Annuity Jargon Buster

Accrual rate
The proportion of pensionable earnings you receive as a pension for each year of a pension scheme
membership.

Annuity
An annuity is a series of fixed payments that are paid at regular intervals – usually until you die.

Annuity Calculator
An annuity calculator is a tool to help you calculate the best annuity rates from the open market.

AVCs – Additional Voluntary Contributions
A pension top-up for an occupational pension. You pay contributions into a scheme run by your employer to boost your main pension.

Contracting out
The facility to leave the State Second Pension (or SERPS) and build up benefits in a personal pension.

FSAVCs – Free-Standing Additional Voluntary Contributions
A pension top-up policy for an occupational pension, but separate from your employer’s pension scheme and normally run by an insurance firm.

Group Personal Pension
A type of personal pension offered by some employers but not classified as an occupational pension scheme
– see Money purchase pension.

Lifetime annuity
A lifetime annuity converts money from your pension fund into a pension annuity which is income, which is taxed. There are different types to suit your circumstances

Money purchase pension
Some occupational pensions and all personal, group personal, stakeholder, FSAVCs and some AVCs are money purchase pensions. Your contributions are invested in, for example, the stockmarket. The size of your fund depends on how much is invested and how well those investments do. At retirement, some or all of the fund may be used to buy an annuity.

Occupational pension
Available through employers and run by pension scheme trustees. There are two types – salary-related (defined benefit) and money purchase (defined contribution).

Personal pension
A pension policy you take out yourself from an insurance company or another financial institution and into which you pay contributions. It may also be offered by employers – see Money purchase pension.

Protected rights pension
The part of your pension fund which was used to contract out of the State Second Pension (or SERPS) that must be used to buy a protected rights annuity.

Salary-related pension scheme (also known as a final salary or defined benefit)
A type of occupational pension. The amount of pension you get is worked out on your salary at or near retirement, or when you left employment, and your pensionable service.

Stakeholder pension
A type of personal pension that has to meet certain standards set by the government.

State Pension
A pension based on your National Insurance contribution record.

State Second Pension
An additional State pension paid on top of your basic State Pension. This used to be called SERPS. Selfemployed people cannot build up a State Second Pension.

Tax-free lump sum
An amount of cash you can take at retirement free of tax set by HRMC. Individual pension schemes may have different rules on the amount of tax free cash you can take.

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