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

Accumulation units/shares

This is where any income earned by the unit trust is reinvested in the unit or share. This means the capital value of the unit/share increases. If you are investing for income, you should look for funds offering 'distribution units/shares'.

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Active management

An actively managed unit trust means that your money is invested in a portfolio of assets selected by a professional fund manager (an actively managed fund). Each fund manager constantly monitors companies, economic conditions and markets, and decides where best to invest to meet the fund's objectives on an ongoing basis.

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Additional expenses

In addition to the annual management charge, the fund may also pay other management expenses each year, such as auditors, trustees, custodian, registrar and regulator fees, which are paid out of the fund. For more information please see the Key Features for the product you are looking to invest in or in which you are invested.

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Annual allowance

The Annual Allowance for the tax year 2011/2012 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. Contributions received as a result of contracting out of the State Second Pension and transfer payments are not counted for the purpose of the Annual Allowance test. 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.

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Annual management charge (AMC)

Covers the fund manager's management costs and other costs associated with the provision and administration of the product. For more information please see the Key Features for the product you are looking to invest in or in which you are invested.

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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.

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Asset class

There are four main categories of asset class:

• Cash. The least risky of the four asset classes but this lower risk is offset by often modest returns on investment.
• Equities. Shares issued by a company normally listed on a stock exchange. Individuals who buy equities hold a share in that company and are entitled to dividend payments and voting rights.
• Fixed interest. A fixed interest security is a way of 'lending' money to a government, or to a company, in return for a fixed rate of interest over a set period. This type of investment aims to provide a regular, reliable income.
• Property. Invests in commercial property such as office blocks, retail parks.

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Auto enrolment

This is where an employee joins their company pension scheme automatically, without any action on their part. Auto enrolment is a Government initiative to encourage people to save more for their retirement. It will be phased in from October 2012 with larger employers starting first.

Find out more about auto enrolment 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 the price at which you sell, transfer or giveaway an asset and the lower price at which you acquired it.

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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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Designated account

If you invest in a unit trust for the benefit of a child then the investment is still yours and you'll pay whatever taxes you would normally pay on it. It is possible for you to ‘designate’ the investment in the name of the child as a way of identifying that the investment has been made for the benefit of that child.

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Distribution units/shares

This is where any income earned by the unit trust is paid direct to your bank or building society account, and isn't reinvested into the trust/OEIC. Also known as ‘income units/shares’.

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Equities

Shares issued by a company that’s normally listed on a stock exchange. Individuals who buy equities hold a share in that company and are entitled to dividend payments and voting rights.

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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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Extra expenses

In addition to the annual management charge the trust may also pay other management expenses each year, such as auditors, trustees, custodian, registrar and regulator fees, which are paid out of the fund.

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Fixed interest securities

A fixed interest security is a way of 'lending' money to a government, or to a company, in return for a fixed rate of interest over a set period. This type of investment is intended to provide a regular, reliable income.

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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

Money is pooled together from various sources and managed by a professional fund manager whose aim is to increase the size of the fund so investors can benefit from a larger pot of money.

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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

Fixed income or index-linked bonds issued by the UK Government to raise funds. They are usually safe and secure (known as 'gilt-edged') but they are not entirely without risk. This type of investment is intended to provide a safer return on your investment than from Corporate bonds over a set 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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Income units/shares

Any income earned by the unit-trust is paid direct to your bank or building society account, not reinvested into the unit-trust. Also known as 'distribution units/shares'.

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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, the value of money falls, so your money has progressively less buying power.

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Initial charge

A charge taken when you make your initial investment. This charge is usually a percentage of the contribution.

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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 £1.8 million for the 2011/2012 tax year (this will reduce to £1.5 million from the 2012/2013 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 larger amount, 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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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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Passive funds (see index-tracker)

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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Pound cost averaging

Investing small amounts of money on a regular, monthly basis. The fixed amount will buy more units/shares when the unit price is low and fewer shares if the price increases.

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Registered Pension Schemes

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 although investors can stop, start and change the contribution amount to suit their circumstances. Other pension products may differ.

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Retail Distribution Review (RDR)

The Financial Services Authority (FSA) has been reviewing how retail investments products, such as pensions, are supplied by the market. The changes are due to take effect from the end of 2012 and are intended to improve outcomes for savers and investors by enhancing the quality of advice they receive.

Find out more about RDR  on the FSA website.

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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 increasing from 60 to 65 from 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. The Financial Times Stock Exchange 100 Index (FTSE 100) lists the 100 largest companies on the London Stock Exchange. These companies are the largest in terms of market capitalisation, 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.

If you are switching out of a With Profits investment you should consider that an MVR may be applied, this would reduce the amount used for switching and you may loose the value or guarantees and benefits. Find out more about Market Value Reductions and why they might be applied.

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Total expense ratio (TER)

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

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Tracker

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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Transfer

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

If you transfer out of a With Profits investment you should consider that an MVR may be applied, this would reduce the amount used for transfer and you may loose the value or guarantees and benefits. Find out more about Market Value Reductions and why they might be applied.

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Transfer value analysis

We strongly recommend that you seek independent 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 then divided into units. The number of units you buy 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 them more tax efficient.

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