Jargon buster.

Choosing the right investment or pension for you can be a daunting process, which is why we've created this jargon buster to explain some of the most commonly used investment words and terms.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Annual allowance

The Annual Allowance for the tax year 2013/2014 is £50,000.  It takes into account gross contributions paid by you and any contributions paid by your employer or third parties to any registered pension scheme. 

In the case of final salary schemes, 'contribution' is defined as the increase in the value of benefits for active members. 

If the total contributions to all of your pensions add up to more than the Annual Allowance, you will have to pay a tax charge on the amount paid above the Annual Allowance. The Annual Allowance will not apply in the tax year in which you die or if you take your benefits on the grounds of serious ill health. 

Where the total of the contributions to all of your registered pension schemes exceeds the Annual Allowance in a given tax year, unused allowances from up to three previous tax years may be available. The Annual Allowance for each of the three tax years before the tax year 2013/2014 is assumed to be £50,000 for this purpose. You must have been a member of a registered pension scheme in both the current tax year and the tax year(s) from which you wish to make use of any unused allowance. If you think this may affect you please contact your financial adviser. 

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Annual management charge (AMC)

Covers the set up and management costs and other costs associated with the provision and administration of the product. For more information, please see page 9 of the Stakeholder key features (PDF: 1186KB) .

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Annuity

A policy that provides a regular income for people aged 55 and over in exchange for a lump sum.

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Asset allocation

Is the process of deciding what proportion of an investment portfolio should be invested in;

• different types of investment (for instance, shares or bonds),
  
• what markets (what regions or countries for example the UK or Overseas market),
  
• what sectors (for example technology or healthcare).

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Asset class

Assets are what funds invest in. They have a significant impact on the performance of your investment so it’s important to understand the differences between the main types of assets.

There are four main types of asset and each has its own characteristics:

1. Equities – also known as ‘shares’, they buy you a small part of a company so that you may be entitled to any profits. They’re considered to be good for long-term growth but value can go up and down a lot in the short term.

2. Fixed Interest Securities – also known as ‘bonds’, they are essentially a loan to a company or a government - the company pays regular interest on the loan and then pays it all back at a set date. The value of these funds tends to go and up and down less than in equities but potential returns are often lower.

3. Commercial property – here you buy ownership in buildings, such as office blocks or shopping units. Funds may grow from rising property values and rent paid by tenants. Property value is opinion based so the fund value may go up and down sometimes.

4. Cash - Some funds keep a proportion of your money in cash, adding flexibility to your ‘asset mix’ and making the fund more stable. The proportion of the investment in cash is usually quite low as the growth potential is low. So it’s low risk but offers the lowest potential return.

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Automatic enrolment

Automatic enrolment is a Government initiative to encourage people to save more for their retirement. Employers will automatically enrol their eligible employees into their pension scheme. 

Find out more about automatic enrolment here or by visiting the Directgov website.

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BACS

Bank's Automated Clearing Services. A system supported by the major UK clearing banks for automated cash transfers between accounts, eliminating the need for cheque payments.

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Beneficiary

The policyholder will be asked to nominate a beneficiary when applying for a Stakeholder pension. Should the policyholder die, the person who will benefit from the pension fund is known as the beneficiary.

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Bid / offer spread

The difference between the 'buying' and 'selling' price of units in a fund.

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Bid price

The price at which units are 'sold' or 'encashed' by the customer.

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Capital

Generally viewed as the amount of the original investment.

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Capital gain

The difference between what you paid for an investment and what you received when you sold that investment.

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Capital gains tax (CGT)

This is a tax which could be charged on certain capital gains.

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Cash Lumpsum

An option to take some of the value of a pension fund as a tax-free cash lump sum. This will result in a lower pension income.

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Company pension

This is a pension scheme set up by an employer to provide an income, or a tax free cash sum and a reduced income for when their employee retires. Typically, both the employer and the employee make regular contributions into the scheme. These are also known as Occupational pensions.

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Corporate bond

Corporate bonds are a type of fixed interest security. When you invest into a corporate bond fund, instead of 'lending' your money to a bank, which is effectively what happens when you place money on deposit, we lend your money to companies who agree to pay an amount of interest over a certain period of time.

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Derivatives

Some funds can use specialist investments known as derivatives. Their name reflects the fact that their price is derived from the change in value of the investment that it's linked to, such as shares, property or bonds. Experienced managers use derivatives as part of an investment strategy to manage the effect of possible market falls or changes in exchange rates.

For some funds, derivatives will be used to seek to enhance overall investment returns, manage risk and to help protect returns from market falls. This includes investing in derivatives whose value rises when the market falls, but whose value falls if the market rises.

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Equities

Also known as ‘shares’, they buy you a small part of a company so that you may be entitled to part of any profits, called dividends. They’re considered to be good for long-term growth but their value can go up and down a lot in the short term.

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Ethical investment

An investment that conforms to a range of ethical and environmental guidelines.

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Exit charge

Also known as a withdrawal charge, some companies charge a fee when you cash your units in.

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Fixed interest securities

Also known as ‘bonds’, they are essentially a loan to a company or a government - the company pays regular interest on the loan and then pays it all back at a set date. The value of these funds tends to go and up and down less than in equities but potential returns are often lower.

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FTSE

Is the Financial Times Stock Exchange, an independent company jointly owned by the Financial Times and the London Stock Exchange. The FTSE researches and publishes thousands of indices, securities and other investment vehicles.

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Fund

A collection of assets that your pension contributions/payments can invest in. Money is pooled together from various sources and managed by a professional fund manager. This means that you can invest a fairly small amount while still enjoying the benefits of a larger fund.

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Fund manager

A professional person who manages the fund and aims to meet the financial goals for the benefit of the investor.

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Fund of funds

Allows you to invest in several funds to create a diverse portfolio through a single investment.

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Gilts

Gilts are bonds issued by the Government to raise money. The term originated in the UK and referred to debt securities that had a gilt (or guilded) edge. When you invest into a gilt, instead of 'lending' your money to a bank, which is effectively what happens when you place money on deposit, your money is lent to the Government who agree to pay an amount of interest over a certain period of time.

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Gross income

Income before tax is deducted.

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Gross interest

Interest before income tax has been deducted.

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HMRC

Her Majesty’s Revenue & Customs is responsible for collecting taxes.

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Index-tracker (or passive fund)

Index-tracker funds invest in most or all of the same shares, and in a similar proportion, as the index they are tracking, for example the FTSE 100 index. Index-tracker funds aim to produce a return in line with a particular market or sector, for example, Europe or technology. They are also sometimes known as 'tracker funds'.

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Inflation

The increase in prices over a period of time tracked by the Office of National Statistics UK. As prices rise, what you can buy with a fixed amount of money falls, so your money has progressively less buying power.

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Lifetime Allowance

This is the maximum amount of pension benefits you can build up over your lifetime. There are no restrictions on the value of the total benefits payable from all your UK Registered Pension Schemes. However, HMRC will tax any benefits over your Lifetime Allowance at up to 55%. The tax rate depends on whether you take the amount above the allowance as cash or income. The Lifetime Allowance, which takes into account all benefits you receive from registered pensions schemes, is £1.5 million for the 2013/2014 tax year.

Certain circumstances may mean you have a personal Lifetime Allowance – these are known as fixed, primary or enhanced protection and you will have completed an HMRC election form if they apply to you.

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Lump sum investment

An investor can choose to make regular monthly contributions into a fund or pay a single payment, known as a lump sum. Lump sum payments are often one off payments, with an initial minimum investment amount of £20 gross for Stakeholder pensions.

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My accounts

Is the name of our service that allows you to manage your investment and/or pension online seven days a week. You can change your contributions, switch funds or simply check up on your investment funds whenever it suits you.

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NATIONAL EMPLOYMENT SAVINGS TRUST (NEST)

NEST is a new pension provider set up by the Government as part of its changes to workplace pensions. Employers who have to enrol their eligible employees into a pension scheme as a part of automatic enrolment can use NEST instead of a private pension scheme, which many employers are expected to do. This will happen gradually, between October 2012 and 2018. To find out more about NEST, visit The Money Advice Service.

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Net income

Income after tax is deducted.

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Net interest

Interest after income tax has been deducted.

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Nominee

Is a company whose business is looking after the ownership of investments on behalf of someone else.

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Occupational pension

This is a pension scheme set up by an employer to provide an income, or a tax free cash sum and a reduced income for when their employee retires. Typically, both the employer and the employee make regular contributions into the scheme. These are also known as company pensions.

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Offer price

Determines how many units will be purchased for the investment amount. So if an investor has £10,000 to invest and the offer price is £1 they could purchase 10,000 shares.

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Open-ended investment companies (OEICs)

Are established as companies that issue shares to investors. The value of an OEIC is set on a daily basis and divided into shares of equal worth. They are similar to unit trusts as they pool investors' money and they can invest in sub-funds in different market sectors giving greater diversity.

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Pound cost averaging

To benefit from pound cost averaging you need to invest money on a regular basis. Spreading your investment over a period of time will help to cushion you from fluctuations in the price of units as you will buy more units/shares when the unit price is low and fewer shares if the price increases.

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Registered Pension Scheme

A scheme that is registered under Chapter 2 of Part 4 of the Finance Act 2004.

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Regular investment

An investor can choose to make monthly contributions to their chosen fund, known as regular investments. The minimum monthly contribution is £20 gross for Stakeholder pensions and investors can stop, start and change the contribution amount to suit their circumstances. Other pension products may differ.

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Risk

All funds have their own risk factors with some having higher overall risk ratings than others. Higher risk funds offer the potential for higher returns but carry with them an increased risk of not getting back all the money you initially invested.

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Securities/stocks

Capital of a company raised through the issue and subscription of shares.

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Share price

The price at which you can purchase shares in a company that’s listed on the stock market. The share price is set by the financial market and so can fluctuate on a daily basis.

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Shares

Shares are sold by companies to raise money. Shareholders are entitled to a share of company profits, usually paid as dividends, and have the right to vote on major decisions. (Also, see open-ended investment companies or OEICs). If the company is a Public Limited Company their shares will be available to purchase on the stock exchange.

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Stakeholder pension

Individual Stakeholder Pensions are a flexible, tax-efficient way of saving money for your retirement. You will receive tax relief on up to 100% of your annual earnings or £3,600 gross, if greater, each tax year on your pension payments and you can stop, start and change the contribution amount to suit your circumstances.

By law, the yearly charges must be no more than 1.5% of your pension fund for the first 10 years and no more than 1% of your pension fund after that.

Please see our charges section for more information.

A pension plan can only be registered as a Stakeholder plan if it meets strict criteria set by the Government regulation.

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State pension

Government funded retirement plan that you may be entitled to at State retirement age that’s funded by your national insurance contributions. For men, the current state pension age is 65. For women, the current state pension age is 65, having been increased from 60 in April 2010. This affects women born on or after 6 April 1950.

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Stock exchange

As the name suggests, a stock exchange is where stocks and shares in companies can be bought and sold. Over 400 companies are members of the London Stock Exchange. The Financial Times Stock Exchange 100 Index (FTSE 100) lists the 100 largest of these companies, in terms of the total value of all the shares issued by the company.

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Switching fee

Switching is when you choose to change your fund choice and/or allocation. You can make a switch at any time and the service is currently free of charge if you switch online but you'll be limited to one switch per day on your Stakeholder pension.

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Total expense ratio (TER)

Shows the total annual operating costs of a unit trust or OEIC.

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Transfer

You can transfer the value of some pensions between providers. We would recommend you seek financial advice before you do this and request a transfer value analysis, so you can compare all the options available to you.

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Transfer value analysis

This is where an adviser looks at the value of your current pension and the value of alternative options available to you should you decide to transfer. We strongly recommend that you seek financial advice to evaluate all your options before transferring the value of your pension fund.

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UK dividends

Dividend payments can be made to shareholders of a company in United Kingdom from that company's profit. The amount of payment is decided by the company directors and cannot be guaranteed.

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Unit

A unit is a share of a fund. Each fund is split in to a series of units. The number of units you hold is your share of the fund.

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Unit trusts

A unit trust is simply a pool of individual investors' money, which buys a spread of investments. The trust is divided into units. The number of units you hold represents your share of the trust.

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Volatility

The degree of unpredictable change over a period of time, normally short term, in the investment market.

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Wrapper

A wrapper is a product designed to go around an investment to make it more tax efficient.

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