Glossary of Terms

This list is by no means exhaustive and if you come across any technical terms on our website which are not explained below, please let us know.

Additional Voluntary Contributions (AVCs)

When you top-up an occupational pension, by making extra contributions into a scheme that’s run by your employer, you make an ‘additional voluntary contribution’.

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Annual allowance

This is the maximum amount of money you can put into your pension funds in a given tax year, and still claim tax relief.

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Annuity

At retirement you have the option to buy an annuity with your pension fund. It’s a payment that’s usually paid monthly, which you’ll receive as a guaranteed regular income during your retirement.

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Asset allocation

Asset allocation is the process of investing in a range of different assets such as equities, property and bonds. By diversifying the assets into which you invest, you can protect against any reduction in value of any one or more asset class. Asset allocation depends on your investment plans and attitude to risk.

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Authorised firm

An authorised firm is one that has permission from the Financial Conduct Authority (FCA) to carry out regulated activities.

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Basic rate taxpayers

Simply put, you are a basic rate taxpayer if you are earning below the higher tax rate threshold and more than the ‘Personal Allowance’.

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Basic State Pension

This is the pension you receive from the government as a result of paying National Insurance (NI) contributions throughout your working life.

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Beneficiary

A beneficiary is a person named in a will or under a trust as entitled to receive a bequest or benefit.

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Bonds

There are two main types of Bond 1. A type of security held on a debt, with a company or the Government for example. 2. A single premium life assurance investment bond.

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Capital Gains Tax (CGT)

If the value of assets that you own increase in value, then you may need to pay Capital Gains Tax (CGT). For example, selling shares for more than you paid for them could involve paying some CGT. You get an exemption for capital gains tax up to a certain limit each year and only pay CGT on any gain over this amount.

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Child Trust Fund

The Child Trust Fund (CTF) is a long-term savings and investment account for children. In December 2010, the Government decided to stop opening CTFs, but those which had already been set up by then are designed to make sure that your children have savings up until the age of 18.

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Commission

This is a payment that’s made to a financial adviser for services that he or she provides, based on a percentage of the value of the investment or premiums paid. It’s paid to the adviser by the product provider. If your adviser takes a commission, you may not need to pay any fees. From 2012 commission is no longer allowable in respect of Investments or Pensions, but might still be payable in respect of older plans and Life Assurance or other forms of insurance.

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Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of inflation used by the British Government for its UK inflation target. It measures changes in a ‘basket’ of goods and services purchased by households.

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Contracting out

When you opt to leave the State Second Pension (S2P) or State Earnings Related Pension Scheme (SERPS), this is known as contracting out. You’ll receive a rebate on your National Insurance contributions, which can be invested in a pension fund. This only applies to people who are members of occupational schemes, however you may still have ‘Contracted Out’ benefits from the past.

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Corporate bonds

These are Bonds that are issued by companies when they need to borrow money. As an investment, they often offer higher rates of return than banks and building societies but with a varying amount of risk depending on the financial security of the company issuing the bond.

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Critical illness cover

This is an insurance policy that you take out so that you can rely on having a lump sum paid if you're diagnosed with a specified critical illness.

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Debt

If you’ve borrowed money, then you are ‘in debt’, typically owing interest as well as the money initially borrowed.

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Defined benefit

In this type of pension scheme, members receive a set pension income on retirement – based on their final salary or average earnings in employment and how many years they’ve been working for the company. It’s may also be known as a final salary scheme.

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Defined contribution

In this type of pension scheme, the amount of money you will have in your retirement fund depends on the amount of money you (or your employer) put in, where the money was invested and how much it grows. It’s also known as a money purchase scheme.

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Diversification

This is the process of spreading – or ‘diversifying’ – your investments over a range of assets, so that you reduce your exposure to risk. By diversifying your investment, if one type of investment falls in value, then the remaining ones may not fall at the same rate, or at all.

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