This list is by no means exhaustive and if you come across any technical terms on our website which are not explained below, please let us know.
Additional Voluntary Contributions (AVCs)
When you top-up an occupational pension, by making extra contributions into a scheme that’s run by your employer, you make an ‘additional voluntary contribution’.
Annual allowance
This is the maximum amount of money you can put into your pension funds in a given tax year, and still claim tax relief.
Annuity
At retirement you have the option to buy an annuity with your pension fund. It’s a payment that’s usually paid monthly, which you’ll receive as a guaranteed regular income during your retirement.
Asset allocation
Asset allocation is the process of investing in a range of different assets such as equities, property and bonds. By diversifying the assets into which you invest, you can protect against any reduction in value of any one or more asset class. Asset allocation depends on your investment plans and attitude to risk.
Authorised firm
An authorised firm is one that has permission from the Financial Conduct Authority (FCA) to carry out regulated activities.
Basic rate taxpayers
Simply put, you are a basic rate taxpayer if you are earning below the higher tax rate threshold and more than the ‘Personal Allowance’. .
Basic state pension
This is the pension you receive from the government as a result of paying National Insurance (NI) contributions throughout your working life.
Beneficiary
A beneficiary is a person named in a will or under a trust as entitled to receive a bequest or benefit.
Bonds
There are two main types of bond:
- A type of security held on a debt, with a company or the Government for example,
- A single premium life assurance investment bond.
Capital gains tax (CGT)
If the value of assets that you own increase in value, then you may need to pay Capital Gains Tax (CGT). For example, selling shares for more than you paid for them could involve paying some CGT. You get an exemption for capital gains tax up to a certain limit each year and only pay CGT on any gain over this amount.
Child Trust Fund
The Child Trust Fund (CTF) is a long-term savings and investment account for children. In December 2010, the Government decided to stop opening CTFs, but those which had already been set up by then are designed to make sure that your children have savings up until the age of 18.
Commission
This is a payment that’s made to a financial adviser for services that he or she provides, based on a percentage of the value of the investment or premiums paid. It’s paid to the adviser by the product provider. If your adviser takes a commission, you may not need to pay any fees.
From 2012, commission is no longer allowable in respect of Investments or Pensions, but might still be payable in respect of older plans and Life Assurance or other forms of insurance.
Contracting out
When you opt to leave the State Second Pension (S2P) or State Earnings Related Pension Scheme (SERPS), this is known as contracting out. You’ll receive a rebate on your National Insurance contributions, which can be invested in a pension fund. This only applies to people who are members of occupational schemes, however you may still have ‘Contracted Out’ benefits from the past.
Corporate bonds
These are Bonds that are issued by companies when they need to borrow money. As an investment, they often offer higher rates of return than banks and building societies but with a varying amount of risk depending on the financial security of the company issuing the bond.
CPI
The Consumer Price Index (CPI) is a measure of inflation used by the British Government for its UK inflation target. It measures changes in a ‘basket’ of goods and services purchased by households.
Critical illness cover
This is an insurance policy that you take out so that you can rely on having a lump sum paid if you’re diagnosed with a specified critical illness.
Debt
If you’ve borrowed money, then you are ‘in debt’, typically owing interest as well as the money initially borrowed.
Defined benefit
In this type of pension scheme, members receive a set pension income on retirement – based on their final salary or average earnings in employment and how many years they’ve been working for the company. It’s may also be known as a final salary scheme.
Defined contribution
In this type of pension scheme, the amount of money you will have in your retirement fund depends on the amount of money you (or your employer) put in, where the money was invested and how much it grows. It’s also known as a money purchase scheme.
Diversification
This is the process of spreading – or ‘diversifying’ – your investments over a range of assets, so that you reduce your exposure to risk. By diversifying your investment, if one type of investment falls in value, then the remaining ones may not fall at the same rate, or at all.
Dividends
These are payments that are made to shareholders by a company from any profits that the business has made.
Equity
This is a term that’s used to describe a company’s issued stocksor shares. If you own shares in a company you own some of the company’s equity.
It can also be used to describe the amount, or value, of your home that you own. If you ‘have equity’ in a property, it means that you own a portion of it above the value of any debts secured on that property, such as a mortgage.
Equity release
Equity release is the process of using the value of your home to raise cash – releasing the equity. There are two main types of equity release scheme available: lifetime mortgage (sometimes known as equity release mortgages) and home reversion schemes. When the property is sold, the plan provider reclaims their loan and any interest due with the remainder going towards the plan owner or to their estate.
Estate Planning
For inheritance tax (IHT) purposes, an individual’s estate is calculated as being his or her total assets less any liabilities at the time of their death. Proper estate planning could save your family hundreds of thousands of pounds, because IHT (sometimes called ‘death duty’) will be charged on what you leave behind, over the IHT threshold at time of death.
Currently, IHT is due at a rate of 40% of the value of all the assets you leave behind on death above the IHT threshold.
Ethical investment
Ethical investments are opportunities offered by businesses or funds that aim to avoid companies involved in some kinds of activities, but instead favour those involved in other activities. For example, companies trading in armaments, cigarettes, animal research or alcohol are unlikely to be considered ‘ethical’ – but a company that is highly committed to recycling or human rights issues, may be considered to have an ethical bias. They might also include investments in companies which engage in positive, socially responsible actions.
Ethical investments can also be known as ‘green investments’ or ‘socially responsible investments’.
Final salary schemes
A final salary pension scheme is another description of a defined benefit scheme.
Fixed interest security
This is another name for a ‘bond’ or ‘corporate bond’. The amount of interest you receive, when you invest in a fixed interest security, is stated at the time of purchase. These are usually regarded as a lower risk investment than stocks or shares.
Fixed rate
An interest rate that’s fixed is one that doesn’t move up or down for a set period of time.
Flexible Drawdown
This is a way of drawing your pension fund in retirement. The level of income is set depending on the size of your fund and your income need. It is possible to take all of your fund, none of it, or anything in between. Because of the potential implications on tax and your retirement income needs it is vital to ensure that you consider carefully the level of income you choose to take.
Group Personal Pension
If you work for a company, you may have a Group Personal Pension. It’s the name given to personal pension plans offered by employers to employees on a money purchase basis.
Hedge fund
Hedge funds are a high risk investment: they comprise a complicated set of strategies that aims to make attractive returns sometimes using complex financial instruments and often with the intention of creating positive returns despite market conditions. They may require very high initial levels of investment. .
Higher rate taxpayer
You are a higher rate tax payer if you are earning more than the higher tax rate threshold and are paying 40% income tax for the tax year and less than the additional rate threshold.
Income protection
This is an insurance policy that pays you a monthly income if you’re unable to work due to illness or injury, until you are able to return to work, or you retire, whichever is the sooner.
Income tax
This is the tax paid on your income. Generally, all income is taxable. The exceptions are for income falling within personal allowances and income that’s generated from certain tax-efficient investments such as ISAs.
Independent financial adviser
Independent financial advisers (IFAs) are professionals who give financial advice about products and services across the whole market. They act on your behalf, and may charge a fee or be paid by commission.
Individual Savings Account (ISA)
There are two types of Individual Savings Account (ISA): Cash ISAs, and Stocks and Shares ISAs. Each tax year, you can put money into both types up to the annual limits. ISAs aren’t an investment in their own right, they’re a tax-free ‘wrapper’ in which you can shelter investments.
Inheritance tax (IHT)
Inheritance tax (IHT) is charged on an estate after a person’s death. It’s currently charged at 40% on amounts above the IHT threshold, which can change every year. A person’s estate includes the total of everything owned, less any liabilities at the time of their death. If this amount is less than the threshold, no IHT is payable.
Interest
When you give your money to a bank, to look after, you may receive an amount of money on top in return. That percentage is known as interest. You may also have to pay interest on loans or mortgages when you borrow money.
Joint life
A ‘joint life’ policy is one that’s taken out by two or more people. Joint life policies can be useful for protecting a family in the event of either or both parents dying.
Junior individual savings accounts (JISA)
Junior individual savings accounts (JISA) offer a tax efficient way for parents to invest on behalf of their children, up to certain limits each year. Parents of children under 16 that do not have a Child Trust Fund can open a JISA in the child’s name.
Fact Find document
This is the form which your financial planner will complete with the details of your personal and financial circumstances, prior to giving you any advice.
Lifetime allowance
This is the maximum amount of money that you can accumulate as pension savings throughout your lifetime and still benefit from tax relief. If the amount you save exceeds the lifetime allowance, then you will have to pay tax on these savings.
Lifetime annuity
A lifetime annuity will give you a regular income for the rest of your life. You buy an annuity with the cash sum that’s built up in your pension fund, so that you can have a regular income during retirement. There are different types of annuities to suit your needs and circumstances.
Mediation
Mediation is the process that parties enter into in an attempt to resolve a dispute without court proceedings. It’s usually undertaken in the presence of a ‘mediator’ – someone with a neutral opinion who can voice the issues of both parties.
Money laundering
The government has introduced tough money laundering laws in a bid to combat international crime and terrorism. This means that financial planners and other professionals need to check that you are who you say you are when you first instruct them. They may also ask for proof of identity if you have not instructed them for some time. Usually, identity is provided with a form of photographic document – such as your passport.
Money purchase pension
Occupational pensions, personal, group personal, stakeholder, Free Standing Additional Voluntary Contributions (FSAVCs) and Additional Voluntary Contributions (AVCs) can be called money purchase pensions. You can choose where your contributions are invested. The size of your fund depends on your contribution levels, over what time period you invest them, and how well your investments grow.
National Insurance contributions
National Insurance (NI) contributions are an amount of money that’s paid to the Government a percentage of your income if you are aged over 16 but under the state pension age and you earn more than the minimum threshold. They go towards providing for state pensions, as well as other state-provided benefits. If you are an employee, NI is deducted from your pay before it is paid to you.
Payment protection insurance
This type of insurance policy pays a regular pre-agreed amount for a stated time if you can’t work for specified reasons.
Personal allowance
A personal allowance is the amount of income that you can earn each year before you start paying income tax.
Personal Equity Plans (PEPs)
From April 2008, Personal Equity Plans automatically became Stocks and Shares ISAs (see the glossary definition of an Individual Savings Account).
Personal pension
This is a pension policy that’s taken out through a pension company, into which you pay contributions and will at retirement provide some or all of your pension income. These are invested in funds, which you can choose according to your attitude to risk and plans for the future. A personal pension is set up on a money purchase (defined contribution) basis.
Qualifying years
Qualifying years are those tax years in which you’ve paid a certain amount of National Insurance contributions. A minimum number of qualifying years must be built up during your working life to qualify for the full basic state pension.
This can also be the number of years’ service with an employer in which pension benefits in a Defined Benefit scheme have been built up.
Repayment mortgage
This is a mortgage that pays off both the capital borrowed and interest due at the same time. Pay all the repayments and the mortgage will be fully repaid at the end of the term.
Risk
Some investments are riskier than others. For example, an investment in the stock market is riskier than money put into savings accounts – there’s more chance of something going wrong and you losing money. Riskier investments tend to offer potentially higher returns as compensation for the risks involved. This is also known as the ‘risk premium’.
RPI
The Retail Prices Index (RPI) is a government defined measure of inflation which tracks the change in the cost of a basket of retail goods and services.
Self Invested Personal Pensions (SIPPs)
A Self Invested Personal Pension is a type of plan that allows you, or your appointed fund manager, to make choices from a wider range of investments than other personal pension schemes offer. With a SIPP you can invest such things as in the shares of any company listed on a stock exchange, commercial peroperty, mutual funds.
Stakeholder Pension
This is a personal pension in its most simple form. A stakeholder pension will allow you to make a minimum investment of £20 per month and offer a range of funds in which to invest – and there must be no penalties for transferring away from the fund. Your employer may offer access to a stakeholder pension scheme.
State Pension
Your basic State Pension is based on your National Insurance contributions. You may also qualify for the additional State Second Pension if you are employed, based on your earnings and National Insurance contributions.
State Second Pension
The State Second Pension is an additional pension that’s paid on top of your basic State Pension. It was called SERPS until 2002. Self-employed people are not entitled to a State Second Pension.
Stocks and Shares
Both terms mean the same thing: companies’ stocks and shares that can be bought and sold. Owning a share in a company means owning a part of that company, or owning some of that company’s stock and an entitlement to a share in the profits in the form of dividends.
Tax credits
Tax credits are payments made by the government. Usually, they’re made to people on low incomes, to families with children, or to registered carers.
Tax Exempt Special Savings Account (TESSA)
From April 2008, TESSAs automatically became ISAs.
Tax-efficient investing
Tax-efficient investing is the process of investing in such a way as to minimise the amount of tax paid. This could mean using tax-efficient investments such as ISAs, or making contributions to your pension. This should not be mistaken for Tax Evasion which is deliberately acting in a way which
Term assurance
This is a policy that provides a guarantee to pay a specific amount of money, during a pre-agreed period of time, if you die. It is a form of Life Assurance.
Unit trusts
These are ‘open-ended’ investments in which the underlying value of the assets is directly calculated by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. There are many different unit trusts available, all investing in different assets.
Unsecured pension
An unsecured pension is a way of taking an income from your pension fund,. It does involve incurring some risk to the value of your pension fund. There are two types of unsecured pension – a short-term annuity and income withdrawal (also known as Flexible Drawdown).
Variable interest rate
These are interest rates, offered by banks and financial institutions on loans or deposits, that may change according to circumstances. For example, a movement in the interest base rate set by the Bank of England would usually be an influence.
Whole-of-life assurance
A whole-of-life assurance policy lasts throughout your life so that your dependants are guaranteed a payout should you die as long as the premiums are kept up.
Wills and probate Law
This is the area of law that governs the interpretation of wills and the distribution of the estate of people who have died.
Yield
Yield is a general term for the rate of income that comes from an investment, expressed as an annualised percentage and based on its current capital value.