Pensions Glossary

Pensions can be confusing. Use our Pensions Glossary to find the meaning behind key terms and phrases.

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Annual allowance

This is the maximum amount anyone can contribute to a pension scheme in a tax year and still receive full income tax relief. Please see our Annual Allowance page.

Annual allowance (Money Purchase)

This allowance is £4,000. It is the maximum amount anyone who has gone through a “trigger event” can contribute to a “money purchase” pension scheme in a tax year and still receive full income tax relief. Please see our Annual Allowance page.

Annual allowance (Tapered)

This reduces the standard Annual Allowance if you are a “high earner”. Anyone earning £110,000 or less should not be affected by this. Please see our Tapered Annual Allowance page.

Annuity (conventional)

An annuity is one option to generate an income from a pension. Generally a pension pot is given to an assurance company in exchange for an annuity income. Annuities must be paid at least annually and cannot decrease in payment.

Annuity (enhanced)

This is exactly the same as a conventional annuity, except the income payments are increased. This is normally done because the annuitant meets certain lifestyle criteria, such as being a smoker.

Annuity (impaired)

This is exactly the same as a conventional annuity, except the income payments are increased. This is normally done because the annuitant has one or more medical conditions which are expected to reduce their life expectancy, such as having suffered a heart attack.

Annuity (third-way)

This is an annuity which has some investment element. The investment element will usually mean that the annuity income is not as secure as a conventional annuity, as it could fall in the future based on investment performance.

AVCs (Additional Voluntary Contributions)

AVCs allow a member of a defined benefits scheme (commonly known as a “final salary scheme”) to pay more into the scheme in order to receive greater benefits.

Carry forward relief

Please see our Carry forward relief page.

CETV (Cash Equivalent Transfer Value)

This is a lump sum offered to a member of a defined benefits scheme (commonly known as a “final salary scheme”) in order to buy the member out of the scheme. It must be paid into an alternative pension scheme. It is the cash value of the member’s scheme benefits.

Commutation (trivial)

This is where a member is permitted to take their pension benefits as a lump sum because the combined value of their pension benefits is below a certain amount.

Commutation (small pots)

This is where a member is permitted to take their pension benefits as a lump sum because the value of the scheme is below a certain amount. This can be paid out regardless of the value of their other pension benefits.

Death in Deferment

This is a lump sum paid out when death occurs between the time that a member leaves a defined benefits scheme and when they take their benefits. It is a fairly uncommon benefit.

Death in Retirement

This is a lump sum paid out when death occurs after the member takes benefits. It is a fairly uncommon benefit.

Death in Service

This is a lump sum paid out when a member is still an active member of a scheme. It is a fairly common benefit.

Drawdown (Capped)

This is where your pension money remains invested in retirement and you draw an income from the fund value. The amount you can draw each year is capped by the Government. This is no longer available for new retirees but people who retired several years ago can still continue to use Capped Drawdown.

Drawdown (Flexi-Access)

This is where your pension money remains invested in retirement and you draw an income from the fund value. The amount you can draw each year is not capped by the Government, so you can draw up to 100% of the fund value but any withdrawals will be taxed as income.

Final salary scheme

Pension benefits which are based on pensionable service and the last salary paid before the member reaches retirement. Essentially a percentage of the member’s final salary is paid as a pension in retirement.

Lifetime Allowance

This is the maximum value of pension benefits which can be built up before tax will be paid at retirement. If someone has pension value in excess of the Lifetime Allowance they will pay tax as soon as they take their pension benefits. This tax will be paid in addition to any income tax. Please see our Lifetime Allowance page.

Pension Commencement Lump Sum – PCLS (“Tax-free cash”)

This is a tax-free lump sum which can be paid from a registered pension scheme.

Preserved Pension

When a member leaves a defined benefits scheme, the preserved pension is the value of the benefits they have built up in the scheme.

Relevant Earnings

This is the maximum amount someone can contribute to a pension in a tax year while still receiving full income tax relief. It is based on earned income (including employment income and self-employment income) plus some other types of income.

S2P (State Second Pension)

This is additional State benefit paid out on top of the Basic State Pension. Entitlement to the S2P is based on a person’s earnings during their working life.

SERPS (State Earnings Related Pension Scheme)

This is additional State benefit paid out on top of the Basic State Pension. Entitlement to SERPS is based on a person’s earnings during their working life. Entitlement was built up from 1978 to 1997.

SIPP (Self-Invested Personal Pension)

This is a Personal Pension which can invest in a wider range of assets, most notably commercial property and shares.

SSAS (Small Self-Administered Scheme)

This is a Personal Pension which can invest in a wider range of assets, most notably commercial property and shares. It can also be used to make and receive loans from a sponsoring employer.

UFPLS (Uncrystallised Fund Pension Lump Sum)

This is where a money purchase pension is exinguised in one transaction – that is, the whole fund value is paid out to the policy owner as a single lump sum. Part of this lump sum is tax-free and part is taxed as income.