Have you ever come across pension terms that just make your head spin? You won’t be alone. We’ve put together this handy jargon-buster to keep you in tip-top-pension-lingo condition.
Adjusted Income
What is it? When the total amount of your income plus any employer or third-party pension contributions reaches £260,000 or over, it’s used alongside threshold income to see if your annual allowance will be reduced.
More detail: The total amount of your income includes all your gross income, such as; income from dividends or interest on savings, your salary, any bonuses, or commission.
Extra detail: For tapering to kick in, your income must exceed both the adjusted income and threshold income limits.
Annual Allowance
What is it? The limit on how much you can save tax free into your private or workplace pensions in one tax year.
More detail: Each tax year, there is a cap on how much you can save into your pension/s whilst still receiving tax relief. The annual allowance for the 2024/25 tax year is £60,000 or 100% of your qualifying earnings (whichever is lower). If you contribute more than this, you’ll be charged an annual allowance tax on any contributions made above £60,000.
Extra detail: You may be eligible to carry forward any unused annual allowance from the earlier three tax years.
If your adjusted income exceeds £260,000, and your threshold income exceeds £200,000 you will have a tapered annual allowance.
Annuity
What is it? A guaranteed income in retirement.
More detail: If you’re ready to access your pension, you may think about buying an annuity. An annuity will pay you a guaranteed income either for the rest of your life, or for a fixed period. Annuities can have different rates and features, which determines how much income you get, so shop around to get the best one for you.
Auto-Enrolment
What is it? The legal requirement for employers to enter you into a workplace pension scheme.
More detail: When you start a job, they’ll automatically enrol you into the workplace’s pension scheme, unless you opt-out. Employees need to pay a minimum of 5% of their gross State Pension age (currently 66, rising to 67 by 2028)
- Earn over £10,000
- Have not opted out of your workplace pension scheme.
Cash in
What is it? When you start to access the money that is saved into your pension.
More detail: Cashing in your pension means you’ve started to access the money that you’ve been saving into it, either through taking a lump sum, drawing down, or buying an annuity. This applies to all your pensions if you have more than one.
Carry Forward
What is it? A rule that allows you to carry over any unused pension Annual Allowance from the previous three tax years.
More detail: If you haven’t used your full annual allowance in the previous three tax years, you can pay more than £60,000 into your pensions, or 100% of your qualifying earnings (whichever is lower) and still receive tax-relief. Anything you’ve not used can be carried forward into the current or next tax year.
Extra Detail: If you contributed £20,000 into your pension during the 2023/24 tax year, you would have £40,000 of annual allowance contributions that you can carry forward into the new 2024/25 tax year, plus the full £60,000 annual allowance available to you in the 2024/25 tax year.
Meaning you could contribute up to £100,000 and still receive tax-relief in the 2024/25 tax year. The rules have changed from how much you can carry forward for the 2021/22 and 2022/23 tax years, as the annual allowance was £40,000 for both of those tax years.
Here’s what it could look like if you’ve only used up some of your annual allowance for the last three tax years.
£20,000| Tax year | Annual Allowance Used | Annual Allowance available to carry forward |
|---|---|---|
| 2023/24 | £20,000 | £40,000 |
| 2022/23 | £20,000 | £20,000 |
| 2021/22 | £20,000 | £20,000 |
| Total allowance available to carry forward | £80,000 | |
| Total allowance carried forward + 2024/25 annual allowance | £140,000 |
Crystallised Pension
What is it? If you decide to take tax-free cash from your pension, some of the remaining funds will be moved into a pension drawdown account. This money is known as "crystallised". When you withdraw this money, it will be fully subject to income tax.
More detail: Normally 25% of your pension can be taken tax-free, but there are limits on how much you can access, called the Lump Sum Allowance. After taking tax-free lump sums from your pension pot, accessing some of your pension through pension income Drawdown, anything that stays in your pension pot is then “crystallised” and subject to tax rules that depend on your personal circumstances. Such as, being taxed on your pension at your marginal rate of income tax.
Defined Benefit pension scheme
What is it? A pension scheme that pays you an income in retirement that is based on your salary and how long you’ve worked for your employer.
More Detail: Final salary pensions aren’t as common as they once were and are now most likely to be offered by public sector and government employers, but there are some private sector employers that still use them.
Defined Contribution pension scheme
What is it? A type of workplace or personal pension that is built up from:
1. the amounts saved into it
2. the investment performance of the contributions.
More detail: Unlike final salary schemes, defined contributions are the most common workplace pension schemes in the UK. They’re built up by the contributions of employees and employers into a workplace pension scheme. Personal pensions are also defined contribution schemes. The money contributed is invested into funds. These funds can invest in equities (the stock market), as well as bonds/gilts, property, money and more. The final amount available to the pension holder when they choose to access their pension, is based on the amount that is contributed and the investment returns that have accumulated over time.
Drawdown
What is it?; A flexible way of taking retirement income that allows you to leave your pension invested.
More detail: Unlike an annuity, with income drawdown, you’re not buying a fixed payment. You can take cash out of your pension at any time. 25% of this is tax-free and the remaining 75% of it will be taxed at your marginal rate of income tax. The rest of the money in your pension stays invested. This is also known as flexibly accessing your pension.
Extra Detail: You don’t need to choose one option over the other when it comes to accessing your pension. You can use a portion of your pension to buy an annuity, whilst leaving the rest in drawdown.
Guaranteed annuity rate (GAR)
What is it? A guaranteed specific rate of income for life when a pension pot is used to buy an annuity.
More detail: Some pension schemes offer a guaranteed annuity rate that could be higher than current market rates. They give a guaranteed level of income regardless of wider market conditions. But these are typically found with older pensions, not the ones available today. Make sure you check any terms with your pension provider, to figure out if it works for you.
Lifetime Allowance
What is it? The amount you can save into a pension over your lifetime before receiving additional tax charges.
More detail: The lifetime allowance of £1,073,100 was the amount that anybody could accumulate across their pensions whilst still benefiting from tax relief. The lifetime allowance was abolished from the 2024/25 tax year, but it’s been replaced by three different allowances; the lump sum allowance, the lump sum and death benefit allowance and the overseas transfer allowance.
Lump sum allowance (LSA)
What is it? The maximum amount of tax-free cash that anyone can take from all their pensions as one or more lump sums.
More detail: From the 2024/25 tax year, the amount you can take as your tax-free lump sum from your pension is 25% but cannot be more than £268,275 for most people. The remaining 75% of your pension, and any lump sums that exceed your available allowance will be taxed at your marginal rate of income tax.
Extra detail: This allowance is applied if you take a Pension Commencement Lump Sum (also known as tax free cash lump sum) or if you take regular tax-free lump sums from Uncrystallised Pension Lump Sums (UFPLS).
Lump sum and death benefit allowance (LSDBA)
What is it? The maximum number of lump sums covered by the LSA, plus additional lump sums that are paid out when you die or face serious ill health.
More detail: From the 2024/25 tax year, the maximum lump sum you, or your beneficiaries, can take and receive tax-free if you were to die or suffer from serious ill health under the age of 75 is normally £1,073,100. After this, any lump sum payments made during your lifetime, above the LSDBA will be taxed at your or your beneficiary’s marginal tax rate.
Marginal tax rate
What is it? The highest rate of tax you’ll pay when taking income from your pension, based on the income tax band you fall into.
More detail: When you start accessing your pension, any amount above the tax-free lump sum is subject to income tax. The amount you withdraw is taxed at your marginal rate, which depends on your total taxable income for the tax year. If you withdraw an amount that pushes you into a higher tax bracket, only the portion above that threshold will be taxed at the higher rate, whilst the rest is taxed at the lower rate that applies to that income.
Income tax band 2024/25 England, Wales, and Northern Ireland
| Income tax band | Your income | Income tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic tax rate | From £12,571 to £37,700 | 20% |
| Higher tax rate | From £37,701 to £125,140 | 40% |
| Additional tax rate | Above £125,140 | 45% |
Income tax bands 2024/25 Scotland
| Income tax band | Your income | Income tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter tax rate | From £12,571 to £14,876 | 19% |
| Basic tax rate | From £14,877 to £26,561 | 20% |
| Intermediate tax rate | From £26,562 to £43,662 | 21% |
| Higher tax rate | From £43,663 to £75,000 | 42% |
| Advanced tax rate | From £75,001 to £125,140 | 45% |
| Top tax rate* | Above £125,140 | 48% |
* You won’t be eligible for any personal allowance if you earn above £125,140
Money Purchase Annual Allowance (MPAA)
What is it? The limit on the amount of money you can pay into your defined contribution pension and still get tax relief on it once you’ve started taking taxable income from any pension.
More detail: Even if you’ve started to flexibly access your pension, you can still pay into it tax-free. But the amount you can contribute each year is limited. The limit was increased to £10,000 in the 2023/24 tax year.
Overseas transfer allowance
What is it? The amount of allowance available applied to any pensions you transfer to a Qualified Recognised Overseas Pension Scheme (QROPS).
More detail: The amount most people can transfer to a Qualified Recognised Overseas Pension Scheme is £1,073,100. Any transfers over this amount would be subject to an Overseas Transfer Charge (OTC).
Pension
What is it? A long-term investment product designed for later life that provides some tax-relief on the money you save into it. As well as tax-free growth on the investments within a pension.
More detail: A pension is typically a pot of money that you’ve been paying into to help save for retirement. It’s designed to support you with income in later life, or when you decide to stop working. You usually can’t access your pension until age 55 (rising to 57 in 2028), but there are some circumstances where you’ll be able to access your pension sooner. For example, in serious ill health.
Pension Contribution
What is it? Money you save into your pension for retirement.
More detail: In its simplest terms, a pension contribution is any money you save into your pension, whether that’s a personal or workplace pension. You can contribute to your pension through; salary sacrifice into your workplace pension, lump sums, or regular payments into your personal pension.
Pension Commencement Lump Sum
What is it? A portion of your pension savings that you choose to take as a tax-free lump sum when you start accessing your pension.
More detail: When you decide to start accessing your pension, you can take 25% of it as a tax-free lump sum, but it can’t be more than £268,275. The remaining 75% of your pension will be taxed at your marginal income tax rate. The Pension Commencement Lump Sum doesn’t need to be taken in one go from each of your pensions (if you have more than one).
Extra detail: Also see tax-free lump sum.
Personal pension
What is it? A personal or “private” pension is a long-term investment product designed for later life that is set up by an individual, not a workplace.
More detail: A personal pension is also known as a private pension and it differs from a workplace pension, which is set up by your employer. A personal pension is opened by you, and where you choose to save your money (choosing your provider), or how you invest your money (choosing your own funds or assets) for retirement is up to you.
Qualifying earnings
What is it? The amount of earnings used to calculate how much both employee and employer need to contribute to the employee’s workplace pension scheme.
More detail: Qualifying earnings are the portion of an employee’s salary which will count towards any pension contributions. For example, this may include your regular salary, any overtime or bonuses or commissions, but doesn’t include things like expenses and other benefits your workplace may offer, like health insurance.
Qualified Recognised Overseas Pension Scheme (QROPS)
What is it? A pension scheme based outside the UK, that HMRC allows individuals to transfer their pension savings to.
More detail: Qualified Recognised Overseas Pension Scheme is a pension scheme which allows individuals who’ve built up their pension savings in the UK to transfer them to a scheme overseas without facing UK tax penalties. The amount that most people can transfer from the 2024/25 tax year is £1,073,100.
Salary sacrifice
What is it? The portion of your salary you give up that is paid into your workplace pension by your employer.
More detail: If you regularly contribute to your workplace pension it may be through salary sacrifice. The benefit of salary sacrifice is that less National Insurance is paid. This is because your salary will reduce.
Extra detail: Salary sacrifice reduces your overall gross salary, which lowers the amount of tax you must pay. This means your take home pay could go up!
Self-Invested Personal Pension (SIPP)
What is it? A Self-Invested Personal Pension is a type of personal pension that allows you the flexibility to choose where your retirement savings are invested.
More detail: A SIPP and a personal pension are similar. You usually have a bit more control when it comes to where your pension saving is invested in a SIPP. You may also have access to a wider range of investments, like stocks, bonds, or commercial property. SIPPs may have higher fees compared to personal pensions and are usually self-managed, meaning you have the responsibility of managing your investments.
State Pension
What is it? The State Pension is a payment made by the government to eligible individuals in the UK, to help fund living costs in later life.
More detail: The State Pension is designed to offer support during retirement, but it might not be enough to support your retirement goals. The new full state pension amount from 6 April 2024 is £221.20 per week, or £11,502.40 per year.
The amount of state pension you are eligible for depends on your National Insurance record and the contributions you’ve made throughout your working life. The age you can access your pension is 66, however this is set to increase to 67 by 2028. You can check your National Insurance record here.
State Pension age
What is it? The age which you can claim and receive State Pension.
More detail: The State Pension age is currently 66 but this is rising to 67 by 2028. State Pension age is different to the retirement age of personal pensions, which is 55 (rising to 57 from 2028).
Tapered Annual Allowance
What is it? The reduction in annual allowance high earners receive when making pension contributions.
More detail: The Tapered Annual Allowance affects high earners with an adjusted income over £260,000 and a threshold income of £200,000. The annual allowance is usually £60,000 per year but is reduced by £1 for every £2 of adjusted income that is over £260,000, down to a minimum of £10,000.
Tax-free lump sum
What is it? 25% of any lump sum you take from your pension which you can withdraw completely tax-free.
More detail: When you’re ready to access your pension, you can take 25% of it as a lump sum, that is completely tax-free and the remaining 75% of your pension will be taxed at your marginal rate of income tax. You can also take smaller lump sums from your pension, more regularly, where 25% of it is tax free, and the other 75% taxed at your marginal rate of income tax.
Tax relief
What is it? A reduction in income tax you pay, based on your pension contributions.
More detail: When you contribute into your pension, the amount you save is deducted from your total taxable income, which reduces the amount of income tax you must pay. This effectively “relieves” you from paying more tax on the portion of your income you contribute to your pension. The amount of tax relief you receive depends on your marginal tax rate and any pension contribution rules.
Tax relief at source
What is it? The tax relief your pension provider automatically claims on your behalf before adding it to your pension pot.
More detail: When you contribute into certain pensions, your provider automatically adds extra money to your pension pot from the government. It’s based on the basic rate of income tax, which is 20%. If you added £80 into your pension, your provider claims an additional £20 from HMRC, boosting the total contribution to £100. Everyone receives at least the basic rate tax relief on their pension contributions. If you pay higher or additional rate tax, you can claim further tax relief through your tax return.
Extra detail: Workplace pension schemes that use a “net pay” arrangement, don’t work in this way, and instead will pay in any contributions into the pension scheme through their payroll before income tax is paid. If you’re not sure which applies to you, you should speak to your workplace pension team.
Threshold income
What is it? The amount of total taxable income which, if over £200,000, is used, alongside adjusted income, to see whether you would have a tapered annual allowance.
More detail: Your threshold income is calculated by adding up your gross income, any taxable benefits, bonuses or commissions and dividends or interest on savings. It doesn’t include your pension contributions.
Extra detail: If your adjusted income is above £260,000 but your threshold income is below £200,000, your annual allowance won’t be tapered. Your annual allowance will only be tapered if both your threshold income and your adjusted income are above their respective thresholds.
Uncrystallised pension
What is it? A personal pension that has not been accessed for retirement income.
More detail: Before you take or convert any income from your personal pension, it is known as uncrystallised. This means you haven’t used any of your pension to buy an annuity or to drawdown on. The funds in an uncrystallised pension remain invested, and continue to grow until you access them, and they become crystallised.
Uncrystallised funds pension lump sum (UFPLS)
What is it? Lump sums taken directly from your pension which 25% of is tax free, whilst the remaining 75% is taxed at your marginal rate.
More detail: If you don’t use your pension to buy an annuity, or take your pension through drawdown, you can take regular lump sums from your pension in this way. T25% of each lump sum is tax-free, and the remaining 75% is then taxed at your marginal rate of income tax.
Workplace pension
What is it? A pension plan that you and your employer both pay into, designed to help you save for later life.
More detail: Unless you opt-out, both you and your employer will pay into a pension, designed to help you save for retirement. It’s a legal requirement for employees to pay at least 5% and employers pay a minimum of 3% into your workplace pension, known as auto-enrolment.