Finance Jargon Buster

Types of Pensions

Many Pension financial terms can be a bit confusing so we’ve put together a quick Jargon Buster this week to help you understand them all the more easily!

Annual Allowance

The annual maximum savings that can be made into a pension, based on your own and any employer contributions before you have to pay tax on them. The Annual Allowance for 2016/17 is £40,000.00. If you’re not earning you can still get Tax Relief on savings up to £3,600 per year.


A form of retirement income that pays a regular payment, usually for life.

Cash Balance Pension

An employer pension arrangement that promises you a pension pot of a specified amount when you reach retirement age. This amount is usually calculated as a proportion of your salary for each year of service.

Cash Lump Sum

Same at a Tax-Free Cash Lump Sum. The amount of cash that you can take from your pension pot tax-free is 25%.

Defined Benefit/ Final Salary Pension

A pension income that is usually based on your salary and the amount of time that you have been employed by your employer. Defined Benefit pensions include ‘Final Salary’ and ‘Career Average’. Usually only available from the public sector.

Defined Contribution

A pension pot that is built up to provide a retirement income based on the amount of contributions and investment returns. There are no guarantees with these schemes and are usually set up and offered by your employer.


Also referred to as Income Drawdown, a pension pot that allows you to withdraw an income from your pension scheme whilst leaving the remaining funds invested.

Flexi-access Drawdown

Allows you to withdraw funds from your pension pot and then take any amount of income without restriction whilst leaving the remaining funds invested. You can take up to 25% as a tax-free lump sum when you first decide to opt into Drawdown.

Guaranteed Annuity Rate (GAR)

A guaranteed income offered by some pension schemes if you take out a Lifetime Annuity with them.

Guaranteed Drawdown

Combines a guaranteed income for life with the flexibility of drawdown.


An increase in the general level of prices of goods and services

Lifetime Allowance

The maximum value of pension savings that can be built up without incurring a tax charge when you come to take your pension. From the 6th April 2016, this Lifetime Allowance is £1million. Exceeding this allowance will mean that you have to pay tax on the excess over the allowance at a rate of 55% or 25% if you take it as an income.

Market Value Reduction

A reduction on your pension pot that may apply if you want to cash in a with-profits policy before or after it’s maturity date or a date specified in the policy documents.

State Pension

A regular payment from the Government that you qualify for when you reach State Retirement Age.

If you are confused about your pension arrangement, you’d like to receive some pension advice or you’d like to talk about your retirement options why not get in touch? We are specialists in Financial Advice and are available to provide you with tailored financial advice. Call 0800 044 5733 or complete the form below.

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