Puzzled by Pensions?

If you are starting to plan for your future retirement, that’s great. It can be tricky to understand some of the technical pension advice terms an Independent Financial Adviser may use. So if you are feeling a little perplexed, we have put together this list of common pension advice terms and phrases to help you. It’s simpler than you might think.

Pension Advice Terms


An annuity is a type of pension product designed to provide you with an income for the rest of your life. Annuities are available through a financial adviser and are usually bought using the money you have built up in your pension plan.

Automatic enrolment

A government initiative whereby millions of employees are being put into workplace pension schemes. If you are one of them, your employer will automatically put you in a pension scheme. They pay money in to help you save for your retirement, and you can 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 will normally have to pay a charge to your pension provider. 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 are in a workplace pension, or a personal pension that allows this.

Defined benefit pension

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

Defined contribution pension

With this type of pension, the idea is that you build up a pension pot based on contributions from you and/or your employer, plus any investment returns. You then use this money to provide yourself with an income when you retire.

Income drawdown

Income drawdown is essentially a way of taking the money you have built up in 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 grow (or indeed fall) in value. You will also pay charges on the money you have got invested, which is important to bear in mind.

Investment fund

You might not know this, but the money you pay into your pension doesn’t sit in a bank vault somewhere, gathering dust. Instead it’s invested in one or more investment funds. Investment funds invest in a range of assets (such as shares, bonds and property). The aim of investment funds is to achieve objectives based on your attitude to risk, 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 is split into bands and you pay different rates depending on what your income is.


A pension is a way of saving for your retirement. The idea is you pay money into a pension while you are working, then use it to provide yourself with an income when you retire or semi-retire.

One big benefit of pensions is that you get tax relief on the money you pay in (up to government limits), boosting the amount that goes into your pension pot. Also known as a pension scheme or pension plan.

Pension pot

Put simply, a pension pot is 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 if you are a basic rate payer, boosting your contribution to £1. If you are a higher or additional rate taxpayer, you may be able to claim even more tax relief through your self-assessment tax return. Cheers taxman!

State Pension

A regular payment you can receive from the government when you reach State Pension age. The amount you will get depends on your National Insurance record. You can find out how much you might get at gov.uk/check-state-pension.

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 gov.uk/state-pension-age.

Tax-free lump sum

When you are 55 or older, you can usually take up to 25% of your defined contribution pension pot as tax-free cash. The other 75% will be taxed at your marginal rate. It may also be possible to take tax free cash from a defined benefit scheme, but in most cases this will reduce the level of income you can receive.

As with most investments, the value of pensions can go down as well as up so 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.

Source: Aviva June 2020