All the financial terms you need in our glossary
Accident sickness and unemployment insurance (ASU): accident sickness and unemployment insurance (ASU) is an insurance that provides a monthly sum for 12-24 months to those unable to work due to illness or unemployment.
Also known as asu, asu insurance, accident insurance, unemployment insurance
Additional State Pension: the Additional State Pension is an additional payment to the Basic State Pension and is calculated on the basis of your earnings and National Insurance contributions throughout your life.
Also known as State 2nd Pension or S2P
Aggressive Investor: an aggressive investor is one prepared to take high risks, in the hope of achieving higher than average returns
Annual Exemption: the Annual Exemption is a tax exemption that allows a parent to transfer a fixed sum (currently up to £3,000 p.a.) to their child free of Inheritance Tax. An unused Annual Exemption can be carried forward by one year; a person who made no transfer last year can combine it with this year’s annual exemption, to total £6,000.
Annual Percentage Rate (APR): the Annual Percentage Rate or APR is used to illustrate the true cost of borrowing, as it allows you to compare the rates charged by various mortgage lenders. APR should be calculated in the same way by all lenders.
Annuity: an Annuity is a contract sold by an insurance company which guarantees regular payments to the holder. An annuity is the most popular way to convert pensions savings into a regular income upon retirement. A fixed annuity guarantees a fixed payment, while a variable annuity does not.
Asset Allocation: asset allocation is the assignment of investment funds to various asset classes (shares, bonds etc.), to spread and reduce risk.
Asset Class: an Asset Class is a type of investment, for example stocks, bonds, property or cash.
Auto-enrolment: auto-enrolment is the process by which employees will be automatically entered into the government pensions initiative, the National Employment Savings Trust or NEST, from 2012. After auto-enrolment, employees are entitled to opt out of the scheme, if they so wish.
Balanced Investor : a balanced investor is seeking a balance of risk and reward, and while not as risk-averse as very cautious or cautious investors, is also not willing to take the higher levels of risk adopted by the aggressive or very aggressive investor.
Bank of England Base Rate : the Bank of England Base Rate is the interest rate, set by the Monetary Policy Committee every month, in an attempt to keep inflation low. The rate is followed by most lenders, and fluctuations generally influence variable rate loans and mortgages.
‘Bare’ Trust : a Bare Trust is a trust which makes its assets available to its beneficiaries once they turn 18. A bare trust is subject to the seven-year rule, which means that you must survive for 7 years after setting up the trust, before the trust’s assets are exempt from Inheritance Tax.
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Basic State Pension
The Basic State Pension is the pension provided by government based on National Insurance Contributions paid. In 2010/11 the full basic state pension is £97.65 per week for a single person, and £156.15 for a couple. This assumes at least 30 qualiftying years of National Insurance contributions. Individual entitlements may be less, depending on how much National Insurance was paid.
Basic Tax Rate
The Basic Tax Rate is the standard 20% rate of tax, as applied to individuals earning up to £44,875 (taking account of personal allowance) in 2010/11.
Bond
A bond is a debt instrument which promises to repay the principal (capital invested) on a specified date (the maturity date). Many bonds pay interest as a regular income to the investor, before returning the initial capital on the maturity date. Bonds are sold by governments, cities, corporations and many institutions, in order to raise finance.
Buildings and Contents Insurance (BCI)
Buildings and Contents Insurance or home insurance provides cover for damage to a property, and damage or loss of the contents within that property. The insurance can be purchased as individual buildings and contents policies, or a joint policy.
Buy to Let
Buy to Let refers to the purchase of a property with a view to renting it to tenants. Where a person purchases a second home as an investment, intending to let it to tenants, Capital Gains Tax will be payable on the profit made on the property, when it is resold. The tax applies not to the full value of the property, only to the profit made – i.e. to the difference between the purchase price and the sale price of the home.
Buy to Let Mortgage
A buy to let mortgage is a mortgage for an investment property that will be let to tenants. Many lenders consider potential rental income in addition to, or in place of earnings income, when assessing the size of mortgage they will offer.
Capital and Interest Mortgage / Repayment Mortgage see Repayment Mortgage.
Capped Rate Mortgage
Capped rate mortgages were designed to offer the benefits of variable and fixed rate mortgages. Payments do not exceed the capped rate, if the variable rate rises, and if rates fall, payments are less in accordance with the fall.
Cash-Equivalent Transfer Value
The Cash-Equivalent Transfer Value of a pension fund is its monetary value at a given point in time. This might be calculated when transferring a pension to another company if changing job, or moving pension savings to a better-performing fund.
Cash ISA
A cash Individual Savings Account (ISA) offers an opportunity for tax-free saving with your money held as cash. In the tax year 2010/11, the maximum that can be saved in a cash ISA is £5,100. see also Stocks and Shares ISA
Cautious Investor see Investor Types
Child Savings Account
A Child Savings Account is a savings account designed specifically for children. Interest in the account is paid tax-free (subject to the normal tax-free allowance, currently £6,475), provided that parents have completed Inland Revenue Form R85 on their child’s behalf.
Child Stakeholder Pension
The Child Stakeholder Pension is a pension which can be set up in the name of your child. Contributions you make on your child’s behalf attract tax relief at the standard 20% rate. Due to the length of time that the funds are invested, contributions can show substantial growth by the time your child reaches retirement age.
Child Trust Fund (CTF)
The Child Trust Fund was a tax-free savings fund for children. Child Trust Funds were abolished in the 2010 budget, although pre-existing accounts continue to be administered by lenders. Government provided the first £250 to open the fund, as a voucher provided for every child born since September 2002. A second £250 voucher was paid into the child’s account on their 7th birthday. Cash in the fund belongs to the child, and cannot normally be touched until the child turns 18 (with the sole exception of a child diagnosed as terminally ill).
Children’s Pension see Child Stakeholder Pension
Closed-ended Fund
A Closed-ended Fund is a fund with a fixed number of shares. Those wishing to invest in the fund must buy shares on the open market. As such, the value of shares is primarily dictated by the performance of the fund, but also influenced by market demand.
Company Pension
A Company Pension is one provided in the workplace by an employer. see also Occupational Pension Scheme
Critical Illness Insurance
Critical Illness Insurance provides a lump sum payment to those rendered unable to work, due to a range of specified illnesses. Core illnesses generally included are cancer, heart attack, stroke, kidney failure, major transplant or heart bypass surgery, and multiple sclerosis. Each insurance company has its own list of critical illnesses, with some offering over 30 illnesses and conditions covered.
Crown Rating
The Financial Express Crown Rating looks at the performance of investment funds, and highlights those which have had superior, consistent performance in relation to risk, when compared with other funds in their sector.
Current Account Mortgage (CAM) / Offset Mortgage
Current Account Mortgages are a flexible type of mortgage which is, in essence, a large overdraft. When your salary goes into your account, it reduces the amount owed on your mortgage, and when you withdraw money from your account, the amount owed increases. Essentially, a current account mortgage allows you to overpay and underpay without being charged.
Death Benefits
Death Benefits are a feature of some pensions annuities that protect the annuity, should the holder die before the age of 75. In this event, the death benefit paid to your estate or beneficiaries is a lump sum equal to the amount paid for the annuity, less the income already received.
Defensive Investor see Investor Types
Deferred Period
A Deferred Period is the period between an event and the time when an insurance policy begins to pay out. With income protection insurance for example, a policy may stipulate a deferred period of 4 weeks, which means that the insurance does not pay out for the first 4 weeks after you stop work. The deferred period can be as much as 2 years. The longer the deferred period, the longer you are agreeing to financially support yourself before your insurance becomes active, and therefore the cheaper the policy premium you pay.
Deferred SIPP
A Deferred SIPP is a personal pension which can be transformed into a Self-Invested Personal Pension (SIPP). see Self-Invested Personal Pension SIPP
Defined Benefit Pension Scheme
A Defined Benefit Pension Scheme, also known as a final salary scheme, is a pension where the payments are set in advance. Payments are calculated based on an employee’s final salary, and their length of service with the company.
Deposit Account
A Deposit Account is a bank or building society account which earns interest and normally requires notice of withdrawals. Deposit accounts normally have higher rates of interest than current accounts.
Discounted Gift Trust
A Discounted Gift Trust is a trust that allows you to make gifts, while continuing to draw an income from those gifts. You must survive at least 7 years after the gift is made, before it is exempt from Inheritance Tax.
Discounted Rate Mortgage
A Discounted Rate Mortgage is where the rate you pay is discounted from the lender’s standard variable rate, for a set length of time. At the end of the discount period, the mortgage payments revert to the lender’s standard rate.
Discretionary Trust
A Discretionary Trust is a trust that carries no specific instructions regarding the distribution of its assets. It is left to the discretion of the trustee to decide who benefits from the trust.
Distribution Bond
A Distribution Bond is a bond designed to provide a regular income drawn from the interest or dividends from the bond, without touching the original capital. There is usually a minimum investment, and income from the bond will fluctuate, depending on performance.
Dividend
A Dividend is a payment received by a stockholder, or by a policyholder in a mutual insurance society.
Early Repayment Charge
The Early Repayment Charge or redemption penalty refers to the fee payable when clearing a mortgage balance early. Early Repayment Charges vary from lender to lender.
Enhanced Pension Annuity
An Enhanced Pension Annuity is an annuity designed for persons whose life expectancy is likely to be less than other people of the same age. One group who might be considered for enhanced annuities would be smokers. An enhanced annuity pays more than a conventional annuity, due to the likelihood that it will pay for a shorter time.
Enterprise Investment Scheme EIS
Enterprise Investment Schemes or EIS schemes invest in smaller UK companies and allow investors 20% tax relief on investments that must remain in place for at least 3 years. EIS investments must be between £500 and £500,000 and also allow the deferral of Capital Gains Tax (CGT).
Equity
Equity is the market value of a property, less the value of the charges on it. For example, if a property is worth £200,000 and the mortgage on it is £110,000, with no other loans secured against it, the equity on the property is £90,000.
Ethical Fund
An Ethical Fund aims to invest only in companies that meet its criteria with regard to social or environmental responsibility. Also known as a socially responsible investment (SRI) fund, it may use positive screening to favour companies involved in ethical activities such as biodiversity, sustainable agriculture and forestry, renewable energies, or water management. Alternatively, ethical funds may use negative screening to identify and exclude companies involved in animal testing, deforestation, meat production, tobacco, military and defence, or environmental pollution.
Equities
Equities are shares which represent a portion of the capital of a company, and entitle the holder to a dividend. Equities are also referred to as ordinary shares.
Estate
The Estate is an individual’s net worth, calculated at any given time, or upon death. Your estate includes the value of your property, cars and other assets, savings, investments and insurances, less the sum of your debts and liabilities.
Ethical Investment see Ethical Fund
Exposure
Exposure is the condition of being subjected to a source of risk. For example, an investment in the stock market carries the risk associated with stock market exposure.
Fixed Annuity see Pensions Annuity
Fixed Rate Mortgage
A Fixed Rate Mortgage is where the rate of interest applied to the mortgage is fixed for a particular period of time. This facilitates monthly budgeting, as the monthly payments remain the same regardless of rises in the Base Rate. However, the mortgage holder also fails to benefit during the fixed period, if interest rates should fall.
Flexible Mortgage
A flexible mortgage allows borrowers to overpay, underpay, borrow back overpayments, and take payment holidays on their mortgage without penalty.
Forecast of Benefits
A Forecast of Benefits is a calculation of your retirement income from your state pension, as provided by the government’s Future Pension Centre.
Fund see Investment Fund
Fund Manager
A Fund Manager is an investment professional who oversees an investment fund. The fund manager makes decisions on buying and selling investments within the fund.
Fund Ratings
Fund Ratings are qualitative assessments of funds based on certain criteria, and are issued by independent companies known as rating agencies. see Crown Rating, Standard & Poors Rating, MorningStar Rating, Old Broad Street Research Ltd. Rating.
Fund Selection
Fund Selection is the process of selecting funds within an investment portfolio. Funds are usually selected based on risk or volatility, past performance, and ratings by the major ratings agencies.
Funds Supermarket
The Funds Supermarket is our online workspace where you can invest in funds at discount prices, sell your ISAs and investments online, switch funds, and obtain detailed information on your investments, also generating your own factsheets, graphs and charts.
Fund Switching
Fund Switching is the process of moving your cash from one investment fund to another.
Gearing
Gearing is the relationship between a company or fund’s borrowings (including long-term debt) and its stockholder funds (capital plus reserves). In general, an investment trust with higher gearing (i.e. with high borrowings) is regarded as being of higher risk than one which has not borrowed.
Gift
A Gift is a voluntary transfer of cash or assets from one entity or person to another, without charge or consideration in return. Gifts can be a tax efficient means of transferring your wealth to your children. Certain gifts are tax-exempt, while others qualify as ‘potentially exempt transfers’ (PETs) which can be exempt under certain conditions.
Gift with Reservation
A Gift with Reservation of Benefit is an asset gifted to your children from which you continue to derive a benefit. For example, if you transfer your home to your children, but continue to benefit by living there, the home is a gift with reservation and as such will not be exempt from Inheritance Tax.
Government Securities
Government Securities are short and long-term bonds issued by government to fund its expenditure.
Group Personal Pension Plan (GPPP)
A Group Personal Pension Plan or GPPP is run by an independent pensions provider, and offered through employers as a company pension scheme. In addition to the pension, GPPPs often include benefits such as life and health insurance.
Guaranteed Annuity
A Guaranteed Annuity is an annuity that promises to make payments for an agreed term, even if the holder dies before the end of the term. If the holder survives the term, the annuity continues to pay. There are two types of guaranteed annuity, the single life annuity and the joint life annuity.
Guaranteed Bond
A Guaranteed Bond is a bond which guarantees to repay the amount invested, ensuring that there is no risk to capital for the investor. While the minimum return from the bond is the amount that was put in, the real value of the investment may have been depleted by inflation, during the time or ‘term’ of the investment.
Guaranteed Growth Bond
A Guaranteed Growth Bond offers a guaranteed return at a fixed rate of interest, provided that the money is left invested for the agreed term. The income is taxable, and is deducted before the return is paid.
Guaranteed Income Bond
A Guaranteed Income Bond offers a guaranteed monthly return at a fixed rate of interest, without touching the initial capital investment. The income is taxable, and is deducted before the return is paid. The bond runs for an agreed term, and carries a penalty if cash is withdrawn before the end of the term.
Guaranteed Insurability Options
Guaranteed Insurability Options allow an insured person to increase the level of their insurance cover at the original rates of the policy. This is particularly useful where the insured’s health deteriorates, as it guarantees extra cover at a reasonable rate.
Guaranteed Premium
A Guaranteed Premium is fixed and cannot change during the lifetime of an insurance policy, in contrast to a ‘reviewable premium’, which can be increased by the insurance company.
Higher Lending Charge
A Higher Lending Charge is a fee charged by a mortgage lender when the customer wishes to borrow a high percentage of a property’s value.
Home Responsibilities Protection (HRP)
Home Responsibilities Protection (HRP) can ensure that your pension entitlement is not affected, if you are unable to make full National Insurance Contributions due to working at home as a carer. HRP must be re-applied for each year.
House Insurance see Buildings and Contents insurance.
Immediate Life Annuity
An Immediate Life Annuity is purchased with savings that were separate from pension savings, as a means of converting those savings into a regular retirement income.
Income Drawdown
Income Drawdown is an option associated with an unsecured pension, where your pension savings are left invested in the stock market. This offers the option to take no monthly pension income from time to time, which is particularly useful to those who ‘retire gradually’ by continuing to do some paid work.
Income Protection Insurance
Income Protection Insurance provides a regular payment equal to a portion of your previous income, when you are rendered unable to work due to ill-health.
Income Tax
Income Tax is a personal tax levied on earnings from work or business. The amount of tax payable is dependant on the amount earned, plus certain other entitlements and exemptions.
Independent Financial Adviser
An Independent Financial Adviser is an adviser who is not tied to a particular financial institution, and is therefore free to take a ‘whole of market’ approach. This enables the IFA to base his advice on all products available in the marketplace.
Individual Savings Account (ISA)
An Individual Savings Account (ISA) is an account which offers tax-efficient savings. The ISA comes in two variants. The cash ISA holds the funds in cash, and earnings are tax-free. The stocks and shares ISA invests in the stock markets, and earnings, while not totally free of tax, are paid at a significant tax advantage.
Industry Ratings see Fund Ratings
Inflation
Inflation is a sustained increase in the aggregate or general price level in an economy.
Inheritance Tax (IHT)
Inheritance Tax (IHT) is a tax payable on transfers of wealth above the individual allowance (£325,000 for an individual or £650,000 for a couple in 2010/11), and on any gifts made during the last 7 years of your life. Wealth and gifts above the allowances are generally subject to Inheritance Tax at 40%.
Inheritance Tax Exemptions
Inheritance Tax Exemptions are transfers of wealth that are exempt from Inheritance Tax. These include transfers to a spouse or civil partner, donations to UK charities, and various allowable cash gifts to other individuals. Spouse Exemptions: no tax is payable on transfers to a spouse, regardless of Inheritance Tax thresholds. UK Charity Exemptions: no Inheritance Tax is payable on donations to a UK charity. Potentially Exempt Transfers (PETs): if you survive for 7 years after making a gift to another person, that gift will then be exempt from Inheritance Tax, regardless of value. Annual Exemption: an amount, currently up to £3,000 per year, can be given to others, free of Inheritance Tax. Small Gift Exemption: small gifts of up to £250 can be made to an unlimited number of individuals tax-free. Wedding and civil partnership gifts: wedding gifts to your children, currently of up to £5,000, and to grandchildren of £2,500, are tax-free. Some relief from Inheritance Tax is also available to owners of a business, a farm, woodland or a National Heritage property.
In Trust
Life insurance set up in trust uses a trust structure to ensure that the value of your life insurance does not count towards the value of your estate. This has the beneficial effect of reducing the value of your estate for tax purposes, and can help protect your wealth from Inheritance Tax.
Insurance
Insurance is a contract by which an insurer agrees to indemnify a party against specified loss, in return for premiums paid. The principal types of insurance cover loss of life, health, income or property.
Interest Calculation
Interest calculation is the frequency with which mortgage lenders calculate the interest on the outstanding balance on mortgages. Interest calculation varies from lender to lender, and can be calculated daily, monthly or annually.
Interest-Only Mortgage
An Interest-only Mortgage takes repayments only of the interest due on the mortgage balance. The mortgage balance is not reduced during the term of the interest only mortgage. The holder generally sets up a separate investment to run concurrently with the mortgage, designed to repay the total balance at the end of the term.
Investment Bond
An Investment Bond is a life insurance policy usually purchased with a single premium (lump sum), with the capital then invested in funds. Income can be taken by withdrawing up to 5% of the original capital per year, and payment of tax is deferred until final encashment. see also With-Profits Bond and Distribution Bond.
Investment Fund
An Investment Fund is a collective or pooled investment vehicle which brings together cash from many individual entities or persons. Investors buy units in the fund, the value of which depends on the performance of the fund. The fund is run by a professional fund manager, who will make investments in various asset classes e.g. stocks and shares, property, gilts, and bonds, in order to spread risk.
Investment Trust
An Investment Trust is a collective investment company, which pools together funds from many individual entities and investors. The trust is closed-ended, in that it has a limited number of shares which are traded on the open market. The value of the shares is, therefore, influenced by market demand, as well as by the performance of the fund.
Investor Types
For purposes of risk profiling, there are six Investor Types. A ‘very defensive’ investor is he who most wishes to avoid risk, and accepts that this may mean only moderate returns on his investments. The other investor types are progressively more prepared to accept risk: the ‘defensive’ investor, the ‘cautious’ investor, the ‘balanced’ investor, the ‘moderately aggressive’ investor, and lastly the ‘aggressive’ investor, who is prepared to take high risks in the hope of achieving higher than average returns.
ISA see Individual Savings Account
ISA Allowance
The ISA Allowance is the maximum amount an individual can invest each year in Individual Savings Accounts (ISAs). In the tax year 2010/11 the ISA maximum is £10,200. Half of this allowance or £5,100 can be invested in a cash ISA, the other £5,100 in a stocks and shares ISA. Alternatively, all of the £10,200 allowance can be placed in a stocks and shares ISA.
Joint Insurance Policy
This is an insurance policy that insures more than one person. Policies can be set up by a couple to pay out on the first death, to the surviving spouse. A joint policy can also be set up to pay out on the second death, to offset any possible Inheritance Tax liability.
Joint Life Annuity
A Joint Life Annuity is an annuity which continues to pay out after your death, either to your spouse until they die, or to your children for an agreed term.
Legal Fees
Legal fees are charged by a solicitor, for instance in relation to a mortgage application. These fees include costs for services such as conveyancing, which deals with the transfer of land ownership and legal registrations. There are many mortgage deals available with free legal fees included.
Life Insurance
Life Insurance is insurance that pays out a lump sum to nominated beneficiaries (e.g. the policyholder’s family) upon the policyholder’s death. A life insurance policy can also be set up to settle debts or the outstanding balance on a mortgage.
Loan to Value (LTV)
Loan to value expresses the relationship between the mortgage amount and the value of the property, as a percentage. For example, a house worth £100,000 with a mortgage of £60,000 would have a loan to value (LTV) of 60%.
Moderately Aggressive Investor see Investor Types
Money Purchase Scheme
A Money Purchase Scheme is a pension scheme where payments are not guaranteed, but depend on the performance of the pension fund.
Morningstar Rating
A Morningstar Rating evaluates the past performance of an investment fund, based on risk, return, and management skill. see Fund Ratings
Mortgage Payment Protection Insurance (MPPI)
Mortgage Payment Protection Insurance (MPPI) covers your mortgage payments for an agreed period, typically 1-2 years, if you are unable to work due to illness or redundancy.
National Employment Savings Trust / NEST
The National Employment Savings Trust or NEST is the government pensions initiative to be introduced from 2012. All workers with no existing pension provision will be automatically enrolled (‘auto-enrolled’) in the Scheme. Contributions to the NEST will attract tax relief, and a guaranteed employer contribution.
National Insurance Contributions (NI)
National Insurance Contributions, or NI contributions, are payments deducted from earnings, if you earn over a certain amount. NI contributions pay for the state pension and other entitlements.
Negative Screening
Negative Screening is the process of excluding certain investments, activities or companies from a socially responsible or ethical investment portfolio. Companies excluded could, for example, include those involved in tobacco products, animal testing, deforestation, meat production, nuclear power, or environmental pollution. see Positive Screening
Non-disclosure
Non-disclosure is the failure to provide information, especially in an insurance application. Non-disclosure can be deliberate, where a customer withholds information about his health or lifestyle, or inadvertent, where a customer fails to include information of which they were unaware. An insurance company can cite non-disclosure as a justification for declaring an insurance policy void, or paying out a reduced amount.
Occupational Pension Scheme
An Occupational Pension Scheme is a company pension scheme which is run by the company itself. see also Salary Related Pension Scheme, Money Purchase Scheme, Stakeholder Pension Scheme
OEICs
OEICs or Open-Ended Investment Companies are investment funds that issue shares, rather than units. The shares are traded on the stock exchange, at a price which rises or falls depending on the performance of the fund.
Old Broad Street Research Ltd. (OBSR) Rating
An Old Broad Street Research Ltd. (OBSR) Rating uses an investment research approach to provide a qualitative assessment of an investment fund, and to draw conclusions regarding a fund’s future performance. see Fund Ratings
One Plan
One Plan is Principle First’s proprietary concept offering our clients a personal online workspace, where they can build their own sustainable financial plan. With our user-friendly toolkit, clients can check existing investments, value their portfolio, and make a checklist of possible future investments. They can also calculate what their current monthly pension savings should be, to achieve a target sum or income upon retirement, or check what monthly mortgage repayments would be, for the mortgage they hope to purchase.
Open-ended
Open-ended is the term which applies to a fund where the number of units or shares is not limited, giving the fund the flexibility to draw in additional investors.
Pension
A Pension is a system of regular payments derived from a pension fund, and providing an individual with an income in retirement.
Pension Contributions
Pension Contributions are the savings an individual makes into his pension fund, and which attract tax relief from government.
Pension Fund
A Pension Fund is a long-term investment fund with special tax rules, designed to provide a regular income in retirement. Contributions to a pension fund attract tax relief from government.
Pension Fund Manager
A Pension Fund Manager is an individual or company which oversees the investment of money in a pension fund. The manager is responsible for controlling the level of risk in the fund, and for maximising returns.
Pensions Annuity
A Pensions Annuity is a contract sold by an insurance company which guarantees regular payments to the holder. An annuity is generally used to convert pensions savings into a regular income upon retirement. Fixed annuities guarantee a fixed payment, while variable annuities do not.
Permanent Health Insurance
Permanent Health Insurance is an insurance which pays you an income until retirement age, should you be rendered unable to work for health reasons.
Personal Accounts Scheme
The Personal Accounts Scheme was the original name for the National Employment Savings Trust (NEST). see National Employment Savings Trust
Personal Pension
A Personal Pension or private pension is a non-company scheme set up by an individual to save for their retirement. A personal pension would usually allow access to a wider range of funds than a standard Stakeholder Pension.
Portable Mortgage
A Portable Mortgage generally provides for the transfer of the mortgage when the holder is moving home, without penalty. Terms and conditions vary between lenders.
Portfolio
A Portfolio is a collection of investments owned by one individual or organisation. A portfolio might include stocks and shares, bonds, and fund investments.
Portfolio Management
Portfolio Management is the process of managing the investments in a portfolio, monitoring their performance and retaining, modifying or disposing of them accordingly.
Positive Screening
Positive Screening is the process of identifying socially responsible or ethical investments, using a range of positive criteria. Such investments may support companies which promote biodiversity, sustainable forestry, environmental products, renewable energies, or water management. see Negative Screening
Potentially Exempt Transfers (PETs)
Potentially Exempt Transfers (PETs) are transfers or gifts of wealth which are not immediately exempt from Inheritance Tax. PETs become tax-free only when the benefactor making the gift has survived for 7 years after the gift has been made. One example of a PET would be the family home. see also Gift with Reservation
Premiums
A Premium is a payment made to an insurance company in return for insurance. An insurance policy can be paid with monthly premiums, or with a single once-off lump sum, a single premium.
Private Health Insurance
Private Health Insurance is a voluntary insurance to cover the cost of medical treatment.
Private Pension see Personal Pension
Public Sector
The Public Sector is the generic term for those companies and organisations not in private ownership, but owned or controlled by government and engaged in the delivery of government services.
Public Sector Pension Scheme
A Public Sector Pension Scheme is a pension scheme provided to civil servants and other government employees working in public sector companies and organisations.
Recommended Portfolios
Our Principle First Recommended Portfolios are our investment selections chosen to suit each investor type, as defined by risk tolerance. There are 6 portfolios, ranging from the most cautious and conservative, the ‘very defensive’ portfolio, to the growth-oriented and risk-tolerant ‘very aggressive’ portfolio.
Release Fee / Sealing Fee / Deeds Release Fee
Release Fee / Sealing Fee / Deeds Release Fee all refer to an administrative charge imposed by mortgage lenders for releasing the title deeds of your property, when you have redeemed or repaid your mortgage. These charges vary considerably from lender to lender.
Repayment Mortgage / Capital and Interest Mortgage
A repayment mortgage or capital-and-interest mortgage allocates part of the monthly repayment to the capital amount owed, and part to the interest charged on the loan. Generally, at the end of the mortgage term, the entire debt will be repaid.
Retail Price Index
The Retail Price Index is an index which tracks changes in the prices of retail goods, to give a broad measure of the level of inflation.
Retirement Age
The Retirement Age is defined by government as the age at which people in a given profession usually retire, and is also termed the ‘normal retirement age’. Where there is no normal retirement age for a particular profession, the default age for both sexes is set by government. see State Pension Age
Reviewable Premium
A reviewable premium is a payment for insurance which is not guaranteed to remain the same for the life of the policy. It is reviewed every 5 years, and the premium can be increased.
Risk Analysis
Risk Analysis is a process of determining the risk level of an investment, in comparison to other investments. Risk Analysis can also refer to the process of evaluating an individual’s attitude to risk, and establishing the maximum level of risk he/she would accept in their investment portfolio.
Risk Profile
The Risk Profile of an investor is a classification of his risk tolerance using certain criteria. Investors are classed in six categories, from most risk-averse to most risk-tolerant: very defensive, defensive, cautious, balanced, moderately aggressive, and aggressive. In stocks and shares investments, as a general principle the higher the risk you accept, the greater your potential returns.
Risk Profiler
The Risk Profiler is Principle First’s online evaluation tool which uses a series of questions to establish the risk profile of an investor. see Risk Profile
Salary Related Pension Scheme
A Salary Related Pension Scheme provides a pension related to a person’s final salary and the number of years they have been in the Scheme.
Sector Selection
Sector Selection is the process of choosing various industrial or commercial sectors (e.g communications, pharmaceuticals) for investments. Sector selection is most commonly associated with investment funds.
Self-Invested Personal Pension (SIPP)
A Self-Invested Personal Pension or SIPP is the pension type that offers maximum flexibility to hold a wide range of investments within your pension fund. In addition to cash, a SIPP can contain government securities, unit trusts, bank deposit accounts, and commercial property. see also Deferred SIPP
Seven-year-rule
The ‘seven-year-rule’ refers to gifts classified as Potentially Exempt Transfers (PETs) for Inheritance Tax purposes. It states that once a gift is made, the person making the gift must live a further 7 years, before the gift is exempt from Inheritance Tax. However, within this 7-year period, the Inheritance Tax liability on the gift decreases gradually from the beginning of year 4.
Single Life Annuity
A Single Life Annuity is a guaranteed annuity which pays out only to the holder, and ends upon death.
Single Premium
A Single Premium is a once-off lump sum payment used to purchase an insurance policy.
Small Gift Exemptions see Inheritance Tax Exemptions
Socially Responsible Investing (SRI)
Socially Responsible Investing or SRI is the process of investing in companies that conform to certain monitored standards of social and environmental responsibility, or avoiding companies indulging in unethical practices. These companies are identified by the processes of positive screening, which means including only companies that care for the environment, and negative screening, which is an exclusive policy actively avoiding companies or industries regarded as being harmful to the environment. see also Ethical Fund
Split Loan / Part Repayment-Part Interest Only
A Split Loan / Part Repayment-Part Interest Only mortgage is a mixture of an interest-only mortgage and a repayment mortgage. The holder repays the interest owed on the mortgage and part of the capital, but not as much as would be payable on a full repayment mortgage.
Spouse Exemptions
Spouse Exemptions are transfers of wealth to a spouse, which are exempt from Inheritance Tax.
Stakeholder Accounts
Stakeholder Accounts are investments for children which place the funds in a range of companies, in order to reduce risk.
Stakeholder Pension
A Stakeholder Pension is the standard pension model. Stakeholder pensions must adhere to government guidelines regarding management charges, and may not impose penalties on those wishing to stop contributions temporarily, or switch to another pension provider.
Stamp Duty
Stamp duty is a land tax payable on property or land purchased in the UK. Currently 2010/11 any property or land under £250,000 is exempt. Stamp duty is charged on properties above that threshold at 1-4 % of the purchase price. From April 2011, a new 5% top rate of stamp duty will apply to properties valued at over £1m.
Standard Variable Rate (SVR)
Each lender has their own Standard Variable Rate of interest, on which all their products are based. Interest charged in the fixed-rate period of a mortgage would normally default to the SVR, at the end of the fixed term.
Standard & Poor’s (S&P) Rating
A Standard & Poor’s (S&P) Rating is based on credit ratings and credit risk analysis, and assesses a company’s ability to meet its financial obligations. see Fund Ratings
State Pension
The State Pension is the pension provided by government, based on National Insurance Contributions paid. This consists of the Basic State Pension and the Additional State Pension, or State Second Pension (S2P).
State Pension Age
The State Pension Age is the minimum age at which you may draw the state pension. For men this is currently 65. For women, this is due to increase from the current 60 to 65 between 2010 and 2020. For both men and women, the state pension age is to increase to 68 between 2024 and 2046.
State Second Pension (S2P)
The State Second Pension (S2P), also known as the Additional State Pension, is given in addition to the Basic State Pension, primarily to low earners, certain carers, and people with long-term disability.
Stock Market
The Stock Market is a public market for the trading of company stocks, shares and derivatives by professional stockbrokers.
Stocks and Shares ISA
A Stocks and Shares Individual Savings Account (ISA) is a savings account which invests in the stock market. Growth on savings is tax-advantaged, rather than tax-free, as some tax is levied on dividends within the fund. See also Cash ISA
Sustainable Investment
Sustainable Investment is the process of investing to meet the needs of the present, with minimal environmental impact and without compromising the ability of future generations to meet their own needs.
Tax Relief
Tax Relief is a reduction in tax due to government. This can take the form of a rebate of tax already paid, e.g. where Government gives tax relief on contributions to a pension fund as a cash ‘top-up’ paid into the fund.
Tax Rebate
A Tax Rebate is a repayment of tax already paid to government.
Term Insurance
Term insurance is a life insurance policy which offers cover for an agreed period only. If the holder lives beyond the end of the agreed period, the policy becomes void. Term insurance is also often used to guarantee repayment of a mortgage, with the value of the payout reducing in step with the mortgage balance, and timed to expire when the mortgage is paid off.
Terminal Illness Benefit
Terminal Illness Benefit is a feature of life insurance policies where the insurer offers to pay out on the policy early, if the policyholder is diagnosed as having less than 12 months to live. The sum paid is usually less than the full sum that would have been payable on death.
Tied Adviser
A Tied Adviser is an adviser working directly or as an agent for one or more financial institutions, and who offers only the products of those institutions. cf Independent Financial Adviser
Tracker Mortgage
A Tracker Mortgage is a variable rate mortgage that is set above or below the Bank of England Base Rate. It then fluctuates in accordance with changes in the Bank of England Base Rate.
Trading at a Discount
Trading at a Discount is the trading of the shares in a closed-ended investment trust at a price that does not reflect the full value of the assets in the fund. see also Trading at a Premium
Trading at a Premium
Trading at a Premium is the trading of shares in a closed-ended investment trust at a price that overvalues the assets in the fund. see also Trading at a Discount
Trust
A Trust is a relationship where one or more persons hold the property of an individual (the settlor) subject to his directions, and with duties to protect and use it for the benefit of others. Assets placed in a trust are no longer regarded as part of the settlor’s estate. As such, they are beyond the reach of his creditors, and do not increase the value of his estate for purposes of Inheritance Tax. see also Bare Trust, Discretionary Trust
Unit
A Unit is a defined quantity adopted as a standard of exchange, for example in a unit trust. The equivalent measure in a company would be a share.
Unit Trust
A Unit Trust is the UK term for an open-ended mutual fund. This is a fund where the number of units is unlimited, and further units can be created according to demand from existing or additional investors.
Unsecured Pension see Income Drawdown
Valuations and Surveys
A Valuation is a report by a qualified valuer, detailing the estimated value of a property. Mortgage lenders use a valuation to ensure that a property offers sufficient security.
Variable Annuity see Pensions Annuity
Variable Rate Mortgage
A Variable Rate Mortgage is a mortgage whose interest rate changes according to fluctuations in the Bank of England Base Rate. Changes in the Base Rate can therefore increase or decrease the mortgage repayments.
Venture Capital Trust (VCT)
A Venture Capital Trust or VCT provides 30% upfront tax relief and invests in smaller UK companies. Shares in the VCT must be held for at least 5 years. If they are not, the tax relief must be repaid.
Volatility
Volatility is the relative rate at which the value of a security moves up or down. A security which moves rapidly up or down over short time periods has high volatility; the volatility of a security whose value changes more slowly is classified as low.
Waiver of Premium (WOP)
Waiver of premium (WOP) or ‘waiver benefit’ is a benefit where an insurer gives up its right to collect premiums, if the policyholder is disabled according to the insurer’s definition. The insurer then takes over payments of the premium on the policyholder’s behalf.
Wedding Exemptions see Inheritance Tax Exemptions
Whole-of-life Insurance
Whole-of-life Insurance is a life insurance policy which runs until the end of the policyholder’s life, and pays out upon his death. This contrasts with ‘term insurance’, where a policy runs for an agreed length of time, and then expires. Whole-of-life cover is more expensive than term cover, as it is certain to pay out.
With-Profits Annuity
A With-Profits Annuity is an annuity which invests your pension savings. As a result, your retirement income fluctuates according to the performance of those investments. Certain with-profits annuities provide a guaranteed minimum payment.
With-Profits Bond
A With-Profits Bond promises to repay the principal (capital invested) on a specified date (the maturity date). Interest is paid out regularly during the lifetime of the bond. With-profits bonds are popular with investors, as they tend to be cautious in their investment strategy.
