Glossary of Financial Terms
Alternatively Secured Pension
This type of arrangement, introduced in April 2006, allows an individual to continue with Income Drawdown (within certain limits) on reaching age 77 and keep residual funds invested as an alternative to the purchase of an Annuity. Due to be removed after 5 April 2011.
Annuity
A series of payments, made at specified intervals, which will usually cease after a specified period, or on the death of the annuitant (the person entitled to the payments).
Assets
Anything owned by individuals or companies with an economic value, especially that which could be converted into cash.
Basic Rate Tax
This is the rate of tax paid by most individuals, on income between the personal allowance and the higher rate tax threshold. The same rate applies to both earned income and savings income. The rate is currently 20%.
Bear market
A market that sustains a continual fall.
Benchmark
The yardstick used to measure performance; this may be relative to a competitor, a fund, bank deposits or other indices.
Bid and Offer Price
Shares, units in Unit Trusts etc. are bought at one price and sold at another. The higher (buying) price is called the Offer Price and the lower (selling) price is called the Bid Price.
Bid-Offer Spread
This is the difference between the price that an investor would pay to purchase units and the price that the company issuing the units would pay on the same day to purchase units from investors who wished to sell their holding
Blue Chip
This actually originates from the highest value chip in a game of poker, but is often used to describe shares in a large and well regarded company of very high quality.
Bonds
A loan agreement or debt instrument, under which the issuer borrows a sum of money from the investor and promises to repay the principal after an agreed period of time. In return the investor receives compensation, typically a fixed interest rate or coupon, for the duration of the loan. There are many different bond variants.
Bull Market
A market that sustains continual growth.
Capital and Interest Mortgage
See Repayment Mortgage
Collective Investments
A form of investment where the investor has his investment pooled with that from other investors into a fund with the total sums involved being invested and managed by a fund manager.
Commission
Amount paid by a financial institution to an intermediary for business placed.
Commodity
A commodity can be an agricultural product (soya beans, grains, coffee, etc.), a metal, wood, or any other physical substance that investors buy or sell, usually as commodity futures contracts.
Commutation
The relinquishing of part or the entire pension that would have been provided under a Final Salary or Money Purchase Pension Scheme in return for a lump sum.
Compulsory Purchase Annuity
Is an Annuity purchased from the proceeds of a pension fund and is taxed as earned income.
Contracted In
This describes a member of an Occupational or Personal Pension Scheme who is also a member of the State Second Pension Scheme (S2P) previously known as the State Earnings Related Pension Scheme (SERPS).
Contracted Out
This describes a member of an Occupational or Personal Pension Scheme who is not a member of S2P.
Corporate Bonds
Are issued by private and public corporations to raise money. In exchange, the company promises to return your money, usually on a specified maturity date, and pays a fixed rate of interest until the maturity date. See Bonds.
Critical Illness Plan
An arrangement that will pay out a lump sum benefit to a policyholder who is diagnosed as suffering from any of the illnesses or conditions specified within the policy.
Decreasing Term Insurance
Is generally a life insurance plan that pays out a lump sum if you die within the term. It can also be a Critical Illness Plan which provides a payment if you are diagnosed as suffering from any of the specified illnesses or conditions. Both benefits can be included in the one plan if desired. Whatever the basis of cover, the amount to be paid reduces throughout the term.
Deferred Annuity
Where a premium is paid in return for annuity payments that will commence at a date in the future.
Defined Benefit Pension Scheme
A scheme where the rules define the benefits provided from the scheme and these are usually linked to service as a member of the scheme and final salary.
Defined Contribution Pension Scheme
See “Money Purchase Pension Schemes”
Derivatives
A collective term for futures, options and warrants.
Disclosure (client)
The duty of a person applying for a policy to tell the insurer all information that could affect the risk.
Disclosure (intermediary)
The duty of an intermediary to tell his client the amount of commission (if any) being paid or fees to be charged for the business placed.
Discretionary Investment Management
An approach to managing an investment portfolio whereby an investor delegates day-to-day responsibility to a professional investment manager, who has the power to make changes to the portfolio without prior permission from the client, subject to the investment manager acting at all times in accordance with parameters documented in a formal agreement.
Distribution
Payment of investment income generated by a fund. This can be paid in cash or reinvested in the fund.
Dividends
A taxable payment given to shareholders out of the company’s current earnings. These are usually paid in cash but can take the form of stock.
Double Indemnity
Payment of twice the normal policy benefit for a specific type of loss under specific circumstances.
Earnings per share
A generally accepted indicator of the return on equity investments. Any figure quoted represents the total amount of a company’s earnings (after deductions) divided by the number of ordinary shares it has issued.
Employee Benefits
Benefits provided by an employer for employees and usually paid for by the employer.
Endowment
An endowment policy will pay you a capital sum when the policy matures, or if you die before that date. Although the amount payable at maturity may or may not be guaranteed, depending upon the nature of the endowment plan, the amount payable on death is usually guaranteed not less than a stated minimum sum. It can be used as both a way of saving and life insurance. Apart from any guarantees that may be given any estimates of possible sums payable at maturity, or on earlier death, are not guaranteed.
Equity(ies)
Another term for shares in a company.
Equity release
A type of remortgage designed to allow home owners to release cash from the value of their property.
Ethical Investments
Investments which are designed to conform to a particular set of moral or ethical principles.
Ex-dividend
This is the time between the announcement and payment of the next dividend. Someone who invests between two distributions is not entitled to the dividend.
Execution only
Where a customer buys a financial product without receiving any advice whatsoever on its suitability.
Executive Pension Plan
An occupational pension arrangement that is normally used for individual senior employees and prior to 5th April 2006 was governed by the rules of an occupational pension and not a personal pension. Since 6th April 2006 all pension schemes are under one set of rules.
Family Income Benefit Policy
A type of term insurance that pays out an income on death, rather than a lump sum benefit, during the term of the policy. Income is paid from the date of death until the end of the policy term.
Final Salary Pension Schemes
A specific type of Defined Benefit Pension Scheme calculated on final salary earnings and years of service.
Financial Services Authority (FSA)
The regulator that authorises the financial services industry in the UK.
Fixed Interest Securities
These provide regular fixed interest payments and include gilts and bonds.
Flexible Benefits
Where a company offers employees a choice of benefits in order to more accurately meet their needs.
Footsie
A much used term for the FT-SE 100 Share Index, the UK stockmarket’s main index, which measures the daily share price performance of Britain’s top 100 public limited companies.
Free Standing Additional Voluntary Contributions (FSAVCs)
A means by which an individual can make contributions into an additional pension policy, in order to supplement their benefits under an Occupational Pension Scheme.
Fund
A term for any investment vehicle which pools together the money of individual investors and invests it according to a specific set of investment aims and objectives.
Fund Manager
A person who invests money with the aim of outperforming their sector of the market, by investing in a range of asset classes, which they think will grow in value. They can choose to keep some of their fund in cash at times when they are not optimistic about the outlook for the stock market.
Futures contract
A contractual agreement to purchase, or sell, a commodity at price agreed on the date of the contract, but with a delivery date in the future.
Gilts
These are bonds issued by the UK government. The interest rate on the underlying value and the price at maturity are guaranteed, but the price will vary during the lifetime of a gilt. The basis of the guarantee may be either a fixed sum or a sum that increases in line with movements in the Retail Price Index depending upon the type of gilt purchased.
Gross Premium
The premium paid by the policyholder before any tax relief or discount is taken into account.
Group Critical Illness Scheme
A scheme that will pay a cash lump sum to scheme members who are diagnosed as suffering from any of the specified illnesses or conditions.
Group Health Insurance
Provides health cover for a number of people under one policy issued to their employer or to an association with which they are affiliated.
Group Income Protection
This is also known as Permanent Health Insurance (PHI) and provides employees suffering from sickness or disability with a replacement income. The benefit usually becomes payable when the company’s sickness scheme ends and continues for the duration of the employees absence – if necessary through to retirement.
Group Life Insurance
This insurance pays either a lump sum or a dependants’ pension, on the death of the member.
Group Personal Pension (GPP)
This is a Personal Pension Plan for employees of a business. This may benefit from reduced charges because of the numbers involved, and the employer may also contribute. A GPP is not an Occupational Pension Scheme.
Guaranteed Minimum Pension (GMP)
This is the minimum pension which an Occupational Pension Scheme must provide as one of the conditions of contracting out in respect of pre April 1997 employment.
Hedging
A strategy used to offset investment risk, often by use of futures or options.
Higher Rate Tax
The highest band of personal income tax, which is currently set at a rate of 50%.
Illustration
A document estimating the returns you might get from an investment, based on standard growth rates and taking charges into account.
Immediate Annuity
An annuity where payments commence straight away.
Income Drawdown
See Unsecured Pension.
Income Protection Insurance
Also known as Permanent Health Insurance (PHI). This provides a monthly income during periods of long-term illness or disability after a predetermined period, with the benefit payable until the end of the agreed term of the policy, or until the claimant returns to work.
Independent Financial Adviser (IFA)
A broker or other intermediary authorised to sell or advise on the policies offered by any insurance company, as well as other financial service providers.
Inheritance Tax (IHT)
This tax is usually payable at the time of death, on anything (money or otherwise) which changes ownership on death or in the preceding seven years. In some circumstances IHT can be payable immediately a gift is made. There is a cumulative level of gifts that can be transferred at death, including those given within the 7 years before death, without IHT being payable, referred to as the ‘nil rate band’. Transfers between husband and wife, (if both domiciled in the UK) are exempt and there are a number of other general exemptions.
Intestate
Dying without having made a Will. This means Intestacy rules apply irrespective of the possible wishes of the deceased.
Investment Bond
A unit linked single premium Whole of Life Assurance policy. Part of the premium gives life cover whilst the balance is invested.
Investment Trust
An investment trust is a Collective Investment fund which is ‘closed-end’ in that it has a fixed number of shares that are traded like stock, often on many different exchanges.
ISA – Individual Savings Accounts
Individual Savings Accounts – provide a way of saving money without having to personally pay tax on any profit, interest or income received. There are two types – Mini and Maxi ISAs. You can only invest in one or the other in any tax year. See below for more detail.
Mini ISA
Currently you are allowed to invest cash up to £3,000 and/or shares up to £4,000 by opening up to two Mini ISAs in any tax year. You can open one for either type of investment, but if you wish to open two you must invest in cash in one and in shares in the other.
Maxi ISA
Investments are made via just one investment manager and can choose between shares or a combination of cash and shares in the same Maxi ISA.
Joint Life Annuity
Pays a benefit throughout the joint lifetime of two people.
The payments cease on second death but the purchasers of the annuity can choose to have the annuity reduced on first death by a pre-determined percentage and thereby obtain a higher initial annuity for the same purchase price than they would if the annuity did not reduce on first death.
Key Person Insurance
Also known as Key Man Insurance. This is designed to protect a business against loss of income resulting from the disability or death of an employee by providing funds to cover the loss and for the replacement of that person on a permanent or temporary basis.
Level Term Assurance
Is generally a life insurance plan that pays out a lump sum if you die within the term. It can also be a Critical Illness Plan which provides payment if you are diagnosed as suffering from any of the specified illnesses or conditions. Both benefits can be included in the one plan if desired. Whatever the basis of cover the amount to be paid remains the same throughout the term of the policy.
London Stock Exchange (LSE)
Is one of the largest and most influential stock exchanges in the world, where many United Kingdom and overseas companies are listed such that investors may buy or sell their stock on the secondary market. The LSE was founded in 1801.
Lower Rate Tax
The lowest tax rate, currently set at 10%. This rate only applies to investment income, and therefore anybody with ‘earned’ income in excess of the personal allowance is unlikely to benefit from this lower rate.
Managed Fund
A pooled investment fund which generally invests in more than one asset class with the asset class proportions being set by the fund manager.
Market Capitalisation
The value of a company as measured by the total stockmarket value of its issued and outstanding shares. This is arrived at by multiplying the number of shares by the current price of a share. It is also used to indicate the size of a company.
Market Value Adjustment (MVA)
An adjustment or deduction made to charge off a loss, typically associated with With Profits policies.
Maturity Date
The date on which a payment becomes due at the end of the term of the policy or bond or gilt.
Maturity Value
The amount payable to the insured at the maturity date of a policy or bond or gilt.
Money Laundering
This is the practice of engaging in financial transactions in order to conceal the source of money raised through criminal activity. It also covers the handling of the proceeds of crime such as theft, fraud and tax evasion.
Money Purchase Pension Schemes
A pension scheme that provides benefits based on contributions made and the investment return on those contributions. At retirement the accumulated fund is used to purchase an annuity. All personal pensions are Money Purchase Pension Schemes.
Non-contributory
When the employer pays the full cost of benefits and the employee is not asked to contribute. The term most frequently applies to employer sponsored pension arrangements but other employee benefits may also be included.
Occupational Pension Scheme
Set up by an employer for employees. It is run by Trustees and usually provides life insurance and pension benefits. The pension paid is usually based on a percentage of final salary, or on the returns provided on a money purchase basis. These schemes can be contributory or non-contributory.
Offshore Funds
Collective Investment funds that are based overseas, often in ‘tax havens’ in order to gain tax advantages.
Open-Ended Investment Companies (OEIC)
An investment company that works in a similar way to a Unit Trust except that an OEIC is a limited company.
Opting Out
When an employee decides to leave or not join an Occupational Pension Scheme provided by his/her employer.
Option
The right to buy or sell a given quality of a specified property at an agreed price at or before a specified date.
Pension
A continuing income usually paid from retirement until death.
Pensionable Service
The period of service with an employer that is used to calculate ‘service related’ pension benefits from an Occupational Pension Scheme.
Permanent Health Insurance (PHI)
See “Group Income Protection Insurance” and “Income Protection Insurance”
Personal Allowance
The amount of income that can be received by an individual in any one tax year before a tax liabilityarises. Individuals aged 65 and over are entitled to a higher allowance, as long as their total incomedoes not exceed a certain level.
Personal Equity Plan
A plan which allows individuals to profit from stockmarket- investments, free of personal income tax and capital gains tax. From 6 April 1999, new investment in PEPs was no longer possible. Existing PEPs can continue in existence and can be transferred to alternative PEP managers without losing their tax benefits.
Personal Pension Plan
A pension plan which produces an income and possibly a tax-free lump sum on retirement or death. Personal pensions can be used to ‘Contract Out’ of the State Second Pension Scheme (S2P). Employers can usually contribute to an employees Personal Pension Plan.
Portfolio
A collection of different investments which between them are designed to achieve an investor’s overall objectives but where the individual components of the collection may have different roles to play.
Pre-existing Condition
These are any physical or mental conditions that exist prior to the effective date of an insurance policy.
Preferred Stock
Is stock holding in a company that gives the preferred stock holder a prior claim, in the event of bankruptcy.
Preserved Pension
This refers to the benefit which remains in an employer’s pension scheme after a member of the scheme leaves service or the scheme is discontinued. The benefit may be either;
The annual pension entitlement which increases each year with increases announced by the trustees and is payable at the normal retirement age under the scheme (Final Salary or Defined Benefit scheme).
or
The value of the pension fund, which remains invested, to grow until it is converted to provide retirement benefits at the normal or selected retirement age (Money Purchase or Defined Contribution Pension Scheme).
Price/Earnings Ratio (P/E)
This is calculated by dividing the market price of a company’s ordinary shares by its Earnings per Share figure. This reflects the market’s expectation of the future earnings of a company in relation to its current earnings; to show its performance potential.
Primary Market
The process by which a company first issues shares, or stock, to the public or institutions. Subsequent trades are effected on a Secondary Market or Stock Exchange.
Private Medical Insurance (PMI)
An insurance policy which pays towards private medical treatment if your condition is covered by the policy.
Qualifying Policy
This is a life assurance policy that complies with Her Majesty’s Revenue and Customs’s ‘Qualifying Policy Regulations’. Proceeds on maturity or death will not give rise to a personal tax charge.
Quartile
Most UK funds are grouped into sectors and each sector is divided into four quarters (quartiles). The halfway point is called the median. All funds want to see their performance stay above the median but the real target is to be consistently in the top 25% (quartile) of all funds in that particular sector.
Redemption Penalties
If you pay off your mortgage early, you may have to pay a fee. Some lenders only charge a redemption penalty during the time of their special deal; others may tie you in for a number of years afterwards.
Remortgage
This is when you transfer your mortgage from your current lender to another one, normally to obtain lower interest rate payments or a further advance.
Repayment Mortgage
Also known as a Capital and Interest Mortgage, this is where your monthly payments are used to pay off both the capital (the amount you borrowed) and the interest on that amount. At the end of the term, both the borrowing and interest is paid in full.
Reversionary Bonus
This is a bonus added to the value of your With Profits policy each year.
Secondary Market
The market where securities, stocks and shares are traded after they have been initially offered to the public via the primary market. Most trading is done in the secondary market. An example may include the London Stock Exchange.
Securities
Another name for stocks and shares but can also apply to any approved or registered products such as bonds.
Shares
Shares are issued by a company to raise money and in return give you part ownership of the company. Most shares are listed on a stock exchange, which makes them easier to buy and sell. Also known as Equities..
Small Self Administered Scheme (SSAS)
A SSAS is an Occupational Pension Scheme generally set up by the owners of small businesses. They enable members to have control over the manner in which scheme funds are invested. A SSAS must have fewer than 12 members.
Stakeholder Pension
Similar to a Personal Pension in that they offer a way for people to save for their retirement. Employers with five or more employees who do not offer any other kind of pension scheme have to provide access to a Stakeholder scheme.
State Earnings Related Pension Scheme (SERPS)
The predecessor to the State Second Pension Scheme. If you were employed, part of your National Insurance contributions were paid towards the State Earnings Related Pension Scheme, which is paid on top of your basic state pension when you retire. If you chose to contract out of SERPS using a Personal Pension Plan the Government paid the money that would have gone into SERPS into your Plan. If you were a member of an Occupational Pension Scheme and your employer chose to contract members of the scheme out of SERPS you paid a lower rate of National Insurance contribution.
State Second Pension Scheme (S2P)
If you’re employed, part of your National Insurance contributions are paid towards the State Second Pension Scheme, which is paid on top of your basic state pension when you retire. If you choose to contract out of S2P through a Personal Pension Plan the Government will pay a rebate in National Insurance into your Plan each tax year.
Stock Exchange
A forum for the buying and selling of listed securities, stocks and shares on the Secondary Market.
Stocks
Units of ownership in a company represented by shares.
Preferred Stock
Is stock holding in a company that gives the preferred stock holder a prior claim, in the event of bankruptcy.
Term Assurance
Is generally a life insurance plan that pays out a lump sum if you die within the term. It can also be a Critical Illness Plan which provides payment if you are diagnosed as suffering from any of the specified illnesses or conditions. Both benefits can be included in the one plan if desired. If no death or critical illness, (depending upon the cover selected), occurs during the term, then the policy will lapse and no money will be returned.
Terminal Bonus
Additional bonus that may be paid under a With Profits Policy, either at maturity or on death of the policyholder.
Transfer Value
Instead of receiving a Preserved Pension when leaving an Occupational Pension Scheme, a member has the right to transfer its value to the new employer’s scheme or a Personal Pension Plan. The transfer value is the amount that is transferred.
Trust
A legal arrangement where assets are held by appointed persons (trustees) for the benefit of others (beneficiaries). Use of a trust can be an effective way of reducing one’s liability for tax.
Trust Deed
This is a legal document that establishes and governs the operation of a Trust.
Trustee
An individual or corporation appointed to administer the terms of a Trust document.
Unit Trust
A trust set up as a pooled investment fund. The portfolio of investments is structured in a way that allows investors to buy and sell in the form of units.
Unsecured Pension
Where an Annuity does not have to be purchased at retirement and can be delayed up to age 77. The individual can ‘draw down’ income from his pension investment fund within certain limits up to age 77 when an Annuity must be purchased or an Alternatively Secured Pension can be arranged.
Upper Earnings Limit
The maximum earnings on which National Insurance contributions are payable by employees.
Voluntary Scheme
A scheme in which the members choose the extent and levels of benefits provided. These are usually schemes in which members pay the premiums.
Warrant
This is a security issued by a company, allowing you the right to acquire ordinary shares.
Whole of Life Assurance
A policy that pays out on death, whenever this occurs. Premiums may be payable throughout life, or for a shorter period.
With Profits
A Collective Investment that enables policyholders to participate in a share of an insurance company’s With Profits fund. Each year a bonus is added to the guaranteed sum insured or existing unit value, (depending upon the nature of the policy benefit), to reflect the overall performance of the underlying fund. Also see Market Value Adjustment.
Without Profits
Where the policyholder is not entitled to any bonus. The sum payable will never exceed the amount guaranteed in the policy.
Yield
The amount of annual income generated on an investment, expressed as a percentage against the price of the investment. Yield can also be referred to as Rate of Return.
