures you get a lump sum at the end of the term, which is agreed upon before purchase.

Guaranteed Annuity Rate (GAR)

GAR is a guaranteed annuity rate written into your pension contract, which your provider must honour if you use it to buy an annuity. GARs are usually found in older pension policies, often from the 1970s–90s.

Income Tax

Income Tax is charged by the UK government if your pension contribution exceed a certain threshold, called the Personal Savings Allowance. Any amount over this is charged at different rates depending on your annual income.

Inflation-linked Annuity

Inflation-linked annuity increases your income annually, typically in line with the typical inflation benchmarks Retail Price Index (RPI) or Consumer Prices Index (CPI). This offers protection against rising costs.

Investment-linked Annuity

Investment-linked annuity is where part of your income is guaranteed and linked to investment performance. Due to this, payments may increase and decrease monthly depending on the value of the investment.

Lifetime Annuity

Lifetime annuity pays you a guaranteed income for the rest of your life. It ensures you don’t run out of money during retirement, but it is an irreversible decision, meaning once you purchase it, you cannot change your mind.

Money Purchase Annual Allowance (MPAA)

A reduced limit on how much you can pay into a pot-based (defined contribution) pension each year and still get tax relief. Once you start taking taxable income out of your pension, for example through drawdown or a taxable lump sum, your annual allowance drops from £60,000 to just £10,000. It's a permanent change; it covers all your DC contributions (including your employer's), and it's designed to stop people from taking money out just to pay it back in and claim tax relief twice. Taking only your 25% tax-free cash doesn't trigger it; it's the taxable withdrawals that count.

National Insurance

National Insurance is a type of tax that individuals who earn over a certain amount pay to the UK government. It's used to fund state benefits, including the State Pension, healthcare services like the NHS, unemployment benefits, and other social welfare programmes.

Normal Pension Age

The earliest age you can claim state pension. It is currently at 66, but is increasing to 67 between 2026 – 2028, and 68 between 2044 – 2046. Click here to use our calculator to find out what your state pension age is.

Pension Consolidation

Pension consolidation is when you combine several different pensions together into a single pot. Many people have lost or forgotten about pensions from previous jobs, or you may just have quite a few that you’re aware of but find it hard to keep track of them all separately.

Purchased Life Annuity (PLA)

PLA is a type of lifetime annuity purchased which is purchased with a lump sum of money from outside your pension. It provides a regular stream of income for the rest of your life.

Self-Invested Personal Pension (SIPP)

A Self-Invested Personal Pension or SIPP, sometimes also called a private pension or personal pension, is a type of pension that allows individuals to save for retirement by managing their own investments. This is different from the State Pension or workplace pension schemes, where individuals usually have limited control of what they're invested in. SIPPs come with tax relief designed to incentivise people to save for retirement, where for every amount you add to a SIPP account, the UK government will contribute additional money based on your usual rate of Income Tax.

State pension

The State Pension is a type of pension provided by the UK government to eligible UK adults once they reach the State Pension age (currently 66 but rising to 67 from 2026). It's designed to offer a basic amount of financial support during retirement. The amount a person receives depends on their track record of National Insurance contributions.

Tax-free lump sum

A tax-free lump sum allows all UK adults the right to withdraw a lump sum worth up to 25% of the total value of your pension (capped at £268,275) without paying tax once you reach 55. It usually takes around two to four weeks for your funds to be released.

Tax relief

Tax relief is money the Government adds to your pension to make up for the Income Tax you've already paid on it. For a SIPP, everyone gets tax relief at 20% (the basic rate), which boosts the value of your pension automatically.

A tax-free lump sum allows all UK adults the right to withdraw a lump sum worth up to 25% of the total value of your pension (capped at £268,275) without paying tax once you reach 55. It usually takes around two to four weeks for your funds to be released.

Workplace pension

A workplace pension is a type of pension set up by an employer for its employees. Both the employee and the employer contribute to it. The auto-enrolment scheme, introduced in 2012, stipulates that UK employers must enrol all employees who meet certain requirements in a workplace pension scheme. It also outlines minimum contributions for both parties - 5% for employees and 3% for employers.