glossary

Glossary - A-Z of Financial Jargon

At Hunter Hammond Daniel Associates Ltd our aim is to make financial matters easy to understand and help you take control of your financial planning.

Here is our jargon busting A-Z.

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Additional Voluntary Contributions (AVCs)

These are regular or lump sum payments into your existing pension fund, which will enhance your final income on retirement. If you have a “final salary” scheme AVCs can be used to purchase “added years” and so increase your years of service with your employer to give you a bigger pension based on your final salary. Sometimes AVCs are invested to produce a fund available to increase the income at retirement.

AER - Annual Equivalent Rate

This is the hypothetical rate of interest that is always quoted in adverts for interest-bearing savings accounts. If an account pays interest more than once a year the AER is calculated by adding each interest payment to the deposit and then calculating the next interest payment, thus compounding the interest.

It is thus intended to demonstrate what your interest return would be if the interest was compounded and paid annually instead of monthly, bi-monthly, quarterly or half yearly. It is important to note that the AER is only a notional rate and will not necessarily reflect your actual cash return as certain assumptions are made in the calculation.

Gross AER is the rate of interest payable before the deduction of income tax. Net AER is the amount of interest payable after allowing for the deduction of 20% tax for basic rate taxpayers. AER normally excludes any bonus interest that may be payable, although not always, so be careful that you are comparing like with like.

Annuity

75% of a pension fund must be used to purchase an annuity upon the retirement of the policyholder. Annuities are sold by pensions providers and insurance companies and guarantee the policyholder an income throughout his or her retirement. When you buy an annuity you exchange a lump sum for income in the future. Unlike other investments, however, an annuity usually only pays out until you die although you can have an option for guaranteed periods.

The rate of income you receive from the annuity will depend on how much capital you have paid to the insurance company and how old you are. The younger you are the smaller the income you will receive, because the annuity provider will expect you to live longer. Similarly women will be offered lower annuity rates as they are expected to live longer.

With a “life annuity” the insurance company ceases the payments when you die and so you are taking a statistical gamble as to how long ou are going to live. Whereas with a “guaranteed” annuity the payments will be made for a fixed term regardless of when you die. You can also take out “joint life” annuities where the capital is handed over to the insurance company which then pays an income for the life of both spouses.

Annuity rates vary between providers and are influenced by the level of interest rates in the economy.

APR Annual Percentage Rate

This the rate that every lender is required by law to quote you and was introduced as part of the Consumer Credit Act of 1974. As such it is the best way to compare like with like, so always insist on being given it.

The headline quoted rate on a mortgage or a credit card states the rate of interest you pay per month or per year. However it is the APR figure (which is usually shown in brackets) which calculates the total amount of interest that will be paid over the whole term of the loan. The APR should also take into account any charges which the borrower has to pay.

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Base Rate

The base rate is the minimum rate at which banks are prepared to lend money and acts as the benchmark for other interest rates, including those for personal loans and mortgages. The high street banks' base rate changes following the Bank of England's signals through its daily money market operations. The central bank moves base rates by changing the dealing rates at which it buys bills from the discount houses.

Bid/Offer Spread

The difference between the buying and selling price of a share or unit trust. It includes an allowance for an initial charge, if there is one, plus the cost of making the investment.

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Capital Gains Tax, CGT

Is basically a form of Income Tax on the gains you made when you sell assets such as shares, works or art or a holiday home, for more than you paid for them.

You are allowed to make a certain level of profit each year before CGT is charged, this allowance is currently Ł7,700 [2002/2003 tax year]. Sales of certain assets are exempt, these include government securities, savings certificates, life assurance and your home (main dwelling property).

CGT affects about one in 500 taxpayers!

Capped rate mortgage

See mortgages – a guide to mortgages

Capped & collared rate mortgage

See mortgages – a guide to mortgages

Cash Plans

Are low cost healthcare schemes which, for a few pounds a week, will pay you a cash benefit if you need certain medical or hospital treatment. This can include cash towards dental or optical procedures, physiotherapy, hearing aids and in an outpatient hospital treatment.

CAT standard

This is the Government standard for ISAs intended to direct consumers towards a better value product. The standards are voluntary and some, but not all, product providers have chosen to apply them to some of their products.

The CAT stands for Charges, Access and Terms. All charges are set below a pre-set ceiling; easy access to your savings without penalty charges applying; and the terms of the contract are easy to understand and in plain English.

Please note that CAT standard product is neither approved by nor its performance guaranteed by the Government. It is up to you to decide if a product meets your savings needs and you independent financial adviser can help you in this also.

Collective investments

These are funds which take money from a number of private investors and pool it together to allow the purchase of a more diverse share portfolio under the control of a professional fund manager. Unit Trusts, Open Ended Investment Schemes and Investment Trusts are all examples of collective investments.

Company pension schemes

See Occupational Pension Schemes

Convertible term life assurance

See life assurance

Cooling off period or cancellation period

When you buy some investments and insurances you are given a period during which you can change you mind and have your money back. However, cooling off periods do not apply to investments you buy “off-the-page” in response to an advertisement or as an execution only customer.

Corporate bonds are debt obligations, or IOUs, issued by private and public corporations. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding the business.

When you buy a bond, you are lending money to the corporation that issued it, which promises to return your money, or principal, on a specified maturity date. Until that time, it also pays you a stated rate of interest, usually semi-annually. The interest payments you receive from corporate bonds are taxable. Unlike stocks, bonds do not give you an ownership interest in the issuing corporation.

Critical illness assurance

An insurance policy that pays out a lump sum if you are diagnosed with a specified life changing or threatening illnesses. Typical illnesses covered would be cancer, heart attacks, multiple sclerosis or a stroke, but many schemes now cover more than 20 conditions. Some schemes include cover for accidents that result in serious injury such as blindness, burns or coma.

The cost of critical illness cover depends on your age, sex, lifestyle, whether you smoke, any pre-existing medical conditions and the amount of money you wish to insure yourself for when a critical illness is diagnosed. Most critical illness plans are unit-linked, so your monthly premiums will be used to buy units in an investment fund where they will hopefully grow sufficiently in value to provide the sum assured.

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Defined benefit pension

See Final Salary Pension

Defined contribution pension

This is a type of occupational pension. The amount paid into the scheme is known while the final outcome of the scheme is not. The final amount the employee will receive depends on the investment performance of the money put into the scheme. The contribution levels are decided by the employer running the scheme and are normally a percentage of an employee’s salary. Each member on the scheme’s pension builds up an individual account within this fund.

Discounted or low start mortgages

See mortgages – a guide to mortgages

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Early redemption charge or withdrawal penalty

This is a charge made by your mortgage lender which is often payable on certain types of mortgage - usually discounted or fixed interest rate mortgages. The charge is only applied if the loan is redeemed or part-redeemed within the specified early redemption charge period.

Equity release scheme

These allow you to access money tied up in your home in old age without having to sell your property and move. The scheme provider either allows you to take out a further loan on your property or actually buys a proportion of your home in return for a regular income or a cash lump sum. When you die your property is sold to repay the loan and what is left over is passed on to your estate.

Ethical Investments

These are collective investments that try to invest in stocks and shares of companies that match certain criteria for either being useful to our world or that are specifically involved in environmentally based businesses.

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Family Income Protection

This is insurance designed to protect a partner and/or children in the event of untimely death. In the event of death the policy pays a regular sum or income from the date of death until expiry of the policy term. The contract does not contain any investment element.

Final salary pension

Also called a defined benefit scheme, this is a type of occupational pension. It calculates the amount of money that the employee will receive on retirement in advance. The pension increases in line with the number of years of service and the maximum it pays out is two thirds of the final salary. Fewer employers are, however, offering this type of scheme.

Fixed rate mortgages

See mortgages – a guide to mortgages

Flexible mortgage

See mortgages – a guide to mortgages

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Group personal pension schemes, GPPs

A group personal pension is basically a cluster of individual personal or stakeholder pensions rather than a shared fund as with an occupational pension scheme.

The advantages of GPPs are:

Flexibility – if you change jobs you can take your pension with you.
You own your own investment fund and therefore know exactly what is in it.
Charges of running a GPP ought to be lower than having your own personal pension scheme because of the economies of scale that the pension provider will have.

Income protection (IP) or permanent health insurance

This type of insurance will typically replace 50% of your income tax free if illness or disability leaves you unable to work. Unlike critical illness cover, benefits are paid on any condition that leaves you unable to do your job.

Independent financial adviser, IFA

An intermediary who can find the most suitable financial products for you, be it an investment, mortgage, pension or protection product. They have access to all the products in the market and are not committed to the products of any one provider.

These are advisers who can either offer you a full range of products from all the financial services companies on the market, or from a panel of companies they believe to be the best in the market.

In carrying out their business IFAs must observe some key principles. They must 'get to know their client' by asking for sufficient information so as to be in a position to form a comprehensive overview of his/her needs. This 'fact find' as it's sometimes called seeks to put the adviser in a position of knowledge so that he will be able to offer 'best advice'.

The adviser will then select products from the whole market, or from a panel of companies that he believes to be the best in the market. There is some cynicism among professionals, journalists and some of the general public about which products are offered as the adviser may be remunerated by commission from the insurance or other investment company who's products he is selling. For example, life insurer, Equitable Life doesn't pay commission to middlemen, nor does the Department of National Savings whose savings products are sometimes appropriate.

An independent financial adviser has to make clear to clients how he is being remunerated - is he receiving commission, or is he, instead charging you by the hour.

If the IFA is charging a fee, he must give you full details of the charges at the outset and state clearly at what stage they will begin charging or 'start the meter'.

Since the beginning of 1995, the introduction of 'hard disclosure' obliges IFAs to give customers full details of any commission they receive on the policies/investments they recommend as well as the level of charges. All independent financial advisers must contribute to the industry wide compensation scheme.

Individual savings account (ISA)

An ISA is a tax free "container" for collective investments, insurance plans, shares or deposit accounts. The main features of the ISA are that you are able to put Ł7,000 per annum into the plan (at least until tax year 2006-2007) of which no more than Ł3,000 can go into cash and Ł1,000 into life insurance. Alternatively you can put your whole Ł7,000 annual ISA allowance into shares, unit trusts or investment trusts.

Inheritance tax (IHT)

A tax chargeable on death of UK residents which applies to inherited assets worth more than Ł250,000. Above this amount tax is payable on the excess at 40%.

Interest only mortgage

See mortgages – a guide to mortgages

Investment bonds

A life assurance policy paid by a single one-off investment into an asset-backed fund. Interest is paid at an agreed rate and the investment plus growth is returned at the end of the term. There can be attractive tax benefits with investment bonds.

Investment Trusts

These are companies that invest in a diverse range of shares. As with an OEIC you invest in the investment trust itself, whose shares are traded on the stock market and are hence subject to its fluctuations.

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Keyperson or Partnership Protection

This is life assurance and/or critical illness and/or health insurance designed to protect surviving business partners or shareholders and directors against the financial implications of a premature death of a key partner or director.

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Level term life assurance

See life assurance

Life assurance

Life assurance policies pay out a lump sum on the death of the policyholder, who will have made regular (monthly) contributions throughout the term of the policy. They can be used to provide protection to the policyholders family or to pay off mortgages and other loans upon his or her death. There are a number of types of life assurance policy:

Level term is for a fixed term, contains no investment element and pays a lump sum in the event of death during term of the policy.
Whole of life as the name implies provides life cover without imposing a limited term. The level of life cover chosen will be paid out on death of the life assured whenever it occurs, as long as the policy is in force at the time of death. Such policies offer long term protection, and can be put in a Trust to avoid Inheritance Tax.
Convertible term is similar to level a term assurance policy with one distinct difference. It may be converted into an endowment or whole of life policy regardless of the state of health of the insured. Clearly, this is a valuable facility. Higher premiums are usually paid for this type of life assurance compared with level term assurance.
Renewable term allows the policy to be replaced with a new plan at the end of its term, regardless of state of health.

Long term care insurance (LTCI)

A TTCI policy will cover your care costs during old age, whether you are receiving care in a residential home, nursing home or in your own home. It allows you to protect assets such as your house, investments and savings, which may other wise have to be realises to pay for care.

Long term care bonds

These are an alternative to LTCI and are where money is invested in a bond that will meet your care costs. If you do not need care, the money is returned to your estate when you die, but, due to this, bonds are more expensive than insurance.

long term care assurance

Protection policies that are designed to cover your costs in old age whether you are receiving care in a residential home, nursing home or in your own home.

Low start or discounted mortgages

See discounted mortgages.

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Money purchase pension schemes

These are pension schemes where you save over a period of time for your retirement to build up a pension fund. Your contributions and those of your employer, if they pay into your scheme, are invested and should grow in value during the period until your retirement.

When you retire a portion of this fund can be taken as a tax-free lump sum and the remainder used to buy an annuity. This provides you with an income to live off for the rest of your life.

Mortgages - a guide to mortgages

A mortgage is a loan taken out to buy a property, with lender making the loan on the basis of the property as security. The lender will offer to loan up the 95% of the properties value, although in some cases a 100% will be advanced, but most charge lower interest rates with a larger deposit. You may usually borrow up to three times the first income plus half of the second income, or two and a half times joint income. Also if you borrow over 75% of the value of the property you may have to pay insurance or mortgage indemnity to protect the lender against you not paying the mortgage. The rate of interest we pay on the loan is based upon the base interest rate set by the Bank of England.

When taking out a mortgage there are a number of additional expenses, which include a valuation fee, solicitors fees and the mortgage indemnity.

Types of mortgage:

A Repayment Mortgage is one where you pay off part of the capital each month as part of your regular monthly payment. The amount of capital paid off each month usually increases as you get towards the end of the mortgage term.

An Interest Only Mortgage is one where your monthly payments cover only the interest on the loan amount. You then need to repay the loan amount separately. This can be done by a separate investment, such as an ISA, endowment policy, PEP or pension, or a combination of these.

A Flexible Mortgage is one that allows you to vary your monthly payments, giving the borrower the option of underpaying or overpaying, without any penalty, depending upon their financial circumstances or needs. Flexible mortgages also allow the borrower to consolidate his or her borrowings in a single account, often with a chequebook provided. Bank loans, credit card loans and overdrafts can all get lumped in with the mortgage with the advantage that you only pay a single interest rate.

Types of interest rate:

Variable Rate - This is the standard interest rate of the lender. This rate will change whenever the lender alters its lending rate, going up or down depending upon the rate of the Bank of England. There can be quite a difference between the variable rates of the various lenders and it is worthwhile shopping around.
Discounted Rate - This is where the lender specifies a discount off the variable rate for a given period of time. During this period the rate payable will vary whenever the lender changes its variable rate and the discount will be taken off the new rate. When the discount period ends the rate payable usually reverts to the lender's variable rate. The borrower usually has to agree to stay with the lender for a set period of time or face a withdrawal penalty or early redemption charge.
Fixed Rate - Fixed rate mortgages have the interest rate on the loan fixed for a period of time. They thus guarantee borrowers that their mortgage payments will be for a set period of time. The borrower is protected from any upward swing in mortgage rates, but also does not benefit from any downward movement. Fixed rate deals often involve the borrower agreeing to a withdrawal penalty or early redemption charge if they decide to pay back the mortgage before the agreed period.
Capped Rate - This is a mortgage where an interest rate is charged in line with current prevailing rates, but the borrower is given a guarantee that the rate will not exceed a certain amount. Such offers are usually limited for a period, two or three years. The advantage to the borrower is their mortgage rate can fall but there is a limit to how high it can rise. At the end of this period the interest rate will revert to the lender's variable rate
Capped & Collared Rate - This is where the interest rate is will not exceed a maximum rate (cap) or fall below a minimum rate (collar) for a fixed period. At the end of the period the rate reverts to the lender's variable rate.

Mortgage Indemnity Premium

This is an insurance policy designed to protect the lender against your failure to pay your mortgage. The policy is paid for by the borrower, but is for the benefit of the lender, covering any loss they may risk if they have to repossess your property and sell it, possibly at a loss. Indemnity premiums are often taken as a one off payment when the loan is taken out.

Mortgage Offer

This is the document issued by the lender to the prospective borrower following approval of the mortgage application. It sets out the terms & conditions on which the mortgage is being made available.

Mortgage Payment Protection Policy

This is an assurance policy, the most basic of which, pays your mortgage payment in the event of you losing your job. Additional cover is also available, to cover such risks as accident, sickness and longer-term unemployment.

Mortgage Protection Policy

This is a life insurance policy to protect the outstanding capital of a repayment mortgage, the amount assured decreases as the capital outstanding on the mortgage decreases. This is different to a Mortgage Payment Protection Policy which protects the outstanding loan if you were to lose your job.

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National Savings are a range of savings products that are issued by the Government and are hence very low risk, offering total security on any capital invested. There are a number of different products such as Income Bonds offering a regular income and National Savings Certificates offering tax-exempt capital growth.

Negative Equity

This is the term for when the value of an asset, for example your home, falls below the amount of the loan you have taken out to buy it.

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Occupational pension or company pension

See pensions - company schemes

OEICs or Open Ended Investment Companies

OEICs are open-ended collective funds similar to unit trusts where the investors' money is collectively invested into a wide range of investments. With an OEIC you buy shares in the company managing the fund instead of buying units.

The investments making up the fund of the OEIC are valued and each share represents an equal part of the investments. The company takes an annual management charge to pay for its expenses in administering the fund.

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Payment Protection Insurance

See mortgage payment protection

Pension Mortgage

Self employed people or those with a personal pension plan or stakeholder pension can link their mortgage to a pension plan. At the end of the term, part of the tax free lump sum of the pension fund is used to repay the outstanding capital.

Pensions - company schemes

Executive plans for directors have the advantage of being "defined benefit" or "final salary" schemes, the level of contributions being linked to the final salary of the contributor. The pension to be paid can be up to two thirds of the final salary of the director, meaning that contributions can be made to ensure that this is payable at the time of retirement. All pension contributions are subject to tax relief at the highest rate payable.

Small self-administered schemes or SSASs are similar to SIPPs only they are for directors of companies. They allow the pension fund to purchase and hold assets on behalf of the company and also attract tax relief at the highest rate payable.

Occupational schemes or company pensions are set up and run by employers for their employees. Either the employer or the employee or both contribute to the scheme on a monthly basis. At present you do not have to join such a scheme, but it is often advisable to do so as the employer will be responsible for many of the costs for setting up the plan and many such plans have additional benefits such as life assurance.
- Traditional occupational schemes have a major disadvantage in that the pension does not belong to the employee and it is not portable, so you cannot take it with you if you change jobs, unless they are within the same company.
- Group Stakeholder pension plans for employees are now the most popular type of occupational pension scheme because of their low charges, flexibility and portability. Each employee within the scheme has his or her own individual pension and if they leave the company they can take their pension with them without any financial penalties.

Important note for Employers: Recent Government legislation dictates that employers who employ over 5 staff are obliged to provide access to a stakeholder arrangement via the workplace, unless they have an existing pension scheme in place that meets the criteria set by the Government.

Pensions -individual schemes

Stakeholder Pensions are personal pension plans that meet certain statutory requirements set by the Government. For example the provider's charges may not exceed 1% per annum and there can be no transfer penalties or exit penalties. The minimum you can contribute is Ł20 as either a single, annual or monthly premium. Anyone can take out a stakeholder pension, whether or not they are employed. Stakeholder pensions are "defined contribution schemes", the level of contributions being strictly determined by factors such as the level of earnings and age of the contributor.

Contributions are limited to Ł3,600 per year, unless you have relevant earnings which do not have a pension arrangement. Depending upon your age you can contribute between 17.5% and 40% of your salary. All contributions benefit from being exempt from tax at the rate applicable to the policyholder.

Personal Pensions are also an option if you are self-employed or if your employer does not run a company scheme. The personal pension plan charges the individual for setting up the plan and these charges may be significant, especially if you have to stop or suspend payment of premiums or change the selected retirement age that you originally gave.

Self invested pension plans or SIPPs are available to the self-employed and allow the owner to make his or her own investment decisions and place different assets within the pension fund. The fund can thus contain shares, unit trusts, property etc. all of which benefit from the pension's tax exempt status.

PEPs or Personal Equity Plans have been superseded by ISAs and you can no longer invest into them. You can, however, still transfer an existing PEP from one manager or fund to another without losing the tax benefits or your current ISA entitlement.

Permanent health insurance or income protection insurance

See income protection insurance

Personal Pension Schemes

See pensions - individual schemes

Private Medical Insurance

Private medical insurance is designed to pay the cost of treatment for any medical condition which falls within the cover taken out. This can include surgery such as coronary by-passes, hernia repairs and hip replacements. Private medical insurance is unlikely to cover long-term illnesses or degenerative diseases brought on by old age. Self-inflicted conditions such as suicide attempts, drug or alcohol abuse are not covered, nor is AIDS

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Redemption

This has a strict legal definition and in plain language means that once the borrower finishes repaying his or her mortgage loan, the property then belongs to them.

Remortgage

Simply put this is the replacement of an existing mortgage with a new one. It may be done for a number of reasons, often to get a better interest rate or better terms from the new lender.

Renewable term life assurance

See life assurance

Repayment mortgage

See mortgages – a guide to mortgages

Retirement pension

A specified sum paid to an individual by the State when they have reached a certain age or have retired from full-time employment. The normal retirement age is 65.

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Second mortgage

This is a further mortgage taken out on a property where there is already a mortgage. Also called a secured loan.

State Pension

This is currently Ł75.50 per week for a single person and is available for those people who have worked and paid a sufficient number of National Insurance Contributions.

SHIP (Safe home income plans)

A market benchmark aimed at raising standards of equity release schemes. All providers that are members of SHIP guarantee that customers will not face negative equity if they take out their plan.

Shares

Companies listed on the stock exchange are divided up into shares which can be bought and sold. Each share give the owner a legal right to company profits, known as dividend and also, sometimes, voting rights on company decisions.

Self administered pension plan, SIPP

See pensions – individual schemes

Stamp duty

Stamp duty is a government tax levied on certain legal transactions including the purchase of property. If you buy a home for more than Ł60,000, stamp duty is payable.

State earnings related pension (S2P)

State pensions are augmented by S2P, which relate pensions to inflation, and ensure that men and women are treated equally. Employers can contract out part of the State pension and replace it with an occupational pension scheme, and they can also contract out of S2P if they set up their own personal pensions scheme.

Stakeholder pension

See pensions – individual schemes

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TESSA – Tax Exempt special savings account

A TESSA is a five-year savings accounts which enable you to receive interest tax free. It has not be possible to start new TESSAs Since 5 April 1999, although exisiting ones can continue to run to maturity.

Tracker Funds

These are collective investments, which try to follow and track a particular financial index, such as the FTSE 100. Some tracker funds invest in the same shares as the index they track and some invest in 'derivatives' such as options and futures to mimic the movement of the index they follow.

Trusts

This is an arrangement whereby property is held by a person or people (known as trustees) on behalf of another person or group of people (known as beneficiaries). Although the trustee is the legal owner of the property the beneficiary has an equal share in it.

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Unit trusts

An investment fund managed by a fund manager made up of a portfolio of different shares that allows individual investors to buy unit in it. Small investors can get exposure to a diverse range of holdings and risk that an investment of this size would not normally allow.

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Variable rate mortgages

See mortgages – a guide to mortgages

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Whole of life assurance

See life assurance

Will

This is a document that contains someone’s instructions relating to the disposal of someone’s assets after their death. To be legally binding it must be signed by the person (testator), or under instruction from them and in their presence. It must also be witnessed and signed by two people who are not beneficiaries of the will.

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