You can find an explanation of common financial terms listed
Administrator - a person who is appointed by a
probate court to manage the settlement of an estate of someone who
has died intestate or without making a will.
Annual Equivalent Rate (AER) - interest
calculated under the assumption that any interested paid is
combined with the original balance and the next interest payment
will be based on the slightly higher account balance.
Annual Allowance - the maximum amount you can
pay into your pension in a tax year and still claim tax relief.
Annuity - A financial instrument provided
by an insurance company that pays a guaranteed annual income to the
holder, typically until death. Members of defined contribution
pension schemes can purchase an annuity to secure an income. See
also 'Drawdown' below.
Annual Percentage Rate (APR) - the annual rate
charged for borrowing as a single percentage number that represents
the actual yearly cost of funds over the term of a loan. This
includes any fees or additional costs associated with the
Asset Allocation - an investment strategy that
aims to balance risk and reward by adjusting the percentage of each
asset in an investment portfolio according to the individual's
goals, risk tolerance and investment time frame.
Asset Classes - the underlying investments
- shares, bonds, property and cash deposits.
Assignment - an act of making a legal transfer
of a right or liability.
Basic Rate Tax - the amount of tax you pay on
your income as long as you earn less than the higher rate tax
threshold. Basic rate tax is currently at 20%.
Basic State Pension - this is the amount you
will receive from the government at retirement as a result of
paying National Insurance (NI) contributions throughout your
Beneficiary - a person who gains and
advantage/profits from something. For example: Trust, Will or life
Benefits in Kind - is a benefit which is paid
to you outside of your annual wage. For example: a car allowance or
Bid Offer Spread - the difference between the
bid price (the amount at which the holder can sell shares) and the
offer price (the amount at which the holder can buy
Bonds - a loan to a company or a
Budget - an estimate of costs and revenues over
a specified period, reflecting financial goals.
Capital Gains Tax - if your assets increase in
value then you may need to pay Capital Gains Tax (CGT). You receive
an annual allowance for capital gains and only pay CGT on any gains
above this amount.
Child Trust Funds - is a long term savings
or investment account for children in the UK. New accounts cannot
be created as they have been replaced by Junior ISAs. Existing
accounts can still receive new money.
Close or Price - this is the level at which
the company's shares stood when the markets closed the previous
day. In most cases it is expressed as a number midway between the
buying and selling prices.
Corporation Tax - the amount that the company
must pay on the taxable profits.
Coupon - another word for a bond's fixed
rate of interest, expressed as a percentage of its nominal
Critical Illness - insurance that pays out a
lump sum on the diagnosis of a specific critical illness covered by
Consumer Price Index (CPI) - is a measure
of inflation used by the British Government.
Current Account - a general bank account
enabling people to deposit money, get out cash and have access to
Credit - a contractual agreement in which a
borrower receives a value now and agrees to repay the lender over a
specified period of time including any interest owed on the
Credit Score - is the score you receive based
on how credit worthy you are. Banks use this to calculate the
interest rate on any money you borrow.
Debit Card - a card issued by a bank that
you use to pay for goods and services. Usually, the money is taken
out of your account immediately.
Debt - the amount of money you owe to another
party. This also includes the interest you owe as well as the
amount initially borrowed.
Defined Benefit Scheme - a pension scheme in
which the rules specify the amounts paid. The most common defined
benefit scheme is a salary-related scheme in which the benefits are
based on the number of years of pensionable service; the accrual
rate; and the final salary.
Defined Contribution Scheme - a pension
scheme in which the benefits are determined by the contributions
paid into the scheme, the investment return on those contributions,
and the type of annuity purchased upon retirement. It is also known
as a money purchase scheme.
Dental Insurance - a specialist health cash
plan that focuses on dental care expenses.
Discretionary Trust - gives the trustee the
power to decide which beneficiary receives the funds and up to what
Discounted Mortgage - a mortgage which has a
discounted variable rate of interest for a set period, after which
the rate charge will rise.
Diversification - spreading your investments
across different asset classes, or types of investments within a
Dividend - the amount of money paid by a
company to shareholders out of its profits. This is usually paid
Domicile - your primary residence for tax
Drawdown - a decline in an investment or fund.
Usually quoted as the percentage between the peak and the
Endowment Policy - a life insurance policy
designed to pay a lump sum at the end of a specified term or on
death. These were usually taken out alongside a mortgage in order
to pay the remaining capital at the end of the mortgage term.
Equity - the value of the shares issued by
a company. If you own company shares then you own some of the
company's equity. It can also be described as the amount, or value
that you own of your home.
Equity Release - this is the process of using
the value of your home to raise cash i.e. releasing the
Estate Planning - an individual's estate is
calculated as being the total amount of assets, less any
liabilities at the time of death. Proper estate planning can save
the family money in inheritance tax (IHT). IHT is due at 40% of all
assets over the IHT threshold.
Ethical Investment - these are funds offered by
businesses or companies that avoid certain types of assets. For
example companies who trade in arms, cigarettes, alcohol, or animal
research are unlikely to be considered 'ethical'. Ethical
investments can also be known as 'green investments' or 'socially
Exchange Traded Fund (ETF) - is an investment
fund traded on stock exchanges. It tracks an index, commodity or
basket of assets like an index fund but can be bought and sold
during the day like common stocks.
Executor - is a named person in a will who is
in charge of administering the deceased's estate and the
distribution of assets to the named beneficiaries.
FCA - Financial Conduct Authority (FCA) is the
UK's financial services regulator.
Fees - this is the amount you pay for
advice or services. These are usually fixed and agreed before the
advice or service is provided.
Fixed Interest Rate - monthly payments are
set at a certain level for an agreed period. At the end of this
period they will either switch to another fixed rate or go on to
the standard variable rate.
Fixed Rate Mortgage - some lenders offer a
fixed rate mortgage for a period of time, usually 2-5 years. This
means the amount of interest you pay is fixed for that period of
time. After this time you will then pay the Standard Variable
Mortgage Rate (SVR).
Fraud - wrongful or criminal deception intended
to result in financial or personal gain.
Gilt - long term fixed interest debt security
(bond) issued by the UK Government and traded on the London Stock
Guaranteed Minimum Pension (GMP) - is the
minimum pension which a United Kingdom occupational pension scheme
has to provide to those employees who were contacted out of the
State Earnings-Related Pension Scheme (SERPS) between 6 April 1978
and 5 April 1997.
Health Cash Plans - these provide limited
cash sums to help pay everyday healthcare bills.
Higher Rate Tax - is the amount of tax you pay
on your income if you are earning over the higher rate tax
threshold. This is currently 40%.
Income Drawdown - income
drawdown/unsecured pension is the facility to keep your retirement
savings invested whilst taking an income each year instead of
purchasing an annuity.
Income Protection - policies that pay out
a regular sum - for as long as required - to help cover your living
costs if you are on long-term sick.
Indexation - a technique used yo adjust the
payments by means of a price index in order to maintain the
spending power of the public after inflation.
Individual Savings Account (ISA) -
vehicles which allow people to earn tax-free returns on a variety
of assets, including cash, stocks and shares. There are limits to
how much you can save in any one tax year.
Inflation - when prices go up. Inflation
effectively erodes the value of money in your pocket which means
the same amount will buy less each year.
Interest Rate - the rate of interest you
will have to pay. This is usually linked to the base rate set by
the Bank of England's monetary policy committee and rates can move
up and down.
Interest-Only Mortgage - a mortgage where
you only pay the interest charges of the loan each month - and
won't be reducing the loan amount. This will need to be repaid in
Inheritance Tax (IHT) - is charged on the
estate of the deceased for any amounts above the IHT threshold 40%
tax will be charged.
Investment Trust - type of investment formed of
holding securities in other firms and obtaining its capital from
public issues of shares that are traded on the stock exchange.
Joint Life - this is a policy which is taken
out by two or more people. These policies can be useful in
protecting a family in the event of either or both parents
Junior Individual Savings Accounts (JISA) -
these offer a choice of thousands of funds that can be held tax
efficiently. Parents of children under 16 can open a JISA in their
Key Features Document - this is the document
that all firms and product providers authorised by the FCA have to
give you to explain their services or products.
Lifetime Allowance - this is the maximum amount
of money you can as pension savings throughout your lifetime and
still receive tax relief. Anything over the lifetime allowance is
Lifetime Annuity - this is the vehicle by
which you receive your pension savings over the remainder of your
life. There are various types of annuities that you can buy to suit
your needs and circumstances.
Loan - this is the amount of money that a
company agrees to lend you over a set period of time. The amount of
interest you pay on the loan will vary depending on your
Market Capitalisation - this is the value
of a company, normally expressed in millions of pounds. This is
calculated by multiplying the current share price by the total
number of shares that have been issued.
Mortgage - is a loan for the purpose of buying
a property. The lender may be able to take ownership of the
property if you do not keep up with the terms of the mortgage.
National Insurance Contributions (NI) - this is
an amount of money which is taken as a percentage of your income
and paid to the government from age 16 up until the pension age.
The amount you pay goes towards state-provided benefits.
Net Relevant Earnings - the amount of income
used to assess the maximum contribution that can be made into a
personal pension plan.
New Individual Savings Account (NISA) -
tax-efficient savings and investment accounts which allow you to
save cash or invest in stocks and shares. This new savings account
allows you to save £15,000 annually in either all cash, all stocks
and shares or a combination of the two. You do not pay income tax
on the interest your receive from the ISA and the profits are
exempt from Capital Gains Tax.
Nominal Value - the price at which a bond
will be redeemed at maturity.
Occupational Pension Scheme - a pension
scheme set up by an employer for the benefit or its employees.
Open Ended Investment Company (OEIC) - a type
of company/fund structured to invest in other companies with the
ability to adjust constantly its investment criteria and fund
Open Market Option (OMO)- is the term used to
describe the choice you have to buy your annuity from another
provider, who is not currently your own.
Pay As You Earn (PAYE) - is a method of paying
income tax and national insurance contributions. Your employer
deducts tax and national insurance contributions from your earnings
before paying you.
Personal Allowance - is the amount of income
you can earn in any given year before you start having to pay
Personal Pension Ccheme - a scheme where the
contract to provide contributions in return for retirement benefits
is between an individual and an insurance firm, rather than an
employer or the state.
Power of Attorney (POA) - the authority to act
for another person in specified or all legal or financial
Premium - the sum that an insurer will
require you to pay for the cover provided.
Private Health Insurance (PHI) - a type of
insurance that pays for medical and surgical expenses incurred by
the insured. Some employers offer this to their employees as part
of their employment benefits.
Probate - is the process of gaining legal
authority to deal with the affairs of the deceased. Including
getting the Will certified to allow the executors to carry out the
wishes of the deceased in winding up the Estate.
Prospectus - a legal document which is required
by and filed with the Securities and Exchange Commission, that
provides details about an investment offering for sale to the
public. It should contain the facts that an investor needs to make
an informed investment decision. (Also can be know as an 'offer
Qualifying Policy - a life insurance policy
whose terms meet a set of conditions meaning the proceeds from the
policy are free of tax.
Qualifying Years - the tax years in which you
have paid National Insurance contributions. You must work for a
minimum number of years before you will be eligible for the full
basic state pension.
Redemption - the organisation that issued
the bond will redeem it at the end of its life and pay the
bondholders the agreed nominal value.
Repayment Mortgage - is a mortgage in which you
pay both the interest and the capital off at the same time.
Rights Issue - an issue of shares offered at a
special price to its existing shareholders.
Risk - refers to the investment and the amount
of risk you will take on by investing in that asset. Some
investments are a lot riskier than others and although they can
potentially offer higher returns they can also lose you money.
Security -a deposit/pledge as a guarantee of
the fulfilment of an undertaking or repayment of a loan to be
forfeited in case of default
OR a certificate attesting credit/ownership of
stocks or bonds connected with tradable derivatives.
Self-Assessment - the calculation of your tax
Self-Invested Personal Pensions (SIPP) - is a
type of pension that allows you to manage and make choices from a
wide range of investments including the shares of any company
listed on the stock exchange. They provide you with a wider range
of investments than other personal pension schemes can offer.
Stakeholder Pension - available since
2001, this is a flexible, portable, defined-contribution personal
pension arrangement (provided by insurance companies) with capped
management charges. They can be taken out by an individual or
facilitated by an employer.
Shares - one of the equal parts into which the
company's capital is divided entitling the holder to a proportion
of the profits.
Share Capital - the part of the company capital
that comes from the issue of shares.
Stamp Duty - HMRC tax that is levied on the
transfer of certain types of assets. Home buyers must pay stamp
duty on properties with a value above a set figure. Anyone buying
shares also needs to pay stamp duty.
Standard Variable Rate - mortgage Payments
move up or down with the lender's own mortgage rate, which in turn,
is usually dictated by the Bank of England's base rate.
Stockbroker - a broker who buys and sells
securities on the stock exchange on behalf of clients.
Superannuation - the amount deducted regularly
from employees incomes and invested in a company pension
Surrender Value - the amount payable to the
policy holder of a life insurance policy if they decide to exit
before the policy matures.
Tax Allowance - concessions by the
government that can be used to reduce your taxable income. The main
allowance for UK tax payers is the personal allowance (an amount
set by the government each year which is tax free).
Tax Avoidance - the arrangement of your
financial affairs to minmise tax liabiltiy within the
Tax Evasion - is the illegal non-payment or
underpayment of tax.
Tax Year - the financial year for taxation. (UK
tax year runs from the 6-April)
Term - this is the length of the contract you
make with a mortgage, policy or investment provider.
Term Assurance - is a life insurance policy
which provides cover at a fixed rate of payments over a limited
period of time (term).
Terminal Bonus - an additional bonus paid to
the policy holder at the policies maturity (time the policy is to
Total Expense Ratio - the total costs
associated with buying into a fund.
Tracker Rate - a variable rate which tracks
the amount set by the Bank of England. This means it will increase
when the Bank's rate goes up and falls when it goes
Travel Insurance - a policy that pays out if
you fall ill while away, accidentally injure someone, lose your
possessions or have to cancel your holiday.
Trust - an arrangement whereby a person
(trustee) holds property or assets as its nominal owner for the
benefit of the beneficiaries.
Underwriting - the process that a lender or
other financial service uses to assess the risk of a potential
customer and accept the liability under the terms of the
Unit Linked - relates to a life assurance
policy or other investment in which the premiums or payments are
invested in a unit trust.
Unit Trusts - a 'pooled' investment fund
in which new units are created when a new investor joins the fund
and cashed in when an investor leaves. It uses the cash raised from
investors to buy shares in a number of different
Upper Earnings Limit - the maximum earnings on
which National Insurance contributions are payable by
Waiver of Premium - a clause in an insurance
policy under which the policy will be kept in force when the policy
holder is not paying premiums due to illness or disability.
Will - a legal document which outlines how you
wish your estate to be distributed after death. Also known as a
'will and testament'.
With Profits Policy - an insurance policy or
investment which pays an annual bonus and is linked to the annual
profits of the issuing company. A bonus is also usually paid at
Whole of Life Insurance - a life insurance
policy with level premiums which has both an insurance and an
investment component. The insurance component pays a stated amount
upon the death of the insured.
Yield % - the return on your investment -
or dividend - that you can expect, expressed as a percentage of the
company's share price.