Your adjusted income is made up of your gross annual income, plus the total value of your pension contributions, including any employer contributions. For example, Jane earns £100,000 a year. She paid £5,000 into her pension and her employer paid £3,000. Therefore Jane’s adjusted income is £108,000.
You can find further information on adjusted income on the HMRC website.
The annual allowance, also called the ‘annual pension contribution limit’, is a cap on how much you can save into your private or workplace pensions tax-free each year. The annual allowance in 2023/24 is £60,000 a year. You’ll be charged an annual allowance tax on any pension contributions above this limit. The annual allowance applies across all of your pension savings, not per pension scheme.
If your adjusted income exceeds £240,000, your annual allowance may be reduced. See ‘tapered annual allowance’ for more information on what this means and how this works.
See also: Money purchase annual allowance (MPAA), Carry forward rule.
Annual management charge
An annual management charge (AMC), also called an annual management fee, is the yearly cost for your pension provider to manage your savings. An AMC may be taken as a flat fee or as a percentage of the value of your pension pot. Check your annual pension statement to find details about your AMC.
At retirement, you can cash in your pension to buy an annuity, which will pay you a guaranteed income, either for a fixed period or for the rest of your life.
When you start a term of employment, in most circumstances your employer’s required to enter you into a workplace pension scheme in accordance with UK law, this is known as Auto-Enrolment. Unless you opt-out, as an employee you’ll need to pay at least 5% of your gross qualifying earnings into your workplace pension. Your employer must pay at least 3%. Qualifying earnings are what you earn between £6,240 and £50,270 for 2023/24.
You’ll be auto-enrolled as long as you:
- Work in the UK
- Are aged between 22 and State Pension age (currently 66, but rising to 67 by 2028)
- Earn over £10,000
- Don’t opt-out of your workplace scheme.
Carry forward rule
The pension carry forward rule allows you to make pension contributions above the annual allowance of £60,000 and still receive tax relief, by carrying forward any unused allowance from the previous three years. For personal contributions, you can carry forward unused allowance up to the value of your annual earnings. Any contributions made over this amount will be subject to income tax.
A contribution charge is a percentage fee taken by your pension provider every time you pay into your pension. This is usually deducted from either your pension pot or your contribution. There are no contribution charges with any PensionBee plans.
Crystallised funds pension lump sum
Also known as a pension commencement lump sum (PCLS) or tax-free cash. When crystallising your pension, you can choose to take 25% of your savings as a tax-free lump sum.
See also: Uncrystallised funds pension lump sum (UFPLS) / Tax free lump sum.
The Department for Work and Pensions (DWP) is a branch of the government that’s responsible for welfare, pensions and child maintenance policy in the UK.
Defined benefit pension scheme
Defined contribution pension scheme
Defined contribution (DC) pensions, also called money purchase pensions, are the most common type of workplace and personal pension. Your retirement income will depend on how much you’ve saved into your defined contribution pension and how your investment has performed over time.
Income drawdown, also called flexible retirement income product or pension drawdown, allows you to leave your pension savings invested and take cash as and when you need it during retirement.
When someone gets divorced, it’s common for their assets to split with their former partner. As pensions are often one of our larger financial assets, there’s a likelihood that they’ll be included in a settlement. An earmarked pension is the proportion of an individual’s pension owed to their former partner when they start withdrawing. That amount is ‘earmarked’ for the other person.
This can also be known as ‘Pension earmarking’ in Scotland, and ‘Pensions attachment’ in England, Wales and Northern Ireland. Usually an earmarked pension order moves across when a full pension is transferred to a new scheme, however this isn’t guaranteed and your new pension provider can reject it.
See also: Pension sharing order (PSO).
Easy bank transfer
See also: Open Banking.
Emergency tax code
Emergency tax codes can be applied temporarily if HMRC doesn’t have up-to-date details of your income. You may be placed on an emergency tax code when you start taking the taxable 75% of your pension. This may result in an overpayment of income tax on your pension, which you can claim back from HMRC.
See also: Open Banking.
A pension fund manager, also called a money manager, makes specific investment decisions on behalf of large amounts of invested customers, such as which companies to invest in or where these investments are located around the world. BlackRock and State Street Global Advisors are some of the biggest fund managers in the world.
Guaranteed minimum pension (GMP)
The guaranteed minimum pension (GMP) was a workplace pension scheme provided to public sector employees who were contracted out of the State Earnings-Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997. The GMP was set up to match the SERPS pension these employees would have received before they were contracted out.
If you were enrolled onto a GMP between 1988 and 1997, it would have offered inflation-linked increases of up to 3%. If you enrolled before 1988, you wouldn’t have been entitled to any inflation-linked increases. Since April 2016, State Pension reforms mean that inflation-linked increases are no longer offered, regardless of when you got your GMP. Instead, the new State Pension‘s calculated based on how much pension you built up using these old systems.
See also: Defined benefit pension scheme, Public sector employees, Reference scheme test (RST), State Earnings-Related Pension Scheme (SERPS).
Guaranteed annuity rate (GAR)
An annuity rate determines how much retirement income you can purchase with your pension savings. Some pension schemes offer a guaranteed annuity rate (GAR), which offer a favourable rate on an annuity, if you decide to purchase one. It’s worth checking the terms and conditions on your pension plan to see if there are any restrictions to receiving a GAR, such as a specified retirement date. It may also be in your interest to check how a GAR compares to other annuity rates on the market.
See also: Annuity.
Guaranteed drawdown mixes elements that you’d find in an annuity with that of income drawdown. You’re able to leave your pension savings invested after retirement, like with income drawdown, whilst also receiving a guaranteed income, like with an annuity.
See also: Annuity, Drawdown.
HM Revenue and Customs (HMRC) is responsible for collecting tax in the UK and provides tax relief on eligible pension contributions
An investment is where money is paid into an investment fund, such as a pension scheme, with the aim of getting a profitable return. Money invested is used to buy financial products such as stocks, shares, bonds and property. Investment performance and value fluctuate over time in line with financial markets.
See also: Investment fund.
An investment fund is a financial product that is managed by a fund manager, who’ll make specific investment decisions about the money in the fund.
See also: Fund manager.
This is how the value of an investment changes over time. Investments can increase in value, showing positive returns, or decrease, showing negative returns.
All investments come with an element of risk. The level of risk may be higher or lower depending on the type of investment. Greater risk sometimes offers more opportunity for an investment to increase in value, but can also increase the possibility of a fall in value. Lower risk tends to offer greater security against a fall in value, but may also offer smaller returns.
Letter of authority (LOA)
A letter of authority (LOA) is a document that must be signed by a customer authorising a pension provider to contact another financial services company of which they are a customer. Once an LOA is received, documents and information can be shared directly between providers. LOAs may be required in order to transfer a pension more efficiently.
The lifetime allowance is currently £1,073,100 (in 2023/24) and applies across all of your pensions except the State Pension. In the 2023/24) tax year, any amount tested over the lifetime allowance will be taxed as income at your marginal tax rate.
Lifetime allowance protection
Lifetime allowance protection is an insurance that safeguards savers from reductions in the lifetime allowance. There are two protections currently available to eligible savers.
- Individual protection 2016: if your pension(s) were worth more than £1m on 5 April 2016, you can apply for individual protection 2016. This keeps your lifetime allowance at either £1.25m or the value of your pension(s) on the 5 April 2016, whichever amount is lower. You can continue paying into your pension(s) but after you retire, you must pay tax on any withdrawals that exceed your protected lifetime allowance.
- Fixed protection 2016: this fixes your lifetime allowance at £1.25m but you can no longer contribute to your pension without losing the protection.
Marginal tax rate
Also known as your highest tax rate, your marginal tax rate indicates which income tax band you fall into and how much income tax you need to pay on your pension withdrawals.
Income Tax rates 2023/24 (England, Wales and Northern Ireland)
|Income Tax Band||Your income||Income Tax rate|
|Your personal allowance||Up to £12,570||0%|
|Basic Rate||£12,570 - £50,270||20%|
|Higher Rate||£50,270 - £125,140||40%|
|Additional Rate||Over £125,140||45%|
Income Tax rates 2023/24 (Scotland)
|Income Tax Band||Your income||Income Tax rate|
|Your personal allowance||Up to £12,570||0%|
|Starter Rate||£12,570 - £14,732||19%|
|Scottish Basic Rate||£14,732 - £25,688||20%|
|Intermediate Rate||£25,688 - £43,662||21%|
|Higher rate||£43,662 - £125,140||42%|
|Top rate||Over £125,140||47%|
Minimum contributions are a minimum amount you must pay into your pension each month. Workplace pensions require minimum contributions of 5% of qualifying earnings for employees, and 3% for employers. Some personal pension schemes also require minimum contributions.
See also: Auto-Enrolment.
Money purchase annual allowance (MPAA)
The money purchase annual allowance (MPAA) is a limit on how much money you can save into your defined contribution pension tax-free, after you’ve started drawing an income from your pension. Currently, the MPAA for 2023/24 is set at £10,000. The MPAA only applies when you’re drawing the taxable part of your pension. You’ll be charged income tax if you make any contributions over this limit.
See also: Annual allowance.
A person, people, trust, charity, or society that you nominate to receive your pension savings when you die.
Open banking’s a technology that allows customers to share their data securely between financial institutions. The data’s shared via APIs (Application Programming Interfaces), which is a secure technology that requests and sends data with the customer’s consent.
Whilst data sharing’s one of the most important features of Open banking, the other benefit’s the secure, fast transfer of money. Rather than having to log in to your bank account to make a payment, another company can direct you straight to your bank account to confirm or reject a payment request.
Origo is a safe and efficient electronic transfer process which enables vetted and secure financial services providers to transfer pension policies electronically where possible, within an agreed standard transfer time of 12 working days.
A pension is a long-term investment product designed to help you save for retirement, so that you can support yourself financially in later life.
A pension plan invests your money into a long-term investment fund. Different pension plans take different approaches to investment decisions and the type of assets your money will be invested in.
Pension sharing order (PSO)
As part of the financial settlement in a divorce, a court may order your former partner to split their pension with you in a process called ‘pension sharing’. If this happens you are entitled to take a share of their pension straight away and can join their pension scheme or move it into a pension of your own. Not all pension providers will accept a transfer of this nature, so you’ll need to speak to the company you wish to transfer to before taking any action.
See also: Earmarked pension.
A personal pension, also called a private pension, is a long-term investment product designed for saving for retirement that you set up yourself. This is different to a workplace pension, which is set up by your employer. The earliest you can access a personal pension is usually from age 55 (rising to 57 by 2028).
See also: Auto-Enrolment, Workplace pension.
The Private Sector consists of companies that are run privately for profit, and are not associated with or operated by the government.
If you’re a Private Sector employee and aged between 22 and State Pension age, and earn at least £10,000 per year, your employer will be required to enter you into a workplace pension scheme as part of Auto-Enrolment. This will usually be a defined contribution (DC) scheme.
See also: Auto-Enrolment, Defined contribution pension scheme, Public Sector, Workplace pension.
A projection is an estimate of how an investment might perform in the future, based on current trends. However, a projection does not guarantee future performance.
Protected Retirement Age (PRA)
At present, pension legislation states that you need to be aged 55 or over to access your workplace or personal pension. It’s expected this will rise to 57 from 2028 as the normal minimum pension age (NMPA) increases.
A protected retirement age (PRA) can apply to certain careers where early retirement is common such as professional sports, modelling and military service. As a PRA is lost on transfer, we’ll notify you if we find a PRA of 50 or under when transferring a pension so that you can consider if transferring your pension is right for you.
In addition, a technical protected retirement age of 55 may be created where poor historical legal drafting in a pension provider’s trust deed refers to the age of “55” instead of “Normal Minimum Pension Age”. There won’t be a direct financial impact of transferring a pension with a technical protected retirement age of 55 to a pension with an NMPA retirement age, such as the PensionBee Personal Pension. As the law is intended to raise the NMPA to 57 in order to enable pension savers to maintain their savings for longer and to avoid financial hardship prior to the increasing State Pension Age of 67, we will not take further action where we transfer a pension with a technical protected retirement age of 55 and will proceed with the transfer as normal.
Please check with your current provider for any features or special benefits present on your pension which may be lost before transferring.
Protected rights pension
A protected rights pension is a type of historical personal pension. If you made National Insurance Contributions (NICs) above the amount required for the basic State Pension in the past, the government paid these excess NICs into a protected rights pension. This means that if you were contracted out of SERPS, your extra NICs were paid into a protected rights pension. Nowadays though, there’s no difference between protected rights and non-protected rights pensions or how you access your pension savings.
The Public Sector consists of organisations that are owned and run by the government, such as the NHS, Armed Forces and Civil Service.
If you’re a Public Sector employee, it’s likely that you’ll have a defined benefit (DB) pension which will be set up by your employer.
See also: Auto-Enrolment, Defined benefit pension scheme, Private Sector, Workplace pension.
Reference scheme test (RST)
The reference scheme test replaced guaranteed minimum pensions (GMP) from 6 April 1997. Instead of a GMP, employees contracted out of SERPS were enrolled onto a pension scheme with benefits equal to the value of a ‘reference scheme’. This reference scheme, and the criteria to pass the match test, was outlined in law.
See also: Guaranteed minimum pension (GMP), State Earnings-Related Pension Scheme (SERPS).
Your employer may offer salary sacrifice as part of your workplace pension scheme. Salary sacrifice gives up a portion of your salary, which is paid into your pension by your employer alongside their own employer contribution. This allows both you and your employer to pay lower National Insurance Contributions by lowering your qualifying salary.
There are two main types of salary sacrifice:
- Simple or ‘standard’ salary sacrifice reduces your gross salary which could increase your net income, also called take home pay, by decreasing how much tax you need to pay on your salary.
- SMART (Save More And Reduce Tax) salary sacrifice reduces your salary by the amount you would normally pay into your pension, achieving the same amount of take home pay but saving more into your pension by paying less tax on pension contributions.
Shariah-compliant pensions are pensions that invest money in accordance with Islamic principles on finance. For example, Shariah-compliant pensions restrict or exclude investment in certain industries such as tobacco, alcohol, and arms.
Self-Invested Personal Pension (SIPP)
A Self-Invested Personal Pension (SIPP) is a type of defined contribution personal pension that lets you choose how your savings are invested. You can manage your investments yourself, or you can appoint a fund manager to make investment decisions for you.
State Earnings-Related Pension Scheme (SERPS)
SERPS, also called the Additional State Pension, was in place from 1978 to 2002, offering a top up on the basic State Pension. Many people opted out of SERPS, which meant the government paid their extra National Insurance Contributions (NICs) into a personal pension instead, called a protected rights pension. If you opted out of SERPS, you will have paid lower NICs than people who paid into SERPS, so you’ll be entitled to a lower State Pension amount.
If you’re entitled to SERPS, you’ll start receiving it upon reaching State Pension age.
See also: Protected rights pension.
The State Pension is a regular payment you can get from the government once you reach State Pension age. The amount of State Pension you’re eligible to receive is based on your National Insurance record, and whether you have been making National Insurance Contributions during your working life. Currently, both men and women can claim their State Pension from the age of 66. However, this is set to increase to 67 by 2028.
State Pension age
You can claim State Pension once you reach State Pension age, which is currently age 66, but rising to 67 by 2028. The State Pension age is different to the retirement age for personal and workplace pension, which is currently age 55 (rising to 57 from 2028).
Tapered annual allowance
If you’ve got an adjusted income of over £240,000, your annual allowance may be reduced. This is called the tapered annual allowance. For every £2 of income you earn over £240,000, the annual allowance decreases by £1. The maximum reduction is £36,000, therefore a tapered annual allowance can be no lower than £4,000.
See also: Annual allowance.
Tax free lump sum
When you take your pension at retirement, you can withdraw some or all of your pot as a cash lump sum. The first 25% of this withdrawal is tax-free. You’ll pay income tax on the remaining 75%.
Most UK taxpayers get tax relief on their pension contributions. HMRC will usually add a 25% tax top up to basic rate taxpayers’ contributions. For example, if you were to contribute £100, the tax top up will essentially boost that saving up to £125. Higher and additional rate taxpayers can claim further tax relief through their Self-Assessment tax return.
Your personal pension remains uncrystallised until you start taking a retirement income from it using drawdown or an annuity.
See also: Crystallised pension.
Uncrystallised funds pension lump sum (UFPLS)
You can choose to take an uncrystallised funds pension lump sum (UFPLS) if you don’t intend to buy an annuity or take your pension with drawdown. With a UFPLS, 25% of each payment you take from your pension will be tax-free and income tax will be charged on the remaining 75%.
See also: Crystallised funds pension lump sum.
With profits funds are a type of ‘pooled investment’ fund, meaning that you pay into the fund alongside other members. The fund’s then invested in stocks, shares, equities, bonds and property over a set period of time.
With profits funds put in place ‘smoothing’. This means investors in with profits funds don’t get to see the actual value of the underlying assets. The value of the underlying fund changes daily, but customers’ fund values grow by a steady rate, called the regular bonus rate, which is calculated annually.
This smoothing mechanism helps restrict the variation in payout at the point of retirement. Customers can still get their money out at other times: but for smoothing to work, there needs to be a mechanism to protect the whole fund from being depleted by investors trying to exit after a market fall. If a customer wishes to withdraw from the fund early, at a time when the market value of the fund’s reduced, the customer may find that the actual value of the underlying investments is lower. The difference between the fund value and the underlying investments is called a ‘market value reduction’.
A workplace pension is a long-term investment product designed to help you save for retirement. Workplace pensions differ from personal pensions as they are set up by your employer. If eligible, you’re required to pay at least 5% of your qualifying earnings into your pension (which includes tax relief from the government), whilst your employer must pay in at least 3%. The earliest you can access a workplace pension is from age 55 (rising to 57 from 2028).
See also: Auto-Enrolment, Personal pension.
Last edited: 06-04-2023