A Glossary of Important Financial Terms

Please note that this list is not exhaustive. Definitions are kept brief for clarity, in some cases the detail is more nuanced.

Absolute Trust

 A type of trust in which the beneficiaries are named. They can be more efficient but legally entitle the beneficiaries access to the trust assets at 18.

Active Investing

 Investing in a fund or funds that are selective about the shares or bonds invested in on the expectation that it will provider higher returns or more income than investing in an index. The OCF tends to be higher than index investing as a result. Read more here: https://neliganfinancial.co.uk/an-emoji-guide-to-active-vs-passive-investing/

Annual Allowance

 The maximum that can be contributed to a pension in a tax-year to receive tax-relief. Currently, the lower of £40,000, 100% of earnings or £3,600. The maximum is after the addition of basic rate tax-relief. See also carry-forward.

Annual Management Charge (AMC)

 The annual cost for a pension or investment product. Typically expressed as a %.

Annuity

 A guaranteed income, payable for life purchased with the value of a private pension. The capital value of the pension is given up and the income ceases on death or at the end of a guaranteed period if selected. Or second death for joint life annuities

Asset Class

 The collective term for a category of investment. For example, shares, bonds, commodities, property.

Beneficiary/Beneficiaries

 Individuals or class of individuals (e.g. spouse, children, grandchildren) who are entitled to the assets of a trust.

Benefit Crystallisation Event

 A point at which the value of a pension fund is tested against the Lifetime Allowance. Typically the commencement of a pension income or receipt of a tax-free lump sum but also includes reaching age 75 and death. See also Crystallisation.

Bonds (Government & Corporate)

 Loans by investors to governments or companies to fund projects. Investors are provided with a fixed interest payment for the term of the loan and the expectation of the return of the capital at the end of the term. Capital is at risk. Read more here: https://neliganfinancial.co.uk/what-are-bonds/.

Carry-Forward

 The ability to use previous years unused pension annual allowance. It is only possible to go back three tax years and only when the current year’s annual allowance is used in full.

Chargeable Lifetime Transfer (CLT)

 The payment of capital into a discretionary trust that may be subject to inheritance tax. If a CLT or total number of CLTs made in 7 years are below the nil rate band IHT is not liable.

Crystallisation

 The commencement of pension benefits, either by taking the tax-free lump sum and/or an income payment.

Death Benefits

 The provision of capital and/or income from a pension scheme to a surviving dependent or, in the case of income drawdown, anyone.

Defined Benefit/Final Salary Pension

 A company sponsored pension scheme that provides a guaranteed income in retirement. The level of income payable in retirement depends upon years of service, earnings and the accrual rate for the scheme.

A tax-free lump sum is also available either in addition or with a reduced ‘commuted’ income.

Discretionary Fund Manager/Management

 An investment service in which changes to a portfolio are made on behalf of the investor without the need for their express approval. Adds an additional layer of costs onto the overall cost of an investment or pension.

Discretionary Trust

 A type of trust in which the trustees have the discretion over who benefits are paid to (beneficiaries) and when. They the settlor (person(s) making the gift more control, but they can be less tax efficient. See also Chargeable Lifetime Transfer

Diversification

 Reducing investment risk by spreading a portfolio across different asset classes and indices. I.e. not having all your eggs in one basket. Read more here: https://neliganfinancial.co.uk/an-emoji-guide-to-diversification/.

Drawdown

 See Income Drawdown

Equities

 See also Shares

ESG

 Investing in funds or companies that are screened on their Environmental, Social and Governance credentials. A type of Sustainable or Responsible investment.

Ethical Investing

 Investing in line with your values. The avoidance of investing in companies or sectors that are incompatible with your values (negative screening). For example, animal testing, tobacco, arms dealing, gambling or adult entertainment. Or, only investing in companies that are compatible with your values (positive screening). See also impact investing, ESG, Sustainable Investing and Responsible Investing.

Fixed Interest Securities

 See Also Bonds (Government & Corporate)

Flexi-Access Drawdown

 Taking the tax-free lump sum and/or income from a pension pot on an ad-hoc or regular basis whilst keeping the fund invested. See also Income Drawdown.

FTSE 100

 The largest 100 listed (public) British companies. See also index and shares.

Fund

 An investment vehicle that pools investors money to invest in different assets (e.g. shares, bonds or commodities) with a specific objective. Available within ISAs, pensions or General Investment Accounts.

General Investment Account

 An investment that is subject to capital gains and tax on dividends and interest. Used to invest in a fund(s) or individual shares or bonds.

Impact Investing

 Investing with the intention of having a greater positive effect on the environment or society. A stage on from ESG investing, the positive effect is deemed to be of greater importance than the cost of investing or financial return. Another version of Sustainable or Responsible investing.

Income Drawdown

 A withdrawal of regular or ad-hoc income from a pension fund. More commonly referred to a ‘drawdown’ or ‘flexible drawdown’. Only available after the minimum pension age; currently 55 but rising to 57 in 2028.

Distinct from an annuity because the pension remains invested. Capital is at risk.

Index Investing

 Investing via a fund in every company in an index, such as the FTSE 100 or S&P500. It is typically a lower-cost way to invest than active investing. Read more here: https://neliganfinancial.co.uk/an-emoji-guide-to-active-vs-passive-investing/

Index/Indices

 A group of publicly traded companies all listed on the same stock exchange. The companies are listed according to their size (market capitalisation; the total value of their shares). For example, the FTSE 100 or S&P500.

Individual Savings Account (ISA)

 A tax-efficient investment that is free from income and capital gains tax. Subject to an overall maximum contribution of £20,000 in a tax year, there are different types with different limits: Cash ISAs, Junior ISAs and Lifetime ISAs.

Junior ISA

 See also Individual Savings Account (ISA). Available to anyone under the age of 18 and available to them at 18. The current maximum contribution limit is £9,000.

Lifetime Allowance (LTA)

 The maximum value of a pension pot, above which a charge is applied. Pension pots are tested against the LTA at Benefit Crystallisation Events.

Money Purchase Annual Allowance (MPAA)

 The reduced annual allowance applicable when income is withdrawn from a pension fund via income drawdown, a pension is encashed in full or an investment linked or flexible annuity is purchased. Currently £4,000.

Money Purchase Pension

 A pension where contributions are made to a personal ‘pot’ that has a capital value which is used to provide an annuity or income drawdown in retirement.

Nil Rate Band

 The threshold value of a person’s total wealth (estate) below which inheritance tax is not taxed. Currently £325,000. See also trusts.

Ongoing Charge Figure (OCF)

 The total cost of a fund to include transaction costs. Typically expressed as a %.

Passive Investing

 See Index Investing

Pension

 A tax-efficient investment aimed at providing an income in retirement. Contributions benefit from tax-relief with growth being tax-free. A tax-free lump sum of up to 25% of the value of the fund is available but not mandatory. The balance is used to provide a taxable income. See also Money Purchase Pension, SIPP, annuity and income drawdown. Contributions are limited to the annual allowance, or possibly tapered annual allowance or money purchase annual allowance.

Pension Commencement Lump Sum

 The tax-free lump sum payable from a pension fund.

Personal Allowance

 The threshold value of income below which income tax is not liable. Currently £12,570.

Portfolio

 A collection of funds, shares or bonds within an investor’s ISA, pension or General Investment Account

Potentially Exempt Transfer (PET)

 A financial gift made to someone or an absolute trust that will be exempt from inheritance tax if the donor survives 7 years. Also known as the ‘7-year clock’.

Power of Attorney

 The legal document providing the authority for a third party to make decisions on behalf of someone else who no longer can do so, usually due to mental incapacity. There are two types: health & wellbeing and property & financial affairs.

Responsible Investing

 See also Sustainable Investing.

Risk

 The chance of money losing its purchasing power, either in the short-term or long-term. Or, the inability of not achieving your priorities. Different risks include volatility, inflation and institutional risk. Read more here: https://neliganfinancial.co.uk/an-emoji-guide-to-financial-risks/.

S&P500

 The largest 500 listed (public) US companies. See also index and shares

Self-Invested Personal Pension (SIPP)

 A type of pension that provides wider investment options than a standard personal pension. For example, the ability to invest in individual shares or directly owned commercial property.

Shares

 The ownership of a company, either publicly traded (listed on an index) or privately in a limited company. The value of the shares rise and fall depending upon the profit expectations of the company, and therefore demand for the shares. Capital is at risk.

Sustainable Investing

 Investing money in a way that has a neutral or positive influence on the planet and/or society.

Tapered Annual Allowance

 A reduced annual allowance for high earners.

Tax-Relief

 The supplementary payment paid by HMRC when a contribution has been made to a money purchase pension. Basic rate tax-relief is paid by HMRC directly to the pension provider. Higher rate and additional rate taxpayers claim back the additional tax relief.

The Financial Conduct Authority (FCA)

 The regulator of UK financial services. Firms and investment companies that aren’t regulated are likely to create higher risk of capital losses.

The Financial Ombudsman Service (FOS)

 The organisation that rules on complaints against any regulated financial services companies.

The Financial Services Compensation Scheme (FSCS)

 The organisation that provides compensation payments to savers and investors in the event of a financial institution becoming insolvent. The compensation limits vary depending upon the type of financial product. More information is available here: https://www.fscs.org.uk/

Total Expense Ratio (TER)

 The annual cost of a fund. Typically expressed as a %.

Trusts

 A legal arrangement in which assets are placed under the control of trustees for the benefit of others (beneficiaries). Commonly used to reduce Inheritance Tax liabilities on an estate.

Uncrystallised Funds Pension Lump Sum (UFPLS)

 An ad-hoc payment of tax-free lump sum and taxable income from a pension fund.

Volatility

 A measure of risk. How much a particular investment goes up and down in value. Measured by standard deviation.

Will

 A legal document expressing the wishes of the deceased. It states how assets are to be divided as well as any other directions.