Glossary of Pension & Tax Terms

Plain-English definitions for common pension and tax terms used in retirement modelling.

A

Additional Rate: The highest UK income tax band. Income above £125,140 is taxed at 45%, sometimes called the top rate.; UK Income Tax in Retirement
Annual Allowance: The maximum amount you can contribute to pensions in a single tax year and receive tax relief. The standard annual allowance is £60,000 (or your total earnings, whichever is lower).; How UK Pensions Work
Annuity: A financial product that converts a lump sum into a guaranteed income for life. Once purchased, the terms are typically fixed and the capital is not recoverable.; Accessing Your DC Pension How Annuities Work

B

Basic Rate: The first main UK income tax band. Income between £12,571 and £50,270 is taxed at 20%.; UK Income Tax in Retirement
Bed & ISA: A technique where investments held in a General Investment Account (GIA) are sold and immediately repurchased inside an ISA, sheltering future growth from tax. The sale may use the annual CGT allowance.; ISA Types and How They Work Capital Gains Tax on Investments

C

Capital Gains Tax CGT: Tax on the profit when you sell an asset that has increased in value. Each person has an annual CGT allowance (currently £3,000). Rates depend on the type of asset and your income tax band.; Capital Gains Tax on Investments General Investment Accounts
Capital Gains Tax on Property: CGT on residential property that is not your main home is charged at 18% (basic rate) or 24% (higher/additional rate) on the gain above the annual exemption. Gains must be reported to HMRC within 60 days of completion.; Capital Gains Tax on Investments Property in Retirement
Cash Equivalent Transfer Value CETV: The lump sum value that a defined benefit pension scheme offers in exchange for giving up your right to future guaranteed income. Accepting a CETV converts a DB pension into a DC pot and is a major, typically irreversible, decision.; Defined Benefit Pensions
CGT Allowance: The amount of capital gains you can realise each tax year without paying Capital Gains Tax. Currently £3,000 per person per year.; Capital Gains Tax on Investments
Commutation: The option offered by some defined benefit pension schemes to exchange part of your regular income for a one-off tax-free lump sum at retirement. The exchange rate is set by the scheme.; Defined Benefit Pensions
Compound Interest: Earning returns on previous returns, not just on the original amount. The effect accelerates over time — a small difference in annual return becomes a large difference over 20 or 30 years.; Investment Returns: Real vs Nominal
Crystallisation: The process of accessing pension funds. When you crystallise, part becomes tax-free cash and the rest enters a drawdown pot. Once crystallised, funds cannot return to their previous state.; Accessing Your DC Pension

D

Defined Benefit DB: A pension that pays a guaranteed income in retirement based on your salary and years of service, rather than an investment pot. Also called a final salary pension.; Defined Benefit Pensions How UK Pensions Work
Defined Contribution DC: A pension where the final value depends on contributions made and investment performance. SIPPs are a type of defined contribution pension. There is no guaranteed income.; How UK Pensions Work
Dividend Allowance: The amount of dividend income you can receive each year before paying dividend tax. Currently £500 per person per tax year.; Dividend Tax
Drawdown: A way of taking income from your pension while leaving the rest invested. Your fund can still grow or fall in value. Also called flexi-access drawdown.; Accessing Your DC Pension

F

Flexi-Access Drawdown FAD: The most common method of taking income from a pension. At crystallisation, 25% is taken as tax-free cash and 75% enters a drawdown pot. All subsequent withdrawals from the pot are taxable as income.; Accessing Your DC Pension UFPLS vs Flexi-Access Drawdown
Furnished Holiday Lettings FHL: A former tax regime for short-term holiday lets that offered preferential treatment including full mortgage interest deduction and lower CGT rates. Abolished from 6 April 2025 — former FHL properties are now taxed as standard secondary properties.; Property in Retirement Capital Gains Tax on Investments

G

General Investment Account GIA: A standard investment account with no tax shelter. Investment growth is subject to Capital Gains Tax and dividends are subject to dividend tax.; General Investment Accounts Capital Gains Tax on Investments Dividend Tax

H

Higher Rate: The second main UK income tax band. Income between £50,271 and £125,140 is taxed at 40%.; UK Income Tax in Retirement

I

Inflation: The rate at which prices rise over time, reducing the purchasing power of money. UK inflation is measured by CPI (Consumer Prices Index) and RPI (Retail Prices Index).
Investment Bond: A life assurance contract that holds investments and defers tax until withdrawal. Often used for tax-efficient income in retirement via top-slicing relief. Not to be confused with government or corporate bonds.; Investment Bonds
ISA: Individual Savings Account. A tax-free wrapper for savings and investments. You pay no income tax or Capital Gains Tax on money held in an ISA. The annual contribution limit is £20,000.; ISA Types and How They Work

L

Lifetime ISA LISA: A government-backed ISA for first-time buyers and retirement saving. The government adds a 25% bonus on contributions up to £4,000 per year. Withdrawals before age 60 (other than for a first home) incur a 25% penalty that exceeds the bonus.; Lifetime ISA (LISA) ISA Types and How They Work
Lump Sum Allowance LSA: The maximum amount of tax-free cash that can be taken from pensions over a lifetime. Currently £268,275. Once exhausted, further pension withdrawals are fully taxable.; Accessing Your DC Pension

M

Marginal Tax Rate: The tax rate applied to the next pound of income. Depends on which tax band that pound falls into. Can be higher than expected for income between £100,000 and £125,140 where the effective rate is 60%.; UK Income Tax in Retirement
Marriage Allowance: A tax benefit where one partner can transfer £1,260 of unused Personal Allowance to the other, saving up to £252 per year. Only available when one partner earns below £12,570 and the other is a basic rate taxpayer.
Money Purchase Annual Allowance MPAA: A reduced pension contribution limit (£10,000 per year) triggered the first time you take taxable income from a defined contribution pension. It permanently replaces the standard £60,000 annual allowance for future pension contributions.; Accessing Your DC Pension UFPLS vs Flexi-Access Drawdown
Monte Carlo Simulation: A modelling technique that runs thousands of possible market scenarios to show a range of outcomes rather than a single projection.; Understanding Uncertainty

N

National Insurance NI: Contributions paid by employees and employers during working life that fund State benefits including the State Pension. You typically need 35 qualifying years to receive the full State Pension.; How UK Pensions Work The UK State Pension
Nominal Returns: Investment returns expressed as the headline percentage, before adjusting for inflation. Contrast with real returns, which show the growth in purchasing power.; Investment Returns: Real vs Nominal

O

Ongoing Charges Figure OCF: The annual cost of holding a fund, expressed as a percentage of the fund's value. Includes the fund manager's fee, custody, and regulatory costs. Previously called Total Expense Ratio (TER).; Investment Fees and Their Impact

P

PCLS: Pension Commencement Lump Sum. Also called tax-free cash. The 25% of your pension that can be taken tax-free when you crystallise, subject to the Lump Sum Allowance (£268,275 lifetime cap).; Accessing Your DC Pension UFPLS vs Flexi-Access Drawdown
Personal Allowance: The amount of income you can earn each year before paying income tax. Currently £12,570 for most people. It reduces for income above £100,000 and reaches zero at £125,140.; UK Income Tax in Retirement
Primary Residence: Your main home — the property you live in. Benefits from Principal Private Residence (PPR) relief, exempting any gain from Capital Gains Tax on sale. Only one property can be your primary residence at any time.; Property in Retirement
Principal Private Residence Relief PPR: A CGT exemption that applies to your main home. If the property has been your only home throughout ownership, the entire gain on sale is exempt from Capital Gains Tax — regardless of size.; Property in Retirement Capital Gains Tax on Investments

R

Real Returns: Investment returns adjusted for inflation, showing the true increase in purchasing power. If a fund returns 5% and inflation is 2.5%, the real return is approximately 2.5%.; Investment Returns: Real vs Nominal
Rent-a-Room Scheme: A tax exemption that allows you to receive up to £7,500 per year tax-free from letting a furnished room in your main home to a lodger. If the property is jointly owned, the threshold is halved to £3,750 per person. Does not affect PPR relief on the property.; Property in Retirement UK Income Tax in Retirement

S

Secondary Property: Any residential property you own that is not your primary residence — including buy-to-let properties, holiday homes, and vacant second homes. Gains on sale are subject to CGT at 18% (basic rate) or 24% (higher rate).; Property in Retirement Capital Gains Tax on Investments
Section 24: The restriction on mortgage interest relief for residential landlords, fully in force since April 2020. Landlords can no longer deduct mortgage interest as an expense; instead they receive a 20% basic rate tax credit. This significantly increases the tax burden for higher-rate taxpayer landlords.; Property in Retirement UK Income Tax in Retirement
Sequence of Returns Risk: The risk that poor investment returns early in retirement deplete a portfolio much faster than the average return would suggest, even if later returns recover. This is a key reason why a single projected return can understate retirement risk.; Understanding Uncertainty
SIPP: Self-Invested Personal Pension. A pension wrapper that gives you control over how your retirement savings are invested. Contributions receive tax relief and withdrawals are taxable as income.; How UK Pensions Work
Spending Phases: The typical pattern of spending through retirement, often described as Go-Go (active early years), Slow-Go (moderate middle years), and No-Go (later years with reduced activity but possible care costs).
State Pension: A regular payment from the UK government once you reach State Pension age, based on your National Insurance record. The full amount is currently £11,973 per year (2025/26).; The UK State Pension How UK Pensions Work

T

Tax Year: The UK tax year runs from 6 April to 5 April the following year. All tax allowances, bands, and limits reset at the start of each tax year.; UK Income Tax in Retirement How the UK Tax System Works
Tax-Free Cash TFC: Also called Pension Commencement Lump Sum (PCLS). You can usually take 25% of your pension tax-free when you crystallise, subject to the Lump Sum Allowance.; Accessing Your DC Pension

U

UFPLS: Uncrystallised Funds Pension Lump Sum. A way to take money directly from your pension without first moving it into drawdown. 25% of each withdrawal is tax-free, 75% is taxed as income.; Accessing Your DC Pension UFPLS vs Flexi-Access Drawdown

V

Venture Capital Trust VCT: A listed company that invests in small, early-stage UK businesses. Investors can claim 30% income tax relief on VCT shares and receive tax-free dividends, in exchange for a five-year minimum holding period.; Venture Capital Trusts (VCTs)

W

Withdrawal Rate: The percentage of your portfolio you take as income each year. The appropriate rate depends on total assets, other income sources, spending requirements, and desired portfolio longevity.