Pension Terms Explained

Pensions can be confusing and far in the distant future, and the terminology used can be technical and even mystical. We have created you a guide that aims to help you better understand your pension entitlements so you can make informed decisions about your retirement plans.

Annuity: An insurance product that converts your pension savings into a guaranteed lifetime income. The amount you receive depends on the annuity rate offered by the provider.

Capital Gains Tax on Pensions: No CGT is imposed on pension investment growth.

Final Salary/Defined Benefit: An employer-sponsored defined benefit pension scheme where the benefits at retirement are based on earnings and length of membership in the plan. These are rare in the private sector due to the high cost and liability for companies but are still offered by public sector organizations. Before transferring from a final salary scheme, it’s recommended to seek professional advice as these plans offer valuable guarantees.

Group SIPP: A type of pension plan where a company enrolls its employees into a collection of individual pension plans under the company’s name. Each member has their own plan and access to the full features of a SIPP.

Income Drawdown: A way to access your pension pot by leaving it invested and withdrawing funds as needed. At age 55 or over, you can take 25% tax-free and choose to withdraw the rest as a regular income, lump sums, or both. This option allows for flexibility in investment and withdrawal, but also carries the risk of running out of money if too much is withdrawn.

Inheritance Tax on Pensions: Pension funds that have not been touched or are in drawdown pass tax-free to beneficiaries if the holder passes away under age 75.

Investment Platform: An online service for buying, selling, and holding funds. You can use a platform directly (D2C) or through a financial advisor.

Managed Funds/Unit Trusts: A type of investment where money from multiple investors is combined and managed by an investment manager. The manager chooses the stock allocation based on their research.

SIPP (Self-Invested Personal Pension): A cost-effective, flexible, and straightforward way to save for retirement with a wide range of investment options, online management, and flexibility in retirement options.

SSAS (Small Self-Administered Scheme): A defined contribution pension scheme common in small businesses, allowing members to invest in a range of assets including commercial property. The scheme may also offer loans to the company for investment purposes.

Tax Relief: Tax benefits received on contributions made to a pension. This is the highest rate of income tax paid, provided total contributions (by you, your employer, and others) don’t exceed your annual earnings. There are limits to pension contributions, typically up to £40,000 per tax year, but it’s always best to consult a financial advisor.

Example: If you’re a basic rate taxpayer and pay £8,000 into a pension, you get immediate tax relief of 20% for a total contribution of £10,000 (including £2,000 from HMRC in the form of tax relief).

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