Annual allowance
The maximum amount that can be saved by you or on your behalf in a pension scheme each year without giving rise to a tax charge.
Annual Management Charge (AMC)
The Annual Management Charge (AMC) covers the costs associated with the administration, investment and distribution of a defined contribution pension plan.
Beneficiary
A person nominated to receive benefits under a pension scheme, or who will benefit in certain events, such as the death of the pension scheme member or annuitant.
Company pension (also called Occupational pension and Workplace pension)
A pension scheme set up by an employer. Typically both the employer and the employee make regular contributions into the scheme. Company pension schemes can be either defined contribution or defined benefit schemes.
Default Fund
If you have a defined contribution pension scheme, it may offer a a default fund. Your pension contributions will be invested in the default fund if you make no decision or if you choose it over the other funds available.
Defined Benefit pension scheme (also called Final Salary pension scheme)
A type of company pension scheme where what you get when you retire depends on your pensionable earnings and years of membership of that pension scheme. Compare with Defined contribution pension scheme.
Defined Contribution pension scheme (also called Money Purchase pension scheme)
A pension scheme that provides retirement benefits based on the amount of money paid in and investment growth on this money. At retirement you can shop around to choose how your regular retirement income will be provided from the scheme. All personal pension schemes, including stakeholder schemes, are defined contribution pension schemes.
Group Personal Pension (also called Group Personal Pension (GPP) Plan, or GPP)
A type of personal pension scheme set up by an employer on behalf of its employees. Although arranged by the employer, who can also make contributions, each pension contract is between the pension provider and the employee.
Inflation
This is the percentage change in the cost of living over time, measured through the Consumer Prices Index (CPI) or Retail Prices Index (RPI). As prices rise, so the value of money falls.
Lifetime allowance
The total pension funds you can build up in your lifetime without paying extra tax. If you exceed this allowance, your pensions savings may be subject to extra taxation. The lifetime allowance is reviewed and changed periodically by the Government.
Normal Retirement Age (NRA)
If you have a defined benefit pension scheme, this is the age at which your pension scheme specifies your pension benefits will come into payment. Compare with Selected Pension Age.
Pension (also known as Pension fund, Pension income or Retirement income)
This term is used to refer to either the pot of money built up over a number of years (also known as Pension fund), i.e:
- a long-term investment where you can build up a pot of money from your own pension contributions, those of your employer and tax relief added to your contributions (see Defined Contribution pension scheme)
and
- the retirement income you are promised from a Defined Benefit pension scheme)
Or during retirement, the income you are paid from this pension fund (also known as Pension income or Retirement income).
Pensionable earnings
The earnings on which the pension benefits from a defined benefit scheme are calculated. This is usually your basic annual earnings before any bonuses, overtime and commissions. This will normally be set out in your pension documents.
Pension Commencement Lump Sum – see Tax-Free Lump Sum
Personal Pension
A type of defined contribution pension scheme into which you and/or your employer make contributions.
Selected Pension Age
When you start a personal pension plan, you choose an age at which you expect to start taking a retirement income. Compare with Normal Retirement Age.
Stakeholder Pension
A type of personal pension that has to meet certain standards set by the Government.
Statutory Money Purchase Illustration (SMPI)
A forecast of the amount of retirement income your pension pot may be able to buy when you retire, based on assumptions set out by regulations. This is shown in the annual pension statements issued by providers to members of defined contribution pension schemes.
Tax relief
Tax relief means you do not pay any Income Tax on the contributions you and/or your employer make into your pension scheme. Funds held in the scheme also receive favourable tax treatment. Income tax is payable on any income taken from the scheme.
The content on this page is from the Association of British Insurers (ABI) and is correct as at February 2011