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.

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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Loan Trust

A loan trust is used as means to take the growth from your investments out of your estate. As you lend your money to the trust, the original capital is repayable to you on demand, and as such still part of your estate, but the growth on this capital belongs to the trust and the trust beneficiaries. The use of the loan trust ‘freezes’ that part of an estate. The growth is out with the estate from day one while the amount of the outstanding loan remains part of the estate. While not as effective as a gift, taking longer to remove the capital from your estate, a loan trust can play a key role in effective IHT planning.

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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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Nil Rate Band

Every Individual has what is known as a Nil Rate Band which is currently £325,000 or for a couple £650,000 without attracting Inheritance Tax.

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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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Pension Plan for Children & Grandchildren

A parent or grandparent can contribute up to £2,880 a year into a pension for a child. And, this contribution will benefit from a 20% tax relief ‘top up’ from HM Revenue and Customs, amounting to an annual contribution of £3,600. The child won’t be able to access the pension before they’re 55 — as things currently stand. Pensions benefit from tax efficient growth and a 25% tax-free lump sum when accessed in the future. Bearing in mind the long timescales involved and compound returns, this option could generate a significant sum. That said, pensions aren’t suitable for shorter-term needs like education fees and home deposits.

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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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Personal Pension

A personal pension’s a policy taken out through a pension company. You pay contributions, and it’ll pay you an income when you retire. Your contributions are invested in funds, which you can choose in line with your attitude to risk and plans for the future.

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Qualifying Years

Qualifying years are those tax years in which you’ve paid a certain amount of National Insurance contributions. A minimum number of qualifying years must be built up during your working life to qualify for the full basic state pension. This can also be the number of years’ service with an employer in which pension benefits in a Defined Benefit Scheme have been built up.

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Repayment Mortgage

This is a mortgage that pays off both the capital borrowed and interest due at the same time. Pay all the repayments and the mortgage will be fully repaid at the end of the term.

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Residence Nil Rate Band (RNRB)

The government started the process of increasing the tax-free limit by way of the Residence Nil Rate Band (RNRB) in 2017. The measure will be fully in place by 2020, and will mean that for each individual, up to a further £175,000 or for a couple £350,000 could be excluded from IHT. The family home will be excluded from IHT, up to a total value of £175,000 for an individual or £350,000 for a couple so long as it is passed onto direct descendants. This RNRB is however reduced by £1 for every £2 above a net estate of £2 million. Once the Residence Nil Rate Band is fully introduced in 2020 a couple could have an estate valued at £1 million which would be exempt from Inheritance Tax.

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Retail Price Index (RPI)

The Retail Prices Index (RPI) is a government defined measure of inflation which tracks the change in the cost of a basket of retail goods and services.

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Risk

Some investments are riskier than others. For example, an investment in the stock market is riskier than money put into savings accounts – there’s more chance of something going wrong and you losing money. Riskier investments tend to offer potentially higher returns as compensation for the risks involved. This is also known as the ‘risk premium’.

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Self Invested Personal Pensions (SIPPs)

A Self Invested Personal Pension is a type of plan that allows you, or your appointed fund manager, to make choices from a wider range of investments than other personal pension schemes offer. With a SIPP you can invest such things as in the shares of any company listed on a stock exchange, commercial property, mutual funds.

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Stakeholder Pension

This is a personal pension in its most simple form. A stakeholder pension will allow you to make a minimum investment of £20 per month and offer a range of funds in which to invest – and there must be no penalties for transferring away from the fund. Your employer may offer access to a stakeholder pension scheme.

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State Pension

Your basic State Pension is based on your National Insurance contributions. You may also qualify for the additional State Second Pension if you are employed, based on your earnings and National Insurance contributions.

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State Second Pension

The State Second Pension is an additional pension that’s paid on top of your basic State Pension. It was called SERPS until 2002. Self-employed people are not entitled to a State Second Pension.

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Stocks and Shares

Both terms mean the same thing: companies’ stocks and shares that can be bought and sold. Owning a share in a company means owning a part of that company, or owning some of that company's stock and an entitlement to a share in the profits in the form of dividends.

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Tax Credits

Tax credits are payments made by the government. Usually, they’re made to people on low incomes, to families with children, or to registered carers.

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Tax Efficient Investing

Tax Efficient Investing is the process of investing in such a way as to minimise the amount of tax paid. This could mean using tax-efficient investments such as ISAs, or making contributions to your pension. This should not be mistaken for Tax Evasion which is deliberately acting in a way which

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Tax Exempt Special Savings Account (TESSA)

From April 2008, TESSAs automatically became ISAs.

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Term Assurance

This is a policy that provides a guarantee to pay a specific amount of money, during a pre-agreed period of time, if you die. It is a form of Life Assurance.

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Unit Trusts

These are ‘open-ended’ investments in which the underlying value of the assets is directly calculated by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. There are many different unit trusts available, all investing in different assets.

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Unsecured Pension

An unsecured pension is a way of taking an income from your pension fund,. It does involve incurring some risk to the value of your pension fund. There are two types of unsecured pension – a short-term annuity and income withdrawal (also known as Flexible Drawdown).

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Variable Interest Rate

These are interest rates, offered by banks and financial institutions on loans or deposits, that may change according to circumstances. For example, a movement in the interest base rate set by the Bank of England would usually be an influence.

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Whole-of-life Assurance

A whole-of-life assurance policy lasts throughout your life so that your dependents are guaranteed a payout should you die as long as the premiums are kept up.

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Wills and Probate Law

This is the area of law that governs the interpretation of wills and the distribution of the estate of people who have died.

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Yield

Yield is a general term for the rate of income that comes from an investment, expressed as an annualised percentage and based on its current capital value.

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Pension Myth 4 Property is Better sm

Pension Myth #4 Property is Better

Many regard investing in property as a one-way street. Rents go up and house prices rise even faster. A buy-to-let property can be a great investment, but there really are no guarantees....read more from our Pension Myths Explained.

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