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 pension tax-free each year. The annual allowance is currently £40,000 a year. Any personal contributions you make are capped at 100% of your salary. You will be charged income tax on any pension contributions above the annual allowance. 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.
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.
You must be automatically enrolled onto your employer’s workplace pension scheme in accordance with UK law. In addition, Auto-Enrolment requires that employees pay at least 5% of qualifying earnings into their workplace pension, and employers must pay in at least 3%. Qualifying earnings are what you earn between £6,240 and £50,270 for 2022/23.
You will be auto-enrolled as long as you:
- Work in the UK
- Are aged between 22 and State Pension age
- Earn over £10,000
- Are not already a member of a suitable workplace pension scheme.
Carry forward rule
The pension carry forward rule allows you to make pension contributions above the annual allowance of £40,000 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 from your pot or your contribution every time you pay into your pension.
Crystallised funds pension lump sum
Also called a pension commencement lump sum (PCLS) or tax-free cash. After 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 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.
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.
Your pension fund is managed by a fund manager, also called a money manager, who makes specific investment decisions about the pension savings within the fund, like which companies to invest in or where these investments are located around the world.
Guaranteed minimum pension (GMP)
The guaranteed minimum pension (GMP) was a workplace pension scheme provided to public sector employees on defined benefit pensions who were contracted out of the State Earnings-Related Pension Scheme (SERPS) between April 6, 1978, and April 5, 1997. The GMP was set up to match the SERPS pension these employees would have received if not contracted out.
If you were enrolled onto a GMP between 1988 and 1997, your GMP used to offer inflation-linked increases up to 3%. If you enrolled prior to 1988, you are not 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, your new State Pension eligibility is calculated based on how much pension you built up using the old systems.
See also: 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. It’s worth checking to see how a GAR compares with rates on the market, and whether it comes with terms and conditions, like a specified retirement date, that might impact your retirement plans.
Guaranteed drawdown leaves your pension savings invested after retirement, like with income drawdown, whilst also providing a guaranteed income, like with an annuity.
HM Revenue and Customs. HMRC is responsible for collecting tax in the UK and provides tax relief on pension contributions.
An investment is where money paid into an investment fund, like a pension scheme, 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.
An investment fund is a financial product that is managed by a fund manager, who will make specific investment decisions about the money in the fund.
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) authorises a pension provider to contact a customer’s other financial services providers, so that 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 a limit on the amount of money you can withdraw from your pension before triggering an extra tax charge from HMRC. The lifetime allowance is currently £1,073,100 (in 2022/23) and applies across all of your pensions except the State Pension.
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 2022/23 (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 - £150,000||40%|
|Additional Rate||Over £150,000||45%|
Income Tax rates 2022/23 (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 - £150,000||41%|
|Top rate||Over £150,000||46%|
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 is set at £4,000. The MPAA only applies when you’re drawing the taxable part of your pension. You will 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.
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.
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.
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 rights pension
A protected rights pension is a type of historical personal pension. If you made National Insurance (NI) Contributions above the amount required for the basic State Pension the government paid these excess NI Contributions into a protected rights pension. This means that if you were contracted out of SERPS, your extra National Insurance Contributions were paid into a protected rights pension. Nowadays though, there is no difference between protected rights and non-protected rights pensions or how you access your pension savings.
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 into a personal pension instead, called a protected rights pension. If you opted out of SERPS, you will have paid lower NI Contributions than people who paid into SERPS, so you will be entitled to a lower State Pension amount.
If you’re entitled to SERPS, you will start receiving it upon 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 NI Contributions during your working life.
State Pension age
You can claim State Pension once you reach State Pension age, which is currently age 66 and set to rise. The State Pension age is different to the retirement age for personal and workplace pension, which is currently age 55.
Tapered annual allowance
If you have 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 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 pension contributions. HMRC will add a 25% tax top up onto basic rate taxpayers’ contributions, which amounts to an extra £25 for every £100 you pay in. 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
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. You are required to pay at least 5% of your qualifying earnings into your pension, whilst your employer must pay in at least 3%.
See also: Auto-Enrolment