Pensions Glossary

ACCRUAL RATE - the rate at which pension rights accumulate for each year of elligible pensionable service in a defined benefit scheme. The commonest accrual rate in the UK is 1/60th of final pensionable salary for each year of elligible service.

ACTIVE MEMBER - a member of an occupational pension scheme who is at present accruing benefits under that scheme in respect of current employment or service.

ACTUARY - an adviser on financial questions involving probabilities relating to mortality and other contingencies. They work using statistical techniques.

ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVCs) - additional contributions paid by an occupational pension scheme member to provide additional pension benefits. [find out more]

ANNUAL ALLOWANCE - this is the maximum amount of pension contributions that can be made by an individual that will benefit from tax relief in the given tax year.

ANNUITY - a pension annuity is a guaranteed income for life (made as regular payments) purchased from an annuity provider with the proceeds of a pension fund.

BASIC STATE PENSION - The flat rate state pension available to everyone upon reaching Retirement Age, provided sufficient National Insurance payments have occurred. [find out more]

CAREER AVERAGE REVALUED SCHEME - a career average scheme where benefits are revalued by reference to an appropriate index (usually in some way related to salary / length of service) during relevant pensionable employment. [find out more]

DEFINED BENEFIT SCHEME - a pension scheme where the eventual benefits are defined independent of the contributions payed, i.e. benefits are not directly related to the investments of the scheme. [find out more]

DEFINED CONTRIBUTION - a scheme under which employer contributions and, if applicable, employee contributions, are individually allocated to the credit of the employees, and eventually provide whatever pension the accumulated contributions and investment earnings will buy at retirement - i.e. the final pension is determined entirely by what has been paid into it. [find out more]

ENHANCED PROTECTION - this is a method of protecting both pension benefits built up before A-Day and any growth in these benefits post A-Day.

HYBRID SCHEME -

An occupational pension scheme in which the benefit is calculated as the better of two alternatives, for example on a final salary and a money purchase basis.
An occupational pension scheme which offers both defined benefit and defined contribution benefits.

[find out more]

INCOME DRAWDOWN - this is an option currently available to holders of personal pension arrangements. It offers an alternative to purchasing an annuity where a variable income can be drawn directly from the pension fund. You would need to take advice as to its suitability for you.

INDEXATION

A system whereby pensions in payment and/or preserved benefits are automatically increased at regular intervals by reference to a specified index of prices and earnings.
An investment strategy designed to produce a rate of return in line with a particular index, either by replicating the constituents or by sufficient sampling to give a proxy,

LIFETIME ALLOWANCE - this is effectively the total amount of pension funds an individual can build with contributions that receive tax-relief (in either a single scheme or several different schemes).

MONEY PURCHASE - the determination of an individual member’s benefits by reference to contributions paid into a pension scheme in respect of that member, usually increased by an amount based on the investment return on those contributions.

NORMAL RETIREMENT AGE (NRA) - for employment purposes the age at which employees holding a particular position normally retire from employment.

OCCUPATIONAL PENSION SCHEME - a scheme organised by an employer or on behalf of a group of employers to provide pensions and/or other benefits for or in respect of one or more employers on leaving employment or on death or retirement. [find out more]

OPTING OUT - A decision by an employee to leave or not to join an occupational pension scheme of the employer

PENSIONABLE EARNINGS - the earnings on which benefits and/or contributions are calculated under the pension scheme rules.

PROTECTED RIGHTS - the benefits from a scheme contracted out on a money purchase basis deriving from at least the minimum contributions or minimum payments, which are provided in a specified form as a necessary condition of contracting out.

RETAINED BENEFITS - retirement or death benefits in respect of an employee deriving from an earlier period of employment or self employment. In some circumstances retained benefits must be taken into account in the maximum approvable benefits.

TAX RELIEF - this is the mechanism by which successive Governments have encouraged individuals and corporations to make private provision for retirement.
For individuals, it means that tax can be reclaimed on pension contributions at the highest rate at which it is paid. It is the basis of the efficiency of pensions investment as a saving method for retirement.

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