In short, AAA ratings (‘triple-A ‘ratings) are the highest credit rating available for an investment, such as a bond or company.
AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.
Similarly, the AA+ rating is issued by S&P (Standard and Poor) and is similar to the Aa1 rating issued by Moody’s. It comes with very low credit risk and indicates the issuer has a strong capacity to repay.
Accrual rate is the speed by which a pension from an earnings−related occupational pension scheme builds up from one year to another. The rate is shown as a fraction or a percentage of the member’s final yearly salary.
The type of unit trust which reinvests the income it earns, instead of paying it out immediately to the investors, is called an accumulation unit.
An actuary is an expert on pension scheme assets and liabilities, life expectancy and probabilities for insurance purposes (the likelihood of things happening). An actuary works out whether enough money is being paid into a pension scheme to pay the pensions when they are due
People in occupational pension schemes can pay in extra money to increase their pension benefits. It’s not compulsory. The extra money they pay in is an additional voluntary contribution.
An agreement between you and your financial adviser to pay directly for the services you receive, initially and ongoing. The payment may be made directly, as a fee, or taken from your investment as a matched deduction which will be facilitated by a financial product provider.
This stands for annual equivalent rate. It is quoted by financial institutions, such as banks, to show how much the interest rate would be if the interest was worked out just once a year. It is intended to make it easier for people to judge how much interest they pay (or receive) when it is being worked out more than once a year. It is also intended to make it easier to compare different financial products.
When money is paid into a fund (such as a pension fund) the allocation rate is the percentage of the money left which can be invested after the charges have been taken off. For example, if the charges were 2% the allocation rate would be 98%.
The Annual Allowance is the limit of pension savings you can make in any tax year before you face a tax charge. You may be able to “carry forward” unused allowance from the last three years to increase your limit for the current year. Your annual allowance includes all the payments made into your pension by you, your employer, or any third party. It also includes most increases in benefits if you are an active member of a defined benefit pension scheme (or final salary, or career average pension plan). Check the latest tax rules at www.hmrc.gov.uk or get professional help.
Fees taken by financial service providers for looking after your investments.
An annuity is an amount paid out every year to someone. The money usually comes from an insurance policy. It can be split up into smaller amounts and paid out more frequently, such as monthly. It is usually paid for the rest of the beneficiary’s life.
This stands for annual percentage rate. It is intended to give people a more accurate idea of how much they are being charged when they borrow money.
The proportion of investments in a fund or portfolio that are held in different asset types, such as equities, fixed interest and cash, UK or overseas.
Items owned by an individual like investments, shares and property. Money held in a bank account is known as a liquid asset. Assets may also be held in a fund.
An attorney is a person appointed to act for another person, for example, when someone is unable to look after their own affairs. A formal document called a power of attorney is used to appoint the attorney
Acronym for Bankers Automated Clearing System, a process for sending money electronically between banks. A BACS payment happens when money is sent electronically from one bank account to another.
If someone has a history of defaulting on repayments, they may be considered a bad credit risk for further borrowing.
A fund that aims to provide capital growth through investments in a diversified portfolio of collective investments. Generally low to medium risk investments.
This is the interest rate set by the Bank of England which is used as a benchmark by UK lenders.
This is the retirement pension the Government pays to people who have paid enough national insurance contributions. Some people may receive a reduced basic state pension because they have not paid enough contributions.
A measure often used in describing small percentages. Each basis point is equal to 0.01%, 25 basis points equals 0.25%.
Someone who benefits from a will, trust, pension fund or a life assurance policy.
If an employee or a director gets benefits (perks) from their work, such as a company car, the benefits are called benefits in kind. They may have to pay tax on the value of the benefit in kind.
This is the price you get when you sell shares, bonds or units in a unit trust. The price you buy shares, bonds or units in a unit trust is known as the Offer (Buying) Price. The difference between the two is often referred to as a Bid Offer Spread.
A bond is a written promise to repay a debt at an agreed time and to pay an agreed rate of interest on that debt. They are low to medium risk loans, generally to the government or large companies, that pay a fixed rate of interest.
Investment funds which are specialised in some way. This will be either through the expertise needed to manage the portfolio or because it has an unusual theme. Also, may be a collection of funds under one fund manager.
‘Boutique’ funds are typically offered by smaller, niche firms rather than large investment management companies.
A short-term loan to cover the shortfall between buying one property and selling another. They are commonly used when you find a house you want to buy before managing to sell your current home. They’re very costly and should be avoided unless you can repay quickly, within six months or so.
A bond issued by the British Government. Also known as a Gilt, as the original bond certificates were gilded around the edges.
The price at which you can buy shares, bonds or units in a unit trust.
If a unit trust manager takes the management charges out of the fund’s capital instead of the income it has generated, it is called a capital charge.
If you sell or give away an asset that has increased in value, you may have to pay Capital Gains Tax (CGT) on the profit. This typically applies to shares and other investments, including property that’s not your main home. Each tax year you are allowed to make gains up to a certain amount without paying any tax. For more information, visit the HMRC website at hmrc.gov.uk or seek professional tax advice.
Where the interest rate you earn can go up or down, but not beyond a certain level for a set time.
Pensions that are based on your earnings and how long you have been in the scheme.
An investment fund that aims to provide a combination of income and capital growth, while reducing risk by diversifying investments in a broad range of types and locations.
These pool money from many different investors into one fund. Examples are a unit trust, open ended investment company (OEIC) or investment trust.
Money paid by a financial services company to a third party for selling a product. The 3rd party may be an Independent Financial Adviser or direct agent. The financial company can recover the cost of the commission through charges to the client.
A pension provided or sponsored by an employer for its employees. Company pension schemes can be defined benefit (final salary schemes) or defined contribution schemes (money purchase schemes).
This where interest is added to both capital and the accrued (previously earned) interest, from time to time. The longer you leave an investment the more advantage you can take of compound interest.
For example, if in year one a customer is paid 10% on his/her £100 investment, at the end of the year the investment is worth £110. In year two, with compound interest taken into account, the customer now earns 10% on £110, giving £121 at the end of the second year.
A measure of inflation that takes the prices of a fixed “basket of goods” bought by a typical consumer. Used as a measurement of inflation. Compare this to RPI and CPIH, the consumer prices index with Housing. See my blog on the impact of inflation on your savings and investments. Full explanation given in this government blog.
Contracting out was a system where employees gave up their right to additional state pension, firstly in the form or the state earnings related pension scheme (SERPS), then from 2002 in the form of the state second pension (S2P) In return workers and their employers paid reduced national insurance. Instead, they paid into a private pension scheme which had to meet certain conditions. Not used nowadays.
One type of conventional annuity is a guaranteed annuity, which provides you with a regular income for the rest of your life, in return for you paying over a lump sum from your pension fund. It can provide a guaranteed level of income which stays the same each year, an income that increases by a fixed percentage or one that changes in line with inflation. The level of income you receive will depend on various factors including your age, health and size of your pension fund.
The amount of time you have to change your mind and get your money back after buying something or signing a contract. Check the paperwork to find out how long you have.
Shares in companies whose business conditions are not particularly linked to the business cycle. They provide goods for which demand does not tend to be affected by recession – utilities and basic food producers or retailers, for example.
A company pension scheme where what an employee receives is linked to their length of service and size of salary as defined in the scheme rules. They are often referred to as final salary schemes.
A company pension scheme where the contributions made by the employer and employee are set. The final pension an employee receives depends on several factors, including the size of their fund on retirement. This final fund is then used to buy an annuity or income drawdown. These are also referred to as money purchase schemes.
These include products such as futures and options, generally an arrangement to buy or sell a quantity of a specified asset on a fixed future date at a price agreed today.
Spreading your investments to help reduce risk within your portfolio.
Normally the country where you have your permanent or main and to where, whenever you are absent, you intend to return. You can only have one domicile at a time. For inheritance tax purposes for instance, you are deemed domiciled in the UK if you spend 17 out of 20 tax years in the UK.
Domicile is a legal concept and is distinct from residence, which is a HMRC categorisation of how many days per tax year you spend in a country. You are considered resident in the UK for tax purposes if you spend more than 183 days per tax year in the country.
Please note – this is only a summary. More information is available from HMRC.
If in doubt, consult a professional.
Duty is a levy charged by the Government, usually when things are bought, such as shares or buildings.
When a member starts to take their pension before the normal retirement date of the scheme.
A pension provided (sponsored) by an employer for its employees. Company pension schemes can be defined benefit schemes (final salary schemes) or defined contribution schemes (money purchase schemes).
Shares or stocks that represent a share of the ownership of a company. Equities can provide regular payments (dividends) and their price changes as the value of the company changes.
Over the longer term, equities can offer greater growth potential than many other asset types. However, the value of the equities can go up and down a lot and tend to carry a higher risk than corporate or government bonds or money market instruments.
See my blogs on the subject of equities.
Schemes that allow homeowners to release cash from the value of their property.
There are two types of equity release scheme. A lifetime mortgage scheme allows you to raise money against the value of your property while you still own it. A home reversion scheme lets you sell all or part of your home to a reversion company. The options for releasing the money are not standardised across the industry and depend upon the specific terms of each product.
Ethical investment funds aim to make socially responsible investments. They won’t invest in companies with interests in socially unacceptable markets or produce harmful products or by-products, such as high levels of environmental pollution. What is ‘ethical’, of course can vary.
This is an investment fund, the units of which are traded on a specific stock exchange. Exchange-traded funds may hold a range of assets, like stocks, bonds or commodities. Most will track an index, such as the FTSE 100 or the S&P 500.