Glossaries: Retirement Options

Lifetime annuity
A lifetime annuity will give you a regular income for the rest of your life. You buy an annuity with the fund you have built up in a money purchase pension fund. There are different types of annuity to suit your needs and circumstances.

Money purchase pension
Some occupational pensions and all personal, group personal, stakeholder, Free Standing Additional Voluntary Contributions (FSAVCs) and some Additional Voluntary Contributions (AVCs) are money purchase pensions. Your contributions are invested in, for example, the stock market and the size of your fund depends on your contributions and how well your investments do. You buy a lifetime annuity with your pension fund to provide you with retirement income.

Occupational pension
Only available through employers and run by pension scheme trustees. There are two types - salary-related (defined benefit) and money purchase (defined contribution).

Open market option
You do not have to buy a lifetime annuity from your pension provider. You can shop around to compare rates and arrangements offered by other insurance companies and buy an annuity from another provider if you find a better deal - this is called the 'open market option'.

Personal pension
A pension policy you take out yourself from an insurance company or financial institution and into which you pay contributions. See 'money purchase pension'.

Protected rights annuity
The part of your pension fund used to contract out of the additional State Pensions (SERPS or State Second Pension) must buy a protected rights annuity.

Salary-related occupational pension scheme ('final salary' or 'defined benefit')
A type of occupational pension. The amount of pension you get is worked out on your salary at or near retirement, or when you left employment, and the length of your pensionable service.

Stakeholder pension
A type of personal pension that has to meet certain standards set by government. You can take one out yourself or it may be available through your employer. See 'money purchase pension' above.

State Second Pension
The State Second Pension is an additional State Pension on top of your basic State Pension paid by The Pension Service. This was called SERPS but is now called the State Second Pension. Self-employed people cannot build up a State Second Pension.

Tax-free lump sum
HM Revenue & Customs limits how much you can take as a tax-free lump sum from your personal or stakeholder pension fund - currently up to a quarter (25%) of your fund. For occupational pensions it depends on the rules of the scheme.

Unsecured pension
A way of taking an income from your pension fund up to age 75, while leaving the rest of your fund invested, but this involves some risk to your pension fund. There are two types of unsecured pension - short-term annuity and income withdrawal.

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