Glossary of Personal Finance Terms
I’ve developed this glossary to help you understand personal finance better. Sometimes the terms we use in personal finance can be confusing, if you’re not in the sector.
As a rule, I do try to speak with normal, everyday words to describe what I’m talking about, but do occasionally lapse into industry jargon. And certainly if you read articles elsewhere in publications online or offline, you’ll come across lots of specialist expressions.
So, hopefully this summary of the main terms used on this blog site and elsewhere will help you to navigate the world of personal finances.
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.
Company pension scheme where the final pension an employee receives is linked to the size of final salary and the number of years of membership of the pension scheme. Also referred to as defined benefit pension schemes.
There are 4 primary classes of financial adviser:
- tied advisers (working for one financial institution),
- multi-tied advisers (paid by more than one financial institution),
- whole of market advisers (working with all companies but only on a commission basis) and
- independent financial advisers. Independent Financial Advisers (IFAs) must offer their clients the option to pay for advice by fee rather than commission.
The FSCS is the UK’s statutory compensation scheme for customers of authorised financial services firms. The FSCS can pay compensation if a firm is unable, or likely to be unable, to pay claims against it.
Generally known as ‘bonds’. These are loans issued by companies or governments to raise money. Bonds issued by companies are called corporate bonds, those issued by the UK government are called gilts and those issued by the US government are called treasury bonds. In effect, all bonds are IOUs that promise to pay a sum on a specified date and pay a fixed rate of interest along the way. Very low risk investments, generally.
A form of drawdown where you to take an unlimited amount of income or lump sums from a pension fund. This replaces flexible and capped drawdown, although existing capped drawdown plans are continuing.
A non-compulsory payment made by a member of a company pension scheme to boost their retirement benefits, yet separate the payments from their occupational fund. Payments are made into a separate FSAVC fund.
The financial services regulator in the UK.
Financial Times Stock Exchange Index . An index of the share prices of the largest companies (by market capitalisation) in the UK.
FTSE 100 is the index of the top 100 companies.
FTSE All-Share is the index of all listed companies. There are other FTSE indices too.
FTSE is a trademark jointly owned by the London Stock Exchange plc and The Financial Times Limited and is used by FTSE International Limited (“FTSE”) under licence. The FTSE 100 index is calculated solely by FTSE. FTSE does not sponsor, endorse, or promote this website and is not in any way connected to it and does not accept any liability in relation to its issue, operation and trading. All copyright in the index values and constituent list vests in FTSE.
An individual employed by a company to manage money. It’s a fund manager’s role to buy shares or other assets that they believe will increase in value or provide a level of income, in line with the fund’s stated objectives.
A “fund of funds” (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. Sometimes known as multi-manager investment, a fund of funds may be ‘fettered’, meaning that it invests only in funds managed by the same investment company, or ‘unfettered’, meaning that it may invest in other funds.
Monetary value of a fund, calculated by adding up the value of its underlying assets. For example, the price of units in a unit trust is calculated from the value of all its holdings divided by the number of units issued.
A gift is a transfer of goods or property which is free of charge. There are limits to the value and number of gifts you can make without any immediate or future inheritance tax liability. Check with HMRC or a professional adviser.
Bonds issued by the British Government. Called Gilts as the original bond certificates were gilded around the edges.
Earnings before income tax and other deductions are taken.
Any income that a fund produces (e.g., interest and dividends) is reinvested back into the fund and is not liable for UK tax.
A payment into a pension savings plan, deducted from earnings before income tax is taken.
Guarantees that the annuity rate will always be at a certain minimum level.
The minimum pension that a company final salary pension scheme must provide in respect of contributions paid between April 1978 and April 1997, as a condition of contracting out of SERPS, the State Earnings Related Pension Scheme.
The same as Conventional Annuity (above). It pays a regular, guaranteed income, usually for life. Your annual income can stay the same, increase each year by a fixed percentage or change each year in line with inflation.
A strategy employed to reduce or mitigate risk. Hedging involves making an offsetting transaction in one market to protect against possible losses in another. Currency hedging is a specific example of hedging where the fund manager tries to protect an existing or anticipated position from an unwanted move in exchange rates.
This is a form of credit which allows the purchaser to have possession of the goods shown in the hire purchase agreement. Ownership passes to the purchaser when they have paid all the instalments and any fee
The sale of part of or your entire home to a reversion company in return for a lump sum, regular income or a combination of the two. You can continue to live in your home until you die or go into long-term care. When your home is sold the percentage you sold will go to the plan provider.
An example of the potential growth you may expect to receive from an investment. The growth rates used are set by the industry regulator, the Financial Conduct Authority (FCA). It is important to remember that actual returns could be higher or lower than that shown on the illustration.
Enables those with a certain type of pension to draw an income and/or cash lump sums from their pension fund. This is an alternative to buying an annuity and takes income direct from their pension funds.
A specific type of Financial Adviser. IFAs must offer their clients the option to pay for advice by fee, rather than commission. See Financial Adviser, above.
An index is a statistical term that shows rate of change in a single figure. Indices may be applied to anything that changes in value, such as currencies, inflation or equity prices.
In the stock market, an index is a device that measures changes in the prices of a fixed basket of shares. The purpose is to give investors an easy way to see the general direction of shares in the index. Examples of stock market indices are the FTSE 100, FTSE All-Share, Nikkei and Dow Jones.
A fund that is managed to generate the same returns as a specified Index (also known as “Passive” or “Tracker” funds).
The linking of a payment, such as a pension, to an inflation index – for example the Retail Prices Index (RPI) – with the aim of keeping pace with inflation.
A method of classification developed by FTSE. It’s used to segment markets into economic sectors. The ICB uses a system of 10 industries, partitioned into 19 super-sectors, which are further divided into 41 sectors, which then contain 114 subsectors.
A charge made by an investment provider to cover the cost of setting up an investment. The amount invested is the amount contributed less the initial charge.
A mortgage where you only repay the interest each month. This means you are not reducing the loan itself and must find a way to repay it at the end of the mortgage term. These are common among buy-to-let mortgages, where the investor relies upon rising property values to repay the original loan.
The amount of money a customer can earn on an investment or is charged for borrowing money. It is usually expressed as a percentage of the total amount invested or borrowed.
Intestate or intestacy refers to a person dying without a valid will. Upon death their assets are distributed according to the law, regardless of the person’s intent when they were alive.
A credit rating given to a government or corporate bond that indicates that the agency giving the rating (e.g., Standard & Poor) believes that the issuer has a relatively low risk of default. Bonds with credit ratings of AAA, AA, A or BBB are considered investment grade. Low-rated bonds, with ratings of BB or below, are often called High-Yield or Junk Bonds.
A company that invests in the shares of other companies, or other assets such as property or bonds. When investing in an investment trust, clients own shares in the trust rather than owning the shares it invests in.
When the shares of a company are available to buy on an open market for the first time.
A savings vehicle that allows customers to invest in equities or save cash without having to pay any income or capital gains tax, subject to limits.
Different types of ISA include:
- Cash ISA – for cash savings. Up to £85,000 is protected by FSCS.
- Help to Buy ISA (now closed to new applicants).
- Lifetime ISA – save up to £4,00 p.a. and the Government tops it up by 25%. Accessible only when you buy your first home r reach age 60.
- Stocks & Shares ISA – hold shares or funds without paying tax on the returns. Usual risks of investing in the stock market.
- Innovative Finance ISA – allows you tax-free access to Peer-to-Peer (P2P) lending markets. Risky as not protected by FSCS.
- Junior ISA – anyone can save on behalf of a child, up to £9,000 in 2022/23. Ownership reverts to child at 16, they can withdraw from 18. Good for university fees savings.
An annuity that pays you a regular income for life and then when you die, pays your dependant a regular income for life too.
A high-risk Bond of below Investment Grade, issued by a company or government.
Interest rate that London banks charge when lending money to one another over a short period of time, often overnight. LIBOR is often used as a benchmark when setting other short term interest rates.
Other than qualified solicitors, these are the only people allowed to do conveyancing and charge a fee for it.
An assurance policy that pays out a lump sum or instalments on the death of the life assured.
There is no limit on how big your pension fund can grow to. However, you’ll have an allowance of the maximum amount of tax-relief benefits you can build up over your lifetime. If you think you are affected by this limit, visit the HMRC website or get professional advice.
An investment approach that aims to mirror or track the performance of a financial index. Also known as Tracker Funds. This is normally done by either investing in the exact constituents of an index or by taking a representative sample of that index. The managers of the fund have lower expenses than active fund managers, and the charges to investors are therefore lower.
An employer collects income tax and national insurance. These are collected from employees’ pay and the employer pays it to HMRC. This system is called Pay As You Earn (PAYE).
The person that money is being paid to.
This insurance covers people’s finance agreement repayments if they cannot work because of long−term illness or redundancy. Fell into disrepute owing to significant mis-selling.
This is a type of annuity usually bought with the proceeds of an HMRC registered pension scheme. Provides a fixed annual income for the rest of your life.
A type of authorised investment fund, regulated by the Financial Conduct Authority (FCA). Investors in a QIS will be institutional investors, such as life and pension funds.
Quantitative easing (QE) is a form of monetary policy in which a central bank purchases longer-term securities from the open market to increase the money supply. This encourages lending and investment. Buying these securities adds new money to the economy and serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet.
Formerly a little-known term outside central baker circles, it’s become a standard form of policy since the financial crash of 2008-9.
The interest rate after the effects of inflation have been removed – e.g., interest rates that are high may be relatively low in “real” terms if inflation is also high.
The Return from an investment adjusted to consider the effect of inflation.
In general terms, a recession is significant economic decline, when the GDP (Gross Domestic Product – the value of all the goods and services a country produces in a year) goes down.
To be precise, for an economy to be in recession, it must have experienced 2 successive quarters of falling GDP.
A tax-efficient method of increasing the money paid into a pension scheme by giving up existing salary or proposed salary increases, so that the sum forgone can be used as an additional company contribution into a pension scheme.
An employee savings scheme that stands for Save As You Earn. You can save up to £500 of your salary each month for a set period. At the end of that period, you can use the savings to buy shares, usually in the company you work for.
A loan that is secured on your home or other asset. So that if you fail to keep up with repayment, the asset could be taken by the lender to cover the loan. A mortgage is a type of secured loan.
Reducing tax bills by using legal means is called tax avoidance.
A state benefit paid to employees through the tax system, which has the effect of increasing net income.
Breaking the law to reduce tax bills (such as by concealing income) is called tax evasion.
UFPLS stands for Uncrystallised Funds Pensions Lump Sum.
Since April 2015, from age 55 you can take all of a pension fund as a single or series of cash lump sums. The first 25% is tax free, with the remainder added to your income and taxed accordingly.
If you are physically present in the UK for 183 days in a tax year, then you will be deemed resident in the UK and taxable on your income and capital gains.
If you’re abroad only temporarily, or if you spend an average of three months a year in the UK for four years, you will be treated as ordinarily resident and therefore taxable. Please refer to HM Revenue & Customs for full details.
The above is based on my understanding of current legislation and HM Revenue & Customs’ practice, all of which is subject to change without notice. The impact of taxation (and any tax reliefs) depends on individual circumstances.
Generally, this is the valuation of a company final salary pension fund where the actuary perceives there are insufficient funds to support current liabilities.
Income received from sources such as interest on savings accounts, dividends from shares and bonds that has not been earned by working
A trust that pools together customers’ money, allowing them to increase their investment options, therefore potentially reducing the risk. Unit trusts issue units, unlike OEICs which issue shares.
Unit trusts generally have two prices: a bid price at which you sell and an offer price at which you buy. The difference between the two is referred to as a ‘bid offer spread’.
Unit trusts are overseen by an independent body called the trustees.
Where the value of the saver’s fund is linked to the value of the units of the fund it is invested in. The value is therefore directly dependent on the performance of the underlying asset.
Where the value of the saver’s fund is linked to the value of the units of the fund it is invested in. The value is therefore directly dependent on the performance of the underlying asset.
A loan that isn’t secured against your home or other asset you own. You agree to pay back the loan within a set period. The lender is taking a bigger risk than with a secured loan, so interest rates tend to be higher. Example: Credit card debt.
Bonds issued by the British Government.
An investment approach that invests in shares believed to have been under-priced by the market.
Measure of how much an investment’s price is likely to fluctuate during a set period of time.
A feature on a personal pension or life insurance plan that guarantees your contributions will be paid for a period, usually by the insurer, if you are ill or lose your job. It usually costs extra.
A security that entitles the holder to buy shares in the issuing company at a specific price and within a certain time frame. Warrants are freely transferable and traded on major exchanges. Their value will go up or down as the price of the shares to which they relate goes up or down.
Life assurance a customer pays for throughout the whole of their life that pays out when they die. On some whole-of-life policies, premiums stop at a certain age.
A document drawn up to administer an estate on death.
An amount that is added to a with-profits life assurance policy. It can be added within the term of the policy (regular) or at the end of a policy (final).
Essentially a fund made up of shares, property, cash and fixed interest securities, which usually carries a medium risk.
The products that use with-profits are typically regular and single premium savings plans and pensions. With-profits funds pool policyholders’ investments, and customers share in the company’s investment returns and other profits. These returns are smoothed to help reduce the volatility associated with direct equity investments.
An investment where regular premiums or a lump sum are paid into a with-profits fund made up of shares, property, cash, and fixed interest securities. With-profits policies are usually medium-risk investments that use a smoothing device, when determining any bonus additions that might apply, to provide some protection for the investor from ups and downs of the market.
A measure of the return on an investment compared to the price paid for it. This is normally expressed as an annual percentage. There are several types of yields. Bonds for instance have a nominal yield, current yield and yield to maturity. Shares have a dividend yield and an earnings yield. Yield can refer to growth or income, while net yield refers to the yield after charges and other deductions have been made.
A bond paying no interest but is bought at a lower price than its redemption value.
This means:
• that the rate of interest is 0%; or
• that the VAT rate is 0%. (But it could be raised from this level, if the Government wished to, without fresh legislation being needed.)
Zero−rate does not mean the same as exempt. If something is exempt from tax, no tax can be charged on it, unless the law is changed.