Jargon Busting: A Guide to Pension Terms

By January 19, 2019Pensions

The thought of sorting out your finances can be intimidating – even more so when faced with some of the pension jargon you need to wrap your head around. Pension transfers, defined contribution and defined benefit… it’s enough to intimidate anyone.

In light of this, our financial planners at Weston Murray & Moore thought it would be helpful to collect a list of simple definitions surrounding pensions. Hopefully, this will help you as you approach your retirement planning.

Please do get in touch if you need more information and advice.


Think of this as your income or savings after you retire from work. There are different types of pension, which we will cover below. In simple terms, you can either draw a monthly income from your pension, or you can take out one or more lump sums.


Defined contribution pension

This is a type of pension which involves building up a pot of retirement money throughout the course of your career.

Your workplace pension is quite likely to be a defined contribution pension, where both you and your employer put in a set amount of money into your retirement pot each month.


Defined benefit pension

Sometimes this is called a “final salary pension”, and it is a different type of workplace pension (now less common). Here, instead of building up a pot of money over time with your employer, the latter pays you an income after you retire.

The amount you get will depend on a few factors, for instance, how many years you worked at the company, what your salary was and your “accrual rate”.


Private pension

A private pension is sometimes also referred to as a “personal pension”, and is usually a type of defined contribution pension (see above). However, in this case, you usually set up the pension yourself rather than through your employer.


State pension

Your state pension is the money that the UK government gives you as an income after you retire. The amount you get each week depends on how many years’ National Insurance you have paid into the system. If you have 35 full qualifying years, you should get the full amount.


State pension age

This is the minimum age you have to reach in order to start receiving your state pension (assuming you qualify to receive it). The age you must attain will depend on your date of birth. At the moment, it is 65 for men and women. However, this will go up to 67 between 2026 and 2028.


Auto enrolment

Under UK law, your employer is required to put you onto a pension scheme. This is known as auto enrolment. Under this scheme, both you and your employer must contribute into your pension pot.

In 2018-19 you must contribute at least 3% of your salary, and your employer a minimum of 2%. Please note that these are set to rise in the next tax year to 5% and 3% respectively.



When you approach retirement, you have a number of options when it comes to deciding what to do with your pension money. One option might be to buy a financial product called an “annuity”, which basically gives you a guaranteed lifetime income during retirement.


Income drawdown

Another option for deciding what to do with your retirement money is income drawdown. This is where you take bits of money out of your pension pot gradually, over time, as and when you need it. The rest of the pot stays invested, which means it can continue to grow over time.


Annual allowance

This refers to the maximum amount you can put into your pension each year, without attracting a tax charge. In 2018-19 this is currently £40,000, and it applies across all of your pensions.


Lifetime allowance

This is the maximum total amount you can have saved into your pension(s) without incurring taxes when you start drawing from it/them. For 2018-19 the lifetime allowance is £1,030,000, but it will go up to £1,055,000 in 2019-20 in line with the Consumer Prices Index.



Prices of goods and services across the UK market do not remain static. They tend to go up each year, which is known as inflation.

To help ensure that people’s retirement money retains the same spending power over time, the government uses policies like the “triple lock”. This ensures that the basic state pension rises by either 2.5%, the rate of inflation or average earnings growth (whichever is highest).


Lump sum / tax-free lump sum

After you reach age 55, UK law currently says that you can take up to 25% out of your pension pot without attracting tax. This is your “tax-free lump sum”.



You can do many things with your money intended for retirement. You could put it into a simple savings account, for instance, which might earn you a little bit of extra money through interest.

Or, you could use it to buy “investment products” which usually have a better chance of getting you higher interest rate over time. Examples of these products include “bonds”, “stocks and shares” or “commercial property.”

A financial adviser will be able to help you sift through the different types of investment products available, and discern the best set of investments to put your money into.


Investment / risk profile

As mentioned immediately above, there are lots of different types of investment product you can buy. Some (e.g. “stocks and shares”) have the potential to bring you are higher return but tend to carry a higher risk of going down in value. Others (e.g. “government bonds”) have a lower chance of going down in value, but correspondingly carry less potential for a high return.

Your investment profile refers to your investment “style”, and it plays an important role in determining which mixture of investment products you should buy. Please note that there is no “right” or “wrong” investment profile – there are just different types of people.

For instance, if you have a more “conservative” profile then this usually means you do not want to expose yourself to too much investment risk. As a result, you might buy a higher number of bonds compared to someone with a “growth” investment profile, who might buy more stocks and shares due to their willingness to take on more investment risk.