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Pension jargon buster

Plain-English definitions for the pension and annuity terms you'll come across when planning your retirement.

Annuity: A financial product, bought with some or all of your pension pot, that pays a guaranteed income for life or for a fixed term.
Annuitant: The person who receives the income from an annuity.
Annuity rates: The rate a provider uses to convert your pension pot into an income. Rates vary between providers and change daily based on factors like gilt yields, your age, and your health.
Contracted-out benefits: Benefits built up while a pension scheme was 'contracted out' of the additional State Pension, which can carry their own rules and guarantees.
Cost of delay: The reduction in retirement income that can result from delaying a decision, such as putting off buying an annuity while rates or your health change.
Compulsory Purchase Annuity: An annuity bought using money that must, under the scheme's rules, be used to provide a pension income rather than taken as cash.
CPI (Consumer Prices Index): A measure of inflation sometimes used to increase (escalate) annuity or pension income each year in line with the cost of living.
Dependant's pension: An income paid to a financially dependent spouse, partner, or child after the annuity holder dies, where this option has been chosen.
Enhanced annuity: An annuity that pays a higher income because of health or lifestyle factors, such as smoking or a medical condition, that may reduce life expectancy. Also called an impaired-life or medically underwritten annuity.
Escalation: An annual increase applied to your annuity income, either at a fixed rate or linked to an index such as RPI or CPI, to help it keep pace with rising prices.
Final salary pension: Also known as a defined benefit pension. Pays a guaranteed income based on your salary and length of service, rather than the value of a pot you've built up.
Financial adviser: An FCA-authorised professional who provides a personal, regulated recommendation tailored to your circumstances - as distinct from generic guidance.
Financially dependent: A description used to determine whether a partner, spouse, or child qualifies to receive a dependant's pension after you die.
FCA (Financial Conduct Authority): The regulator responsible for authorising and supervising financial advisers and firms in the UK, including Pense.
FSCS (Financial Services Compensation Scheme): The UK's statutory compensation scheme, which may protect your money if an authorised financial services firm fails and cannot meet its obligations.
GAR (Guaranteed Annuity Rate): A rate, attached to some older pensions, that guarantees a more favourable annuity income than could typically be bought on the open market today. Usually lost if the pension is transferred.
GMP (Guaranteed Minimum Pension): A minimum pension level that some schemes must provide to members who were contracted out of the additional State Pension between 1978 and 1997.
Guaranteed period: A chosen number of years (commonly 5 or 10) during which your annuity continues to be paid to your estate even if you die before the period ends.
GILTs: UK government bonds. Annuity providers hold gilts and similar low-risk assets to help back the guaranteed income they pay, and gilt yields are a major factor in annuity rates.
Impaired-life annuity: Another name for an enhanced annuity - one that pays more because of a health condition affecting life expectancy.
Lifetime Allowance (LTA): A former limit on the total amount you could hold in pensions without an extra tax charge. Abolished in April 2024 and replaced by lump sum allowances.
MVR (Market Value Reduction): A charge some providers apply when you cash in or transfer certain with-profits policies during a period when investment markets have underperformed.
Money Advice Service: A former government-backed guidance service (now part of MoneyHelper) offering free, general information on money and pensions.
Money purchase scheme: Also known as a defined contribution pension. Your eventual income depends on how much has been contributed and how it has grown, rather than a guaranteed formula.
OMO (Open Market Option): Your right to shop around and buy an annuity from any provider, rather than accepting the rate offered by your existing pension company.
PCLS (Pension Commencement Lump Sum): The formal name for your pension tax-free cash - usually up to 25% of your pot, capped at £268,275 across all your pensions combined.
Proportion: The share of your annuity income that continues to be paid to a dependant, such as 50% or 100% of your original income under a joint life annuity.
RPI (Retail Prices Index): An older measure of inflation, sometimes still used to escalate annuity or pension income each year.
Tax-free cash sum: Another name for your Pension Commencement Lump Sum - the portion of your pension you can take without paying income tax.
Value protection: An annuity option that pays a lump sum death benefit equal to the difference between what you paid for the annuity and the income already received. May be taxed above certain allowances.
With-profits annuity: An annuity where your income depends partly on the performance of a with-profits fund, meaning it can rise or fall rather than staying level or on a fixed escalation.

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