Pension Terms and Glossary
Terminology relating to personal pension, pensions, retirement pensions, annuity and retirement annuities
This page provides reference to pension terms which you may find useful if you’re a novice to this subject area.
What is a pension plan?
A pension plan is a pension retirement scheme where the employer funds a pool of money which is set aside to pay out a pension to the employee upon retirement.
How does a pension fund work?
A pension fund in the case of a personal pension is your fund of money which you’ve built-up by making contributions from your salary. This fund of money is then usually invested through a pension provider company, into investment markets in order to gain growth.
What’s the difference between a state pension and a personal pension?
A state pension is funded by your regular national insurance contributions. The state pension is then paid out at the official retirement age. A personal pension is one that you’ve funded yourself from contributions and is held together to form a pot of money that is usually invested in the financial markets to achieve growth, and paid when you nominate a date.
What is Guaranteed Minimum Pension (GMP)?
GMP is the minimum amount of pension benefits you will receive if you’ve contracted out of the state SERPS scheme. SERPS (State Earnings Related Pension Scheme) was an additional state pension which ran from 1978 to 2002 which allowed individuals to gain an increase on their levels of state pension. Contracting Out of SERPS was allowed so that individuals could augment their private or workplace pension instead of continuing within SERPS.
How do I know what my GPM is?
Your GMP is revalued each year to be in-line with the increase in average national earnings. You can visit the Government’s site to see how to calculate your pension scheme’s GMP below:
What’s good about having a pension?
Firstly, if you want to lower the amount you pay in taxes, a pension will allow you to gain generous tax relieve on your contributions, ensuring you can enjoy a higher standard of living when you retire.
What is Pension Vesting (crystallisation)?
Pension Vesting is where you are able to receive the financial benefits from your personal pension funds. These benefits mean that you can take up to 25% of your pension fund’s value as a lump sum which is tax free. The balance of your fund can then be drawn-down, or you can purchase an annuity with the remainder of the fund to give you a guaranteed regular income until death. Draw-down needs to be very carefully managed to ensure you do not deplete your fund to the point of being without future income.
What is Pension Shortfall?
This is a catastrophic situation where a company that provides their employees with a defined benefits pension scheme is unable to meet its financial obligations, meaning that scheme members will be deprived of their rightful income.
How do I know if I have a Pension Shortfall?
This is an area where shortfalls in defined benefit pension schemes are on the increase so you need to be vigilant. It’s a situation where basically there isn’t enough money in the company pension scheme to meet their obligation to scheme pensioners and it’s where the liabilities of the scheme are greater than their assets. If The Pensions Regulator are aware of the deficit, they may create a plan within the company to repair the deficit, although this may take time to implement successfully, if indeed it can be.
What is a Pay-as-you-go Pension?
This is a scheme where you as a scheme member decide how much you’d like to contribute to the scheme.