Calculators

Jargon translator

We try to avoid using financial jargon as much as possible. However, in the financial services industry there are some technical terms which are unavoidable. We hope this glossary helps clarify their meaning.

Absolute return funds: 'Absolute return funds' typically target a higher rate of return than cash investments and aim to provide positive returns regardless of market conditions. These funds can invest in a wide range of assets and use different investment strategies. They can include derivatives as well as short or long positions. This means the fund may benefit when an asset falls as well as when it rises.
Accumulation shares: A type of share offered by an OEIC fund. ‘Accumulation shares’ refers to the fact that any income earned by the shares is kept in the fund to accumulate. The fund price then reflects the fact that this income is automatically reinvested. If you’re investing for income, you should consider funds offering ‘income shares’ instead. Also see Income Shares.
Active management: Active fund managers seek to add value by aiming to outperform the stockmarket or chosen benchmark. They aim to achieve this by making decisions (buying, selling or holding) on both the types of assets and the specific asset itself.
Actuarial services: Actuaries analyse past financial data and potential future events in order to determine the probability of certain events. Financial provision can then be made on the basis of the calculated probability.
Administration Services: Day-to-day services are required to administer financial contracts. These could be life assurance or pensions contracts or pure investment vehicles.
Alternative assets: ”Alternative assets” is a generic term used to describe assets other than the main asset classes - equities, bonds, property and cash. They can include commodities and private equity.
Alternative investment strategies: “Alternative investment strategies” can refer to strategies used by fund managers other than the traditional long-only approach. These can include short-selling and the use of derivatives, in an attempt to enhance return and/or reduce risk. Hedge funds and absolute return funds often use these strategies.
Annuity: This is a plan which provides a person with a regular taxable income in exchange for a lump sum payment. They are usually paid out until death or for a minimum period of time. An annuity can be bought with the total value of your pension pot at retirement (a pension annuity) or with any other lump sum (a purchased life annuity).
Asset allocation: This refers to how invested money is distributed across different asset classes, industry sectors, and geographical regions. Asset allocation should reflect the investment objectives of a fund and the degree of risk the investor is prepared to take. It’s important to get investment asset allocation right, as returns on investment rely heavily on this. Also see Diversification.
Asset class: Asset classes comprise distinct types of investments. The four main asset classes are equities, bonds, cash and property. Also see Asset allocation and Diversification.

Base rate: This is the interest rate set by the Bank of England’s Monetary Policy Committee. It is usually the minimum rate at which banks are prepared to lend money. The interest rates on most loans are expressed in terms of a certain percentage over (or occasionally under) the base rate.
Bond: This is a type of investment offered by governments or companies. Effectively investors ‘lend’ a government or company money over a set period for an agreed rate of interest with the loan due to be repaid to the owners of the bond at the end of the term. The interest rate may be fixed (a fixed interest bond) at the outset or index linked (e.g. to the Retail Prices Index). The interest rate will depend on, for example, the duration of the loan and the level of risk involved. Also see Corporate bond and Gilts.

Capital gains tax (CGT): This is a tax charged on the net gain made by selling certain assets e.g. a business, a second home or shares. Everyone is allowed to make a certain level of profit each year before capital gains tax is charged. For individuals this annual exempt amount is £10,100 in the 2009/10 tax year. Once your overall gain is more than this threshold, CGT is normally charged at a flat rate (currently 18%). If you don’t use your annual exemption in any year, it is lost. You cannot carry it forward to future years. Gains made in ISAs and UK Government bonds are exempt from CGT. Any profit made on the sale of your main home is also exempt. CGT applies on disposal of an asset – this could be a sale, a gift, or an insurance payment if the asset was destroyed, say in a fire.
Commodities: This is an alternative asset class that include precious metals such as gold, non-precious metals such as iron, agricultural products such as corn, and energy products such as oil and natural gas. Commodity markets tend to behave differently to bond and equity markets, thereby providing diversification.
Company pension scheme: This is a pension scheme set up by an employer to provide employees with retirement benefits such as an annuity and, in many cases, a tax free lump sum. Both the employer and the employee may make contributions into the scheme. Company pension schemes are also known as occupational pension schemes.
Confirmation: See Probate.
Contracting Out: Is opting out of the State Second Pension and will provide Protected Rights. Also see Protected Rights.
Corporate bond: This is a bond issued by a company. Also see Bond.
Corporation tax: This is the tax on income and capital gains earned by companies and some organisations such as trade and housing associations. It is not payable by the self-employed.
Credit ratings: Credit ratings are an assessment of the probability that a company or government will honour repayment of the loan it received in respect of any bonds that it has issued or make the interest payments. Independent providers of credit ratings include the widely quoted Standard & Poor’s, whose ratings range from AAA (best) to D (worst).
Critical Illness Cover: A type of life insurance which pays a cash lump sum on diagnosis of one of a range of specified critical illnesses during the term of the policy.

Defined benefits: This describes the retirement benefit provided by occupational pension schemes. With these schemes the pension benefit is related to pensionable service, pensionable salary (either final salary, or career average earnings) and whether the employee retires at the agreed normal pension age.
Derivatives: A derivative is a financial instrument whose value is derived from underlying assets such as equities or bonds. The value of a derivative is therefore affected by movements in the underlying assets. Examples are futures, options and warrants. Typically, they are used only by professionals.
Dilution adjustment: An adjustment which might be made to the share price of a fund, for example an OEIC, when there are large amounts of cash going into or coming out of the fund. The adjustment reflects the difference between the buying and selling prices of the investments of the fund and any costs incurred, including taxes.
Diversification: Refers to the practice of investing in a range of different asset classes that perform differently in any particular set of market conditions, with the aim of spreading the overall risk of investing.
Dividends: These are the part of a company’s net profits after tax which are paid to shareholders. Dividends are made at the discretion of the director(s) and are not guaranteed.

Equities: Equities is another name for shares in a company. Holders of equities are entitled to receive a share of any dividends distributed by the company out of net profits. They also have voting rights at the AGM.

Final salary pension: See Defined Benefits.
Fixed interest securities: See Bond.
Futures: A future is a contract under which the owner agrees to buy or sell an asset at a fixed price at a fixed date in the future. A futures contract is transferable and can therefore be traded like a security.

Gilts: These are bonds issued by the UK Government to raise public funds. They are usually relatively safe and secure investments (leading to the term ‘gilt-edged’) but they are not entirely without risk. Also see Bond.
Guaranteed Minimum Pension (GMP): Guaranteed Minimum Pension (GMP) is the minimum pension which an occupational pension scheme has to provide for those employees who were contracted out of the State Earnings-Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997. The amount is said to be 'broadly equivalent' to the amount the member would have received had they not been contracted out. Also see Contracting out.

Hedge funds: Hedge funds are investment funds, which are not generally made available to the public, that are permitted to undertake a wider range of investments and trading activities than other types of investment fund. Hedge funds can use a wide range of investment approaches. For example they can use short positions which mean they can benefit when an asset price falls or use long positions which benefit when assets rise in value. The can use derivatives or can borrow money which is then used to generate returns.

Income shares: A type of share offered by an OEIC fund which could provide you with a regular pay-out of income. If you’re investing for growth, you may want to consider funds offering ‘accumulation shares’ instead. Also see Accumulation shares.
Index tracker: An investment fund that follows the make-up of a market index, such as the FTSE 100 Index. While the value of the investment will go up and down in line with the index that it aims to match, the value of the fund won’t exactly match the index it tracks. This could be, for example because of various expenses associated with running a fund or if the fund has purchased just a representative proportions of stocks in the index.
Individual Savings Accounts (ISAs): These are potentially tax-efficient savings plans. There are two types of ISA – cash ISAs and stocks and shares ISAs. Different investment limits apply to each of these. No personal tax is payable by the investor on any interest or net dividend arising in the fund. No capital gains tax is payable by the investor on any gains realised when the investment is cashed in.
Inflation: When prices of a selected group of items are going up, the rate of increase in prices is the rate of inflation. The rate of inflation depends on the range of goods measured. Inflation results in a reduction in the purchasing power of money. Conversely, deflation results in an increase in the purchasing power of money.

Life Assured: The person covered by a life cover policy.
Life Cover: Life insurance which pays a cash lump sum on death during the term of the policy. It’s usually taken out with a mortgage to provide money for the loan to be repaid if the borrower dies during the term.
Long positions: “Long positions” are the traditional method of investing – where an asset is purchased in the expectation that its price will rise in value.

Money market instruments: These are short term, tradeable, cash-type investments. They include, for example, Certificates of Deposit, Commercial Bills and Treasury Notes.
Multi-asset investing: This is a way of increasing diversification by investment in several types of assets which have different performance characteristics.
Multi-manager investing: This is a way of increasing diversification by accessing several fund managers through one fund.

Non-Protected Rights: The amount of your pension pot that has come from contributions paid by you, an employer, or someone of your behalf (for example a grandparent) is known as non-protected rights. This may include regular contributions, single payments and the Non-Protected Rights part of a transfer from another pension scheme. Payments from opting out of State Second Pension (S2P) are known as Protected Rights.

Occupational pension: This is a pension scheme set up by an employer to provide employees with retirement benefits such as an annuity and, in many cases, a tax free lump sum. Both the employer and the employee may make regular contributions into the scheme. Occupational pension schemes are also known as company pension schemes.
Open-Ended Investment Companies (OEICs): These are collective investment schemes, also known as Investment Companies with Variable Capital (ICVCs), which allow investors to pool their money, with the aim of diversifying investments and reducing risk associated with direct stock market investments, while benefiting from professional fund management. An OEIC is structured as a company and may be made up of a number of sub funds, each of which may cover a different investment objective, asset class, risk profile or market sector. The value of an OEIC fund is usually calculated on a daily basis and the value, when divided by the number of shares in the OEIC fund, then sets the daily price for each share.
Options: An ‘Option contract’ gives an individual the right to buy or sell a fixed amount of an asset, such as an equity or bond, at a future date. There is no obligation on the holder to do this (hence ‘option’).

Passive management: Unlike an active approach (see Active management), passive investment managers do not make decisions on markets and stock selection, or form views on market movements. They simply aim to match their given benchmarks. Examples of passive management include index tracking funds (for instance a fund designed to track the Financial Times Stock Exchange 100 Index) or where the aim is to follow a peer group or other benchmark’s neutral position to provide the investment mix of the fund.
Personal Equity Plan: The forerunners to ISAs, PEPs were designed to offer a simple, flexible and potentially tax-efficient way for individuals to invest in the stock market. They were available for new investment between January 1987 and 5 April 1999. On 6 April 2008 all PEPs were automatically reclassified as stocks and shares ISAs and became subject to ISA rules.
Portfolio: A spread of investments held by an individual or a fund.
Private Equity: Private Equity is a shareholding in a company which isn’t quoted on a stock market. This may be a company that is at an early stage of development and so offers the potential for strong earnings growth (with increased risk). Or it could be a private family company. The company may never have been listed on the Stock Exchange or shares may never have been issued to raise capital.
Probate (England and Wales): ‘Getting probate’ refers to the process of securing clearance to deal with the assets of someone who has died. This process ensures that any liability to inheritance tax is assessed and paid, before the remaining assets are distributed in accordance with the deceased’s Will or the intestacy rules. The equivalent in Scotland is Confirmation.
Protected Rights: If you are contracted out of the State Second Pension (S2P) – previously known as SERPS – you must use that part of your pension fund to buy a ‘protected rights annuity’. The annuity rates will be the same for both men and women and if you are married, you will have to buy a joint-life annuity. Also see Contracting out.

Retiral quote: This is sent to a member of a pension scheme as they approach retirement. It shows the current value of their pension fund, and quotes the amount of annuity that could be purchased with that pension fund. It is typically issued a few weeks prior to the planned retirement date.

Securities/Stocks: General terms to describe shares or bonds.
Self-Invested Personal Pension (SIPP): SIPPs are a tax-efficient way of holding a range of investments under one pension wrapper, offering greater flexibility and investment choice than an ordinary personal pension plan.
Share price: refers to the cost of buying shares, for example, in companies on the stock market.
Shares: Shares represent ownership in a company or fund. Shares generally give the holder a fraction of the decision-making power, and potentially a fraction of the net profits, which may be issued as dividends. The value of a share is based on how a company or fund is performing at any given time and, in the case of company shares, how much in demand they are – this is why share prices fluctuate.
Short positions: A Short position is an investment approach which involves selling an asset which isn’t possessed. This is done in the expectation that its price will fall so that it can be bought at a lower price. Short positions are generally considered more risky sophisticated investment strategies.
Stakeholder pension: This is a type of low-charge pension plan, introduced in 2001 to encourage people on lower incomes to start saving for retirement. By ensuring they must meet a number of minimum government standards they offer value for money and flexibility.
Stamp duty: a tax on certain financial transactions including the purchase and/or transfer of shares. This is currently charged at 0.5% of the amount paid. Gilts and corporate bonds are currently exempt from stamp duty.
Stamp duty reserve tax (SDRT): we may be liable to stamp duty reserve tax on some of our OEIC funds. This is normally a tax incurred when shares in the fund are cashed in, and is paid for out of the value of the fund. However, the payment of SDRT may also be required on large investments or encashments, or on a transfer between third parties, in which case we may deduct it from the amount invested or from what you get back, and pay it back to the fund to offset any tax charge.
State pension: This is the main pension benefit you will receive from the Government at State Pension age. In order to receive the full basic State Pension you must pay, be treated as having paid, or have been credited with National Insurance Contributions (NIC) for a certain proportion of your working life. The State Pension age is 65 years old for men and 60 years old for women. However, the State Pension age for women is changing - it will rise gradually from age 60 to 65 from 2010 to 2020. The state pension age for both men and women is to increase from 65 to 68 between 2024 and 2046..
Stock exchange: This is a place where stocks and shares are bought and sold.
Sum assured: For life assurance policies with no investment element, this is the amount that will be paid out on the death of the life assured during the policy term. For life assurance policies with an investment element, the amount payable will be the higher of the policy value immediately before the date of death and the sum assured. For investment bonds, the sum assured is normally equal to 101% of the policy value immediately before the date of death.

Terminal illness: This is an advanced or rapidly progressing incurable illness where, in the opinion of an attending consultant and our Chief Medical Officer, the life expectancy is no greater than 12 months.
Transfer value analysis: This refers to the analysis of the amount that a pension scheme may transfer when a member leaves. This amount can either be transferred into a new scheme, or be used to purchase a buy-out policy. ‘Analysis’ refers to the process of deciding whether or not it’s beneficial for the member to transfer.
Trust: A trust is a way of giving away something of value (the asset) for the benefit of others (the beneficiaries) but without giving them full access to and control over the asset. The asset can include property, shares and money as well as life insurance policies. When placing the asset in trust the life assured specifies who they want to be a beneficiary and who they want to look after or control the trust asset (the trustees).

Underwriting: This is the term we use to describe the process by which we assess a protection policy application to decide whether the amount of cover that has been applied for and the premium for this cover are reasonable based on the information which has been provided on the application form.
Unit trusts: Unit Trusts are collective investment schemes which allow investors to pool their money while benefiting from professional fund management, with the aim of diversifying investments and reducing risk associated with direct stock market investment. This shared portfolio is divided into individual units which can be bought or sold by investors (hence ‘unit’ trusts).

Venture Capital Trusts (VCTs): A VCT is a type of private equity trust established by the government to encourage investment in high-risk, small, young companies. They have traditionally offered lucrative tax concessions to attract risk capital from higher rate taxpayers.

Warrant: Gives the holder the right to buy a specified number of shares in a company at a fixed price at some agreed future date. They are commonly issued in conjunction with a bond but are often split-off and traded separately. They are not for the inexperienced investor.
Wind-up services: This refers to the process of terminating an occupational pension scheme. It normally occurs when an employer decides it no longer wishes to make the required level of contribution to its scheme (for example on the grounds of cost) or is no longer able to do so (it may, for example, be insolvent). The merger or take over of companies is another common reason for pension schemes to wind-up.