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Terms Explained.
Choosing the right pension or investment can be a daunting process. Our terms explained section aims to make the process easier and help you understand some of the commonly used financial words and terms.
| Term | Definition |
|---|---|
A | |
| 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. |
| Annual allowance | You can contribute, and receive tax relief on, up to 100% of your earnings in a tax year, or £3,600 gross if that is greater. You can pay this up to age 75, even if you are not working. If total gross contributions to any registered pension scheme paid by you or on your behalf exceed an amount known as the Annual Allowance you will have to pay a tax charge, unless you can carry forward unused Annual Allowances from the previous three tax years. The Annual Allowance for the tax year 2011/2012 is £50,000. |
| Annuity | In the context of a pension scheme, an annuity is an income, guaranteed for life, which is paid to you in return for handing over your pension fund to an annuity provider. Annuities are mainly offered by insurance companies, and you are entitled to shop around for the highest annuity when you wish to take your benefits – you don’t have to buy your annuity from the same company that manages your pension scheme. |
| Annual management charge (AMC) | ISA Pension |
| Assets | These are investments held within your ISA or pension plan. Within a pension, they could include shares, unit/investment trusts, deposit accounts and any other allowable investments within the pension plan. Within an ISA, they could include shares and/or investments in unit trusts and/or open ended investment companies (OEICs). |
| 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), in what markets (what regions and countries) and in what sectors. |
| Asset class | There are four main categories of asset class:
|
| Autoswitch | This facility gives you the opportunity to switch your unit trust investment to an ISA at the start of a new tax year. This means your investment moves to a more tax efficient position as soon and as easily as possible. |
B | |
| 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. |
| Benefits | Payments made to you in respect of your accumulated pension fund, either in the form of an annuity, income withdrawal or cash. |
| Beneficiary | The policy holder will be asked to nominate a beneficiary when applying for a pension. This is a person who will benefit from the pension plan should the policy holder die before taking retirement benefits. |
| Bonus sacrifice | Giving up part or all, of a bonus, so that your employer can make a contribution to a pension plan on your behalf. It can result in National Insurance savings. |
C | |
| Capital gain | The difference, if any, between the price at which you sell, transfer or give away an asset and the price at which you bought it. |
| Capital gains tax (CGT) | This is a tax which could be charged on certain capital gains. |
| Cash ISA | An individual savings account to hold cash, which earns interest tax-free. |
| Cash option | An option to take some of your pension benefits as a tax-free cash sum. This will result in a lower pension. |
| Cash reserve | For the WorkSave ISA, this bank account is held by us in accordance with FSA rules, the ISA regulations and any other regulations or guidance issued by HM Revenue & Customs (HMRC) from time to time. It is used to pay fees and charges, hold income received from your investments temporarily pending your investment instructions and used for new investment purchases within a WorkSave ISA. This is a non-interest bearing account. All monies held in this account are on a temporary basis awaiting your investment instructions. |
| 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 in retirement. Typically, both the employer and the employee make regular contributions into the scheme. These are also known as occupational, group or corporate pensions. |
| Corporate bond | Corporate bonds are a type of fixed interest security. When you invest in a corporate bond fund, instead of 'lending' 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. |
D | |
| 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 investments that they're 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. This reduces the cost of investing in assets and helps to manage cash flow. For some trusts, 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. |
| Distribution dates | The date when income is paid. |
| Dividends | Payments made by a company to its shareholders, as a portion of its profits. |
E | |
| 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. |
| Ethical investment | An investment that conforms to a range of ethical and environmental guidelines. |
| Ex-dividends dates | These are the dates at which income is calculated. If you own units on this date, you are eligible to receive that income distribution. |
| Exit charge | Also known as a withdrawal charge, some companies charge a fee when you cash your units in. |
F | |
| 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. |
| FTSE | Financial Times Stock Exchange, an independent company jointly owned by the Financial Times and the London Stock Exchange. |
| Fund | Money is pooled together from various sources and managed by professionals to allow investors to benefit from a larger pot of money spread across investments. |
| Fund Management Charge (FMC) | The FMC covers the fund manager’s management costs and is taken out of the assets of the fund. It varies from investment fund to investment fund. The way it is calculated depends on who manages the investment fund. |
| Fund manager | A professionally appointed person to manage a mix of funds to meet financial goals for the benefit of the investor(s). A fund manager will make the decision on what funds to invest in and how the investment is split. |
G | |
| Gross income | Income before tax has been deducted. |
| Gross interest | Interest before income tax has been deducted. |
| Growth rate | Used in connection with illustrations, it is the assumed rate at which an investment’s value will increase year to year. Where appropriate, we use the standard growth rates set by our regulator (the Financial Services Authority) for similar products. However, we use lower growth rates where we think the standard rates may be unrealistic in the medium to long term. This is generally the case for unit trusts investing largely in property, corporate bonds and/or cash. |
I | |
| Income withdrawal | Also referred to as pension fund withdrawal or income drawdown – is a way for members to take an income directly from their pension fund without buying an annuity when they start taking benefits. HMRC sets a minimum and maximum level of income that can be ‘withdrawn’ from the fund each year, and members are free to choose any amount of income within these limits. The member continues to direct how their remaining fund is invested. A pensions provider may have their own minimum fund size requirements |
| Any income earned by the trust is paid direct to your bank or building society account, and isn't reinvested into the trust. Also known as 'distribution units/shares'. | |
| 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'. |
| Initial charge (IC) | If a unit trust has an initial charge, it is paid every time you make an investment in a unit trust within a WorkSave ISA. |
| Inflation | The increase in prices over a period of time. As prices rise, the value of money falls, so your money has progressively less buying power. |
L | |
| Lifetime allowance | The Lifetime Allowance (LTA) is the maximum value of your relevant benefits from all registered pension schemes that you can take without incurring a tax charge. The standard LTA for the tax year 2011/2012 is £1.8 million. This will reduce to £1.5 million from the tax year 2012/2013. HMRC will tax the value of any benefits over your Lifetime Allowance using a rate of up to 55%. In certain circumstances you may have a different personal Lifetime Allowance - the alternatives are known as fixed, primary or enhanced protection. If you are unsure if any of these apply you should speak to a financial adviser. |
M | |
| Manage Your account | Our online service allows you to manage your pension and savings 24 hours a day, seven days a week. You can change your contributions, switch funds or simply check up on your investment funds whenever it suits you. |
N | |
| Non Protected Rights | These are pension benefits that are not Protected Rights (see below). That is, benefits which are not deemed to replace State benefits. |
O | |
| Open ended investment companies (OEICs) | An open ended investment company authorised by the FSA is available for investment within a WorkSave ISA. It allows you to pool your money with other people and invest in equities, fixed interest investments and property. |
P | |
| Protected rights | These are pension benefits which are built up because an individual has contracted-out of the earnings related component of the State Pension Scheme, or because they belong (or belonged) to an occupational pension scheme, which was contracted-out. These benefits are deemed to replace the State Second Pension (previously known as the State Earnings Related Pension Scheme) and consequently are treated differently to Non Protected Rights. |
| Passive funds | Please see index-tracker. |
| Portfolio | A holding of funds, this could be split across ISA, unit trust and pension investments. An investment portfolio may be held by a financial institution or a private investor. Portfolio turnover rate (PTR) gives an indication of how much the trust's investments have changed in a year. A PTR of 200% is equivalent to all investments having been replaced once. |
| Prospectus | A legal document provided by businesses to describe the investments/products they offer customers. The Prospectus usually provides investors or potential investors with fund information. |
Q | |
| Qualifying investments | Shares, collective investments and any other investments that are allowable in an ISA under ISA regulations and any other regulations or guidance issued by HM Revenue & Customs (www.hmrc.gov.uk/isa) from time to time. Please note that not all of these investments are allowable within the WorkSave ISA, please see ‘The Wider Investment Options’ brochure for more information. |
| Qualifying shares | Shares in UK companies which are allowable in the WorkSave ISA under the ISA Regulations and other rules and regulations issued by HM Revenue & Customs (www.hmrc.gov.uk/isa) from time to time and which are permitted for investment under the Terms and Conditions of the WorkSave ISA. |
R | |
| Reduction in yield (RIY) | This shows the effective charges over an investment period. A Reduction In Yield (RIY) of 1.1% compared to a growth rate of 6% means that the charges would effectively be the same as reducing the investment growth to 4.9% for the year. |
| Registered Pension Scheme | Any scheme registered with HMRC. This includes occupational schemes and private personal pension schemes and excludes State pension schemes, such as the State Second Pension. |
| 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 that was initially invested. |
S | |
| Salary sacrifice | Giving up part of your salary so that your employer can make a contribution to a pension plan on your behalf. It can result in National Insurance savings. |
| Save As You Earn (SAYE) | This is a HM Revenue & Customs (www.hmrc.gov.uk) approved share option scheme, set up by an employer, under which an employee may be given a right, known as a ‘share option’, to buy a certain number of shares at a fixed price at a particular time. The shares can only be bought using amounts saved under a ‘Save As You Earn’ contract. |
| Selected range of Legal & General unit trusts | The range of unit trust funds which we offer within the WorkSave ISA. Details of the selected range of Legal & General unit trusts can be found in The Selected Range of Legal & General Unit Trusts brochure. |
| Share Incentive Plan (SIP) | A HMRC approved, tax efficient all employee share plan. There are four main elements to a SIP, of which companies can use one or more of the following: Free Shares, Partnership Shares, Matching Shares, Dividend Shares. |
| The price at which you can purchase shares in a company on the stock market. The share price is determined by the financial market and so can fluctuate on a daily basis. | |
| Shares are sold by companies to raise capital. If the company is a Plc (Public Limited Company) their shares will be available to purchase on the stock exchange. 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 (OEICs)). | |
| Simplified prospectus | A document relating to a fund that contains the key information a customer needs to help them decide if that fund is right for them. |
| Stamp Duty Reserve Tax (SDRT) | Any unit trusts which invest in UK shares have to pay SDRT each month. This is paid out of the assets of the fund. The duty is paid on any units the trust buys back from one investor and sells to another. The amount of SDRT paid is reduced if part of the trust is not invested in UK shares, including any cash not invested. |
| State pension | Government funded retirement plan that you may be entitled to at State retirement age depending on your National Insurance contributions. |
| Stocks | The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. |
| 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 the shares issued by the company. |
| Stock market | A stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. |
| An Individual Savings Account which allows you to invest in a range of investments consisting of shares and collectives, such as unit trusts and open ended investment companies (OEICs). | |
| Switching | 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 pension. |
T | |
| Tracker | Please see index-tracker. |
| Transfer | ISA Pension |
U | |
| Unit trusts | A unit trust is simply a collection of individual investors' money, which buys a range of investments. The trust is then divided into units. The number of units you buy represents your share of the trust. |
V | |
| Valuation point | Is the point in time on each business day that a unit trust is valued and a price calculated. |
| Volatility | The degree of unpredictable change over a period of time, normally short term, in the investment market. |
W | |
| Wider market | With a WorkSave ISA, you can invest within the wider market. This allows you to invest in stocks and shares quoted on the UK stock market, permitted within an ISA. It also allows investment in UK collectives, which include unit trusts, investment trusts and open ended investment companies (OEICs). These investments are outside the selected range of Legal & General unit trusts. |
| Wrapper | A wrapper is a product designed to go around an investment to make it more tax efficient. For example, an ISA wrapper allows you to invest in a unit trust without having to pay personal income or capital gains tax. |
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