A complete A-Z guide of financial terms and acronyms to help you better understand the world of finance and make the most of your money.
Confused by financial jargon and acronyms? Use the NorthStar Jargon Buster to better understand some commonly used terms.
A type of fund that aims to produce a positive return over a given period, usually three years. Such funds have the flexibility to invest in a wide variety of assets to achieve this objective.
The rate at which your pension benefits build up as pensionable service is completed in a final salary scheme.
The date when income will be paid by a unit trust. This income is reinvested back into the unit trust increasing the value of the units instead of being paid out to the investor.
These units reinvest the income a unit trust earns, instead of paying it out to investors as an income. Unit holders or policy holders get the benefit through the increased value of the fund.
A traditional investment approach where fund managers actively build and change a portfolio of assets (eg stocks and shares) in order to take advantage of the best opportunities in the stock market.
A market in which the volume of securities traded is higher than normal.
The difference between the actual level of investment made in a particular asset class and the benchmark level of investment in that asset class.
Someone qualified to consider financial issues, particularly ones involving probabilities such as life expectancy.
Additional rate taxpayer
An employed or self-employed person who is earning over £150,000 a year. Additional rate taxpayers pay 45% income tax on earnings over £150,000. There are also subject to higher rate tax at 40% on earnings below £150,000.
The new way financial advisers have to charge for their services after commission was banned on most financial products in 2013. Advisers have to disclose their charges upfront and in an explicit way so you know what you are paying for.
The percentage of the customer’s money that is actually invested in the policy after any initial charges have been taken out.
A measure of the performance of actively managed funds. It is the return that is generated in excess of the fund’s benchmark index. A positive alpha of one means a fund has beaten its benchmark by one per cent, a negative alpha of one means it has underperformed by one per cent.
Alternative Investment Market (AIM)
The sub-market of the London Stock Exchange for smaller and growing companies that are not big enough to join the London Stock Exchange. You can buy shares of companies that are listed on AIM.
An option which may be exercised any time between its initiation and expiration dates (inclusive).
Person who studies a particular market or industry sector and gives a generic opinion as to the future value of a company’s shares.
The amount of money you can save into your pension each year while retaining pensions tax relief, currently £50,000.
Annual compound return (ACR)
The annual rate of return earned on an investment which includes any growth.
Annual equivalent rate (AER)
The interest paid from current, deposit or savings accounts.
Annual exemption (for Capital Gains Tax)
Each tax-paying individual in the UK is entitled to an annual exemption on their capital gains each year. This means that they can make a certain level of gains (eg. on share sales) without paying Capital Gains Tax.
Annual management charge (AMC)
The charge, usually a set percentage, levied each year by fund managers to cover the cost of the running their fund.
Annual Percentage Rate (APR)
The percentage rate, taking account of charges over a year, you are charged on the outstanding balance when you borrow money or make a purchase on credit. This means your income will start to be paid one month, quarter, half-year or year from the date your annuity is set up and will be paid at the end of each payment period.
A measure used to assess the risk of a portfolio.
The expression of a rate of return over periods other than a year, but converted to annual terms.
Additional Voluntary Contributions (AVCs)
Extra payments you can make in addition to your main occupational pension scheme contributions to boost your retirement benefits. AVCs can be paid either to your employer’s scheme or to a separate arrangement. See also FSAVCs
This is the contract you purchase from an insurance company using a lump sum of money (e.g. the proceeds of your pension fund) to guarantee you an annual income for a period of time (e.g. for ten years).
Taking advantage of countervailing prices in different markets – eg the purchase of an asset for a low price in one market and its sale for a higher price in another.
This determines the level of income you will receive from your annuity. Annuity rates fluctuate, but, once you buy your annuity, the rate you receive is fixed.
The percentage split of an investment portfolio among different asset classes (shares, bonds, property, cash etc).
The different types of assets available to investors. For example, equities, cash, fixed interest or property.
Also known as investment management, asset management is the professional management of various securities/assets such as shares, bonds, real estate etc to meet the goals of the investor.
Anything of value can be referred to as an asset, such as your home, jewellery or antiques. Within investments, assets are another word for investments in a unit trust portfolio.
The transfer of ownership to another party.
Association of British Insurers (ABI)
A trade body through which insurance companies can air views on matters of common concern.
The process by which the return on an investment portfolio is attributed to its manager’s investment decisions, typically, stock selection, asset allocation and market timing.
Authorised Corporate Director (ACD)
An individual who is responsible for operating the ICVC company in accordance with the regulations and the ICVC’s instrument of incorporation.
The term used by the government to describe the automatic enrolment of employees into a company pension scheme.
What you will receive if you are eligible for child benefit, detailing how much, who for and where the benefit will be paid.
An investment portfolio which diversifies its holdings over a range of asset classes which typically include shares, fixed interest, property and cash.
Bank of England
This is the UK’s central bank. Its job is to keep the economy and financial system stable. The banks’ Monetary Policy Committee sets interest rates to keep the rate of inflation at a low level and it is in charge of issuing bank notes.
This is the interest rate set by the Bank of England’s Monetary Policy Committee (MPC) each month to keep inflation as close to the government’s 2% target as possible.
Basic rate tax
The income tax paid on taxable income above a certain figure, currently 20%.
Basic state pension
The single person’s flat rate state pension paid when you reach state pension age if you have paid sufficient National Insurance Contributions during your working life.
A measurement of fluctuation of an investment, equal to 1/100 of one percent.
Someone who believes the market will decline (as opposed to bull).
A market in which prices decline sharply against a background of widespread pessimism.
A bond payable to its holder (bearer).
An index or other market measurement which is used by a fund manager as a yardstick to assess the risk and performance of a portfolio.
Someone who you wish to receive a part of your estate on your death, they should be named in your will along with what you would like them to receive.
Best of breed
When a financial adviser recommends from a restricted panel of products or investments it is often known as best of breed, meaning the best products or investments from the whole of market.
A measure of the degree to which the performance of a share or fund will correlate with the wider market. A ‘high beta’ share would be expected to rise when the stock market rises and vice versa. Beta is used in a more general sense to mean the return of the market, while alpha refers to the value that active managers can add to this.
The price at which you sell units in a unit trust back to the investment manager.
The difference between the prices at which you buy units and sell them back.
Referring to the shares of a leading company which is known for excellent management and a strong financial structure. The term has become a generic one for quality securities.
A bond is effectively a loan. You give your money to a government or company and they agree to pay back your money at a certain time in the future with a set percentage increase on your loan. The interest rate is known as the ‘coupon’, the loaned funds as called the ‘principal’, and the date when the money is to be returned is called the ‘maturity’ date.
A system for measuring the relative credit worthiness of bond issues using rating symbols, which range from the highest investment quality (least investment risk) to the lowest investment quality (greatest risk).
An extra payment that with-profits policyholders may have added to their contract depending on the profits the company makes in any one year, or over a period of years.
Shares issued free by a corporation to its existing shareholders on a pro rata entitlement basis.
The net value at which an asset or security is carried on a balance sheet. In portfolio accounting, book value generally refers to the price paid for the security, as opposed to its current worth or market value.
The search for outstanding performance of individual stocks before considering the impact of economic trends. The companies may be identified from research reports, stock screens etc. (as opposed to top-down analysis).
An agent who handles investors’ orders to buy and sell securities, commodities, insurance policies or other property. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.
A fee charged by a broker for the execution of a transaction; or alternatively an amount per transaction or a percentage of the total value of the transaction. Sometimes also referred to as a commission or fee.
One who believes the market will rise (as opposed to bear).
An advancing market (as opposed to bear market).
Referring to the incorporation of a number of services or features into a single product. For example, a bundled pension scheme contract might combine the various activities of investment management, insurance, trusteeship and administration into a single service; whereas an unbundled arrangement would see these activities being conducted by a range of different parties.
An irregular but recurring period of indeterminate scope and origin embracing expansion, prosperity, recession and recovery (also known as an economic cycle). (Opposed to bull market). Bear markets are generally shorter in duration than bull markets.
Business property relief
A tax relief given to a number of assets, including business property and machinery, AIM shares and certain investments. Assets eligible for business property relief are exempt from inheritance tax.
An option which gives its holder the right but not the obligation to purchase an asset at a predetermined date (maturity date) for a predetermined price (exercise price).
The period after signing a contract for some financial products during which you are entitled to cancel and receive your money back without penalty. For single payments you might get back less if the value has fallen.
A ceiling or maximum rate of interest under a loan.
A lump sum of money.
Capital and Interest Mortgage
A mortgage product where the payment you make each month covers the capital and interest on your loan.
Capital Asset Pricing Model (CAPM)
Sophisticated model of the relationship between expected risk and expected return. The model is grounded in the theory that investors demand higher returns for higher risks. It says that the return on an asset or a security is equal to the risk free return (such as the return on a short-term Treasury security) plus a risk premium.
When a unit trust manager takes the management charges out of the fund’s capital instead of the income it has produced.
Capital Gains Tax (CGT)
The tax payable on profit made on the sale of assets or property other than your home.
An increase in the value of shares or other assets in a fund.
Referring to an investment product, normally offered by a life insurance company, which includes some form of guaranteed return of capital.
The markets for medium- to long-term investments, ie three years and over, in securities such as shares and bonds, as distinct from the shorter term money market.
Referring to a type of investment portfolio which is managed in such a way as to reduce or eliminate the risk of capital losses, usually through the use of quantitative techniques such as protection overlays.
Capital protected annuity
An annuity that pays a lump sum to your estate or your beneficiaries if you die before age 75. The lump sum is subject to a 55% tax charge.
Capital redemption bond
A Capital Redemption Bond is a policy of assurance that will mature after a certain period of time with a minimum maturity value being calculated on an actuarial basis. A redemption contract has no lives assured, and therefore can be passed to future generations.
The sum of the total amount of various securities issued by a corporation, multiplied by the price of those securities. Similarly, the capitalisation of the share market is the sum of the value of listed shares.
A capped mortgage means there is a ceiling on your interest rate. So while your rate is variable in that you can still benefit from falls in interest rates, should rates rise yours can’t go above the set limit.
Care fees annuity
An annuity that pays out income to cover the cost of your long-term care, the amount paid depends on the lump sum you provide as a premium.
Career average pension scheme
A type of final salary pension scheme where the outcome is calculated as an average of the salary that you earned in your life at the company rather than the final salary you have at retirement.
A member can sometimes transfer pension contributions to an earlier tax year for tax relief purposes. This is called carry back. The carry back rules no longer apply after 31 January 2002.
Generally, coin and note currency of a country in circulation and deposited in cheque accounts and other deposits that are available on short notice. One of the asset classes invested in as part of a typical balanced investment portfolio.
Short-term investments held in lieu of cash and readily converted into cash within a short time span (ie bank bills, treasury notes etc), generally with maturities of no longer than 180 days.
The amount you might get if you cash in an investment.
Stands for (reasonable) Charges, (easy) Access and (fair) Terms and is a mark awarded by the Government to mortgages which meet these standards.
Certificate of Deposit
A written certificate by a bank or financial institution stating that a fixed amount has been deposited with it for a fixed period of time at a predetermined rate of interest.
A document showing details of units held within a unit trust, shares or bonds.
Certified Financial Planner (CFP)
This professional mark is issued by the Institute of Financial Planning (IFP). Taking this qualification is the equivalent of completing a three year degree in financial planning (a level six qualification) and exceeds the minimum requirement advisers must have.
If a person is give a gift that is a potentially exempt transfer (PET) for inheritance tax reasons but the donor does not survive seven years, the gift become liable to inheritance tax. See potentially exempt transfer.
Chartered Financial Planner
This professional mark is issued by the Chartered Insurance Institute (CII). Taking this qualification is the equivalent of completing a three year degree in financial planning (a level six qualification) and exceeds the minimum requirement advisers must have.
Chartered Insurance Institute (CII)
A professional body for people working in insurance and financial services. It sets exams, provides training and issues statements of professional standing to financial advisers. It is home to the chartered financial planner qualifications. Also see Personal Finance Society.
Technical analyst who charts the patterns of stocks, bonds and commodities to make buy and sell recommendations to clients. Chartists believe recurring patterns of trading can help them forecast future price movements.
A tax credit paid to people who have children where the wage earner/s do not earn more than a set level each. Also more formally known as child tax credit.
Child Trust Fund (CTF)
A tax-free way of saving for children launched in September 2002 and abolished at the end of 2010. All government contributions have now been stopped, though parents can still pay in money and benefit from the account’s tax-free status. If your child has a CTF account they can’t have a Junior ISA as well.
An imaginary ‘wall’ comprising procedures and policies adopted to avoid conflicts of interest within an organisation (eg to separate the stock broking and investment management operations of a financial services group).
The practice of acquiring a holding of shares and then placing both buying and selling order for those shares (usually at about the same price or slightly higher) in order to build up turnover.
Funds which are no longer accepting new investments, but where the fund is still invested and managed in the usual manner.
A pooled fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed-end funds do not stand ready to issue or redeem shares on a continuous basis.
The price at which the final transaction in a security took place on a particular business day. Share prices are quoted daily in the financial pages of leading newspapers and show opening, high, low and last sale (closing) prices, plus net change from the previous day.
An amendment to a will that is made separately to the original will but kept with it.
Referring to a loan facility in which both maximum and minimum interest rates are specified. The maximum acts as a cap while the minimum rate is a floor below which the interest rate will not be allowed to fall.
If there is a ‘collar’ on your mortgage it means your interest rate can’t fall below a set level.
Collective investment scheme
This is the technical name for a fund. Funds encompass investment trusts, unit trusts and exchange-traded funds. Funds pool together cash from lots of investors and invest it in far more places than an individual could do on their own. Putting your money in a fund takes a lot of the hassle out of investing, and means your money can go further.
Property which is used for business rather than for living in, this includes shops, offices, warehouses etc.
A payment to a financial adviser after they have invested your money in a certain investment or product, usually expressed as a percentage of the amount of money invested and paid out of your money.
This is a pension scheme set-up by your employer. Your employer may make payments into the scheme on your behalf and may ask you to contribute too.
Procedures undertaken at regular intervals or on an on-going basis to ensure internal and external controls and regulations are complied with.
Interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year.
Consolidation is when you transfer all your personal pension plans into one plan so you no longer make multiple payments into different plans or pay multiple charges.
Consumer Price Index (CPI)
The official measure of inflation which the government uses to decide how much to increase state pensions and other benefits. It does not include housing costs and is therefore usually lower than the retail price index.
Continuous professional development (CPD)
The on-going training financial advisers have to do to prove they are competent to do their job. Advisers have to log a specific amount of continuous professional development points each year.
An agreement between individuals, companies or other entities, which binds each party and is legally enforceable.
A contract note is evidence that you’ve bought or sold shares or funds. It is an important legal document given that certificates are rarely physically issued these days.
An amount of money placed into a fund. In relation to pension funds, contributions may be made by either employers or employees or both.
An occupational pension scheme where the employee contributes a proportion of their salary in addition to a contribution made by the employer.
This is a director who owns or controls 20% or more of the voting capital of a company either directly or indirectly. This 20% includes shares held by the director’s family and associates.
A type of bond, also known as a CV, that gives the buyer the option to convert the bond into a predetermined number of shares: essentially a stock option wrapped inside a bond.
Convertible term assurance
Life insurance which pays out a lump sum on death in a certain period but can be converted into a different policy without health checks at the end of the term.
A form of investment offered by a corporation with the purpose of raising capital, in which the lump sum is repaid with interest at maturity. Corporate bonds can be bought and sold on the stock market.
A generic term covering issues associated with the management practice, board structures and personnel policies of companies. From the investor’s point of view, corporate governance is normally concerned with the degree of influence which should be exerted over companies by their shareholders in order to advance their financial interest, normally through the exercising of voting rights.
Applies only to limited liability companies and is chargeable on the company’s profits.
A movement in prices which reverses a previous trend. The term is normally used to refer to a lowering of share prices after a sustained period of increase.
A temporary document that can be used as evidence of insurance cover, while the actual policy and insurance certificate are being prepared.
The interest rate paid by a bond.
The risk of suffering loss due to another party defaulting on its financial obligations.
A test of an individual’s financial status. Points are awarded on a range of criteria that include income, home ownership, debts and repayment history.
Critical illness insurance
Pays a lump sum if you are found to suffer from one of a range of designated illnesses (normally including certain forms of cancer, heart attack, and stroke among others). When a condition requires you to stop working for some time, worries are eased. The policy usually pays out after surviving 28 days after diagnosis.
Referring to a share which is trading such that buyers rather than sellers qualify to receive the next dividend payment. This is usually reflected in the price of the security in question.
The performance of a fund’s price over a given period of time.
A country’s unit of exchange that has a value in terms of purchasing goods and services within the country.
An option contract which gives the buyer the right (but not the obligation) to buy or sell a specified amount of a foreign currency in exchange for another on or before a specified future date. Sometimes used to hedge securities held in overseas markets.
An investment management technique aimed at protecting an investor’s overseas currency exposure.
Risk of incurring losses as a result of movements in international exchange rates.
Charges made by the bank or other financial institution that keeps custody of stock certificates and other assets on behalf of clients.
A bank or other financial institution that keeps custody of stock certificates and other assets on behalf of clients.
Possession of securities by a financial institution on behalf of others, for purposes of safekeeping.
Shares whose prices move in line with the overall economy are called ‘cyclical’. Typically, cyclical companies sell consumer discretionary goods, sales of which will fall during a recession as people cut back on spending. ‘Counter cyclical’ stocks are those that tend to perform best when the economy is struggling. They typically sell consumer staples, demand for which is relatively constant.
An individual who places orders to buy or sell securities.
Death after retirement benefits
The pension and lump sum paid to the deceased member’s spouse and/or other dependants where death occurs after retirement or after the member’s normal retirement date if s/he is retiring late.
Death in service benefits
The pension and lump sum paid to the deceased member’s spouse and/or other dependants where death occurs while still working for his/her employer, before his/her normal retirement date.
A type of debt security backed by the general credit of the issuer and not by a specific security.
Operates like a credit card except that the normal amount is deducted directly from your bank account so that no debt is accrued.
A statistical measure dividing a sample into ten numerically equal groups.
Decreasing term assurance
Life insurance which pays out a lump sum if you die within a certain term. The lump sum decreases as the term goes on and is usually linked to a mortgage.
Deed of covenant
An agreement in a deed to transfer income from one person to another in a tax efficient way.
Defined benefit scheme
A pension scheme that offers a set, or defined, income at retirement based on a multiple of years worked at the company and a proportion of the employee’s salary at retirement. Also known as final salary schemes.
Defined contribution scheme
Also known as a money purchase scheme. A scheme where the amount of a member’s retirement benefits depends on the contributions paid into the scheme in respect of the member and investment performance, less charges. The rate of the contributions is decided by the employer.
A general price decline during which consumer spending is substantially curtailed, bank loans contract and the amount of money in circulation is reduced. It is the opposite of inflation and generally applies to more than just a temporary decline.
This could be your spouse, partner, civil partner, a child aged under 23 or a financially dependant physically or mentally impaired adult.
The income paid to your dependant when you die.
A basic cash account usually held with a bank, into which you can save money. Usually offer low interest rates but the rate will depend on how easy it is to access your money, if you tie your money to the account for a certain period, you will normally get a better rate.
The Depository is responsible for the safekeeping of securities and independent monitoring of the ICVC’s compliance with FCA regulations.
The writing-down of the cost of an asset systematically over the life of that asset.
A prolonged slump in economic activity, characterised by rising unemployment and serious falls in production and consumption of goods.
A contract between two parties that specifies conditions (typically dates, resulting values of the underlying variables, and notional amounts) under which payments are to be made between the parties. The value of the derivative is dependent on the fluctuations of the underlying assets. Futures contracts, forward contracts, options and swaps are the most common types of derivatives.
Usually refers to investments in relatively small, unlisted companies either in a start-up position or embarking on new or turnaround ventures that entail some investment risk but offer the potential for above average future profits.
A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities.
A charge levied by the ACD (Authorised Corporate Director) of an ICVC (Investment Company with Variable Capital) to be made for the purposes of reducing the effects of dilution.
This document explains the type of service the adviser is allowed to give and the range of products on offer. This will enable consumers to decide whether the services offered are appropriate to them.
A mortgage rate which gives you a discount on your lender’s standard variable rate (SVR) for a set period of time.
The performance of an investment during a defined time period.
Discretionary fund manager
An investment manager who is able to buy and sell on your behalf without gaining your permission on every transaction. They will work within an agreed limit depending on your risk profile. See risk profile.
What an investment manager must gain in order to buy or sell on your behalf without your permission. If an investment manager does not have these permissions they will have to ask your permission before buying or selling on your behalf.
This is a type of trust where the trustees can decide who will benefit from the trust and how much they will get.
Payments made to investors of income generated by an investment fund.
A fund which is invested to provide a distribution payment of income on a regular basis to policyholders.
The spreading of investment funds among classes of securities and localities in order to distribute and control risk.
The distribution to shareholders of a company’s profits in proportion to the number of shares held.
Dividend (distribution) yield
The return on share investment, calculated by dividing the dividend rate by the market price of the share.
Dividend Discount Model
A model for determining the price of a security based on the discounted value of its projected future dividend payments. These models are very sensitive to interest rates.
If a company pays a dividend it provides each shareholder with a dividend warrant. This gives information about the dividend such as the class of share, the amount and the tax credit.
A set of indices compiled daily from New York Stock Exchange closing prices. The averages are unweighted arithmetic indices, useful for showing general price movements. The Industrial Average consists of 30 industrial stocks. Referred to as the ‘Dow Jones’ and is probably the most widely quoted US index.
The ability to draw funds from your pension when you retire. You can take any amount at any time, but this may be subject to income tax.
Earnings per share (EPS)
A measure of a company’s performance, calculated by dividing the company’s net operating profit after tax, divided by the number of shares in issue.
A ratio calculated by dividing a company’s earnings per share by its current share price. The reciprocal of the price earnings ratio.
An investment portfolio is said to reside on the ‘efficient frontier’ if it is expected to produce returns greater than other portfolios (ie with different asset mixes) of the same or lesser risk, where risk is defined as the standard deviation of the returns. In order to calculate an efficient frontier, future investment returns and their standard deviation need to be known. These are, of course, unknown and need to be estimated from past market data. However, there is no guarantee that the past will be a suitable guide to the future and so efficient frontiers cannot be determined with certainty.
Electronic Trade Confirmation (ETC) system
The generic term for any message or interface service that enables investors, brokers and custodians to electronically exchange confirmations that trade settlements have occurred.
Financial markets in countries with developing economies, where industrialisation has commenced and the economy has linkages with the global economy. The financial markets in these countries are immature compared to those of the world’s major financial centres, but are becoming increasingly sophisticated and integrated into the international markets. These markets provide potentially high returns but are subject to high risk and volatility.
A type of insurance contract that pays a lump sum on maturity of the policy, usually policies are either five, 10 or 15 years, or on the death of the policyholder.
Enhanced benefits can offer a higher income to people with certain medical and lifestyle conditions that affect their life expectancy.
Enhanced life annuity
A special annuity that pays out more than a standard annuity if you have an unhealthy lifestyle that shortens your life expectancy.
Enterprise investment scheme (EIS)
An enterprise investment scheme is a way of investing in small, high-risk companies to allow their to raise finance. These risky investments come with a number of tax breaks to reward investors.
The ordinary shares of a company.
The process of releasing cash from your home through taking a loan with the property as collateral which pays out a lump sum or a monthly income.
Equity risk premium
The difference between the rate of return available from risk-free assets (such as government bonds) and that available from assuming the risk inherent in more volatile investment such as shares.
Escalating annuities / inflation-linked annuities
An escalating annuity is one where your income rises by a set amount, usually between 3% and 5% each year. An inflation-linked annuity tracks inflation and will rise if the inflation index rises. Choosing this option means you will get a lower initial income than if you chose a level annuity.
When a pension in payment is automatically increased at regular intervals by a fixed percentage rate or the increase of a specific index such as the Retail Price Index (RPI).
All of your possessions, including all the property, assets and debts left when you die.
An investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical portfolio might, for example, avoid investing in alcohol or tobacco.
The Euro Interbank Offered Rate (Euribor) is the Eurozone’s equivalent of Libor (see Libor). There are 15 different Euribor rates ranging from one week to one year, based on data from a panel of over 50 European banks.
A payment made that is not legally necessary under the terms of a contract. It is usually made because of a moral obligation and no legal liability is admitted by the payer when making an ex gratia payment.
The return achieved by a security over and above that obtained from a risk-free asset (such as a short-term government bond) held over the same period.
The price of one currency in relation to another.
Exchange rate risk
The risk that the value of an investment may be diminished by movements in the exchange rate on a foreign currency.
Exchange traded funds (ETFs)
Low-cost funds that track a certain index/stock exchange or basket of stocks or commodities rather than being invested by a fund manager in specific stocks in order to make a return.
The interval between the announcement and payment of the next dividend or, in the case of a unit trust, the next income distribution.
A straight-forward, usually online, service that allows you to buy and sell funds directly without advice.
The person named in your will who is in charge of valuing your estate, paying your debts and distributing what is left per your instructions in your will.
Estates that are exempt from inheritance tax due to their value, who they have been left to, and the domicile of the person who has died.
Monetary gifts that can be made without incurring a possible inheritance tax charge on death.
The risk associated with investments in a particular industry sector, country, company etc. Assessments of exposure risk are routinely conducted by responsible investors, as some risk element is inherent in all forms of investment other than cash.
An organisation (eg an investment management company) engaged to manage and invest funds on behalf of a client.
The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuer. Face value is ordinarily the amount that the issuer promises to pay at maturity and is not an indication of current market value.
Family income benefit
Insurance that pays out a monthly tax-free income to your beneficiaries for a set period of time should you die.
A person or organisation entrusted with the responsibility of managing, holding or investing assets in the best interest of the owner of the assets. Trustees of pension funds are fiduciaries in respect of the members of their funds.
Final salary scheme
Also known as defined benefit scheme. This is the traditional form of company or occupational pension where your pension at retirement is calculated as a proportion of your salary in the last few years of work, with the proportion depending upon how many years you have been in your company scheme.
A financial specialist who can help you make a decision about the best financial solution for you. Some advisers can only advise on one company’s products, others can advise on a range of companies’ products. Independent financial advisers can advise you on the products offered by all companies. Advisers have to tell you what product range they cover before they offer you any advice.
Financial Conduct Authority (FCA)
The main regulatory body of the financial services industry.
Financial Ombudsman Service (FOS)
The FOS handles disputes between individuals and regulated financial businesses that they haven’t been able to resolve themselves. Its service is independent and completely free of charge. It can’t fine companies but can award up to £150,000 in compensation to individuals.
Financial Services Authority (FSA)
The City watchdog which regulated all financial services firms prior to the formation of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
Financial Services Compensation Scheme (FSCS)
The compensation fund that pays out if a regulated financial services company you make a claim against cannot pay or is insolvent. However, only up to £85,000 of deposits and £50,000 of investments per individual per institution are protected.
First time buyer (FTB)
The term used to describe someone who is looking to buy a house for the first time and has never previously owned property. Lenders usually offer a range of mortgages specifically for this group of borrowers, while the government regularly launches schemes aimed at helping struggling FTBs get a foot on the increasingly expensive property ladder.
Influencing an economy through taxation.
Fixed interest / fixed income
Referring to income which remains constant and does not fluctuate, such as income derived from bonds, annuities etc. Any debt security which has a fixed flow of income is known as a fixed interest security.
Fixed rate account
A savings account that guarantees you a set rate of interest on your money for a specified period of time.
Fixed rate mortgage
A mortgage which charges a specified interest rate for a set period of time regardless of any changes to the Bank of England base rate.
Flexible access drawdown
A mortgage product where you can vary the amount you pay each month, reduce the term by making extra or increased payments and take breaks from your monthly payments.
Flexible pension plan
A pension product where you can vary the amount you pay each month and take breaks from your monthly payments.
Floating Rate Notes (FRN’s)
Floating Rate Notes (FRN’s) are long-term (5 years or more) debt securities whose interest rates are adjusted periodically in line with a benchmark rate. FRNs appeal to investors who might otherwise be reluctant to commit funds to fixed interest investments for lengthy periods in times of fluctuating interest rates.
A cash market transaction in which two parties agree to the purchase and sale of a commodity at some future time under such conditions as the two agree. Unlike futures contracts, the terms of forward contracts are not standardised. they are not transferable and there is no margin or collateral requirement to assure performance of the contract.
Forward Rate Agreement (FRA)
A contract for borrowing or lending at a stated interest rate over a stated period that begins at some time in the future. FRAs are used by parties wishing to protect themselves against future interest-rate movements.
Free Standing Additional Voluntary Contribution (FSAVC)
Extra payments you can make into an individual plan, which runs alongside your company pension scheme, to top up your pension fund. The plan is independent of your employer’s main pension scheme.
A fee charged to a borrower at the commencement of a loan, or a commission levied on an investor to buy into a unit trust. Also known as a front-end load.
The popular name for the Financial Times Stock Exchange 100, the main UK share index which represents the prices of the top 100 shares in public limited companies.
An index of the share prices of over 800 leading companies and Investment Trusts on the London Stock Exchange.
General term for an investment vehicle which pools the money of investors and invests it according to a defined set of investment objectives.
A person who is in charge of investing money placed in a certain fund, the money is invested depending on the remit of the fund and the manager is paid a percentage of the fund’s assets under management.
Fund manager tenure
The length of time the particular fund manager has been running the fund.
The value of all the assets held in a fund. Usually based on the bid or selling price of the underlying assets.
The monetary value of a fund, calculated by adding up the value of its underlying assets.
The amount of income that a fund has paid out in proportion to its price, and is usually stated in annualised terms. It may express either actual or expected distributions. A fund’s yield is commonly associated with a fund’s interest rate or dividend payment.
The underlying economic factors such as industry output, wages, cost of materials and fluctuations in currency which affect a market, country or sector.
Analysis of share values based on factors such as sales, earnings and assets that are ‘fundamental’ to the enterprise of the company in question. These factors are considered in light of current share prices to ascertain any mispricing of the shares.
Funded Unapproved Retirement Benefits Schemes (FURBS)
This is an occupational pension scheme that is not designed to be approved. This type of scheme saves up assets to pay members’ benefits, unlike an unfunded scheme. Most FURBS are top-up pension schemes.
A financial contract between two parties; the buyer agrees to purchase something, a commodity that has not yet been produced, from the seller at a set price in the future. The buyer hopes that the commodity is worth more in the future than the price they have agreed to pay for it.
A measure of indebtedness, ie the extent of borrowing as against the equity held by a person or company in an asset. The ability to increase exposure by investing in futures contracts without making the underlying cash available.
Is a transfer of goods or property to another party. There are limits to the amount of gifts you can make without any tax liability.
Gilt edged security (gilt)
A fixed-interest bond or security issued by the British Government.
Grant of administration
If a person dies without a will someone, possibly a family member, will have to apply for a grant of administration in order to gain the right to deal with the estate.
Grant of probate
A legal document that the executor of a will may need to gain the right to deal with a deceased person’s estate. See also grant of administration.
The total before deductions have been taken away.
Gross domestic product (GDP)
A measurement of the aggregate goods produced and services provided within an economy over a year and excluding income earned outside the country. Considered one of the main yardsticks of the health and vitality of an economy.
The amount of interest you receive without any income tax taken out.
Gross national product (GNP)
An economic statistic which includes GDP (Gross Domestic Product) plus any income earned by residents from their overseas investments, minus income earned within the domestic economy by overseas residents.
Gross salary is what you are paid before any deductions such as tax and benefits.
Group Personal Pension (GPP)
An arrangement made for employees of a particular employer to participate in a personal pension scheme on a group basis.
One who seeks capital gain from expected further growth in company earnings. Typically, growth investors care less about price/earnings ratios and other valuation measures and more about earnings growth.
Stocks, whose earnings have grown at an above-average rate over a number of years, and which are expected to continue to grow at a high rate for some time to come.
An investment fund or policy that includes a guarantee that your plan will be worth at least what you originally invested plus any growth the fund has experienced at the plan maturity date.
Guaranteed maturity value
An investment option that provides a guaranteed value at the plan maturity date.
Guaranteed minimum pension (GMP)
A guaranteed pension amount paid, as a condition of contracting out of SERPS (State Earnings-Related Pension Scheme) under a Final Salary Scheme, up to and including 5 April 1997, from which point different rules apply.
An option where your product provider will pay your income for a set period of time even if you die.
Guaranteed period annuity
An annuity that pays out for a set period of time even if you die. The income can continue to be paid to a spouse or other beneficiary or as a lump sum to your estate.
Guaranteed whole of life
Life insurance which last for your whole life rather than for a set term. No matter when you die a lump sum will be paid out.
An extra child benefit payment paid to those who are bringing up a child whose parents have both died.
Hang Seng Index
The principal Hong Kong Share Price Index.
The published overall inflation rate, unadjusted for non-economic factors, as opposed to underlying inflation.
A type of investment portfolio under which the fund manager is authorised to utilise a number of higher risk investment techniques, including using derivatives, short selling and borrowing funds to generate a higher return.
A strategy designed to offset investment risk.
High yield bond
A high-paying bond with a lower credit rating than an ‘investment grade’ bond. Because these bonds have a higher risk of default they pay a higher yield to attract investors. Bonds with a very high risk of default are also known as ‘junk bonds’. High-yield bond funds provide a way to access this market without the risk of investing in just one company’s bonds.
Higher rate taxpayer
An employed or self-employed person who is earning a high rate of income. Higher rate taxpayers pay 40% tax on earnings above a certain level.
A company which controls another company, usually by owning 50% or more of its shares.
Holistic financial plan
A financial plan which takes into account every aspect of your life rather than focusing solely on one area, eg. a pension or life insurance. Independent financial advisers can offer this service.
An example of the potential growth rates a customer might expect to receive from an investment. The growth rates used are set by the Financial Conduct Authority, an industry regulator. It is important to remember that the actual return received could be higher or lower than those shown on the illustration.
Grouping of funds for performance measurement by the Investment Association.
Impaired life annuity
An special annuity that pays out more than a standard annuity if you suffer from a medical condition that shortens your life expectancy.
The money you earn through employment or self-employment, paid by a pension or gained through investments and savings.
Facility by which you can draw an income from your pension fund while keeping the rest fully invested.
A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.
Tax payable if you have income above the minimum level taxable in the UK.
Unit(s) held within a unit trust that pays out to investors as an income, instead of being reinvested.
An annuity that pays out an increasing income throughout your lifetime to protect your money from the eroding effect of inflation.
Increasing term assurance
Life insurance which pays out a lump sum on death within a certain period but the lump sum increases over the period of the policy to try and counter the effect of inflation.
An insurance designed to compensate a policy holder for any loss suffered.
Independent financial adviser (IFA)
IFAs are a type of financial adviser who are able to select from all the products available in the marketplace. IFAs are bound to the Financial Conduct Authority rules, which oblige them to provide advice most suited to your personal requirements. In addition, when making recommendations they have to provide written reasons why they think that it is right for An adviser is not independent if they do not offer a fee only option.
The means of measuring movement of statistics over a period of time used as a benchmark by unit trust managers.
Making an adjustment to allow for the effects inflation can have on money, used to reduce the amount payable in Capital Gains Tax.
A portfolio of securities structured in such a way that its value will closely follow a nominated market index, eg an equity index fund may be designed to track the FTSE All-Share Index.
Payments protected against the effects of inflation by increasing in line with the changes in the index of retail prices.
A UK government bond (gilt) whose redemption value and interest payments are linked to inflation (as measured by the Retail Prices Index).
Index-linked term assurance
Life insurance that pays out a lump sum on death in a certain period but the amount paid out and the premiums paid are linked to the retail price index.
Individual Savings Account (ISA)
A savings vehicle that allows customers to invest in equities, life assurance policies, or save in cash, without having to pay tax on the returns gained from them.
The rate of change in the general level of prices of goods and services over a period of time expressed as a percentage. It can be measured by the Consumer Price Index (CPI) or the Retail Price Index (RPI).
An inflation-linked annuity tracks the UK Retail Prices Index and will rise if the index rises. Choosing this option means you will get a lower initial income than if you chose a level annuity.
Tax payable after you die on the value of your assets in excess of a certain threshold value although gifts between husband and wife are exempt. It is also chargeable in certain circumstances while you are still alive.
A charge levied by your investment manager to cover administration and sales commission when you invest in a fund.
Initial Public Offering
(IPO) The first sale of shares of a company to the public.
The illegal practice of trading in securities on the basis of ‘inside’ or secret information which is not available to the public at large.
Instant access account
A flexible savings account that allows you immediate access your money whenever you want without charging you a penalty for doing so.
Institute of Financial Planning (IFP)
A professional body for people giving financial advice or working in financial advice firms. It sets exams, provides training and issues statements of professional standing to financial advisers. It is home to the certified financial planner qualification.
A single premium life assurance policy that allows you to invest in a variety of funds. Normally designed to produce long-term capital growth, but can be used to generate an income.
Insurance premium tax
A tax levied on most non-life insurance policies.
A person covered by an insurance policy.
A company that offers an insurance policy.
The return earned on funds which have been loaned or invested (ie the amount a borrower pays to a lender for the use of his/her money).
A measure of a company’s ability to meet its interest obligations, calculated by dividing interest payments into income. The higher the ratio the better.
A mortgage which requires you only to pay the interest charges on your loan each month. This means that your monthly payments will be much cheaper, but when your mortgage term ends you will still be left with the loan to pay off.
The amount of money a customer can earn on an investment. It is usually expressed as a percentage of the total sum invested.
Interest rate risk
The risk borne by fixed interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When interest rates rise, the market value of fixed interest securities declines and vice versa.
Interest rate sensitivity
The degree of movement in the price of a security, usually that of a bond, resulting from moves in interest rates.
International Monetary Fund (IMF)
An international organisation founded in 1947 to promote maintenance of equilibrium in the balance of payments among the various nations of the world. The functions of the IMF include the levying of quotas on member nations to create a pool of funds available to be loaned to nations facing balance of payments problems.
A tax-free transfer between husband and wife or between civil partners under Inheritance Tax rules.
You die intestate if you die without leaving a will. This means your estate will become subject to Intestacy Rules and may not go to the person you would like it to.
Investment Association (IA)
A trade association for the UK investment management industry formally known as the Investment Management Association (IMA).
Investment Company with Variable Capital (ICVC)
The generic term for an OEIC (Open Ended Investment Company) or similar investment vehicle where investors pool their contributions with those of other people, to create a portfolio of assets.
An asset acquired for the purpose of producing income and/or capital gains for its owner.
A financial expert trained to analyse the activities and future prospects and earnings of companies and securities for the purpose of investment.
A company whose main business consists of specific activities relating to investments. For example stockbrokers and investment fund managers.
Investment grade bonds
Bonds which have a credit rating which is sufficient for them to be purchased by most institutional investors.
An organisation or individual that specialises in the investment of a portfolio of securities on behalf of individuals and/or organisations, subject to the guidelines and directions of the investor.
The set of principles or systems used by investors to govern the way they manage portfolios. Sometimes confused with investment style, which tends to be more associated with the level of risk in the portfolio.
A type of collective investment which invests in shares, securities or property but is itself listed as a quoted company. Investors buy shares in the company, the price of which is determined by how popular it is, of which there are a limited amount meaning it is a closed-ended investment.
An annuity where your income is linked to the stock market so you have the opportunity to benefit from stock market rises but you risk a lower income is the stock market falls.
A person whose principal purpose is to invest money prudently and productively over the longer term with the objective of achieving a reasonable return relative to the investment risk involved The opposite of a Speculator, who will sacrifice safety of principal for the possibility of larger gains.
Joint life plans cover two (or more) people, usually a husband and wife. Benefits can be paid following the first death, or following the death of both.
Joint life annuity
A way of allowing you pension income from an annuity to be passed to your partner or beneficiary rather than losing the income on your death. Also known as a partner pensions, spouse pension or reversionary pension.
Junior ISA (JISA)
Launched in 2011, the Junior ISA is a new tax-free way to save for children under the age of 18. Just like a normal ISA you do not have to pay any tax on the interest you earn and you can save in both cash and stocks and shares.
A high risk, high yield debt security rated below investment grade at the time of purchase.
Key investor information document (KIID)
A two-sided information sheet that provides all the key facts and figures about an investment fund. It has a standard layout with sections describing what the fund does, the investment risk, charges and performance. The regulations mean that all funds have to use the same layout, making it easier to compare funds from different providers.
Key person insurance
This provides cover, in the short-term, against the loss of profits a company is likely to suffer following the death of a key employee.
Lasting power of attorney (LPA)
A legal document that is drawn up to give a specified person, or a number of persons, control of your welfare, finances and property should you become mentally or physically unable to make these decisions yourself.
A straightforward annuity that pays out a set income when you retire, the income remains the same (level) regardless of how long it is paid out for. Also known as a standard annuity.
Level term assurance
Life insurance that pays out a set lump sum if you die within a certain period. The lump sum does not change.
A synonym for gearing (eg using derivative investments to over-invest a portfolio).
A debt, or amount of money, owed to others.
An insurance policy which pays out a lump sum on the death of the policy holder.
The life assured is the person (or persons) covered by the life insurance contract that has been taken out with the life company. You can take out life insurance on your own life or the life of other individuals such as your spouse or business partner, provided you can show that you have a financial interest in them.
Life assurance is a contract between an insurance company (the life company) and an individual(s), where the insurance company pays out, in return for premiums paid, if the insured person dies before the end of the contract.
A pool of money held by a life company into which all life assurance policy holders’ premiums are paid and all claims are made from.
The lifetime allowance is a limit on the total amount of pension fund you can use for retirement benefits before extra tax applies. It is set by the Government. The limit is currently £1 million. The vast majority of pension scheme members will not be affected by this limit.
An annuity is one option for converting you pension pot into a retirement income. An annuity provider will provide an income until you die in exchange for a lump sum.
The degree to which an asset can be bought or sold without affecting the price. Assets with a high level of trading activity are easily bought and sold, and are described as ‘liquid’. Shares in large companies, such as those featured in the FTSE 100, are an example of a liquid asset. It’s safer to hold liquid assets as it’s easier to get your money out if you need it.
A market where selling and buying can be accomplished with ease, due to the presence of a large number of interested buyers and sellers willing and able to trade substantial quantities at small price differences.
The risk that an investment may not be easily converted into cash with little or no loss of capital and with minimum delay.
A company whose shares are quoted on a recognised stock market.
A security bearing a fixed rate of interest. The capital (the amount loaned) is repaid after a given period of time.
Loan to value (LTV)
The amount of money you borrow from a mortgage lender expressed as a percentage of the property’s value. For example, if your house is worth £150,000 and you take out an 80% LTV mortgage, you will need to pay £30,000 as a deposit.
London Interbank Offered Rate (LIBOR)
The average rate banks charge to lend to one another. It is announced every business day before midday by Thomson Reuters based on data provided by a panel of major banks. There are 150 Libor rates in total for 15 different borrowing periods ranging from overnight to 12 months, spanning 10 currencies.
London Stock Exchange (LSE)
The main market in the UK on which companies that are large enough can trade their shares and raise money from investors.
Long-term care bonds
An investment bond designed to cover the costs of care in old age. It can be used to cover residential home costs as well as expenses incurred when care takes place within the home.
A person independent of the insurance company, but paid by it, who is responsible for checking that the claim is covered under the policy and negotiates the amount paid with the policy holder.
Lower earnings limit
The minimum amount which must be earned in any pay period before National Insurance becomes payable.
The point at which management and other investors enjoy a return on their investment, by selling the business either on the stock market, to a competitor, or to another institution such as a VCT. A managed exit will be initiated according to a careful strategic plan which is often compiled with professional advice.
Managed funds are generally made up of a spread of other specialist funds so spreading the risk.
Accounts which are prepared for use when managing the business.
The agreed objectives given by an investor to his or her investment manager, often including a benchmark, guidelines as to sector exposures and prohibited investments.
Marginal tax rate
The additional tax which someone pays on each £1 increase of their taxable income.
The value of a company measured by the total stock market price of its shares, calculated by multiplying the number of shares by the current market price of a share.
A business cycle concerned specifically with rises and falls in market activity, as measured by an index.
With reference to a security, the last reported price at which the security sold. Alternatively, the highest price which a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.
Risk that relates to the market as a whole and therefore cannot be diversified away simply by holding a greater variety of securities.
The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities,as well as judgements of underlying value.
The value of an asset to a third party on the open market.
Market value reduction (MVR)
A market value reduction may be applied to unitised with-profits investments. A market value reduction is a way of protecting investors during periods when investment returns are below the level we would normally expect or following a large or sustained fall in the stock market. We apply a market value reduction to ensure that those who remain invested in a with-profit fund are not disadvantaged when others choose to leave. If you move money out of the fund when a market value reduction is in place it will reduce the value of your pension fund. We will tell you if a market value reduction is applying before taking your money out of the fund.
The date on which a loan, bond, mortgage, life policy, or other debt or security is due to be repaid.
A way for the government to determine what benefits you are entitled to, if any, depending on your income, assets and savings.
A person who has been admitted to membership of a pension scheme and is entitled to benefits under the scheme.
The tendency of an asset price to keep moving in the same direction, either upwards or downwards.
Influencing an economy through control of the money supply.
Monetary Policy Committee (MPC)
The MPC consists of nine members: five from the Bank of England, four external members appointed by the Chancellor and is chaired by the Governor of the Bank of England. They meet every month for a two day meeting to set interest rates. The minutes of the meetings are published monthly.
Money Advice Service (MAS)
An independent, free advice service set up by the government to help people get to grips with their money. It is paid for by the financial services industry and now also coordinates the provision of debt advice across the UK.
The market for trade in short-term securities such as Bills of Exchange, Promissory Notes and Government and Semi-Government bonds. Participants in the money market include banks and other financial institutions, life offices, stockbrokers, pension funds and Government authorities.
Money Purchase Scheme
Also known as defined contribution scheme. A scheme where the amount of a member’s retirement benefits depends on the contributions paid into the scheme in respect of the member and investment performance less charges. The rate of the contributions is decided by the employer.
The number of deaths within a known group, within a given period. Some people will die earlier than expected and others will live longer than expected.
A way of borrowing money to buy a house. The loan is secured against your property which means if you repeatedly miss payments your lender could seize your home.
Mortgage indemnity insurance
Insurance that covers the mortgage lender, in the event that the property is repossessed and its value when sold does not cover the remaining loan.
MSCI (Morgan Stanley Capital International) Index
A series of country indexes of equity prices. The MSCI World Index is one standard for comparisons of international equity performance, although there are others, including the Frank Russell and Financial Times indices.
Multi-manager is a means of investing where you can access a wide range of different fund managers through a single investment product.
A company which has no shareholders but is owned instead by its with-profits policyholders.
An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets in accordance with a stated set of objectives. Shares are issued and redeemed on demand.
National Employment Savings Trust (NEST)
The Government-backed pension scheme which employees without access to a workplace pension scheme are automatically be enrolled into.
National Insurance Contributions (NICs)
Payments made out of earnings by employees, employers and the self-employed to the Government that entitle you to a state pension and other benefits.
National Insurance Rebate
The amount by which a person’s National Insurance Contributions can be redirected into an Appropriate Personal Pension if contracted out of the State Second Pension (S2P).
National Savings & Investments (NS&I)
A Government-backed savings organisation. Money invested or saved is loaned to the government to finance public spending and in return the government pays interest, returns or gives out prizes.
When the market value of your house is less than the amount outstanding on your mortgage.
Not investing in companies that do not meet the ethical standards by which the fund is run. For example, not investing in tobacco or defence companies.
Interest received on a savings account after tax has been deducted. This term also applies to premiums paid net of tax relief.
Net asset value (NAV)
The valuation of a collective investment based on the market value of securities added to the cash element held in its portfolio.
Interest received on a savings account after tax has been deducted.
Net present value (NPV)
The current value of a stream of income discounted by a factor (usually inflation) over the period of an investment.
Net relevant earnings
Net relevant earnings are used to determine the maximum contributions to a retirement annuity, personal pension or stakeholder pension. They are your relevant earnings less allowances deductible for tax in relation to business purposes and any losses from business.
Net salary is what you are paid after taxes and benefits are deducted by your employer.
The return on an investment after tax has been deducted.
New Individual Savings Account (NISA)
Tax-efficient savings plans which can hold cash or investments, or a combination of the two, which were introduced in 1999 to replace TESSAs and PEPs.
Nil-rate band (income tax)
Refers to the ceiling on earnings for income tax purposes, under which no tax is payable.
Nil rate band (inheritance tax)
The part of your estate that is not subject to inheritance tax.
No claims bonus
A reduction in an insurance premium because the customer has a claim-free record.
The face value of something eg a share issue.
An individual or company in whose name a security is registered to be owned, although the real (or beneficial) ownership is actually held by another party. Nominee companies are often used by share investors who for some reason wish their identities to remain undisclosed or who simply require another party to manage (or hold as custodian) their investments.
An occupational pension where the employee does not make any type of contribution. It is entirely funded by the employer.
No notice account
A flexible savings account that allows you easy access to your money, but could take up to a few days to process your transaction.
The total value from all payments into your pension fund that was not ‘protected rights’ monies.
Normal retirement date (NRD)
The date you told your pension provider that you would like to retire. This may be a set date for a company pension.
Occupational pension scheme
A legal contract set up by an employer to provide pensions and/or other benefits for one or more employees on retirement, death or leaving pensionable service.
The price at which you buy units from a unit trust manager.
A mortgage which is linked to your current account or savings account. When the balance in your account increases you pay less interest on your mortgage and vice-versa.
Anywhere outside the UK not within the authority of HM Revenue & Customs.
A collective investment which is based outside of the UK but open to investment from those based in the UK. They provide tax breaks for UK investors but are often more risky as they are not usually covered by the UK’s compensation scheme. See Financial Services Compensation Scheme.
Open Ended Investment Company (OEIC)
Managed funds which hold a portfolio of investments which you can buy into. They issue shares instead of units and normally quote a single price.
Open Market Option (OMO)
The ability to buy an annuity from any company in the market regardless of whether you have your pension with that company.
A mathematical process which creates a compromise between conflicting objectives (eg between maximising return and minimising risk). An optimisation program will identify the asset mix which is likely to give the highest return for a given risk level, or alternatively, the lowest risk portfolio to achieve a desired return.
In investment terms, a contract giving the right to buy or sell commodities, currencies or shares at a fixed date in the future at a fixed price.
The option to remove yourself from workplace saving after being auto-enrolled into a pension scheme.
For the purposes of taxation an individual may be ordinarily resident in the UK although he or she is not physically resident in a particular tax year. The term ‘ordinary residence ‘is broadly equivalent to habitual residence. If an individual is a resident in the UK year after year, he or she is ordinarily resident here and liable for UK tax.
Securities which represent an ownership interest in a company. If the company has also issued preference shares, both have ownership rights. The preference shareholder normally is limited to a fixed dividend, but has prior claim on dividends and, in the event of liquidation, assets. Ordinary shareholders assume the greater risk, but generally exercise the greater control and may gain the greater reward in the form of dividends and capital appreciation. If the company is wound up, the ordinary shareholders generally rank behind secured creditors, including debenture holders, in the liquidation process.
Achievement of a higher investment return than a benchmark or other measure against which that return is being compared. For example an equity fund would be said to have outperformed the index if the fund achieved a 5% return against a 3% return by the index over the same period (As opposed to underperformance).
Having a greater exposure to a particular sector or stock in an investment portfolio compared with a neutral or benchmark position (As opposed to underweight).
A preserved benefit which is secured for an individual member of a pension scheme or the policyholder of a life assurance policy, where premiums have ceased to be payable in respect of that member.
An investment approach which aims to mirror or ‘track’ the performance of a financial index. This is normally done by either investing in the exact constituents of an index or by taking a representative ‘sample’ of that index. The managers of such funds have lower expenses than active fund managers, and the charges to investors are therefore lower.
Pay As You Earn (PAYE)
Where income tax and National Insurance contributions are collected from your salary, before it is paid to you, by your employer and passed to HM Revenue & Customs.
Payment protection insurance (PPI)
An insurance policy that is supposed to cover your loan repayments in the event you are unable to work. Pension A savings vehicle you pay into throughout your working life to fund the lifestyle you want in retirement.
Term used to describe shares with a low value, usually under £1 per share; very often high-risk shares.
A regular income paid to a person after they have retired. Also used to describe a plan or scheme that is set up to provide a pension or other retirement benefits.
An insurance policy that pays out an income during retirement. The annuity is bought with savings made before retirement eg from a personal pension or occupational pension scheme. This can also be known as a compulsory purchase annuity.
A service provided by the Department of Work and Pensions which tells you what your state pension may be worth when you retire.
General term used to describe the investment fund built up in a pension plan and used at retirement to purchase an annuity to provide a continuing income.
A company which runs a pension scheme.
An independent arbitrator for pension disputes with statutory power to enforce his or her decisions.
Pensions tax relief
The government tax break given to those who contribute to their pension to encourage savings. Tax relief is available on all contributions into personal or company pensions up to defined limits. See annual allowance and lifetime allowance.
Refers to the current value of a pension plan that can be transferred from one approved scheme to another approved scheme. The value is transferred direct from one employer or pension provider to another.
Earnings on which benefits and contributions in a pension scheme are calculated.
Period of service with a company that is used in the calculation of pension benefits.
An independent, professionally recognised trustee. It is a mandatory requirement for a small self-administered pension scheme to have one.
A statistical measure representing the ranking of a particular figure or outcome on a scale comprising 100 equal groups.
A form of analysis that attempts to compare investment managers performance. Measurement should include: analysis of performance over a business cycle (typically 3-5 years) and assessment of returns on a quarterly basis, ideally by sectors as well as total returns; ensuring that like is being compared with like – the best way to do this is to look at each manager’s benchmark, or risk profile, and compare performance against the benchmark, preferably on a sector basis; and analysis of the reason for any extreme out-or-under performance in a given period (eg whether a large overweight position exists in one or a few securities or a sector).
Permanent Health Insurance (PHI)
Insurance that pays a level of income in the event of long-term sickness or disability.
A measure of how long a policy holder keeps their policy with an insurer.
The amount of income you are allowed to receive each year without paying tax on it.
Personal Equity Plan (PEP)
Introduced in 1987 and designed to promote saving by UK investors who are 18 or over. A limited amount could be invested each year. Personal Equity Plans (PEPs) are simple, flexible investment plans which invest in the stockmarket and benefit from special tax advantages. There is no minimum or maximum period for which investments must be held. These plans were replaced by ISAs from April 1999, but existing PEPs can remain in force.
Personal Finance Society (PFS)
A professional body for financial advisers and those working in financial advice firms. It works under its parent organisation the Chartered Insurance Institute (CII).
Personal pension plan (PPP)
A type of private savings plan provided by a financial institution in order to give you a regular income in retirement.
The facility to use small amounts of your pension fund to buy annuities as and when you need income, rather than buying one annuity at retirement with your whole pension fund. Portfolio A collection of shares or funds owned by an investor.
A document giving all of the details of the agreement between the insured and the insurer.
Generally an administration fee usually charged monthly or annually.
Generally taken to mean the owner of the policy.
Any form of investment in which a number of individuals place their money with a professional manager to manage the total fund on their behalf and produce a return to them individually. Also known as collective investment.
The collection of investment holdings of a particular investor usually with reference to its composition ie the mix of different classes of securities, such as bonds, property, shares and cash, or if in a single asset class, the mix of different sectors and stocks.
The process of identifying which asset classes to invest in, and in what proportions.
A person or organisation engaged to manage investment portfolios and make investment decisions on behalf of others. Also known as an investment manager.
The process of selecting an investment portfolio that minimises risk for a given level of return, taking account of a) expected return; b) variances of expected return; and c) covariance of return with every other security under consideration.
The total of an option trader’s open contracts in a particular underlying security. For example, a purchaser of a futures contract has a long position, while a seller of a futures contract has a short position.
The number of months over the last 12 months that a fund has grown in value.
A positive screening strategy means a fund will seek to invest in those companies with a commitment to responsible business practices, positive products and/or services.
Potentially exempt transfer (PET)
Gifts that may become liable to inheritance tax if the person giving the gift does not survive for seven years after the gifting. If they survive seven years or more the gift falls out of the estate of the deceased.
Pound cost averaging
The term used to describe the effect of paying a fixed regular amount into a unitised investment fund where the value of units fluctuates. The amount will purchase more units when prices are low and vice versa. Over the longer-term, the average cost per unit is likely to be lower than the average unit price over the period.
Power of attorney
A legal document whereby one person (the ‘Donor’) gives another person or persons (the ‘attorney’) the power to act on his or her behalf with regard to his or her property and financial affairs.
Shares which rank before ordinary shares in the event of liquidation of the issuing company and usually receiving a fixed rate of return on the investment.
How often the premium is paid, eg monthly or annually.
What you pay an insurer each month in order to keep your insurance up to date.
The current value of an investment which matures in the future, after discounting the maturity at an assumed rate of interest and adjusting for the probability of its payment or receipt.
Calculated by dividing the market price of a company’s ordinary shares by its earning-per-share figure as an indicator of the company’s performance potential.
Private Medical Insurance (PMI)
Insurance which will pay for the cost of medical treatment in accordance with the policy cover.
A place where you can store your will to ensure your wishes are executed after your death.
Profit and loss account
A financial statement showing the earnings and expenses of a company over a given reporting period (as distinct from a balance sheet, which shows the company’s assets and liabilities at a set point in time).
In the finance industry, the term refers to real estate including land and buildings that can be bought, sold or leased.
A written authorisation given by a shareholder to someone else to vote his or her shares at a shareholder’s meeting. Fund management agreements often delegate the authority to the investment manager to exercise proxy votes on behalf of the client.
Prudential Regulation Authority (PRA)
When the Financial Services Authority splits into two next year, the Prudential Regulation Authority will work with the Bank of England to supervise the banks and make sure the UK financial system remains stable.
Public Limited Company (PLC)
Any company with a share capital of at least a statutory minimum.
Purchased life annuity
An annuity bought with money from other sources (such as savings, investments, an inheritance or tax-free cash from your pension fund).
An option giving its purchaser the right, without the obligation, to sell an asset at a specified price (the exercise price) at any time between the purchase of the option and its expiry date.
QCF level four
This is the minimum level financial advisers have to be qualified to in order to practise from 31 December 2013. QCF stands for Qualifications and Credit Framework and level four on the framework is the equivalent of finishing the first year of a three year degree.
QCF level six
A number of advisers hold level six qualifications, above the level four benchmark they must reach. QCF stands for Qualifications and Credit Framework and level six on the framework is the equivalent of finishing a three year degree.
Qualifying (life policy)
A type of insurance policy that can have tax benefits.
Quantitative easing (QE)
Monetary policy intended to increase money supply when conventional policies aimed at stimulating the economy, such as interest rate manipulation, have become ineffective. Under QE central banks buy any assets they like, including government bonds or equities, using electronically created money. The effect of the central bank’s purchases should be to increase the price of whatever it buys, lowering the interest rate on the asset. Cheaper borrowing should lead to more spending, boosting the economy.
An approach to investment management which seeks to use statistical or numerical methods to create efficient portfolios, with the optimum risk/return trade-off. Quantitative managers generally attempt to add value by exploiting pricing anomalies, or by providing particular levels of risk control, rather than by subjective forecasting of market behaviour.
Most UK funds are grouped into sectors and each sector is divided into four quartiles with the best performing funds being in the top quartile.
A brisk rise following a decline in the general price level of the market or an individual share.
The difference between the highest and lowest prices recorded during a given trading period: week, month, year etc.
Rate of return
The yield earned in relation to a capital amount invested.
Property in land, building or housing, as distinct from personal property (eg cars); also known as physical property to distinguish itself from property trusts.
Real estate investment trust (REIT)
A security that sells on a stock exchange but invests solely and directly in real estate by buying either properties or mortgages.
Real interest rate
The nominal interest rate less the prevailing rate of inflation.
An inflation-adjusted return.
To sell an asset (usually when it appears to have appreciated to the maximum extent that can be reasonably expected).
The return of a proportion of a payment which effectively reduces the total outlay or obligation.
The technical definition of a recession in the UK is two quarters of ‘negative GDP growth’. What this means is that the total value of all the goods and services produced by the UK contracts for two quarters in a row. The Office for National Statistics publishes these figures about once every three months, but its initial estimates are subject to revision when more data becomes available.
A fee charged for the redemption (ie withdrawal/cashing in) of units in a unit trust. Also known as back-end load.
A penalty that has to be paid when a customer decides to move lender. Usually they apply within the term of a fixed rate, capped or discounted mortgage.
The redemption yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures.
Method of recouping initial expenses when setting up a unit-linked policy, whereby only a proportion of the investment is allocated to the policy for the first few years.
Reduction in yield
The amount by which an insurance company‘s charges can be expected to reduce the investment return on a policy.
Renewable term assurance
Life insurance that pays out a lump sum on death in a certain period but can be renewed without health checks at the end of that term.
This is the most common type of mortgage. Each monthly repayment will go towards both paying the interest charges on your loan and the loan itself. By the end of the mortgage term, therefore, your loan will be paid in full and you will own your house.
The proportion of a company’s profit not distributed to shareholders as dividends, or an account kept aside by the trustees of a pension fund to cover declines in asset values or investment returns.
Advisers who are not independent and can only recommend products and investments from one or a restricted number of companies provide restricted advice.
Retail distribution review (RDR)
Started by the Financial Services Authority, the review aims to make the process of investing and buying products more transparent and increase the level of professionalism within financial services. The changes set out under the review came into effect on 31 December 2012.
Pension benefits earned in previous employment that are taken into account when determining HM Revenue & Customs limits for a member of an occupational pension scheme.
Retail Price Index (RPI)
An official measure of inflation calculated by weighting the costs of goods and services to approximate a typical family spending pattern.
The period of your life when you are no longer working which usually start taking income from the state pension or your own private pension.
The amount by which the value of your investment increases.
The bonus paid by a with-profits policy or annuity annually, dependent on the growth in the with-profits fund linked to the policy.
New shares sold by a company to raise capital.
Refers to the fact that the value of your savings and investments can fall as well as rise.
The monitoring and controlling of various risk factors in an investment portfolio with the aim of minimising volatility of investment returns.
The extra yield over the risk free rate demanded by investors to compensate them for holding a riskier asset. This is an extremely important concept in relation to setting a long-term asset mix.
A series of questions investors answer to determine how tolerant an investor is to the risk of losing their investment and subsequently where they should be invested.
Risk is a measure of the variability of return. Return, in financial terms, represents the profit – in the form of income and capital appreciation on an investment. The Risk / Return trade off is how much an investor is willing to accept greater risk in order to pursue greater returns. The optimum position is the top left hand corner of the matrix, which represents the highest return and the lowest risk.
An investment with no chance of default, and a known or certain rate of return.
A tax concession, which allows investors and businesses to defer the payment of Capital Gains Tax. For example, if proceeds from the sale of a fixed asset are reinvested, Capital Gains Tax is not payable until the new asset is sold.
An offshore investment fund that does not distribute its dividends.
Equal to the annual income payable on a bond as a percentage of its current market price.
A United States stockmarket index, maintained by Standard & Poors.
The State Second Pension.
A tax-efficient method of increasing the money paid into a pension scheme by giving up existing salary or proposed salary increases, so that the sum foregone can be used as an additional company contribution into a pension scheme.
Sale and rent back market
Firms which buy homes from struggling mortgage borrowers for a low price, and in return allow the homeowner to remain in their house as a tenant.
These funds are often used to complement the Core Funds in an investor’s portfolio. They tend to be more specialised and have a higher risk/return profile.
Examination of various securities, usually through computer models, to identify certain predetermined factors such as valuations, earnings, liquidity, etc, with a view to the inclusion of those securities in an investment portfolio.
The issue of new share certificates to existing shareholders to reflect an accumulation of profits on a company’s balance sheet.
Any market in which existing securities are traded (as distinct from the primary market, in which securities are first issued). The Stock Exchange is the secondary market for share trading.
Section 226 (retirement annuity)
Prior to 1 July 1988, people not in pensionable employment (employment where no pension scheme exists) or people who were self-employed, were able to qualify for tax relief for contributions made to a pension scheme known as a Retirement Annuity under Section 226 of the Income and Corporation Taxes Act 1970. This was the forerunner to the Personal Pension Scheme.
Used widely to describe a buy out bond issued under Section 591 (2) (g) of ICTA 88.
A sector is a grouping of funds with a similar investment objective and make up. An area of the economy where businesses share the same or a related product or service, for example, pharmaceuticals, telecommunications or retail.
Sector averages denote the average performance of all funds within a particular sector. Sectors are governed by the Association of British Insurers for life and pension funds and by the Investment Management Association (IMA).
Sector performance takes into account the contributions of all existing funds the sector comprises of and is therefore referred to as the ‘sector index’. The sector index performance may not match the straight average of the existing sector members, as the latter will not take into account the performance of new funds which have entered the sector during the nominated performance period and which would have affected the sector index performance. Over a long period these differences will be cumulative, resulting in wider divergence between the sector index and the straight sector average.
The general name for stocks and shares.
Self-invested personal pension (SIPP)
A private pension which gives the saver control of where the invest their money. The options for investment are wider than a standard personal pension.
In relation to share trading, an arrangement between brokerage houses for the payment or receipt of cash or securities. It represents the final consummation of a securities transaction and is handled through a clearing house.
The date on which the final consummation of a securities transaction takes place and payment is made.
In relation to foreign exchange transactions, the exposure of one party to another on the value date of the contract. It is the risk that one party, having received settlement of one currency amount from the counterparty, is unable to effect settlement of the other currency amount.
A share is a single unit of ownership of a company, mutual fund or other organisation. Shareholders are entitled to a proportion of a company’s profits if they are declared as dividends, and may vote at annual general meetings (AGMs).
The money paid (subscribed) for ordinary and preference shares in a limited company. Authorised share capital means the total amount of shares available to be issued. Issued share capital relates to the total amount of shares actually subscribed for.
A piece of paper representing legal evidence of ownership of a stipulated number of shares in a company. Also known as scrip.
Owners of unit trusts may use shares they already own to make an investment without having to sell them first. This saves dealing charges.
The owner of one or more issued shares of a company who is normally entitled to: a proportionate share of the issuing company’s undivided assets; dividends when declared by the directors; and the right of proportionate voting power.
An offer by a company, usually to its employees and directors, to buy its Shares at a given price, before a specified date. A number of approved share option schemes offer tax-free capital growth.
Share price index
An index measuring movements in the price of shares, but not of their dividends (as opposed to an Accumulation Index, which measures movements in both price and dividend income).
A register recording all of a company’s shareholders and the number of shares they each hold.
A statistical measure which attempts to show the performance of a portfolio’s return in risk adjusted terms. It is calculated by dividing the portfolio’s excess return over the risk-free rate by the risk (ie standard deviation) of portfolio returns. The higher the Sharpe Ratio, the better the portfolio’s return in risk adjusted terms. A Sharpe Ratio higher than one can be considered to be very good, while a ratio below 0.1 shows that the portfolio has been poorly rewarded for the risk undertaken.
An excess of sales over purchases of a relevant commodity, currency or investment instrument (As opposed to long position).
The sale of a security that is not yet owned, in the expectation that its price will fall so that it can be bought back at a later date.
Bonds or Gilts that have a redemption date within five years. Some institutions use seven years as the cut-off date.
A new low-cost channel of advice where personal recommendations are made on specific financial situations but no full financial plan is provided.
Single life annuity
An annuity which is paid only to you and stops when you die, unless you choose guaranteed payments.
A one off payment into an insurance policy or pension.
Single pricing means that there is just one price for both buyers and sellers of the units or shares. This contrasts with dual pricing where there is one price for sellers and a higher price for buyers, sometimes known as a bid/offer spread.
Another name for small companies shares.
Small self administered scheme (SSAS)
An occupational scheme where the members are trustees and are directly responsible for administering the fund and paying out the benefits. Some funds are invested in assets other than insurance premiums.
Smoothing is only used for with-profits investments. With profit funds invests in a wide range of assets and the performance of these assets contribute to the profits and losses of the fund. Instead of simply sharing out what the fund makes or loses each year, smoothing aims to even out some of the variations in performance. With smoothing, a provider will keep back some of the returns the fund earns in good investment years and use them to help pay bonuses in poor investment years. Losses made in poor investment years may also reduce returns in good investment years.
One off bonuses paid to with-profits policyholders on top of the reversionary (annual bonus) if the fund linked to the policy is performing well, paid at the provider’s discretion.
In relation to share, bond and currency markets, spread is the difference between the bid price and the ask (offer) price, incorporating both an estimate of demand and potential profit for the seller. In relation to unit trusts, spread is the difference between the allocation of redemption price of units, as a result of transaction costs incurred in buying and selling the underlying securities which make up the value of the trust. In relation to option markets, spread is the holding of a long position and an offsetting short position, usually in contracts with the same underlying security or asset.
An investor in the share market who aims for quick gains by subscribing to new share issues and then selling once the shares commence trading on the exchange.
A low cost pension schemes introduced by the government in 2001 to encourage people to make provision for their financial future. They are aimed at those who may not have been able to afford a personal pension and were not eligible for an occupational or group scheme.
A tax on the purchase of shares and property.
See level annuity.
A statistical measure of the dispersion of a set of numbers around a central point. If the standard deviation is small, the frequency of distribution is concentrated within a narrow range of values. For a ‘normal’ distribution, about two thirds of the observations will fall within one standard deviation of the mean. Standard deviation is a commonly used measure of risk because the higher the standard deviation the higher the uncertainty of the return. As standard deviation measures the volatility of investment returns, it is an important measure of risk. Also known as standard error.
Standard variable rate
A mortgage lender’s basic interest rate which is moved up and down according to market conditions and what the Bank of England Base rate is doing. This is also the rate you are usually moved on to when any special rate expires.
You may be able to claim benefits from the government during your retirement. These include the Winter Fuel Payment, Cold Weather Payment and Pension Credit.
State Earnings Related Pension Scheme (SERPS)
A state pension in addition to the basic state pension based on earnings. Replaced by the State Second Pension (S2P) on 6th April 2002.
The pension benefit you are entitled to after contributing to National Insurance throughout your working life. Nearly everyone can expect to get a Basic State Pension when they reach state pension age but this may depend on your National Insurance Contributions during your working life.
State pension age
The age at which you can claim the state pension. It is currently increasing as life expectancy rises.
State second pension (S2P)
The state second pension is a top up to the basic state pension, available to people who have paid a certain level of National Insurance. It replaced the state earnings-related pension scheme.
Statement of professional standing
A certificate financial advisers must gain in order to practise after 31 December 2012. It proves they hold the minimum qualifications and adhere to a code of ethics.
A generic term for equities (shares) and, less frequently, bonds.
A professional person who buys and sells securities on behalf of others in return for a commission (or brokerage).
A market where stocks and shares are bought and sold.
The marketplace for the sale and purchase of shares, government bonds and other securities.
Stocks and shares
Both words effectively mean the same thing: a share in the ownership of a company. The aim is for the share to increase in price and a profit made on it when it is sold. Companies offer shares to the public so they can raise equity, or money, that they can use to invest in the business.
The selection of an individual security within an asset class. For example, stock selection in relation to equity investments is made after analysing the financial standing, future earnings prospects and valuation of the shares of the company concerned. Along with asset allocation, stock selection is a key way in which investment managers add value.
Strategic asset allocation
The composition of the asset mix within a portfolio, constructed with the objective of meeting the long-term views of relative performance of the various asset classes. Usually a benchmark is derived in this fashion.
A government budget deficit that is a result of a fundamental imbalance between tax receipts and spending, rather than one that is the result of short-term factors. Structural deficits can only be removed by reducing spending, increasing the tax base or increasing tax rates.
A company which is wholly or partly owned by another company but which (unlike a branch office) is still a distinct legal entity responsible for its own tax, regulatory compliance, etc.
The guaranteed amount paid on death or maturity under a life assurance policy.
For non-life insurance it is the maximum amount the insurance company will pay out for a claim. For life assurance it is the amount that is guaranteed to be paid on death.
A means of setting aside funds during working life for use as retirement income, under a regulatory system which provides certain taxation incentives and prudential controls for the benefit of contributors.
The amount of money that will be paid to a policy holder if they discontinue a policy before it matures. The benefits the customer usually receives are reduced because of the effects of the charges.
An interest rate, currency or equity exchange transaction involving two parties. In the case of an interest rate swap, one party is obliged to pay a fixed interest rate to the other party in return for a floating interest rate. In the case of a currency swap, one party is obliged to make payments in another specified currency.
Moving an investment out of one fund and into another.
The systematic risk is the portion of the risk that relates to the movements in the underlying market of which this asset forms part. Systematic risk is normally measured in terms of beta. It should not be confused with systemic risk.
Risk pertaining to the fundamentals of a system as a whole – eg in the case of banking, the risk of failure of the payments system or, in the case of property, a collapse of valuations owing to there being no buyers in the market. Systemic risk should not be confused with systematic risk, which relates to risks associated with individual securities rather than markets as a whole.
Tactical asset allocation
A process by which the asset allocation of a fund is changed on a short-term basis to take advantage of perceived differences in relative values of the various asset classes. A variation of asset allocation around a benchmark.
The acquisition of shares by one company in another so as to gain a controlling interest.
Taper relief was introduced into the UK taxation regime with effect from 6 April 1998. Its purpose is similar to indexation, in that it aims to reduce the amount of Capital Gains Tax you have to pay when you sell shares, to account for the effect of inflation.
The different levels at which you pay tax depending on the income you earn. Earnings can be taxed at 20%, 40% or 45% depending on your income. See basic rate taxpayer, higher rate taxpayer and addition rate taxpayer.
Tax-exempt special savings accounts (TESSA)
Tax-exempt special savings accounts replaced by (N)ISAs in 1999. You can no longer invest in a new TESSA but you can transfer your existing TESSA into an NISA.
You can normally take up to 25% of your pension fund as tax-free cash. Taking this will reduce the income you have during retirement.
Monetary gifts that can be made each year without fear that they will be caught by inheritance tax on your death.
Tax-free lump sum
The 25% of your pension pot you are allowed to take on retirement without incurring tax. Money taken after the lump sum is taxed as income.
Amounts which you can deduct from your annual income to reduce the amount on which you have to pay tax.
A period of time used for tax calculations. It starts on 6 April each year and finishes on 5 April the following year.
An approach to the analysis of stock and futures and their future trends which examines the technical factors of market activity, often represented by charting patterns, as contrasted with fundamental analysis. Technical analysts normally examine patterns of price change, rates of change, and changes in volume of trading and open interest, in the hope of being able to predict and profit from future trends. Some investment professionals are sceptical of the predictive ability of technical analysis, but most
A life assurance contract with a fixed term and a sum assured which is paid out only if the life assured dies within the term specified.
A deposit with a financial institution for a fixed period and a rate of interest which applies for the duration of the deposit.
A terminal illness is one where the individual is diagnosed as suffering from an advanced or rapidly progressing and incurable condition which is, in the opinion of our Chief Medical Officer, likely to lead to the individual’s death within 12 months.
A person who dies having made a will is described as ‘testate’.
The Pensions Advisory Service (TPAS)
An independent organisation which gives free advice to members of the public who have a problem with an occupational pension scheme or a personal pension scheme. It does not give financial advice or advice on state scheme benefits.
The period of time over which an investment objective is to be realised. Time horizon is a critical factor for all investors in determining the types of investments they should make or, at least, the amount of risk they are prepared to carry. The investments made to provide for future retirement income, for instance, would almost always be different from those for short-term purposes.
The art of deciding upon the exact moment to buy or to sell.
Top down analysis
A country’s economy is considered before deciding which industry in which to invest. Economic conditions determine which industries or sectors will return well and then attractive stocks are bought within those industries.
A method of calculating Income Tax liability on a chargeable gain from certain packaged products.
Abbreviation for Tokyo Price Index. A Japanese share price index measuring share prices of selected large companies listed on the Tokyo Stock Exchange.
Total Expense Ratio (TER)
The Total Expense Ratio (TER) represents the true cost of running a fund. It includes the fund AMC (Annual Management Charge) as well as the depository and custodial charges, and audit, registration, and compliance fees. For direct property funds, the TER may also include the property expense ratio (PER), which captures all non-recoverable revenue costs associated with the management and operation of the property portfolio. Some fund groups show the PER included and for others it is excluded.
The combination of capital growth and reinvested income at the end of any given period.
Aim to mirror or ‘track’ the performance of any of a number of worldwide stock market indices, such as the FTSE 100 Index.
A mortgage rate which follows or ‘tracks’ changes to the Bank of England interest rate. It will usually track a percentage point above or below the Bank’s rate.
The degree of proximity with which an actual portfolio follows a representative market index. Technically the tracking error is represented by the standard deviation of the differences in return between the portfolio and the index. Tracking error measures the likelihood (based on historical data) of actual returns differing from index returns.
A person who actively buys and sells securities for his or her own account, usually with relatively short time horizons.
Payment made from a pension scheme to another pension scheme, in lieu of benefits which have accrued to the member, to enable the receiving scheme to provide alternative benefits. The amount transferred is known as the transfer value.
The amount of money which is available to be transferred to another pension or investment arrangement.
Negotiable debt obligations of the US government.
Short-term negotiable debt obligations of the US government with maturities of one year or less, issued at a discount from face value.
Long-term negotiable debt obligations of the US government with maturities of 10 years or longer.
Intermediate term negotiable debt obligations of the US government with maturities of 1 to 10 years.
A persistent and pervasive direction, upwards or downwards, of commodities, prices, earnings, etc over a period of time.
A legal obligation binding a person (the trustee) to deal with property over which he has control for the benefit of certain people (the beneficiaries).
An individual, group of people or independent institution responsible for the management of the trust as defined by the trust deed. The trustees have the power to veto any investment which they feel does not adhere to the trust deed.
A person or company that has legal responsibility for financial aspects (receipts, disbursements and investment) of funds; A trust company which acts in a capacity of trust as a fiduciary and to whom assets have been conveyed for the benefit of another party. The Trustee in this case oversees the behaviour of the manager in relation to the operation of a unit trust.
In relation to investment portfolios, the rate at which securities within a portfolio are exchanged for other securities of the same class; in relation to investment markets, the level of trading that occurs.
Investing in a taxable investment, such as residential property and wine, is not allowed through a self-invested personal pension (SIPP) and constitutes an unauthorised payment. These payment incur heavy tax charges.
Referring to the structuring of a product or service where the individual components involved in the management of that product are split out with separate fees usually applying. For example, an unbundled pension arrangement might involve separation of investment management, trusteeship and insurance arrangements among different parties. (As opposed to bundled).
Uncrystalised Funds Pension Lump Sum (UFPLS)
A method of drawing funds from your pensions when you retire. 25% of each amount taken will be tax-free with the remaining 75% likely to be subject to income tax.
Achievement of a lower investment return than a benchmark or other measure (eg competitor portfolios) against which that return is being compared (As opposed to outperformance).
Undertaking for Collective Investments in Transferable Securities (UCITS)
A UCITS fund is theoretically one that is authorised for sale in any of the EU member states. However, many EU countries also have their own requirements which must be fulfilled if a fund is to be offered for sale there.
Referring to a security or currency which trades below what is perceived to be its proper market value, taking account of statistical or fundamental research or other relevant information.
Having a lesser exposure to a particular sector in an investment portfolio, compared with a neutral or benchmark position. (As opposed to overweight).
An individual who decides whether or not to accept a risk and calculates the premium to be paid.
The process of using a doctor to confirm medical details and prove the level of a person’s health when that person has applied for a financial product.
Income received from sources such as dividends from shares and bonds, which has not been earned by working.
Unit linked policy
An insurance policy in which the benefits depend on the performance of units in a fund invested in shares, bonds and property.
An investment contract which invests in a variety of different stocks and shares and is divided into units which are issued to its members instead of shares.
Unitised with profits
Contracts where premiums are invested in units, either in the with-profits fund or in the linked funds or a mixture of both.
When investing in a unit-linked contract, the individual’s contribution is used to buy units. These units will fall or rise in line with the underlying investments.
A common name for the flat rate state pension.
A term sometimes used to describe the total number of operators or competitors in a particular field, or the number of available stocks from which a portfolio is selected. Investment manager performance surveys are also referred to in this way.
Referring to a company and/or shares that are not available for purchase or sale through the stockmarket.
Unregulated collective investment schemes (UCIS)
A collective investment scheme that is not regulated by the Financial Services Authority and is not covered by the Financial Services Compensation Scheme. Ucis are high risk investments and invest in esoteric assets.
The value or worth of a portfolio of investments or life/pension policies recorded on a statement. Not necessarily the amount available if cashed-in.
Value Added Tax (VAT)
A form of indirect taxation levied on goods and services.
The official date when cash or securities are transferred.
One who seeks to buy shares when they are under-priced and to take profits when they appear over-valued. The price/earnings ratio is a key valuation measure.
Shares in companies that are considered to be good value. Usually they are trading at a price that is low either historically or relative to its peer group.
Variable rate mortgage
A mortgage product where the amount of the monthly payment goes up or down in accordance with variations in the interest rate, based on the Bank of England rate.
A measure of dispersion of returns on investments based on deviations from the average or mean value.
Capital which is subject to more than a normal degree of risk, usually associated with a new business or venture and particularly in relation to new technology projects. Also called risk capital or development capital.
The degree by which share prices in a particular market or sector go up or down.
Waiver of premium
An optional feature on some life policies where the insurance company will pay the premiums if the policyholder becomes ill.
A financial contract between two parties; the holder of the warrant has the right to purchase a security from the issuer of the warrant at a certain price within a certain time frame.
The relative proportion of each group of securities or asset classes within a single investment portfolio.
Whole life policy
A life insurance policy which pays a specified amount on the death of the life assured regardless of when death occurs.
A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his or her estate and provides for the distribution of his or her property at death.
The legal termination of a pension scheme.
A type of investment-linked annuity where a low level income is paid out topped up by bonuses, dependant on the performance of the annuity provider’s with-profits fund.
An investment with a fixed term that is taken out with a life company. Investors’ money is pooled and invested and when the investment does well an annual bonus is paid out each year and a terminal bonus is paid when the policy comes to an end. With-profits offer a smoothing process where some money is kept back in good years to make up for a bad return in other years.
The tax payable on payments such as dividends, interest and debt repayments, sent to foreign entities.
The amount of money tied up in the day to day operations of the business.
An informal reorganisation of the business and settlement of its affairs outside of formal insolvency proceedings.
The name given to an online investment account. Policyholders and financial advisers can view, monitor and manage investments efficiently online and enact transactions electronically.
The annual dividend or income from an investment.
A visual representation of the term structure of interest rates. It shows the relationship between bond yields and maturity lengths. A normal or positive yield curve signifies higher interest rates for long-term investment, while a negative or downward curve indicates higher short-term rates.
Yield to maturity
The yield provided by a bond which is held to its maturity date, taking account of both interest payments and capital gains or losses.
Zero coupon bond
Discounted bonds which are issued with no coupon, ie there is no periodic income payment, and the yield to the bondholder is derived from the capital value of the bond at its maturity.
Zero dividend preference share
A share with a predetermined growth rate, but which does not pay dividends.
Goods or services that are taxable for VAT but with a tax rate of zero.
Awards, Accreditations & Trade Associations
At NorthStar, we are committed to delivering the best service to our clients and working to the very highest professional standards. Our work has been rewarded with a number of awards and professional accreditations. We are also members of the leading financial services professional trade associations.