Pension jargon buster

Straightforward explanations for popular pension terms

Your pension annual allowance is the amount you can pay into a pension in a year and get tax relief on the contributions. You can pay as much as you earn into a pension each year, up to a maximum of £40,000. You may also be able to carry forward unused annual allowance from the last three years.

See also lifetime allowance.

Find out more about how much you can pay into a pension.

With an annuity you are essentially using your pension pot to buy a fixed income that usually lasts for the rest of your life. You will know how much money you’ll receive and how often, but once you buy one you cannot usually change your mind.

Find out more about annuities and how they compare to income drawdown.

A type of pension set up by your employer. It pays a percentage of your salary based on each year you’ve worked for your employer. Often referred to as a final salary pension.

Find out more about pensions.

With defined contribution pension schemes such as SIPPs you build up a pension pot with a combination of personal contributions, employer contributions, tax relief from the Government and investment returns. Then when you reach retirement they give you several different options over how to take your money. This differs to defined benefit pensions which are based on your annual salary and promise you a set amount of income in retirement.

Also known as: money purchase pension.

Find out more about pensions.

An employer pension which pays you a percentage of your salary for every year you’ve worked when you’ve retired. Also known as a defined benefit pension.

Income drawdown (also known as flexi-access drawdown) lets you keep your pension invested while you take an income from it. You have total control over how much income you take and how often you take it, but you don’t have the security of a fixed income (like an annuity) as your pension could still go up or down depending on how your investments perform.

Find out more about income drawdown.

In addition to the annual allowance set for paying into your pension, the Government limits the amount you can hold across all your pensions during your lifetime – known as your lifetime allowance. It’s currently set at £1.0731 million.

Find out more about how much you can pay into a pension.

If you have already stopped working and started taking an income from your pension you may have a reduced annual allowance for making contributions. This is known as the Money Purchase Annual Allowance. This year the allowance is £4,000.

A tax-efficient account for saving enough money to live on during your retirement. There are many different types of pension available, including personal or workplace pensions.

Find out more about Bestinvest’s Best SIPP.

See also SIPP and final salary pension.

When paying into your pension you can carry forward any unused annual allowance from the three previous tax years and add them to your allowance for the current year. This means you could pay up to £120,000 into your pension on top of your usual £40,000 annual allowance, but you will only get tax relief on pension contributions up to the amount that you earn each year. You also need to have had a registered pension in the years you are carrying forward your unused allowance from.

A method through which pensions can be dealt with during a divorce. All or part of the pension benefits of one partner are ordered to be paid to the other. The income drawn and the lifetime allowance test are assessed on the original member rather than the ex-partner. The ex-partner receives all or part of their tax-free cash or pension income after tax.

See also pension offsetting and pension sharing.

A method through which pensions can be dealt with during a divorce. The couple keep their own pension rights with the value offset against other assets. For example, if one partner has substantial pension rights, they’ll keep them in their entirety but their ex-partner will get a larger share of other assets (such as the family home) to compensate for the pension.

See also pension earmarking and pension sharing.

A method through which pensions can be dealt with during a divorce. The ex-partner will usually receive an amount of the pension member’s pension fund. This amount will either be used to provide benefits for the ex-partner under the pension member’s scheme or be transferred to a scheme of the ex-partner’s choice.

See also pension earmarking and pension offsetting.

A Government-run service to help people find old pensions that they have lost track of. You can find it at gov.uk/find-lost-pension or by calling 0345 6002 537.

See SIPP.

Just like any other kind of pension, SIPPs (Self-invested Personal Pensions) such as our Best SIPP are designed to help you save for retirement and take an income when you reach it. SIPPs give you more control over your pension investments. With a SIPP you get access to a wide range of investment options and can choose how your retirement savings are invested. They also make it easy to consolidate several pensions in one place.

Discover our award-winning Best SIPP.

Also known as: Self-invested Personal Pension.

When you reach a certain age you are entitled to a State Pension. This is a regular income paid for by the State and based on the National Insurance contributions you made over your working life.