Pensions - Jargon

Annuity
An annuity converts the sum of money from your pension fund into pension income, which is taxed. There are different types to suit your circumstances – see the FSA guide to pensions 3: Annuities and income withdrawal. You currently have to buy an annuity by age 75 if you have a personal, stakeholder or group personal pension, an FSAVC or some AVC plans.

AVCs – Additional Voluntary Contributions
A pension top-up for an occupational pension. You pay contributions into a scheme run by your employer to boost your main pension.

FSAVCs – Free-Standing Additional Voluntary Contributions
A pension top-up policy, also for an occupational pension, but is separate from your employer’s pension scheme and is run by a financial services firm.

Group Personal Pension
A type of personal pension employers arranged with a pension provider for their employees, possibly with special arrangements, but it is not classified as ‘occupational’. See ‘money purchase pension’.

Income withdrawal
A method where you can delay buying an annuity but can take an income direct from your pension fund. You currently have to buy an annuity by your 75th birthday.

Money purchase pension
Some occupational pensions and all personal, group personal, stakeholder, FSAVCs and some AVCs are money purchase pensions. Your contributions are invested in, for example, the stock market and the size of your fund depends on how well your investments do.

Occupational pension
Only available through employers and run by pension scheme trustees. There are two types – salary-related and money purchase.

Open market option
You do not have to buy an annuity from your pension provider, you can shop around to find a better deal – this is called the ‘open-market option’.

Personal pension
A pension policy you take out yourself from an insurance company or financial institution into which you pay contributions. See ‘money purchase pension’.

Salary-related pension scheme (‘final salary’ or ‘defined benefit’)
A type of occupational pension. The amount of pension you get is worked out on your salary at or near retirement, or when you left, and your pensionable service.

Stakeholder pension
A type of personal pension that has to meet minimum standards set down in law. You can take one out yourself or it may be available through your employer, but is not classified as ‘occupational’. See ‘money purchase pension’.

State Pension
The Pension Service (part of the Department for Work and Pensions) will pay your basic State Pension based on your National Insurance contributions. An additional State Pension based on your earnings may also be available.

Tax-free lump sum
The HM Revenue and Customs limits how much you can take as a tax-free lump sum from your personal or stakeholder pension fund – currently a quarter (25%) of your fund. For occupational pensions it depends on the rules of the scheme.