Personal finance

A quick guide to the jargon of financial planning

ABI
Acronym for the Association of British Insurers, a regulatory body for the UK insurance industry.

A-Day
6 April 2006. The effective date of pension’s simplification, when HM Revenue & Customs introduced a single tax regime for all UK pension schemes.

Accrued income
Certain stocks, shares and securities are subject to an arrangement whereby on their sale (before the ex dividend date), the interest accrued between the date of the last interest payment and the date of sale is regarded for income tax purposes as the income of the seller. The buyer can deduct this sum from taxable income.

Accumulation and Maintenance trust
A trust in which the beneficiaries will become entitled to the property or at least the income when they reach a certain age. This must not be more than age 25. The trustees can use the income for the maintenance of the beneficiary before the date that the beneficiary becomes entitled to the property or to an interest in possession in that property.

Accumulation shares/units
Shares/units that are issued by companies to existing share/unit holders instead of dividends. They are treated as taxable income but the taxable amount adds to the basic cost of the shares, reducing possible capital gains tax when sold.

AIM
Acronym for the Alternative Investment Market which is a stock market ‘alternative’ to the London Stock Exchange. It lists companies that are not quoted on the Stock Exchange because they are too small or do not comply with the enormous amount of regulation required for such a listing.

Alternatively Secured Pension (ASP)
Allows a pension scheme member to defer purchasing an annuity at age 75. A defined level of income can be drawn on the invested funds until the member decides to purchase an annuity or dies.

Annuity
A lump sum investment to purchase a periodic amount paid by a life office, usually for life. Predominantly used by people as a pension income in retirement.

APR
Acronym for Annual Percentage Rate. This comprises the interest rate charged on a loan or credit card plus any other charges such as an arrangement fee or the annual credit card fee. It is calculated to a standard formula intended to give you the true cost of borrowing calculated over a year.

Authorised share capital
The amount of share capital that a company is permitted to issue by its Articles of Association (a company’s constitution or rules). The Articles can be varied from time to time if the company wants to vary the authorised share capital.

AVCs
Acronym for Additional Voluntary Contributions. These are ‘top up’ pension contributions in respect of an occupational pension scheme.

Bare trust
A type of trust where the beneficiary(ies) has an absolute interest and the sole duty of the trustee is to hold the property for the beneficiary and transfer it to him or her when required.

Base rate
The rate of interest set by the Bank of England. Sometimes lenders call their own standard variable rate their base rate or basic rate.

Bear market
A phrase used to describe a stock market when share prices are falling or are expected to fall.

Bid price
The price at which the holder of units can sell their units from a collective scheme such as a unit trust.

Bid/offer Spread
The difference between the bid price (the price at which units are sold) and the offer price (the price at which units are bought).

Bond
A term to cover many types of lump sum investments. Life companies can issue a bond where the underlying investment can be with profits, unit linked or guaranteed. May also refer to fixed interest stocks issued by companies or the government.

Bull market
A phrase used to describe the stock market when share prices are rising and investors are optimistic that the trend will continue.

Capital allowance
Also called a ‘writing down allowance’, this is an amount of money a company or the self employed can set against tax each year representing the depreciation of a capital asset used in a trade or profession.

CGT
Acronym for Capital Gains Tax, which taxes the chargeable gains an individual makes on the disposal of assets (compared to the cost paid for that asset and an allowance for inflation). Many assets are specifically exempted from CGT.

Closed-end fund
An investment vehicle, usually an investment trust, whose shares are quoted on the Stock Exchange and which issues a fixed amount of shares to investors.

Convertible assurance
A type of term assurance which can be converted to a whole of life policy or to an endowment policy on payment of an increased premium. Further evidence of good health is not required at conversion.

Convertible bond
A bond which can be exchanged for shares of a company at a later date.

Critical illness insurance
An insurance policy that pays a lump sum on diagnosis of the life assured having a specified critical illness that is covered by the policy conditions.

Decreasing term assurance
An insurance policy from which a lump sum is paid if the life assured dies within an agreed term. This amount reduces during the term of the policy. Often used to protect repayment mortgages.

Defined benefit scheme
See Final Salary Scheme.

Defined contribution scheme
See Money Purchase Scheme

Earnings
The profits of a company available to shareholders, which is what is left after deducting tax and other items.

Earnings per share
A figure arrived at by dividing the earnings of a company by the number of shares issued.

Employer’s pension scheme
See Occupational Pension Scheme.

Endowment policy
A life policy which pays out on maturity or earlier death. Premiums are paid for a fixed number of years.

Enterprise Investment Scheme (EIS)
A scheme to encourage people to invest in small unquoted businesses which by nature are high risk. There is favourable tax treatment for people willing to invest.

Equities
Another name for ordinary shares which represent ownership in a company.

Executive pension plan (EPP)
This is an employer’s pensions scheme offered by insurance companies which covers a few senior employees.

Final salary scheme
Also known as a Defined Benefit Scheme. A type of employer’s pension scheme that provides a pension based on a proportion of your earnings at or near to retirement, also the length of time you have worked for the company.

Financial Services Authority
The lead regulator for the UK financial service industry.

FSAVCs
Acronym for Free-Standing Additional Voluntary Contributions, these are ‘top-up’ contributions for members of an occupational/employer’s pension scheme, paid into a ‘free-standing’ AVC contract from a pension provider. These are paid net but the contribution to the scheme is grossed up at the basic rate of tax. Higher rate tax payers can claim additional tax relief.

Gearing
Gearing is the ratio of a company’s debt, or fixed-interest loan stock, to its ordinary share capital. A highly geared company is one which has a lot of debt on its balance sheet.

Gilts
Also known as British Government Stocks. Gilts are issued to help fund government spending. Most are stocks issued with a fixed interest rate, which is paid half-yearly. At the end of the period of the investment, the government redeems the stock at the known published amount unless the gilt is irredeemable.

GPP
Acronym for Group Personal Pension, which is a collection of personal pensions, usually organised through an employer.

Guaranteed Income Bond
A lower-risk investment, which you buy with a lump sum. It guarantees a fixed level of income, which is paid over the term of the investment annually or monthly. Usually with a return of the capital at the end of the investment.

Home income plan (HIP)
A plan designed to enable an elderly owner or owners of a property to free the capital value locked in the bricks and mortar by providing an income while still allowing them to live there until death.

Index-linked
If an investment, a pension, an annuity etc. is index-linked, it is ‘linked’ to rises in the general level of prices so that it keeps pace with inflation. It is usually linked to the Retail Prices Index.

Investment trust
A type of collective investment where the investor’s money is pooled with that of other investors and invested in a professionally managed portfolio of stocks and shares. An investment trust is a publicly quoted company. Investors buy shares in that company and the investment trust’s fund managers invest in other stocks and shares.

ISA
Acronym for Individual Savings Account, a tax-efficient savings wrapper that can hold a range of different investments. Maxi and mini ISAs have been abolished. Existing mini cash ISAs, Tessa-only ISAs and the cash component of maxi ISAs have been re-classed as cash ISAs. In the same way, mini stocks and shares ISAs and the stocks and shares component of maxi ISAs have been re-classified as stocks and shares ISAs. Personal equity plans (PEPs) have also become re-classed as stocks and shares ISAs.

Issued share capital
This is the amount of a company’s authorised share capital that is issued as shares to shareholders.

Loading
The extent to which an individual is charged more than the ‘standard’ or ‘average’ rate for their insurance. This can be due to a bad claims history, age, occupation and sometimes even gender.

Lifetime Allowance (LA)
The maximum value of fund a pension scheme member can accumulate without incurring a tax charge.

LTV
Acronym for Loan to Valuation. It the size of the mortgage as a percentage of the property value.

Lump sum
Any amount invested as a single payment.

Money purchase scheme
Also known as a Defined Contribution Scheme. This is a type of pension scheme that invests your (and/or your employer’s) contributions to produce a lump sum to buy a pension income when you retire. The benefit is not defined.

National Insurance
A form of state insurance which pays for health care, pensions and other state benefits. National Insurance contributions (NICs) are paid by employers, employees and the self-employed.

National savings
A variety of savings schemes backed by the government in which the public can participate. These schemes are therefore lower risk. They include premium, capital and income bonds and some are tax free.

NAV
Acronym for Net Asset Value, which is the total assets of a company or fund, less its liabilities and other charges.

Negative equity
A term usually used in respect of home ownership, but applicable to any asset currently worth less than the sum of money borrowed originally to buy it.

Net relevant earnings
Relevant earnings before deduction of personal allowances but after deduction of items such as capital allowances, allowable expenses and losses.

Occupational pension scheme
This is a pension scheme set up by an employer to provide pension benefits for employees when they retire. They can be set up either on a Final Salary or Money Purchase basis.

OEIC
Acronym for Open-Ended Investment Companies, which are collective investment schemes.

Offer price
The price at which units are purchased in a collective scheme (e.g. unit trust)

Open-ended fund
A unit trust or OEIC in which the fund managers may change the investments in the trust without notifying the unit-holders.

Open Market Option (OMO)
A provision of defined contribution schemes allowing members to transfer funds at retirement to draw an immediate annuity with another provider.

Options
An option is a right to buy or to sell a security, commodity or currency at a future time and price. You do not have to buy or sell, only if the agreed price produces a profit by being greater than the current market price. If the option is not exercised, it just lapses and the loss will be the original cost of the option.

Ordinary shares
Another name for equities or shares which represent ownership in a company.

Paid up
A term used to describe a pension or life assurance policy when the policyholder has stopped paying premiums before retirement or before the end of the term of the policy. Any underlying value may still be used to maintain benefits.

PAYE
Acronym for Pay As You Earn. It is a means of collecting income tax at source under Schedule E of the tax legislation. Employers have to collect the tax by deducting it from their employees’ wages and pay it to HM Revenue & Customs.

PE ratio
Acronym for Price Earnings ratio. Generally expressed as one number, which is arrived at by dividing the current market price of a share by the ‘earnings’ per share. Earnings are the profits (usually calculated annually) of the company, after allowing for tax and other items. This figure is viewed as a reliable guide as to whether a share price is high or low, compared with the market price.

Penny shares
These are shares which trade at a low price and are generally high risk.

Personal allowance
Individual taxpayers are entitled to a personal allowance, which is an amount deductible from their income which they can earn free of income tax.

Personal Pension Plan (PPP)
A type of defined contribution scheme. Provides retirement benefits based on the build-up of a ‘pot’ of money, accumulated through the investment of contributions.

Permanent Health Insurance (PHI)
Also known as Income Protection Cover. This policy provides an income if you are unable to work because of long-term illness or accident.

PIBs
Acronym for Permanent Interest Bearing shares which are issued by building societies and pay income only. The capital is not repaid.

Pound cost averaging
A means of averaging the cost of buying shares or units to avoid the ups and downs of the market. It involves paying for shares or units by fixed periodic, often monthly instalments. When the price is high, the monthly amount buys fewer shares or units; when prices are low, the amount buys more.

PPP
Acronym for Personal Pension Plan.

Preference shares
These are shares that are considered to be less risky than ordinary shares as they have a fixed return. In the event that the company (to which the shares relate) is wound up, preference shareholders rank above the claims of ordinary shareholders (but behind bank and trade creditors). Preference shares do not usually carry a vote unless dividends fall into arrears.

Primary market
Where securities, such as shares, are sold for the first time, as opposed to the secondary market where the securities already exist and are bought and sold by investors.

Quoted
A company listed on the Stock Exchange is a quoted company. It must meet strict requirements as to the value of the company and publication of financial information.

Redeemable shares
Shares that are issued with the right reserved by the company to redeem them – sometimes on a fixed date, otherwise on a date to be fixed.

Redemption yield
This is the current interest on or income from a stock/security/other investment with an adjustment for the capital gain/loss if the investment is held to redemption.

Renewable assurance
Renewable assurance policies offer the facility to renew at the end of the term without the need to produce further evidence of good health.

Reversionary bonus
An annual bonus, which reflects the underlying growth of investments in a with-profits assurance policy and is added to the sum payable on maturity or death. Once added, the bonus cannot be taken away.

Rights issue
The issue of new shares in accordance with existing shareholders’ rights of first refusal of the shares (pre-emption rights) in proportion to their existing holdings. A rights issue is a means of raising money for the company.

RPI
Retail Prices Index, used as a barometer of the cost of living.

Scrip dividend
A dividend paid by way of shares instead of cash.

Scrip issue
The issue of free shares to existing shareholders, in proportion to their existing shareholding. The effect is to convert cash from the company’s resources into issued share capital and reduce the price of the shares.

Secondary market
A market where securities are sold for the second time. For example the securities already exist, having been sold by the organisation which created the security at the primary market.

Self-Invested Pension Plan (SIPP)
A type of personal pension plan that gives an individual more investment control.

Shares
Another name for equities which represent ownership in a company. Different types of shares confer different entitlements, such as voting rights and payments from the profits of the company. By trading shares you can make a capital gain or loss, depending on the differences in the prices at which you buy or sell. The holders of shares have a right to vote at the company’s Annual General Meeting and an entitlement to a share of dividends declared.

Small Self-Administered Scheme (SSAS)
An occupational pension scheme, usually for small businesses, that gives members more investment control.

Spread
The difference between the bid or buying price for shares/units and the offer price for selling them.

Stakeholder pension (SHP)
A form of private pension vehicle made available from April 2001. These schemes offer a low-cost, straightforward method of funding for retirement.

Stamp duty
A tax charged on the purchase of property or shares.

Stock
Part of a debt of a government body or company, sold by way of a security for deposit of a lump sum, which yields fixed interest on the amount invested and return of the capital at the end of the term of the investment. Often called ‘gilts’ or ‘gilt-edged securities’ if government stock, or ‘corporate bonds’ if company stock.

Tax relief
The process by which HM Revenue & Customs refunds you tax already paid on money committed to a pension or other government-approved scheme.

Term assurance
A type of life cover which guarantees an agreed sum of money if the life covered dies before the end of the term of the policy. The policy only pays out if you die before the end of its pre-set term.

Terminal bonus
A sum of money (not guaranteed) given to policyholders at the end of the term of their with-profits investment such as a bond or endowment, reflecting the growth of the with-profits fund.

Unit trust
A collective investment where a unit trust manager puts an investor’s money, together with that of others, into a fund of shares or securities of a specific type, which is then professionally managed. The nature of the unit trust is determined by a trust deed and the fund itself is held separately by an independent trustee.

Unit-Linked
An investment where units of shares or other asset types are purchased through a life assurance or pension policy. The value of the units, which can go down as well as up, depends upon the performance of the underlying assets.

Venture Capital Trust (VCT)
Investment in small companies that are not quoted on the Stock Exchange. Generally regarded as higher-risk holdings. They offer beneficial tax treatment, including income tax relief and CGT relief.

Waiver of premium
A benefit offered by insurance companies. It means that if you are ill or have an accident over the long term, the product waives your premiums, i.e. pays them for you.

Warrant
The right to buy shares in a company at a fixed time and usually at a fixed price. As with options, there is no obligation to buy.

Weightings
A term used to indicate the percentage of stocks and shares invested in holdings such as pension funds and unit trusts.

Whole of life policy
An insurance policy which pays an agreed sum of money when the life assured dies. The protection lasts for the whole of your life.

With-Profits
This type of policy means that you receive a share of any profits which the life assurance company makes on its with-profits fund (a mixture of shares/property/cash etc.). At the end of the term, a terminal bonus may be paid. If annual or reversionary bonuses are added, they cannot be taken away.

Yield
The annual income earned from an investment, measured against its current market price, always expressed as a percentage.

Zero
Zero is short for Zero Coupon Bonds. As the name implies, zeros pay no interest, so there is nil income tax to pay while they are held. The investment ‘rolls up’, i.e. the interest is included in the capital amount received on transfer or redemption, which is liable to income tax at that time. Zero Dividend Preference shares have similar advantages.