JARGON BUSTER: WHAT THE KEY TERMS MEAN
THE pensions industry is full of jargon. Here are some common terms:
ANNUAL ALLOWANCE
The sum you can save into a pension without losing tax relief. It is £40,000 a year, including employee and employer contributions. But additional rate taxpayers have a lower allowance.
ANNUITY
A contract offered by most insurers to turn a fund into a monthly income. Offers vary widely. Some pay more if you are in poor health. Consider if you want payments to rise yearly, or continue to a spouse when you die – such annuities cost more.
AUTO-ENROLMENT
A Government initiative requiring employers to create a pension pot for workers, funded by a mix of staff and company contributions, and tax relief. The scheme could be extended to the selfemployed in future. Employees can opt out.
DEFINED BENEFITS
A workplace pension providing a guaranteed income on retirement, depending on years worked and salary. Most are now confined to the public sector, though many private sector staff have plans from past work yet to pay out.
DEFINED CONTRIBUTIONS
The main way people now save into a pension. The fund size depends on contributions made and the performance of underlying assets (usually shares).
DRAWDOWN
A more flexible alternative to an annuity, allowing you to take an income from a pension fund when required.
LIFETIME ALLOWANCE
The maximum to which a pension fund can grow (£1 million). Any surplus is liable to further tax.
TAX-FREE CASH
Everyone with a pension can take a slice of taxfree cash from a fund on retirement, usually 25 per cent of its value.