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ABI 1994 method

This is a test to work out whether the benefits paid by a money purchase scheme are more than the Inland Revenue limits. It does not apply to a small self- administered scheme.

Accrual rate

In a defined benefit scheme this is the rate at which pension benefits build up for the member. They will get a certain amount for each year of pensionable service.

Accumulated contributions

These are all the contributions a member has paid, plus anything extra the money has earned. In a money purchase scheme, these can include the employer’s contributions.

Accrued rights

This term is sometimes used to mean accrued benefits.

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Active investment management

This is a system of investment that could be used for a pension fund. It involves buying and selling particular investments to try and get better growth.

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Active member

This is a member of an occupational pension scheme who is building up pension benefits from their present job.

Actuarial assumptions

These are the figures and estimates that an actuary uses when they make an actuarial valuation. This can include how long people are expected to live, price rises, how much people are expected to earn, and the income from the pension scheme investments.

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Actuarial deficiency

This is where the actuarial value of a scheme’s assets is less than the actuarial liability . The actuarial deficiency is the difference between the two.

Actuarial increaseThis is the extra pension benefit a member gets when retiring after the normal retirement age.

Actuarial liability

This is the money a pension scheme will have to pay out for pensions after the date of the actuarial valuation.

Actuarial reductionThis is a drop in a member’s pension because they have taken their pension early.

Actuarial report

This is a report on an actuarial valuation. This name is also used for when an actuary says how changes to a scheme might affect it financially.

Actuarial surplus

This is where the actuarial value of a scheme’s assets is more than the actuarial liability . The actuarial surplus is the difference between the two.

Actuarial valuation

This is when an actuary checks what the pension scheme assets are worth and compares them with the scheme’s liabilities. They then work out how much the contributions from employers and members must be so that there will be enough money in the scheme when people get their pensions.

Actuarial value

This is the value an actuary puts on something.

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Actuary

An actuary is an expert on pension scheme assets and liabilities, life expectancy and probabilities (the likelihood of things happening) for insurance purposes. An actuary works out whether enough money is being paid into a pension scheme to pay the pensions when they are due.

Added years

This is when a member of a defined benefit pension scheme becomes entitled to extra pension benefits because:

a transfer payment has been made by another scheme;
an additional voluntary contribution has been paid; or
the member’s pension benefits have been improved by the employer or the pension scheme (or both).

Additional component

This is another name for additional pension.

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Additional pension

This is what the Government sometimes calls the pension paid by SERPS.

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Additional voluntary contribution (AVC)

This is an extra amount (contribution) a member can pay to their own pension scheme to increase the future pension benefits. Paying AVCs does not normally mean a member will get more from a cash option.

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Administrator

This is the person who is responsible for managing the pension scheme from day to day.

Allocation option

This allows a pension scheme member to give up some pension benefits in return for a pension for the member’s husband, wife or dependants.

Annual pension estimate

This is similar to a benefits statement. This is a statement of the pension benefits a member has earned. An annual pension estimate will be based on certain expectations or predictions, so the benefits the member actually gets will probably be different.

Annual report

This is a report that the trustees of an occupational pension scheme send to members and employers each year to keep them informed on the scheme.

Annuitant

This is a person who receives, or is entitled to, an annuity.

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Annuity

This is a fixed amount of money paid each year until a particular event (such as a death). It might be split into more than one payment, for example monthly payments.

Many schemes use an annuity to pay pensions. When someone retires, their pension scheme can make a single payment, usually to an insurance company. This company will then pay an annuity to the member. The money paid to the member is what people usually call their pension.

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Annuity rate

This compares the size of an annuity (how much it pays each year) with how much it cost to buy.

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Appropriate scheme

This is a pension scheme which meets conditions set by the Contributions Agency. This means that a member of the scheme can contract out of SERPS.

Approval

This is when the Pension Schemes Office (PSO) says that a scheme is suitable for tax relief. This means members can count some or all of their contributions against their tax bill. If a scheme meets certain conditions, it will get mandatory (automatic) approval. If the scheme does not meet the conditions, the PSO may give it discretionary approval.

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Approved occupations list

The Pension Schemes Office (PSO) does not normally allow a scheme to pay a pension before a member is 50 (or 60 with a retirement annuity). With some jobs, the PSO may allow a lower pension age. One example might be professional footballers, whose earnings are mostly early in their life. These jobs are called recognised occupations. The PSO has an approved occupations list to show which jobs are recognised occupations.

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Approved scheme

This is either a personal pension scheme or a free-standing additional voluntary contribution (FSAVC) scheme that has got approval from the Pension Schemes Office (PSO). The term approved scheme is not used for occupational pension schemes, even though they can get approval from the PSO.

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Assets

These are everything that the trustees hold for the pension scheme. They can include investments, bank balances, and debtors.

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Auditor

This is a qualified person who checks accounts. If an auditor believes the law has been broken in an occupational pension scheme, they must tell the Occupational Pensions Regulatory Authority (OPRA). This is called whistleblowing.

On 6 April 2005 the Pensions Regulator took over from Opra (the Occupational Pensions Regulatory Authority). The Pensions Regulator is the new regulatory body for work-based pension schemes in the UK.

Augmentation

This is when extra pension benefits can be bought for a pension scheme member. They are usually paid for by the employer or the pension scheme.

Average earnings scheme

This is another name for a career average scheme. This is a scheme where the pension benefits earned for a year depend on how much the member’s pensionable earnings were for that year.

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Band earnings

These are earnings between the lower earnings limit for national insurance contributions and the upper earnings limit. SERPS is worked out on these earnings. These are also called upper band earnings.

Basic component

This is a term pension companies use for the basic state pension.

Basic pension

This is what the Government sometimes calls the basic state pension.

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Basic state pension

This is a pension paid by the Government to people who have enough qualifying years. It is not earnings related.

Beneficiary

This is a person who is getting pension benefits, or will do so when a particular event happens.

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Benefit statement

This is a statement of the pension benefits a member has earned. It may also give a prediction of what their final pension might be.

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Benefits

With pension schemes, this is everything the member gets after retiring because they were part of the scheme. It usually means the money paid to the member as their pension. It could also include death benefits.With insurance, this is the money the insurance firm pays out if something happens. For example, a life assurance policy would pay death benefits if the insured person dies.

Benefits Agency

This is an organisation connected to the DSS. It is in charge of paying state benefits such as Income Support and Jobseeker’s Allowance.

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Benefits in kind

These are things other than money which an employer gives to you for doing your job, for example a company car or a clothes allowance. Only benefits in kind which are taxed are usually counted when working out figures to do with pensions.

Bid price

This is the price members of a unit trust will get for each unit if they cash them in.

Bridging pension

This is a pension which a member may receive from their pension scheme between the time they retire and the time they reach their state pension age.

Bulk transfer

This is when a group of members is moved from one occupational pension scheme to another.

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Buy out policy

This is an insurance policy which pension scheme trustees can buy for a member instead of paying them pension benefits. The insurance company pays the member (or the member’s dependants) a pension.

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Cash equivalent

This is the amount of money a pension scheme member can transfer to another pension scheme.

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Cash option

This is giving up part or all of a pension in return for getting a one-off payment straightaway. It is also called commutation.

Centralised scheme

This is a pension scheme which is used by several employers.

Certificate of eligibility

This is a document that an employed person fills in to confirm that they are not in an occupational pension scheme, and so they can pay into a personal pension scheme.

Certificate of existence

This is a document to confirm that a pension scheme member is still alive.

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Class A member

A 'class A' member is:

a member of an occupational pension scheme which was created after 13 March 1989; or
a member of an earlier pension scheme who joined after 1 June 1989.

Class B member

A 'class B' member is:

a member of an occupational pension scheme which was created before 14 March 1989; and
the member joined between 17 March 1987 and 31 May 1989.

Class C member

A class C member is a member of an occupational pension scheme who joined before 17 March 1987.

Clawback

This is when a member’s pensionable earnings or a member’s pension are reduced to take into account the amount of state pension the member will get.

Closed scheme

This is the name for a pension scheme which does not accept new members anymore.

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Clustering

This is setting up a number of pension schemes at the same time. It lets the member draw the pension benefits at different times.

Common investment fund

This is the name given when the investments of two or more pension schemes are pooled together.

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Commutation

This is giving up part or all of a pension in return for getting a one-off payment straightaway. It is also called a cash option.

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Commutation factors

These are the things which decide how much pension needs to be given up so that the member can get a one-off payment instead.

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Company pension scheme

This is a scheme organised by an employer to provide pension benefits for their employees.

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Compensation levy

This is money paid by every occupational pension scheme that is covered by the laws on compensation. This money pays for the Pensions Compensation Board.

Compulsory purchase annuity (CPA)

This is an annuity that an insured occupational scheme must buy for a member when they retire.

Contingent annuity

This is an annuity which is paid to someone when someone else dies.

Continuation option

This is an option offered by the insurance company which insures a pension scheme’s death benefits. It allows a member who is leaving the pension scheme to take out a life assurance policy without taking a medical or providing other evidence of their good health.

Continuous service

A member of an occupational pension scheme may have already spent an earlier time in that scheme (with a break in between) or in a different scheme. Continuous service means that this earlier time is added to the member’s existing service. This could happen if a member takes a break from work to have a baby, or moves between two connected schemes.

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Contract out

If someone contracts out of SERPS, their national insurance payments are lower. They also pay into an occupational or personal pension scheme which has to meet certain conditions.

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Contracted out

This term is used to describe a scheme where the members contract out of SERPS.

Contracted out Employments Group (COEG)

This is a part of the Contributions Agency that deals with contracted out employment.

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Contracted out money purchase scheme (COMPS)

This is an occupational pension scheme where members contract out, and the employer pays a certain amount into the scheme. When the member retires, this amount is used to make sure they get at least as much pension as they would have got from SERPS.

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Contracted out salary related scheme (COSRS)

This is an occupational pension scheme where the members contract out of SERPS. The member’s pension is based on how much they have earned.

Contracting out certificate

The Contributions Agency gives this certificate to a pension scheme that meets the conditions to be contracted out.

Contribution holiday

This is the period when the usual contributions to a pension scheme are stopped for a time. This is usually done when the scheme has more funds than it needs.

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Contributions

This is the money paid into a pension fund for a member. It can be paid by a member or an employer.

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Contributions Agency

This is a department of the DSS. It keeps records of people’s national insurance contributions and makes sure that the contributions are paid. It also gives advice on national insurance. The Contribution Agency’s phone number is 0113 232 4854.

Contributions equivalent premium

This is a special payment to the state scheme. It is usually paid when a member with less than two years of qualifying service leaves a contracted out scheme. The member is then counted as having been in SERPS for the time they were contracted out.

Contributory scheme

This is a pension scheme where both the employer and the members have to pay into the scheme.

Control period

This term is sometimes used when an actuary works out the scheme’s liabilities by looking at how much pension the members have earned so far. The actuary may then set the standard contribution rate for a certain length of time (the control period). During this time, the standard contribution rate should be enough to make sure the scheme’s assets are enough to cover its liabilities.

Controlled funding

This is a plan to make sure that all the pension scheme’s liabilities can be paid. It is often used for final salary schemes.

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Cooling off notice

This is a document given to a member telling them the details of the pension scheme and their right to cancel the plan without any cost. The cancellation has to be done within a given time. It is sometimes called a cancellation notice.

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Corporate trustee

This is a company which acts as a trustee.

Creditors

These are amounts owed by the pension scheme.

Current funding level

This is the amount of money needed to pay the pensions that members have earned so far.

Custodian trustee

This trustee looks after the trust’s assets.

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De minimis limit

If a pension pays less than this limit, the whole of the member’s share of the pension fund can be taken as a one-off amount.

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Death after retirement benefit

If a member has this option, then their dependants will get some benefits from the scheme if the member dies after starting to get pension benefits.

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Death benefit

This may be paid to a member’s dependants if the member dies. It may be a pension or a one-off payment. It could be death after retirement benefit or death in service benefit.

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Death in service benefit

If a member has this option, then their dependants will get some benefits from the scheme if the member dies before starting to get pension benefits.

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Debtors

These are amounts owed to the pension scheme.

Declaration of trust

This is the document which creates the pension scheme trust.

Deed of adherence

This is a legal document which allows a new employer to take over the running of a pension scheme. The new employer has to agree to follow the scheme’s rules.

Deed of appointment

This is a legal document appointing a new pension scheme trustee.

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Deferred annuity

This is an annuity which will start to pay out at some time in the future.

Deferred annuity purchase

This name is also used when a member retires, but chooses not to spend their share of the pension fund on an annuity straightaway.

Deferred member

This is a member who has left a scheme, but will get benefits when they retire. These are called preserved benefits.

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Deferred pension

This is a pension which is taken later than the member’s normal retirement date.

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Deferred pensioner

When someone stops being an active member of a pension scheme, the pension benefits they have earned become preserved benefits, and the member is now called a deferred pensioner. They will get these benefits at a later date.

Deferred retirement

This is when a person decides to retire and draw their pension late. It is sometimes called late retirement or postponed retirement.

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Deficit

This word may be used to mean an actuarial deficiency. This is where the actuarial value of a scheme’s assets is less than the actuarial liability . The actuarial deficiency is the difference between the two.

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Defined benefit scheme

This is where the rules of the scheme decide how much pension the member will get. There are different ways of working out the size of the pension, but the member will know which system the scheme uses. The most common type of defined benefit scheme is a final salary scheme.

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Defined contribution scheme

This is where the size of the member’s pension is not decided by the rules of the scheme. The size of the member’s pension will be affected by how much money is put into the pension fund for the member, how much the pension fund has grown, and what annuity rate is available when the member retires. This system is also called a money purchase scheme.

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Definitive trust deed

This document shows the rules of the pension scheme and what it provides in detail.

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Department of Social Security (DSS)

This is the Government department responsible for the state pension schemes.

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Dependant

This is someone who is financially dependent on a member of the pension scheme (or on a pensioner of the scheme). The scheme rules will usually say what is meant by a ‘dependant’.

Dependant's pension option

This allows a member to give up part of their pension so that it can be paid to their husband or wife or a dependant.

Derivative

This is a general word used to describe special financial instruments such as options and futures contracts. Financial instruments are agreements to buy or sell something, under terms laid out in a contract.

Direct investment

This is when the trustees of a self-administered scheme directly hold the scheme’s investments.

Disclosure regulations

These are the rules which pension scheme trustees have to follow when giving information about the scheme to members and official organisations.

Discontinuance

This is when contributions to a scheme stop and the scheme is closed down or becomes inactive.

Discontinuance valuation

This is an actuarial valuation which is done to work out what would happen if the pension scheme was stopped or closed down.

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Discretionary approval

This is when the Pension Schemes Office (PSO) agrees that an occupational pension scheme can be approved, even though it does not meet the usual rules.

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Discretionary increase

This is when the trustees give increases in pension benefits above those set out in the pension scheme rules.

Discretionary scheme

This is a scheme where the employer chooses which employees are allowed to join. The contributions and benefits may also vary from one member to another.

Disqualification order

This is an order made by the Occupational Pensions Regulatory Authority (OPRA). It means that a certain person is banned from being a trustee of any occupational pension scheme.

Drawdown facility

This is when a member retires, but chooses not to buy an annuity straightaway. Until the member buys an annuity, they take an income from the scheme.

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Dynamisation

This is:

indexation (or escalation);
index-linking earnings to work out pension benefits; or
index-linking for working out Inland Revenue limits.

Dynamism

This is another word for dynamisation.

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Introduction

Plain English Campaign owns the copyright on this guide.

The Plain English Campaign has written a detailed glossary of pension terms which they have kindly allowed us to reproduce here for your convenience.

You may find this useful when actually buying a pension. Check any term you want clarified by scrolling down A - Z.

Should you want to download it, it's free, but don't forget the copyright belongs to the Plain English Campaign.

We all have much to learn from this guide. And we all have much to thank Plain English Campaign for. Over the years the Campaign has made a valuable difference to the way government and business communicate with people. It has helped people to understand their rights and duties. This guide is a further important milestone.

Mark H Ashworth
Head of Group Pensions
Nat West Group

We have written this A-Z guide to help you to understand some of the terms you will come across when you buy a pension.

You can click on any of the letters below to go straight to definitions beginning with that letter. When our definitions include a term that is explained in more detail, it is highlighted with a link like this. You can click on the link to go straight to that term's definition.