Pensions jargon buster

15 common terms explained

Some pension terms can be a bit technical – or a bit vague. Don’t worry, we’re here to help.


An annuity is a financial product usually designed to provide you with a guaranteed income for the rest of your life (this is known as a lifetime annuity). Annuities are available from insurance companies and are usually bought using the money you’ve built up in your pension plan.

Automatic enrolment

A government initiative whereby millions of employees are enrolled into workplace pension schemes. If you’re eligible, your employer will automatically put you in a scheme unless you opt out. They’ll pay money in to help you save for your retirement, and you contribute too.


There are certain charges you have to pay when you have a pension, which are usually taken straight from your pension pot. For example, you’ll normally have to pay a charge to your pension provider and you may also have to pay additional charges for investing in certain investment funds.


When money gets paid into your pension, it’s often referred to as ‘making a contribution’ or ‘making a pension contribution’. You can make contributions yourself, and so can your employer if you’re in a workplace pension, or a personal pension that allows this.

Defined benefit pension

A type of pension that pays a guaranteed retirement income based on your salary and how long you’ve worked for your employer. Final salary pension schemes are probably the best-known type of defined benefit pension scheme – but many have now been closed.

Defined contribution pension

With this type of pension, you build up a pension pot based on contributions from you and/or your employer, plus any investment returns. You then use this pension pot to provide benefits when you retire, normally through an annuity, income drawdown, cash withdrawals or a combination of these. The way your pension pot is invested means its value can go down as well as up and you may get back less than has been paid in.

Income drawdown

Sometimes referred to as flexi-access drawdown (or simply ‘flexible income’), this is essentially a way of taking the money you’ve built up directly from your pension pot, as and when you need it. The money you haven’t yet taken out stays invested, so it has the potential to fall as well as rise in value. Overall you could get back more money than you would from an annuity, but your money could also run out during your lifetime, leaving you with no further income.

Investment funds

The money you pay into your pension is invested in one or more investment funds. Investment funds invest in a range of assets (such as shares, bonds and property) with the aim of achieving certain objectives, such as investment growth.

Marginal tax rate

Your marginal tax rate is the highest rate of income tax you pay on each additional pound of income. Income tax rates are split into bands and if your income increases you could move into the next tax rate band. Find out more at:

Pension lump sum

When you take your benefits your pension scheme may allow you to cash in your pension pot and take it all (or in part) as a lump sum. 25% of the lump sum is tax-free and the balance will be taxed as income at your marginal rate of tax. The provider of your scheme will tell you if this option is available. Find out how much tax you'll pay when you withdraw a lump sum with our calculator

Pension pot

Put simply, the total amount of money you have in your pension.

Pension tax relief

One of the biggest benefits of paying into a pension. For every 80p you pay in, the government gives an extra 20p in tax relief, boosting your contribution to £1. If you’re a higher or additional rate taxpayer, you may be able to claim even more tax relief through PAYE or your self-assessment tax return. If you’re paying into a workplace pension through ‘salary sacrifice’ or ‘salary exchange’ this will have a similar effect – the amount that goes straight into your pension won’t be taxed.

State Pension

A regular payment you can get from the government when you reach State Pension age. The amount you’ll get depends on your National Insurance record. You can find out how much you might get at

State Pension age

The age at which you can start claiming your State Pension, if you're entitled to one. State Pension age can vary depending on your gender and when you were born. You can check yours at

Tax-free cash sum

When you start to take your retirement benefits, you can usually take up to 25% of your defined contribution pension pot as a tax-free lump sum. Any other retirement income, whether from an annuity, income drawdown or cash withdrawals, will be taxed as income at your marginal rate. It may also be possible to take tax-free cash from a defined benefit scheme.

Important note: As with all investments, the value of pensions can go down as well as up, and you may not get back as much as has been paid in. The information in this article is based on current tax rules, which can change. Your tax treatment depends on your individual circumstances.

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