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The Ultimate Guide to Pension Terminology

Finance, in general, can be a hard subject for many to have a firm grasp on. In fact, nine in 10 UK consumers are struggling with financial literacy. Understanding pensions is not exempt from this, as 55% of working-age adults don’t feel confident about their understanding of pensions to make decisions about saving for retirement.

This guide will explain what all these pension terms mean and help people make more informed choices when it comes to their finances.

Important Pension Terms Explained


  • Active Member — A pension scheme member making contributions.
  • Annual Allowance — The total amount you can get each year from pension savings without having to pay tax.
  • Annuity/Annuitant — An annuity is a product you can get from cashing in your pension when you retire to earn income for a set period or for the rest of your life. An annuitant is someone who receives an annuity.
  • Auto-enrolment — The law requires your employer to enroll you into a pension scheme and contribute to it.


  • Beneficiary — A person or organization that receives benefits from a trust, a will, a life insurance policy, or death benefits from a pension or annuity.


  • Collective Defined Contribution (CDC) — A pension scheme where employers make a fixed rate of contributions and members can expect variable increases in their pension payments. Members share the risk from their investments while employers bear no ongoing risk.
  • Consumer Prices Index (CPI) — Depending on the pension scheme, payments and liabilities are adjusted according to the CPI. This method is used to account for inflation.


  • Declaration of Compliance — Employers have to confirm with The Pensions Regulator that they are automatically enrolling their employees in a pension scheme and providing supporting information through a Declaration of Compliance.
  • Deferred Member — A pension scheme member who has stopped building up new benefits but has not taken their benefits, such as a person who is part of a workplace scheme but has left that specific workplace. You can choose to be a deferred member without having to leave employment.
  • Defined Benefit (DB) Scheme — A pension scheme where your retirement income is based on your salary and the time you’ve spent with a company. You typically get some of your pension when you retire as a tax-free cash lump sum and the rest as regular income with tax.
  • Defined Contribution (DC) Scheme — A pension scheme where you and your employer’s contributions are put into investments to grow your pot. Your retirement income is based on how much was contributed and how well those investments perform.
  • Dependent — A person who is financially dependent on a pension scheme member (e.g. spouse, children)


  • Eligible Jobholder — UK workers who are 22 years old or over, under the State Pension Age, and have earnings above a certain threshold, which changes every April. They must be automatically enrolled into a qualifying workplace pension scheme.
  • Entitled Worker — UK workers who are 16 years old or over, under 75 years old, and have earnings below a certain threshold, which changes every April. They can join a pension scheme, which doesn’t have to be a qualifying workplace pension scheme, and employers don’t have to make contributions.


  • Flexible Retirement Income Product — Lets you change how much you get from your pension pot or switch the remaining amount to a more secure retirement income product. Typically called “income drawdown” or “pension drawdown”.


  • Guaranteed Minimum Pension (GMP) — This is the minimum pension that a UK occupational pension scheme has to pay the employees who were contracted out of the State Earnings-Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997. Due to inequalities of retirement ages between male and female members, as well as the ensuing lawsuits, this is now in the process of revaluation under GMP Equalisation.
  • Guarantee Period — An option when taking an annuity to get regular payments for a set period even if you die before this period is over. Payments will go to your dependent(s) in the event of your death while the Guarantee Period is ongoing.


  • Hybrid Scheme — A workplace pension scheme composed of DB and DC structures.


  • Indexation/Index-linked — Indexation is the adjustment process in pension benefits to match the changes in the cost of living. An index-linked pension gets an annual increase to account for inflation.
  • Inducement — An illegal method by which employers encourage employees to not join or opt out of a pension scheme.


  • Lifetime Allowance (LTA) — The limit on how much money you can take from your pension without paying tax.


  • Marginal Rate of Income Tax — Determines how much income tax you have to pay when withdrawing from your pension.
  • Minimum Contributions — The minimum amount you have to pay into your pension every month. Employees have to pay at least 5% of their qualifying earnings into their workplace pension schemes, while employers have to pay at least 3%. Personal pension schemes may require their own specific minimum contributions.


  • National Insurance (NI) — The tax you pay to contribute to your state pension and qualify for its benefits.
  • Non-eligible Jobholder — UK workers who are 16 years old or over, under 75 years old, and have earnings above a certain threshold, which changes every April. They can choose to join a qualifying workplace pension scheme, and if they do, employers must make the minimum contribution.
  • Normal Minimum Pension Age — The age at which you can start receiving pension benefits. It’s typically 55 years old, but if you joined a scheme before 6 April 2006, it could be 50 depending on certain conditions.


  • Opt In/Opt Out — Opting in is how non-eligible jobholders and eligible jobholders in postponement join a pension scheme. Opting out is how auto-enrolled employees can leave a pension scheme.


  • Partial Pensioner — A pension scheme member who has only taken some benefits and still has some left to take. Not all schemes allow this.
  • Pay Reference Period — The period when an employee gets paid, such as weekly or monthly.
  • Pension — Retirement income you receive after a long-term investment in a scheme for financial support in your senior years.
  • Pension Plan — A plan or scheme where your financial contributions are put into a long-term investment fund.
  • Pensioner — A pension scheme member who is currently receiving regular payments from their scheme.


  • Qualifying Earnings (QE) — Your earnings that determine if you are an eligible worker. Salary, commissions, bonuses, overtime, statutory sick pay, statutory maternity or paternity, and adoption pay are all accounted for.


  • Right to Join — Your right as an employee and entitled worker to join a pension scheme.
  • Regulated Financial Adviser — Financial advisers authorized and regulated by the Financial Conduct Authority (FCA). They are legally bound to follow the FCA’s rules when providing financial advice, making sure they know your financial and personal circumstances before recommending financial products.


  • Scheme Pays — A method where you get your pension scheme to pay for the charge on your behalf if you exceed your annual allowance, with the cost of reducing your benefits.
  • Staging Date — The date when an employer has to comply with auto-enrolment. The size of the employer’s largest PAYE group determines the staging date.
  • State Pension — The regular income you receive from the government when you reach the state pension age. The amount depends on your National Insurance record and if you’ve been making National Insurance Contributions (NICs) while working.


  • Tax Relief — Pension contributions are taxed, but you can lower the amount of tax you have to pay for your contributions with tax relief.
  • Transfer Value — The amount of money your current pension scheme will offer you if you choose to transfer your benefits to another scheme. It is also called cash equivalent transfer value (CETV).
  • Trustee — Manages a pension scheme along with other trustees, serving the best interests of the pension scheme members and beneficiaries.

Understanding the Language of Pensions

Gaining a basic understanding of pension industry jargon is an important first step to securing your retirement income. Without this knowledge, it would be difficult to make the best choices for your financial future.

We hope this glossary of pension terminology will act as a handy reference tool and shed light on some seemingly complex concepts (so remember to bookmark it).

To help you make even more informed decisions regarding your potential retirement income, Procentia’s state-of-the-art pension administration software gives you all the control you need for your pensions. Find out how by scheduling a demo with us today.