If you’re looking for an investment product that matches your needs, it’s useful to have a good grasp of pension-related terminology.
Here’s a glossary of the most commonly used terms.
Glossary of pensions terms
• Abatement
This is the reduction of someone’s pension (pound-for-pound) if they decide to go back to work after retirement. It applies if their post-retirement salary, plus their pension, is more than their earnings before retirement.
• Accrual Rate
This refers to the rate at which pension benefits are built up, within a DB (defined benefit) scheme.
• Active Member
Anyone who pays into a pension scheme is an active member.
• Annual Compensation Payment
This is your base salary, plus the value of any other financial payment that your employer gives to you.
• Annuity
An annuity is a pension bought by someone when they retire, from an insurance company, using the funds that they’ve saved in a DC, personal or stakeholder pension plan.
• Beneficiary
A beneficiary is an individual who benefits from a will, trust, or an insurance policy.
• Benefit Crystallisation Event (BCE)
This refers to a test that’s carried out whenever benefits are taken from a pension scheme, to ensure that the right tax charge is applied (if it exceeds the lifetime allowance).
• Career Revalued Benefits (CRB)
This DB scheme bases the pension benefits on earnings, and revaluates them over the duration of the scheme.
• Civil Service Pensions (CSP)
The CSP scheme is offered to all employees in government departments, and also public organisations like museums.
• Contractual Maternity / Paternity Pay (CMP / CPP)
This is a payment given during maternity or paternity leave, and is in addition to the statutory rates.
• CPI
The Consumer Prices Index (CPI) measures the inflation of consumer prices. It’s sometimes used to revalue pensions in the UK.
• Deferred Member
When an individual no longer pays money into their pension, but retains their rights, they are called a deferred member.
• Defined Benefit (DB) Scheme
A DB scheme means that guaranteed benefits are paid out after retirement.
• Defined Contribution (DC) Scheme
A DC scheme doesn’t guarantee any level of benefit on retirement, and is a personal pension fund. The pension pay-out is reliant on the contributions paid into the scheme, plus any returns on investment, and the annuity rates.
• Dependant
A dependant is someone who relies on you financially, such as a child.
• Earmarking
When individuals or businesses put aside money for a specific purpose, this is referred to as earmarking.
• Enhanced Protection (EP)
This protection, introduced back in 2006, protects a pension from lifetime allowance tax charges.
• Estate
A person’s estate refers to all the property and wealth that is owned by them. The term is most commonly used after the person has died.
• Final Salary Scheme
This is a type of DB scheme, where the benefits of the pension are calculated using the individual’s salary, the membership, and the rate of accrual.
• Flexible Retirement
Flexible retirement enables employees to receive pension pay-outs while still remaining employed. Usually, they will have reduced their hours or salary.
• Guaranteed Minimum Pension
The GMP is the minimum pension that a scheme has to provide workers who were contracted out of the SERPS (State Earnings-Related Pension Scheme), during the period of 1978 to 1997.
• Lifestyle
A lifestyle pension scheme is meant to secure investment growth as the individual approaches retirement.
• Lifetime Allowance (LTA)
This is the maximum amount of pension that can be taken out without incurring an extra tax charge. At present, this stands at £1.25m.
• National Insurance
National Insurance is an extra contribution which gives individuals access to specific state benefits, such as the State Pension.
• Optional Sick Pay (OSP)
Optional Sick Pay may be paid to workers by their employer. This is equal to either some or all of the employee’s usual earnings.
• Partnership Pension Account
This is a Civil Service defined contribution scheme, with employer contributions. It was introduced in 2002.
• Pension
A pension is an income paid out to retired individuals who have entered into a pension scheme.
• Pensionable Allowances
This is the government cap on the amount you’re permitted to save each year, on which you’re able to earn relief.
• Pensionable Bonuses
Bonuses are used to work out an individual’s pension contributions, as part of their pensionable earnings.
• Pensionable Earnings
These are the earnings used to identify how much an individual should be contributing into their pension. This includes not only salary, but also commission, bonuses and overtime.
• Retired Member
A retired member is someone who is receiving their pension benefits.
• Salary Sacrifice
This is how pension contributions are deducted from a salary. The individual’s wages are lowered by the amount they contribute to the pension, and the employer then pays contributions on their behalf.
• Spouse / Dependant Pension
Upon an individual’s death, the pension can be paid to a spouse or dependant.
• Stakeholder Pension
This is a form of defined contribution personal pension, sometimes offered by employers. A stakeholder pension has low minimum contributions and capped charges.
• State Pension
This is the pension paid by the State, once the individual reaches the official State Retirement Age.
• State Pension Age
This is the age at which a person can claim a State Pension (also referred to as the State Retirement Age).
• Widow or Widower / Civil Partner
The term refers to a legal partner of an individual that has died, who may be entitled to receive the pension benefits of their deceased husband, wife or partner.