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The glossary: financial terms explained

  • A
    • Absolute return A type of fund that aims to produce a positive return over a given period, usually three years. Has the flexibility to invest in a wide variety of assets to achieve this objective. In the other words the fund manager doesn't say 'we invest in shares and beat our rivals but still lost you money'.
    • Additional rate taxpayers An employed or self-employed person who is earning over £150,000 in the tax year 2011/12. Additional rate taxpayers pay 50% income tax on earnings over £150,000. There are also subject to higher rate tax at 40% on earnings below £150,000.
    • Adviser charging The new way financial advisers will have to charge for their services when commission is banned in 2013. From next year advisers will have to disclose their charges upfront and in a explicit way so you know what you are paying for.
    • Alpha Alpha is a measure of the performance of actively managed funds. It is the return that is generated in excess of the fund's benchmark index. A positive alpha of one means a fund has beaten its benchmark by one per cent, a negative alpha of one means it has underperformed by one per cent.
    • Alternative Investment Market (AIM) The sub-market of the London Stock Exchange for smaller and growing companies that are not big enough to join the London Stock Exchange. You can buy shares of companies that are listed on AIM.
    • Annual allowance The amount of money you can save into your pension each year while retaining pensions tax relief, currently £50,000 for the 2011/12 tax year.
    • Annual management charge (AMC) The charge, usually a set percentage, levied each year by fund managers to cover the cost of the running their fund.
    • Annuity A type of insurance that pays out an income in retirement in return for a lump sum of money.
    • Auto-enrolment The term used by the government to describe the automatic enrolment of employees into a company pension or the National Employment Savings Trust.
    • Award Notice What you will receive if you are eligible for child benefit, detailing how much, who for and where the benefit will be paid.
  • B
    • Bank of England This is the UK's central bank. Its job is to keep the economy and financial system stable. The banks' Monetary Policy Committee sets interest rates to keep the rate of inflation at a low level and it is in charge of issuing bank notes.
    • Base Rate This is the interest rate set by the Bank of England's Monetary Policy Committee (MPC) each month to keep inflation as close to the government's 2% target as possible.
    • Basic rate taxpayer An employed or self-employed person who is earning £35,000 or under in the tax year 2011/12. Basic rate taxpayers pay a maximum of 20% income tax on earnings above the personal allowance of £7,475.
    • Beneficiary Someone who you wish to receive a part of your estate on your death, they should be named in your will along with what you would like them to receive.
    • Best of breed When a financial adviser recommends from a restricted panel of products or investments it is often known as best of breed, meaning the best products or investments from the whole of market.
    • Beta A measure of the degree to which the performance of a share or fund will correlate with the wider market. A 'high beta' share would be expected to rise when the stock market rises and vice versa. Beta is used in a more general sense to mean the return of the market, while alpha refers to the value that active managers can add to this.
    • Bond A bond is effectively a loan. You give your money to a government or company and they agree to pay back your money at a certain time in the future with a set percentage increase on your loan. The interest rate is known as the 'coupon', the loaned funds as called the 'principal', and the date when the money is to be returned is called the 'maturity' date.
    • Business property relief A tax relief given to a number of assets, including business property and machinery, AIM shares and certain investments. Assets eligible for business property relief are exempt from inheritance tax.
  • C
    • Capital protected annuity An annuity that pays a lump sum to your estate or your beneficiaries if you die before age 75. The lump sum is subject to a 55% tax charge.
    • Capped mortgage A capped mortgage means there is a ceiling on your interest rate. So while your rate is variable in that you can still benefit from falls in interest rates, should rates rise yours can't go above the set limit.
    • Care fees annuity An annuity that pays out income to cover the cost of your long-term care, the amount paid depends on the lump sum you provide as a premium.
    • Career average pension scheme A type of final salary pension scheme where the outcome is calculated as an average of the salary that you earned in your life at the company rather than the final salary you have at retirement.
    • Certified financial planner (CFP) This professional mark is issued by the Institute of Financial Planning. Taking this qualification is the equivalent of completing a three year degree in financial planning (a level six qualification) and exceeds the minimum requirement advisers must have.
    • Chargeable transfer If a person is give a gift that is a potentially exempt transfer (PET) for inheritance tax reasons but the donor does not survive seven years, the gift become liable to inheritance tax. See potentially exempt transfer.
    • Chartered financial planner This professional mark is issued by the Chartered Insurance Institute. Taking this qualification is the equivalent of completing a three year degree in financial planning (a level six qualification) and exceeds the minimum requirement advisers must have.
    • Chartered Insurance Institute (CII) A professional body for people working in insurance and financial services. It sets exams, provides training and issues statements of professional standing to financial advisers. It is home to the chartered financial planner qualifications. Also see Personal Finance Society.
    • Child benefit A tax credit paid to people who have children where the wage earner/s do not earn more than £50,000 each. Also more formally known as child tax credit.
    • Child Trust Fund (CTF) A tax-free way of saving for children launched in September 2002 and abolished at the end of 2010. All government contributions have now been stopped, though parents can still pay in money and benefit from the account's tax-free status. If your child has a CTF account they can't have a Junior ISA as well.
    • Codicil An amendment to a will that is made separately to the original will but kept with it.
    • Collar mortgage If there is a 'collar' on your mortgage it means your interest rate can't fall below a set level.
    • Collective investment scheme This is the technical name for a fund. Funds encompass investment trusts, unit trusts and exchange-traded funds. Funds pool together cash from lots of investors and invest it in far more places than an individual could do on their own. Putting your money in a fund takes a lot of the hassle out of investing, and means your money can go further.
    • Commercial property Property which is used for business rather than for living in, this includes shops, offices, warehouses etc.
    • Commission A payment to a financial adviser after they have invested your money in a certain investment or product, usually expressed as a percentage of the amount of money invested and paid out of your money. Commission will be banned from 31 December 2012.
    • Consumer Price Index (CPI) The official measure of inflation which the government uses to decide how much to increase state pensions and other benefits. It does not include housing costs and is therefore usually lower than the retail price index.
    • Continuous professional development (CPD) The on-going training financial advisers have to do to prove they are competent to do their job. Advisers have to log a specific amount of continuous professional development points each year.
    • Consolidate (pensions) Consolidation is when you transfer all your personal pension plans into one plan so you no longer make multiple payments into different plans or pay multiple charges.
    • Convertible bond A type of bond, also known as a CV, that gives the buyer the option to convert the bond into a predetermined number of shares: essentially a stock option wrapped inside a bond.
    • Convertible term assurance Life insurance which pays out a lump sum on death in a certain period but can be converted into a different policy without health checks at the end of the term.
    • Corporate bonds A loan provided to a company, which agrees to pay it back at a specific time in the future and with a specific percentage return. The backing for the bond is usually the payment ability of the company, typically money to be earned from future operations. The company's physical assets may also be used as collateral. Corporate bonds are generally higher risk than government bonds, so pay a higher rate of interest to attract investors.
    • Coupon The interest rate paid by a bond.
    • Critical illness cover An insurance policy that pays out a lump sum should you become seriously ill or disabled.
    • Cyclical Shares whose prices move in line with the overall economy are called 'cyclical'. Typically, cyclical companies sell consumer discretionary goods, sales of which will fall during a recession as people cut back on spending. 'Counter cyclical' stocks are those that tend to perform best when the economy is struggling. They typically sell consumer staples, demand for which is relatively constant.
  • D
    • Death in service benefit When an employee dies, their final salary or career average pension fund is divided into three to be paid to their beneficiary. A pay out can comprise all or some of the following; a lump sum, return of contributions and a survivor's pension.
    • Decreasing term assurance Life insurance which pays out a lump sum if you die within a certain term. The lump sum decreases as the term goes on and is usually linked to a mortgage.
    • Defined benefit A pension scheme that offers a set, or defined, income at retirement based on a multiple of years worked at the company and a proportion of the employee's salary at retirement. Also known as final salary schemes.
    • Defined contribution A pension scheme where the outcome is defined by how much money the individual saves, or contributes. Also known as money purchase schemes.
    • Deposit accounts A basic cash account usually held with a bank, into which you can save money. Usually offer low interest rates but the rate will depend on how easy it is to access your money, if you tie your money to the account for a certain period, you will normally get a better rate.
    • Derivatives A contract between two parties that specifies conditions (typically dates, resulting values of the underlying variables, and notional amounts) under which payments are to be made between the parties. The value of the derivative is dependent on the fluctuations of the underlying assets. Futures contracts, forward contracts, options and swaps are the most common types of derivatives.
    • Discount mortgage A mortgage rate which gives you a discount on your lender's standard variable rate (SVR) for a set period of time.
    • Discretionary fund manager An investment manager who is able to buy and sell on your behalf without gaining your permission on every transaction. They will work within an agreed limit depending on your risk profile. See risk profile.
    • Discretionary permissions What an investment manager must gain in order to buy or sell on your behalf without your permission. If an investment manager does not have these permissions they will have to ask your permission before buying or selling on your behalf.
    • Dividend A dividend is a payment made by a company to its shareholders. The decision to pay dividends, and the amount paid, is up to the company's board of directors. Dividends provide an incentive to buy shares in companies that are not experiencing growth, as they offer a source of income.
  • E
    • Endowment life assurance Life insurance wrapped up with a savings plan, which pays out a set amount on death or when the policy matures. Can be boosted by bonuses from the savings part of the insurance at the insurer's discretion.
    • Endowment policies A type of insurance contract that pays a lump sum on maturity of the policy, usually policies are either five, 10 or 15 years, or on the death of the policyholder.
    • Enhanced life annuity An special annuity that pays out more than a standard annuity if you have an unhealthy lifestyle that shortens your life expectancy.
    • Enterprise investment scheme (EIS) An enterprise investment scheme is a way of investing in small, high-risk companies to allow their to raise finance. These risky investments come with a number of tax breaks to reward investors.
    • Equity release The process of releasing cash from your home through taking a loan with the property as collateral which pays out a lump sum or a monthly income.
    • Euribor The Euro Interbank Offered Rate (Euribor) is the Eurozone's equivalent of Libor (see Libor). There are 15 different Euribor rates ranging from one week to one year, based on data from a panel of over 50 European banks.
    • Exchange traded funds (ETFs) Low-cost funds that track a certain index/stock exchange or basket of stocks or commodities rather than being invested by a fund manager in specific stocks in order to make a return.
    • Execution-only service A straight-forward, usually online, service that allows you to buy and sell funds directly without advice.
    • Executor The person named in your will who is in charge of valuing your estate, paying your debts and distributing what is left per your instructions in your will.
    • Exempt estates Estates that are exempt from inheritance tax due to their value, who they have been left to, and the domicile of the person who has died.
    • Exempt gifts Monetary gifts that can be made without incurring a possible inheritance tax charge on death.
  • F
    • Family income benefit Insurance that pays out a monthly tax-free income to your beneficiaries for a set period of time should you die.
    • Financial Conduct Authority (FCA) When the Financial Services Authority is split into two next year, the Financial Conduct Authority will take responsibility for consumer protection.
    • Financial Ombudsman Service (FOS) The FOS handles disputes between individuals and regulated financial businesses that they haven't been able to resolve themselves. Its service is independent and completely free of charge. It can't fine companies but can award up to £150,000 in compensation to individuals.
    • Final salary See defined benefit.
    • Financial Services Authority (FSA) The City watchdog which regulates all financial services firms. All financial services firm have to be registered with the Financial Services Authority. In 2013 the Financial Services Authority will be split into two parts; the Financial Conduct Authority and the Prudential Regulatory Authority.
    • Financial Services Compensation Scheme (FSCS) The compensation fund that pays out if a regulated financial services company you make a claim against cannot pay or is insolvent. However, only up to £85,000 of deposits and £50,000 of investments per individual per institution are protected.
    • First time buyer (FTB) The term used to describe someone who is looking to buy a house for the first time and has never previously owned property. Lenders usually offer a range of mortgages specifically for this group of borrowers, while the government regularly launches schemes aimed at helping struggling FTBs get a foot on the increasingly expensive property ladder.
    • Fiscal cliff The (US) fiscal cliff describes the combination of Bush-era tax cuts expiring and automatic spending cuts kicking in at the end of 2012 and start of 2013. Commentators including the Congressional Budget Office have warned that this could push the US into recession.
    • Fixed rate account A savings account that guarantees you a set rate of interest on your money for a specified period of time.
    • Fixed rate mortgage A mortgage which charges a specified interest rate for a set period of time regardless of any changes to the Bank of England base rate.
    • Fund Funds encompass investment trusts, unit trusts and exchange-traded funds. Funds pool together cash from lots of investors and invest it in far more places than an individual could do on their own. Putting your money in a fund takes a lot of the hassle out of investing, and means your money can go further.
    • Fund manager A person who is in charge of investing money placed in a certain fund, the money is invested depending on the remit of the fund and the manager is paid a percentage of the fund's assets under management.
    • Futures A financial contract between two parties; the buyer agrees to purchase something, a commodity that has not yet been produced, from the seller at a set price in the future. The buyer hopes that the commodity is worth more in the future than the price they have agreed to pay for it.
  • G
    • Gilts A bond issued by the UK government and guaranteed by the government.
    • Grant of administration If a person dies without a will someone, possibly a family member, will have to apply for a grant of administration in order to gain the right to deal with the estate.
    • Grant of probate A legal document that the executor of a will may need to gain the right to deal with a deceased person's estate. See also grant of administration.
    • Gross salary Gross salary is what you are paid before any deductions such as tax and benefits.
    • Guaranteed period annuity An annuity that pays out for a set period of time even if you die. The income can continue to be paid to a spouse or other beneficiary or as a lump sum to your estate.
    • Guaranteed whole of life Life insurance which last for your whole life rather than for a set term. No matter when you die a lump sum will be paid out.
    • Guardian's Allowance An extra child benefit payment paid to those who are bringing up a child whose parents have both died.
  • H
    • High yield bond A high-paying bond with a lower credit rating than an 'investment grade' bond. Because these bonds have a higher risk of default they pay a higher yield to attract investors. Bonds with a very high risk of default are also known as 'junk bonds'. High-yield bond funds provide a way to access this market without the risk of investing in just one company's bonds.
    • Higher rate taxpayer An employed or self-employed person who is earning between £35,001 and £150,000 in the tax year 2011/12. Higher rate taxpayers pay 20% income tax on earnings up to £35,001 and 40% on earnings above this level. Their personal allowance is £7,475.
    • Holistic financial plan A financial plan which takes into account every aspect of your life rather than focusing solely on one area, eg a pension or life insurance. Independent financial advisers can offer this service.
  • I
    • Impaired life annuity An special annuity that pays out more than a standard annuity if you suffer from a medical condition that shortens your life expectancy.
    • Income The money you earn through employment or self-employment, paid by a pension or gained through investments and savings.
    • Increasing annuity An annuity that pays out an increasing income throughout your lifetime to protect your money from the eroding effect of inflation.
    • Increasing term assurance Life insurance which pays out a lump sum on death within a certain period but the lump sum increases over the period of the policy to try and counter the effect of inflation.
    • Independent financial adviser An adviser who has to look at the whole of the market, meaning products and investments, to ensure your money is invested in the best place for you.
    • Index-linked term assurance Life insurance that pays out a lump sum on death in a certain period but the amount paid out and the premiums paid are linked to the retail price index.
    • Inflation The rate of change in the general level of prices of goods and services over a period of time expressed as a percentage. It can be measured by the consumer price index (CPI) or the retail price index (RPI). RPI includes your housing costs where CPI does not.
    • Inheritance tax A 40% tax levied on your estate after your death. The 40% charge applies to all assets over the £325,000 threshold.
    • Instant access account A flexible savings account that allows you immediate access your money whenever you want without charging you a penalty for doing so.
    • Institute of Financial Planning (IFP) A professional body for people giving financial advice or working in financial advice firms. It sets exams, provides training and issues statements of professional standing to financial advisers. It is home to the certified financial planner qualification.
    • Interest-only mortgage A mortgage which requires you only to pay the interest charges on your loan each month. This means that your monthly payments will be much cheaper, but when your mortgage term ends you will still be left with the loan to pay off.
    • Intestate You die intestate if you die without leaving a will. This means your estate will become subject to Intestacy Rules and may not go to the person you would like it to.
    • Investment-linked annuity An annuity where your income is linked to the stockmarket so you have the opportunity to benefit from stockmarket rises but you risk a lower income is the stockmarket falls.
    • Investment trusts A type of collective investment which invests in shares, securities or property but is itself listed as a quoted company. Investors buy shares in the company, the price of which is determined by how popular it is, of which there are a limited amount meaning it is a closed-ended investment.
    • ISA (Individual Savings Account) A tax-free savings account that nets you 100% of the interest you earn on your money. Ordinarily basic rate taxpayers have to pay 20% of the interest they make on their savings to the taxman, 40% if you're a high rate taxpayer, but an ISA acts as a wrapper which protects your money. You can invest in both cash and stocks and shares.
  • J
    • Joint life annuity A way of allowing you pension income from an annuity to be passed to your partner or beneficiary rather than losing the income on your death. Also known as a partner pensions, spouse pension or reversionary pension.
    • Joint life policy Insurance policies that cover both you and your partner and pay out on the first death in the partnership. These policies only pay out once.
    • Junior ISA Launched in 2011, the junior ISA is a new tax-free way to save for children under the age of 18. Just like a normal ISA you do not have to pay any tax on the interest you earn and you can save in both cash and stocks and shares.
  • K
  • L
    • Lasting power of attorney (LPA) A legal document that is drawn up to give a specified person, or a number of persons, control of your welfare, finances and property should you become mentally or physically unable to make these decisions yourself.
    • Libor The London Interbank Offered Rate (Libor) is the average rate banks charge to lend to one another. It is announced every business day before midday by Thomson Reuters based on data provided by a panel of major banks. There are 150 Libor rates in total for 15 different borrowing periods ranging from overnight to 12 months, spanning 10 currencies.
    • Lifetime allowance The amount of money you can pay into your pension over your lifetime while retaining pensions tax relief, currently £1.8 million.
    • Level annuity A straightforward annuity that pays out a set income when you retire, the income remains the same (level) regardless of how long it is paid out for. Also known as a standard annuity.
    • Level term assurance Life insurance that pays out a set lump sum if you die within a certain period. The lump sum does not change.
    • Lifetime annuity An annuity is one option for converting you pension pot into a retirement income. An annuity provider will provide an income until you die in exchange for a lump sum.
    • Liquidity Liquidity is the degree to which an asset can be bought or sold without affecting the price. Assets with a high level of trading activity are easily bought and sold, and are described as 'liquid'. Shares in large companies, such as those featured in the FTSE 100, are an example of a liquid asset. It's safer to hold liquid assets as it's easier to get your money out if you need it.
    • Loan to value (LTV) The amount of money you borrow from a mortgage lender expressed as a percentage of the property's value. For example, if your house is worth £150,000 and you take out an 80% LTV mortgage, you will need to pay £30,000 as a deposit.
    • London Stock Exchange (LSE) The main market in the UK on which companies that are large enough can trade their shares and raise money from investors.
  • M
    • Means-testing A way for the government to determine what benefits you are entitled to, if any, depending on your income, assets and savings.
    • Monetary Policy Committee The MPC consists of nine members: five from the Bank of England, four external members appointed by the Chancellor and is chaired by the Governor of the Bank of England. They meet every month for a two day meeting to set interest rates. The minutes of the meetings are published monthly.
    • Money Advice Service An independent, free advice service set up by the government to help people get to grips with their money. It is paid for by the financial services industry and now also coordinates the provision of debt advice across the UK.
    • Money purchase See defined contribution.
    • Mortgage A way of borrowing money to buy a house. The loan is secured against your property which means if you repeatedly miss payments your lender could seize your home.
    • Multi-tied advisers Financial advisers who can only offer you products or investments from a restricted range of providers. The term multi-tied will become obsolete in 2013 when multi-tied advisers will be known as restricted advisers. Also see: best of breed.
  • N
    • National Employment Savings Trust (Nest) The government pension scheme which employees without access to a workplace pension scheme will automatically be enrolled into from 2012.
    • National Insurance A type of income tax you pay to build up your entitlement to state benefits. If you earn between £139 and £817 per week you pay 12% of your earnings and an extra 2% on earnings over £817 per week.
    • National Savings & Investments (NS&I) A government-backed savings organisation. Money invested or saved is loaned to the government to finance public spending and in return the government pays interest, returns or gives out prizes.
    • Net salary Net salary is what you are paid after taxes and benefits are deducted by your employer.
    • Nil rate band The part of your estate that is not subject to inheritance tax, the current nil rate band threshold is £325,000 per person.
    • No notice account A flexible savings account that allows you easy access to your money, but could take up to a few days to process your transaction.
  • O
    • Offshore funds A collective investment which is based outside of the UK but open to investment from those based in the UK. They provide tax breaks for UK investors but are often more risky as they are not usually covered by the UK's compensation scheme. See Financial Services Compensation Scheme.
    • Offset mortgage A mortgage which is linked to your current account or savings account. When the balance in your account increases you pay less interest on your mortgage and vice-versa.
    • Open-ended investment companies (Oeics) A collective investment that operates as a company and invests in the shares of other companies to make a profit. The fund does not have a limited number of shares for investors to purchase which is why it is open-ended. See investment trusts.
    • Open Market Option (OMO) The ability to buy an annuity from any company in the market regardless of whether you have your pension with that company.
    • Options A financial contract between two parties; the buyer purchases the right to buy (also known as a 'call') or sell (also known as a 'put') a security or a financial assets for a price agreed with the seller (also known as a 'strike price') during a certain period of time or on a certain date.
    • Opt-out The option to remove yourself from workplace saving after being auto-enrolled into a pension scheme.
  • P
    • Partner pension See joint life annuity.
    • PAYE system The Pay As You Earn system is the way in which HM Revenue & Customs collects income tax.
    • Payment protection insurance (PPI) An insurance policy that is supposed to cover your loan repayments in the event you are unable to work. It recently emerged that this policy was mis-sold to millions of customers and as a result the banks have been forced to pay out billions of pounds in compensation to customers.
    • Pension A savings vehicle you pay into throughout your working life to fund the lifestyle you want in retirement.
    • Pensions tax relief The government tax break given to those who contribute to their pension to encourage savings. Tax relief is available on all contributions into personal or company pensions up to defined limits. See annual allowance and lifetime allowance.
    • Personal allowance The amount of income you are allowed to receive each year without paying tax on it. For those aged up to 65 the allowance is £7,475 for tax year 2011/12, for 65-74-year-olds it is £9,940 and for those aged 75 and over it is £10,090.
    • Personal Finance Society (PFS) A professional body for financial advisers and those working in financial advice firms. It works under its parent organisation the Chartered Insurance Institute.
    • Personal pension plan (PPP) A type of private savings plan provided by a financial institution in order to give you a regular income in retirement.
    • Potential exempt transfers (PETs) Gifts that may become liable to inheritance tax if the person giving the gift does not survive for seven years after the gifting. If they survive seven years or more the gift falls out of the estate of the deceased.
    • Premiums (insurance) What you pay an insurer each month in order to keep your insurance up to date.
    • Probate Office A place where you can store your will to ensure your wishes are executed after your death.
    • Prudential Regulation Authority When the Financial Services Authority splits into two next year, the Prudential Regulation Authority will work with the Bank of England to supervise the banks and make sure the UK financial system remains stable.
  • Q
    • QCF level four This is the minimum level financial advisers have to be qualified to in order to practise from 31 December 2013. QCF stands for Qualifications and Credit Framework and level four on the framework is the equivalent of finishing the first year of a three year degree.
    • QCF level six A number of advisers hold level six qualifications, above the level four benchmark they must reach. QCF stands for Qualifications and Credit Framework and level six on the framework is the equivalent of finishing a three year degree.
    • Quantitative easing (QE) Monetary policy intended to increase money supply when conventional policies aimed at stimulating the economy, such as interest rate manipulation, have become ineffective. Under QE central banks buy any assets they like, including government bonds or equities, using electronically created money. The effect of the central bank's purchases should be to increase the price of whatever it buys, lowering the interest rate on the asset. Cheaper borrowing should lead to more spending, boosting the economy.
  • R
    • Real estate investment trust (Reit) A security that sells on a stock exchange but invests solely and directly in real estate by buying either properties or mortgages.
    • Recession The technical definition of a recession in the UK is two quarters of 'negative GDP growth'. What this means is that the total value of all the goods and services produced by the UK contracts for two quarters in a row. The Office for National Statistics publishes these figures about once every three months, but its initial estimates are subject to revision when more data becomes available.
    • Renewable term assurance Life insurance that pays out a lump sum on death in a certain period but can be renewed without health checks at the end of that term.
    • Repayment mortgage This is the most common type of mortgage. Each monthly repayment will go towards both paying the interest charges on your loan and the loan itself. By the end of the mortgage term, therefore, your loan will be paid in full and you will own your house.
    • Restricted advice Advisers who are not independent and can only recommend products and investments from one or a restricted number of companies provide restricted advice.
    • Retail distribution review (RDR) Started by the Financial Services Authority, the review aims to make the process of investing and buying products more transparent and increase the level of professionalism within financial services. The changes set out under the review come into effect on 31 December 2012.
    • Retail Price Index (RPI) A measure of inflation published monthly by the Office of National Statistics (ONS). It calculates the price of a typical basket of retail goods and services, including housing costs, to show by how much the cost of living is increasing. Every year the ONS updates the basket of goods to reflect people's current spending habits.
    • Retirement The period of your life when you are no longer working which usually start taking income from the state pension or your own private pension.
    • Reversionary bonuses The bonus paid by a with-profits policy or annuity annually, dependent on the growth in the with-profits fund linked to the policy.
    • Reversionary pension See joint life annuity.
    • Risk profile A series of questions investors answer to determine how tolerant an investor is to the risk of losing their investment and subsequently where they should be invested.
  • S
    • Sale and rent back market Firms which buy homes from struggling mortgage borrowers for a low price, and in return allow the homeowner to remain in their house as a tenant.
    • Secured minimum income The minimum level of secure pension income you must have in order to utilise income drawdown, the minimum requirement is currently £20,000.
    • Shares A share is a single unit of ownership of a company, mutual fund or other organisation. Shareholders are entitled to a proportion of a company's profits if they are declared as dividends, and may vote at annual general meetings (AGMs).
    • Simplified advice A new low-cost channel of advice where personal recommendations are made on specific financial situations but no full financial plan is provided.
    • State earnings-related pension scheme (Serps) See state second pension.
    • Self-invested personal pension (Sipp) A private pension which gives the saver control of where the invest their money. The options for investment are wider than a standard personal pension.
    • Sipp-lite A self-investment personal pension (Sipp) which offers a stripped back version of a full Sipp. It is usually a cheaper option than a full Sipp as it offers a narrower investment choice.
    • Special bonuses One off bonuses paid to with-profits policyholders on top of the reversionary (annual bonus) if the fund linked to the policy is performing well, paid at the provider's discretion.
    • Spouse pension See joint life annuity.
    • Stakeholder Low-cost savings products introduced in 1999 which have capped fund manager charges.
    • Standard annuity See level annuity.
    • Standard variable rate A mortgage lender's basic interest rate which is moved up and down according to market conditions and what the Bank of England Base rate is doing. This is also the rate you are usually moved on to when any special rate expires.
    • Statement of professional standing A certificate financial advisers must gain in order to practise after 31 December 2012. It proves they hold the minimum qualifications and adhere to a code of ethics.
    • State pension The pension benefit you are entitled to after contributing to National Insurance throughout your working life. Currently the full state pension is £97.65 per week for a single person and £195.30 for a couple.
    • State pension age The age at which you can claim the state pension. It is currently increasing and will be 65 for bother men and women by 2018 and will rise again to 66 by 2020.
    • State second pension (S2P) The state second pension is a top up to the basic state pension, available to people who have paid a certain level of National Insurance. It replaced the state earnings-related pension scheme.
    • Stocks and shares Both words effectively mean the same thing: a share in the ownership of a company. The aim is for the share to increase in price and a profit made on it when it is sold. Companies offer shares to the public so they can raise equity, or money, that they can use to invest in the business.
    • Structural deficit A government budget deficit that is a result of a fundamental imbalance between tax receipts and spending, rather than one that is the result of short-term factors. Structural deficits can only be removed by reducing spending, increasing the tax base or increasing tax rates.
  • T
    • Tax bracket The different levels at which you pay tax depending on the income you earn. Earnings can be taxed at 20%, 40% or 50% depending on your income. See basic rate taxpayer, higher rate taxpayer and addition rate taxpayer.
    • Tax-free gifts Monetary gifts that can be made each year without fear that they will be caught by inheritance tax on your death.
    • Tax-free lump sum The 25% of your pension pot you are allowed to take on retirement without incurring tax. Money taken after the lump sum is taxed as income.
    • Three plus a half A financial services term which means the adviser takes an initial charge of 3% of your initial investment and will charge you 0.5% of the money invested each year for delivering on-going advice.
    • Tied advisers Financial advisers that can only recommend products and investments from one company, most commonly bank advisers. The term tied advisers will become obsolete in 2013 and tied advisers will become known as restricted advisers.
    • Tracker mortgage A mortgage rate which follows or 'tracks' changes to the Bank of England interest rate. It will usually track a percentage point above or below the Bank's rate.
  • U
    • Unauthorised payment Investing in a taxable investment, such as residential property and wine, is not allowed through a self-invested personal pension (Sipp) and constitutes an unauthorised payment. These payment incur heavy tax charges.
    • Underwriting The process of using a doctor to confirm medical details and prove the level of a person's health when that person has applied for a financial product.
    • Unit trusts A fund which invests in assets and pass any profit it makes back to investors rather than reinvesting them. Investors are the beneficiaries of the 'trust'.
    • Universal pension A common name for the £140-per-week flat rate state pension being pushed through by the coalition government.
    • Unregulated collective investment schemes (Ucis) A collective investment scheme that is not regulated by the Financial Services Authority and is not covered by the Financial Services Compensation Scheme. Ucis are high risk investments and invest in esoteric assets, for example teak and violins.
    • Unsecured pensions A pension income taken that is not guaranteed, like an annuity, often refers to money taken through income drawdown in retirement.
  • V
  • W
    • Warrants A financial contract between two parties; the holder of the warrant has the right to purchase a security from the issuer of the warrant at a certain price within a certain time frame.
    • Whole of market When an adviser is independent they can look at all investments and products to find the right one for the consumer. They can review the whole of market rather than just a part of the market. Also see restricted advice.
    • With-profits annuity A type of investment-linked annuity where a low level income is paid out topped up by bonuses, dependant on the performance of the annuity provider's with-profits fund.
    • With-profits policy An investment with a fixed term that is taken out with a life company. Investors' money is pooled and invested and when the investment does well an annual bonus is paid out each year and a terminal bonus is paid when the policy comes to an end. With-profits offer a smoothing process where some money is kept back in good years to make up for a bad return in other years.
  • XYZ
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