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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Bare Trust

When named beneficiaries, who can’t be changed in any way, have the absolute right to trust capital and its income from age 16 in Scotland, or 18 in England and Wales.

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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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Business Property Relief (BRP) Investments

Business Property Relief (BPR) is an established form of tax relief that gives people an incentive to invest their money into trading businesses. It was introduced in 1976 to ensure that inheritance tax wasn’t paid on small businesses. Shares in a BPR-qualifying business can be left to beneficiaries free from inheritance tax, provided they have been owned for at least two years at the time of death.

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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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Career Average Revalued Earnings (CARE) schemes

These are a type of defined benefit pension scheme that are offered by employers. The benefits at retirement are based on your earnings and length of membership of the scheme.

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Chartered Financial Planner

A Chartered Financial Planner is currently one of the highest distinctions of financial adviser qualifications, set at level 6, or the equivalent of having taken a university degree. Chartered Financial Planners have proved that on a technical level they are at the top of their game.

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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 opted to leave the State Second Pension (S2P) or State Earnings Related Pension Scheme (SERPS), this was known as contracting out. You would have received a rebate on or contributed less to National Insurance. The ability to Contract Out ceased in April 2012 for money purchase pensions and April 2016 for defined benefit pensions, 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. Group Critical Illness benefits are often part of a company’s Employee Benefits offering.

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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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Discounted Gift Trust

A Discounted Gift Trust has two parts; the first is the same as a Gift Trust in that once monies are gifted into the trust the seven year period that the donor needs to survive starts. The difference is that the donor sets a level of income that they wish to receive from the capital for the rest of their life at the outset of the trust. Depending on various factors such as the level of income, age, health etc. this gives the donor an immediate ‘discount’ on the original gift that is potentially liable to IHT for the seven year period. The donor has no access to the original capital but will receive an income for the rest of their life. This income cannot be varied or stopped in any way. It is also not possible to pass on any monies from the trust to the beneficiaries until after the donor has died, this is far less flexible than other trust options.

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Discretionary trust

These are useful when the donor wants to keep some control over who benefits from the assets and when. Unlike the bare trust, beneficiaries can be changed at any time.

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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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Dividends

These are payments that are made to shareholders by a company from any profits that the business has made.

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Equity

This is a term that’s used to describe a company’s issued stocks or shares. If you own shares in a company you own some of the company's equity. It can also be used to describe the amount, or value, of your home that you own. If you ‘have equity’ in a property, it means that you own a portion of it above the value of any debts secured on that property, such as a mortgage.

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Equity release

Equity release is the process of using the value of your home to raise cash – releasing the equity. There are two main types of equity release scheme available: lifetime mortgage (sometimes known as equity release mortgages) and home reversion schemes. When the property is sold, the plan provider reclaims their loan and any interest due with the remainder going towards the plan owner or to their estate.

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Estate Planning

For inheritance tax (IHT) purposes, an individual's estate is calculated as being his or her total assets less any liabilities at the time of their death. Proper estate planning could save your family hundreds of thousands of pounds, because IHT (sometimes called ‘death duty’) will be charged on what you leave behind, over the IHT threshold at time of death. Currently, IHT is due at a rate of 40% of the value of all the assets you leave behind on death above the IHT threshold.

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Ethical investment

Ethical investments are opportunities offered by businesses or funds that aim to avoid companies involved in some kinds of activities, but instead favour those involved in other activities. For example, companies trading in armaments, cigarettes, animal research or alcohol are unlikely to be considered ‘ethical’ – but a company that is highly committed to recycling or human rights issues, may be considered to have an ethical bias. They might also include investments in companies which engage in positive, socially responsible actions. Ethical investments can also be known as ‘green investments’ or ‘socially responsible investments’.

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Fact Find Document

This is the form which your financial planner will complete with the details of your personal and financial circumstances, prior to giving you any advice.

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Final salary schemes

A final salary pension scheme is another description of a type of defined benefit scheme.

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Fixed interest security

This is another name for a ‘bond’ or ‘corporate bond’. The amount of interest you receive, when you invest in a fixed interest security, is stated at the time of purchase. These are usually regarded as a lower risk investment than stocks or shares.

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Fixed rate

An interest rate that’s fixed is one that doesn't move up or down for a set period of time.

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Flexible Drawdown

This is a way of drawing your pension fund in retirement. The level of income is set depending on the size of your fund and your income need. It is possible to take all of your fund, none of it, or anything in between. Because of the potential implications on tax and your retirement income needs it is vital to ensure that you consider carefully the level of income you choose to take.

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Free Cover Limit

A free cover limit is also known as the 'Free cover level' or 'No evidence limit'. A free cover limit or the no evidence limit is the amount of cover that each individual policy member within a Group Life Assurance, Group Income Protection or Group Critical Illness policy can have without any requirement of medical evidence or underwriting.

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General Investment Account (GIA)

A General Investment Account (GIA) is a wrapper set up when you open your portfolio, which may hold investments and cash. It allows you to hold a broad range of investments including some which you may not be able to hold within other wrappers, usually for tax reasons. Taxation Growth within a GIA is subject to capital gains tax (CGT). Individuals have an annual exemption, for the year 2019/20 this is £12,000. This means on a joint portfolio the total of gains possible before becoming liable for CGT is £24,000 (based on the assumption that you have no other gains from other sources that need to be considered). For any sales carried out when rebalancing the GIA, we consider any potential capital gain that might arise to keep within the exemption limit. Each year you will also be able to transfer up to the value of your annual ISA allowance of unit trust holdings from your GIA to an ISA, therefore sheltering the holdings from any further income or capital gains taxation.

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Gift Trust

Gifts of an amount up to the nil rate band, £325,000, can be given with no immediate IHT liability. To be effective for IHT the gift must be ‘irrevocable’. The same seven-year period (as mentioned in Gifts to Family) applies to gifts into trust, the donor needs to survive for seven years to make the gift exempt. As with outright gifts, you can insure against death within the seven-year period by taking life assurance. The main difference is that an individual, as trustee of the plan, would retain control over the capital and therefore when any payments are made to the beneficiaries. Only the original gift is potentially liable to IHT during the seven-year period, any growth on the capital belongs to the trust and the trust beneficiaries and is not liable to IHT. Once gifted the donor does not have access to the original capital or any income it generates.

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Gifts to Charity

As long as gifts made are to a registered charity, they are excluded from your IHT calculation. Where more than 10% of your net estate is left to charity you can benefit from a reduced rate of IHT at 36% on the remainder of your estate.

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Gifts to Family

Gifts of any amount can be given with no immediate IHT liability. To be effective for IHT the gift must be ‘irrevocable’. The donor (person making the gift) is required to survive a seven-year period to make this gift exempt. This is called a Potentially Exempt Transfer (PET) and is added back to the estate in full if the value of the gift is less than the nil rate band, £325,000, and death occurs within the seven-year period. Gifts of more than £325,000 benefit from tapering relief between years 3-7 where the amount added back at death is reduced on a sliding scale.

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Group Personal Pension

If you work for a company, you may have a Group Personal Pension. It’s the name given to personal pension plans offered by employers to employees on a money purchase basis.

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Health Cash Plan

Health Cash Plan is a policy which reimburses individuals up to pre-determined levels of everyday medical bills such as optical (e.g. prescription lenses), dental treatment, chiropody, physiotherapy, sports massages, health screening, specialist consultations, personal accident cover etc. This is increasingly becoming part of companies Employee Benefits offering.

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Hedge Fund

Hedge funds are a high-risk investment: they comprise a complicated set of strategies that aims to make attractive returns sometimes using complex financial instruments and often with the intention of creating positive returns despite market conditions. They may require very high initial levels of investment.

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Higher Rate Taxpayer

You are a higher rate tax payer if you are earning more than the higher tax rate threshold and are paying 40% income tax for the tax year and less than the additional rate threshold.

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Income Protection

This is an insurance policy that pays you a monthly income if you're unable to work due to illness or injury, until you are able to return to work, or you retire, whichever is the sooner. Group Income Protection is often part of a company’s Employee Benefits offering.

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Income tax

This is the tax paid on your income. Generally, all income is taxable. The exceptions are for income falling within personal allowances and income that’s generated from certain tax-efficient investments such as ISAs.

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Independent financial adviser

Independent financial advisers (IFAs) are professionals who give financial advice about products and services across the whole market. They act on your behalf and may charge a fee or be paid by commission.

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Individual Savings Account (ISA)

There are two types of Individual Savings Account (ISA): Cash ISAs, and Stocks and Shares ISAs. Each tax year, you can put money into both types up to the annual limits. ISAs aren’t an investment in their own right, they’re a tax-free ‘wrapper’ in which you can shelter investments.

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Inheritance Tax (IHT)

Inheritance tax (IHT) is charged on an estate after a person’s death. It’s currently charged at 40% on amounts above the IHT threshold, which can change every year. A person's estate includes the total of everything owned, less any liabilities at the time of their death. If this amount is less than the threshold, no IHT is payable.

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Financial Planning Week 2019

Book a free consultation with our Financial Planners as part of Financial Planning Week 2019

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