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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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 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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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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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.

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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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Interest

When you give your money to a bank, to look after, you may receive an amount of money on top in return. That percentage is known as interest. You may also have to pay interest on loans or mortgages when you borrow money.

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Joint life

A ‘joint life’ policy is one that’s taken out by two or more people. Joint life policies can be useful for protecting a family in the event of either or both parents dying.

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Junior individual savings accounts (JISA)

Junior individual savings accounts (JISA) offer a tax efficient way for parents to invest on behalf of their children, up to certain limits each year. Parents of children under 16 that do not have a Child Trust Fund can open a JISA in the child’s name.

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Lifetime Allowance

This is the maximum amount of money that you can accumulate as pension savings throughout your lifetime and still benefit from tax relief. If the amount you save exceeds the lifetime allowance, then you will have to pay tax on these savings.

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Lifetime Annuity

A lifetime annuity will give you a regular income for the rest of your life. You buy an annuity with the cash sum that’s built up in your pension fund so that you can have a regular income during retirement. There are different types of annuities to suit your needs and circumstances.

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Mediation

Mediation is the process that parties enter into in an attempt to resolve a dispute without court proceedings. It’s usually undertaken in the presence of a ‘mediator’ – someone with a neutral opinion who can voice the issues of both parties.

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Money Laundering

The government has introduced tough money laundering laws in a bid to combat international crime and terrorism. This means that financial planners and other professionals need to check that you are who you say you are when you first instruct them. They may also ask for proof of identity if you have not instructed them for some time. Usually, identity is provided with a form of photographic document – such as your passport.

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Money Purchase Pension

Occupational pensions, personal, group personal, stakeholder, Free Standing Additional Voluntary Contributions (FSAVCs) and Additional Voluntary Contributions (AVCs) can be called money purchase pensions. You can choose where your contributions are invested. The size of your fund depends on your contribution levels, over what time period you invest them, and how well your investments grow.

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National Insurance Contributions

National Insurance (NI) contributions are an amount of money that’s paid to the Government a percentage of your income if you are aged over 16 but under the state pension age and you earn more than the minimum threshold. They go towards providing for state pensions, as well as other state-provided benefits. If you are an employee, NI is deducted from your pay before it is paid to you.

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Payment Protection Insurance

This type of insurance policy pays a regular pre-agreed amount for a stated time if you can't work for specified reasons.

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Personal Allowance

A personal allowance is the amount of income that you can earn each year before you start paying income tax.

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Personal Equity Plans (PEPs)

From April 2008, Personal Equity Plans automatically became Stocks and Shares ISAs (see the glossary definition of an Individual Savings Account).

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