Glossary

Your guide to any legal or technical words.

AAA

The highest rating assigned by a number of credit rating agencies indicating the financial security of a debt instrument issuer.

Absolute return

Absolute return funds seek to achieve positive returns in all market conditions, typically over rolling one-year periods.

Accumulation unit

A type of unit that reinvests the income it earns, instead of paying it out immediately to the investors.

Actively managed

An investment approach where the fund manager holds a bias in their fund to the investments they think will perform the best. The aim is to outperform an index, market average or benchmark. See also passively managed and aggressively managed.

Additional State Pension

As well as the basic State Pension, you may qualify for an additional pension from the state.This will increase the overall amount you receive from the State when you retire.

Aggressively managed

An investment approach where the fund manager decides where to invest in order to outperform an index, market average or benchmark. Their investment choice can vary more significantly from that of the average or benchmark than a typical actively managed fund.

Allocation rate

Part of the charging structure. The rate at which units are purchased by contributions to a pension scheme. It's normally expressed as a percentage of the contribution being paid, for example 103%.

Alpha

Measures a fund manager's ability to add or subtract value to or from a portfolio. It is the portion of a fund's return that can't be explained purely by moves in the market.

Alternative investments

An investment in assets considered to be outside of normal shares, bonds and cash, for example hedge funds or commodities.

Annuities

An annuity is a product offered by insurance companies. Basically, you give the insurance company the balance of your pension savings, after you’ve taken any tax free cash, and the insurance company will pay you an income for the rest of your life however long you live. This is called a 'pension annuity'. There are other types of annuity.

Asset allocation

This tells you mix of investments that your fund holds. For example it can tell you the regions of the world, types of investment (for example shares, bonds and cash) or industries it's invested in.

Asset class

Different types of investment; for example shares, bonds and cash.

Asset manager

A firm or individual who manages (buys, sells and monitors) a portfolio of assets.

Asset-backed security

Securities backed by debts payable on financial instruments such as credit cards or mortgages.

Associated plan

An associated plan is set up when contributions are being collected from two different bank accounts, for example your bank account and your employer's bank account. Although there are two plans, they are treated as one pension and only one set of pension charges will be deducted.

Bank Base Rate

The Bank of England sets the bank interest rate, known as the Bank Base Rate each month.  It is the rate at which the Bank of England lends to other financial institutions and is set by the Monetary Policy Committee in response to economic conditions.

Bank of England base rate

The reference rate of interest set by the Bank of England that forms the basis for UK interest rates.

Basic State Pension

The basic State Pension is a regular income paid by the government which most people can receive when they reach the State Pension Age. The amount payable is based on the number of years you’ve been paying National Insurance contributions (or received National Insurance Credits) over your working life.  Both men and women must have paid National Insurance contributions for 30 years to qualify for the full basic State Pension.

Basis point

One hundredth of one per cent, usually applied to interest rates. For example, 0.01% equals 1 basis point. The abbreviation bps is commonly used for basis points.

Bear market

Period of sustained stock market decline. The opposite of a bull market.

Benchmark

This is the index, fund or market average that we measure a fund against.

Beta

Measures the sensitivity of a financial security to market movements.

Bid price

This is the price you can sell units at (the selling price).

Bid/offer spread

The difference between the bid price and the offer price.

Bond rating

A credit rating on a bond. It's an indicator of the financial strength of the government, company or institution issuing the bond.

Bond spread

The difference between the yield (income), also known as the coupon, for different types and durations of bond.

Bonds

Sometimes referred to as fixed interest investments, these are effectively loans to companies and governments. Just like paying off a mortgage, the companies and governments pay interest on the loan and must repay the loan at the end of the term.

bonds

These are also known as fixed interest investments. They're loans issued by the government (also called gilts), local authorities, financial institutions and companies (also known as corporate bonds). In return for an investment, they'll pay interest for a given period and return the money at the end of the agreed period of the loan. The price of the loan will vary during its lifetime so there is some element of risk, although not as extreme as for shares (equities).

Bottom-up investment

An investment management style that concentrates on picking the right selection of stocks rather than the region or sector. As opposed to top-down investment which starts by allocating investment to regions or sectors and then selects stocks.

Bull market

A period of sustained stock market growth. The opposite of a bear market.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax on the increase in the value of things you own (like a second home or shares for example) during the time you have owned them.  Any tax is due when you ‘dispose’ of them (usually by selling them or giving them away).  The rate of tax you pay depends on your personal tax position.  Tax is only payable on gains in excess of the annual allowance.

Capital growth

An increase in the value of the underlying investment.

Capped drawdown

Capped drawdown allows you to take an income, or to choose not to take an income, without ever buying an annuity. However the maximum income you can receive is limited to roughly 150% of income you would have received if you had bought an annuity. This limit on income only applies up to April 2015 when a new alternative form of drawdown called flexi access drawdown is to be introduced which does not restrict the amount of income that can be taken.

Cash

Cash is generally considered the least volatile of all the main investment types. This means its price doesn't tend to move much either up or down on a daily basis. The downside is that cash tends to have far less potential to grow than other investments and it can actually fall in value in real terms because of inflation. This is why it's most suited to investors as a shorter-term investment. Cash generally includes money, typically held in bank deposits, and other types of money market investments, which pay the investor regular interest.

Certificate of deposit

A deposit is made in a bank and a certificate confirming that deposit is given to the lender. The certificate has a set maturity date and level of interest.

Closed-end fund

Fund with a fixed number of shares, which means you can only buy from existing investors willing to sell. Changes in demand for these shares are reflected in the share price. For example, investment trusts.

Closing price

The price of the last transaction at the end of a trading session.

Collective investment scheme

An investment vehicle that allows the average investor to pool their money with other investors. Collective investment schemes include unit trusts, investment trusts and open-ended investment companies (OEICs).

Commercial paper

'Paper' issued by corporations or banks promising the holder (lender) a sum of money to be paid in at an agreed date in the future (average maturity 40 days).

Commercial property

Includes shops, retail warehouses, offices and industrial storage and distribution centres.

Commodity

Includes any raw material, for example, oil, gold and livestock.

Commutation rate

This is the rate at which you can exchange pension for tax-free cash in a defined-benefit scheme.  For example, if your pension scheme offers you a commutation rate of 15:1 that means for every £15 of cash you take you’ll lose a £1 of pension.

Consolidation

If you have two or more pension pots it can make sense to bring them together into one pension pot. For example, you could get a better annuity because your total pension pot is higher. This process is called ‘consolidation’.

Consumer Price Index

The Consumer Price Index (CPI) tracks the change in the price of a basket of goods and services that a typical household might buy or use. The CPI is the key measure of inflation for the UK and is used by the Bank of England in making interest rate decisions.

Contracted in

If you are contracted-in to the State Second Pension  then you pay the full, contracted-in rate of National Insurance contributions and are entitled to full benefits from the State Second Pension for the period that you are contracted in.

Contracted out

'Contracted out' means that you have opted out of the additional State Pension so you will no longer build up benefits in the scheme (though there are some instances where you will still be entitled to part of the additional State Pension). This is only available to defined benefit schemes until April 2016 and was removed from all other schemes in 2012.

Contrarian

An investor who takes the opposite position to the majority of those investing in the market.

Contribution earnings

These are the earnings used to calculate amounts of contributions. The figure shown is the last amount notified to us by the employer/trustees. This may not reflect actual earnings at this point in time.

Conventional annuities

A conventional annuity pays a guaranteed income for life that can never fall below the amount payable initially.

Convertibles

A type of financial security that can be changed into another type of security at a given time.

Corporate bonds

A bond issued by a company.

Correlation

A measure of the relationship between two variables. A correlation of 1 indicates perfect positive correlation, a correlation of -1 indicates perfect negative correlation and a correlation of 0 indicates no correlation. For example, a correlation of 1 between a fund and an index would indicate the fund was perfectly tracking the performance of that index.

Coupon

An attachment to a bond that may be separated and used as evidence of the holders' entitlement to interest paid on the bond. More commonly used to describe the amount of interest or yield attached to the bond.

Credit rating

Ratings given by credit rating agencies based on their view of the financial strength of an institution.

Current plan value

The current value of the policy excluding any applicable withdrawal charge, final bonus, market value reduction or smoothing adjustment.

Current transfer value

If you want to move the value of your retirement benefits from one pension scheme to another, the scheme you are moving your benefits away from will quote you a transfer value.  This is their estimate of the cash equivalent of the value of the benefits you built up during your membership of the scheme.

Cyclical stocks

Shares closely linked to economic conditions which tend to rise when the economy is recovering and fall markedly in an economic downturn.

Default

The failure of a bond issuer to pay the interest (coupon) or repay the loan capital when it's due.

Defined benefit scheme

Defined-benefit schemes are often called 'final salary' pensions. This is because they commonly provide a proportion of your earnings when you choose to retire.  For example, they may pay 1/60th or 1/80th for each year of service. Some plans calculate benefits based on the average salary you receive over the time you worked for the employer.

Defined contribution scheme

These schemes are often called 'money-purchase' plans. Money is usually paid into the plan by you and/or your employer. At the point of retirement, you will have a pot of money, based on how much has been paid in, plus any growth on the money (less the costs of running the scheme).

Dependant

A dependant is someone who relies on another person to support them financially. There is a precise definition of who qualifies as a dependant for the purposes of receiving a pension or lump sum on your death.

Depression

Prolonged downturn in economic activity, usually characterised by high unemployment and low production of consumer goods.

Derivative

Types of financial instruments whose performance is derived from the value of underlying assets such as commodities, equities or bonds. Derivatives are contracts that give the right, and sometimes obligation, to buy or sell a quantity of the underlying asset. Futures, options and warrants are types of derivative.

Disclosable yearly charge/expenses

This is an indication of the actual charges applying to a fund as part of the management process. All funds are required to disclose the charges and expenses applying to the fund to prospective investors, although these are estimates and depend on the actual day to day costs incurred by the fund. They include things like bank charges, transaction fees, overdraft interest and safe custody fees.

Diversification

A way of spreading and potentially reducing risk by investing across a range of different asset classes, sectors and markets.

Dividend

If a company has profits to share out it can pay a dividend. How much the shareholders get depends on how many shares they own.

Duration

A measure of risk, expressed in years, that takes into consideration factors such as the expected regular income, maturity value, current yield and term of a bond. The longer the duration, the greater the risk.

EIRIS

Ethical Investment Research Service.

Emerging market debt

Debts issued by governments and corporations within developing economies.

Emerging markets

Financial markets in newly industrialised countries in the early stages of development.

Enhanced annuities

Sometimes called lifestyle annuities, these annuities usually pay a higher income each year if your lifestyle is likely to shorten your life expectancy. For example, smoking or poor diet.

Equities

Equities, or shares, offer part-ownership in a company, unlike bonds, which are loans. Equities are generally considered the most risky type of investment as their value tends to go up and down more than other investment types, in some cases quite dramatically. However, shares are widely considered to offer the greatest potential for returns. Due to the potential for significant gains or losses in value, shares are better suited to investors who are prepared to invest for the medium to long term.

Ethical investment

Investment in securities that don't benefit from unethical activities (for example tobacco, pornography, armaments and so on).

Exchange rate

The price of one currency expressed in terms of another.

Exchange traded funds (ETFs)

A fund that tracks an index but can be traded like a stock.

Exposure

The amount of a portfolio invested in a particular asset class, region or stock.

Final bonus

This is a bonus which may be given to policyholders with with-profits units in their pension plan when the plan matures. Final bonuses aren't guaranteed and vary from year to year depending on investment performance.

Fixed interest

Fixed interest investments, or bonds, are generally considered lower-risk investments. Bonds are issued by governments, local authorities or companies to raise capital. They're generally issued for a fixed time period, during which investors are usually paid interest.

Fixed or increasing annuity

When you buy a conventional annuity, you will be asked to choose between a fixed annuity and an increasing annuity. A fixed annuity will pay you the same amount every year. An increasing annuity, as the name suggests, will increase each year usually by a percentage (say 3% or 5%), or in line with the movement in an index like the Retail Prices Index (RPI).

Fixed-term annuity

These products aren't strictly annuities. They pay an income, but only for a limited number of years – not for life. Usually, they are sold for periods of 5 or 10 years.  At the end of the fixed period, an amount of money is payable (called the 'maturity value'), that can be used to buy an annuity that pays an income for life or, alternatively, to buy another fixed term annuity or, depending on your circumstances, you could choose one of the drawdown options.

Flexible annuities

A flexible annuity is effectively a form of investment linked annuity. That means your money can be invested in a mix of assets including equities, but while this gives potential for growth, the income you are paid each year can fall (though some of these products offer a guarantee that your income can’t fall below a certain level).

Flexible drawdown

Flexible drawdown allows you to take as much as you like from your fund, but you have to demonstrate that you can meet a Minimum Income Requirement (MIR). This requirement only applies up to April 2015 when flexi-access drawdown is due to be introduced .

Floating rate notes

Notes with variable interest rates, usually reviewed every three to six months, which are linked to a money market index like the London Inter Bank Offered Rate (LIBOR). They're used mainly in euro market lending as a medium-term debt instrument and generally have maturities ranging between five and 15 years.

Free sum assured

Free sum assured is the highest amount of death or disability benefits that an insurance company will pay out to any one person without production of evidence of health. It doesn't mean free life assurance.

FTSE100

The FTSE100 is an index of the 100 biggest companies in the UK listed on the London Stock Exchange.

Full replication approach

A passive investment approach where the fund manager invests in exactly the same assets in the same proportion as the index or benchmark they're aiming to track.

Fund

The name given to the place your money is held while invested. There are many different types of fund and you can choose one or a number to invest your money in.

Fund manager

The person responsible for managing the money in the fund and choosing where to invest it, with the aim of meeting the fund objective.

Fund of funds

A fund that invest in a number of other funds with the aim of meeting the overall fund's objective.

Futures

A type of derivative contract that obliges the purchaser to buy an asset (or the seller to sell it) at a pre-determined future date and price.

Gilts

Loan stocks with varying maturity dates issued by the UK government to fund the public sector cash requirement that pay a fixed rate of interest until their repayment date. Gilts are traded in the bond market and their value will be influenced by a number of underlying economic factors such as interest rates and inflation.

Growth style

Where the emphasis is put on selecting companies whose earnings are expected to grow at an above-average rate.

Hedge fund

A type of investment fund in which the fund manager can use a number of specialist investment techniques, including the use of derivatives, short-selling and debt to generate a higher return or make gains even in a falling market.

Hedging

An attempt to reduce risk by offsetting one investment by carrying out another opposing investment.

High yield bond

Also known as 'junk bonds'. High yield bonds are generally regarded as higher risk than gilts or investment grade bonds as they're issued by companies with lower credit ratings. They pay a higher level of interest but also carry a higher risk of default.

HMRC

The initials HMRC stand for Her Majesty’s Revenue & Custom. HMRC is responsible, among other things, for the collection of taxes (previously known as the Inland Revenue).

House view

Common term for the opinion formed on a particular market, sector or economic issue by an asset management company, investment house or other financial institution as a whole.

ICVC (investment company with variable capital)

An open-ended collective investment vehicle, similar to a unit trust. The only difference is that ICVCs are companies and not trusts.

Illiquid asset

An asset that can't be quickly converted into cash, for example, property.

IMA

The Investment Management Association (IMA) represents the interests of the UK investment management industry by engaging in consultation with the UK government and other bodies on issues that affect the industry. It also maintains a system of classifying funds by sector, designed to help investors and their advisers.

Impaired life annuities

If you suffer from a medical condition like cancer, diabetes or high blood pressure, for example, you can qualify for an impaired life annuity. This will usually pay you a higher income.

Income guarantee period

When you buy an annuity you can elect for the income payable to continue to be paid for a fixed period after your death. Commonly, people select either 5 or 10 years. This means if you choose a 10 year guaranteed period, and die 3 years after buying the annuity, the remaining 7 years payments would continue to be made.  This is called the ‘income guarantee’ option.

Income unit

A type of unit that pays out the income it earns to investors, instead of reinvesting it.

Index

An index tracks the rises and falls in value of a particular market over time. Indices are commonly used as a benchmark for investors to compare the performance of their investments against similar types of investments.

Index tracker

A type of fund that aims to perform in line with a particular index by investing in the same shares and in the same proportions as those reflected in the index.

Index-linked gilts

Bonds, issued by the UK government, that provide protection against inflation. The redemption value rises with inflation over the life of the bond.

Inflation risk

The risk that your investment loses value by providing returns below the rate of inflation.

Insured benefits on death

This might be paid to a member's dependants if the member dies. It could be one or more of:

  • an insured lump sum payment
  • an insured spouse's/civil partner’s/dependant's pension

Please see the separate definitions for more information about these benefits. The provision of these benefits is sometimes called 'life cover'. Cover will depend on the payment of contributions and requirements for medical evidence.

Insured element transfer value

The current value of the insured element of the plan if the plan was to transfer from us, including any applicable withdrawal charge, loyalty bonus, final bonus, market value reduction or smoothing adjustment.

Insured element value

The current value of the insured element of the plan, excluding any applicable withdrawal charge, final bonus, market value reduction or smoothing adjustment.

Insured lump sum

If you invest in one of our with-profits funds (including deposit administration) and the money is taken out at any time other than at your chosen retirement date or on earlier death, it may be necessary to reduce the value of your fund by what's referred to as a ‘market value reduction’ (MVR). This applies when your fair share of the total fund growth is less than the regular bonuses added to date. The purpose of the MVR is to make sure that investors get a fair share if they leave with-profits funds early and to protect the interests of the continuing investors. You can get more details are provided in the With-Profits summary.

Insured/Insured element

The insured element of a plan is invested in insured funds. Insured funds are funds managed by a life assurance company, or an investment partner that it selects.

Interest rate risk

The risk that movements in the interest rate will have an adverse effect on an investment.

Investment grade bond

A bond with a high credit rating and generally regarded as 'safer' than bonds with a lower credit rating, as it has a lower likelihood of default. Investment grade bonds generally pay less than high yield bonds and generally have a rating of BB or above.

Investment manager

The person/company who manages a fund.

Investment objective

Designed to give investors an understanding of the style and aims of the investment management employed by a fund and to outline the regions, sectors and asset classes a fund invests in.

Joint life option

When you buy an annuity, you will be offered the choice of ‘joint life’ or ‘single life’. If you choose ‘joint life’ part or all of your annuity payments can continue to be paid after your death to your spouse or partner.

Junk bond

A bond (also known as high yield bond) with a poor credit rating, below that of an investment grade bond. Considered high risk, but offers higher yields as a result.

Large-cap shares

Refers to large companies as measured by market capitalisation (the value of its issued shares).

Leverage

Leverage (also known as gearing in the UK) in investment terms refers to borrowing with the aim of increasing gains. Derivatives are a common way for fund managers to increase leverage in a fund.

LIBID (London Inter-Bank Bid Rate)

The rate of interest that banks bid to secure deposits from other banks.

LIBOR (London Inter-Bank Offered Rate)

The rate of interest offered on loans to other banks in the London inter-bank market.

Lifestyle fund

An investment fund that invests in various asset types for growth when an investor is still some way off from retirement, then gradually switches into investments that prepare the saver for retirement in the final years of saving.

Lifetime allowance

There is a limit on the amount of money you can build up in pension funds before tax penalties apply.  That limit is called the Lifetime Allowance.

Liquidity

The extent to which an asset can be bought and sold quickly and easily without loss of value.

London Stock Exchange (LSE)

The London market in which stocks and shares are bought and sold.

Long bond

A bond that has more than 10 years to maturity.

Long gilt

UK government bonds with more than 15 years to maturity date.

Long position

Holding an asset with the expectation that its price will rise in the future as opposed to short-term trading to take advantage of short-term market movements or investing in derivatives.

Long term

In investment terms, this refers to a period that is longer than a market cycle, typically considered at least five years. This is relevant if you're investing in higher risk assets like equities (shares) which may lose value over shorter periods as they don't have time to recover from market falls.

Lower Earnings Limit

This is the minimum level of earnings that an employee needs to qualify for benefits, such as State Pension benefits.

Managed fund

A fund where managers make all the decisions on how, where and when to invest. Managed funds usually invest across the main asset classes. Some may include other asset types like property. Managed funds generally give access to bond and stock markets worldwide. The ABI has categorised managed funds, depending on how much they invest in equities, as follows: Mixed Investment 0-35% Shares, Mixed Investment 20-60% Shares, Mixed Investment 40-85% Shares and Flexible Investment (which can invest up to 100% in shares).

Marginal rate

This rather confusing term basically means the tax payable on your last pound of income. For practical purposes it could be thought of as the highest rate of tax you'll pay on your income. This isn't strictly true if your income in one year is over £120,000 but for the most part this definition should work.

Market capitalisation

The value of a company based on the price of its shares multiplied by the number of shares in issue.

Market value reduction

If you invest in one of our with-profits funds (including deposit administration) and the money is taken out at any time other than at your chosen retirement date or on earlier death, it may be necessary to reduce the value of your fund by what's referred to as a ‘market value reduction’ (MVR). This applies when your fair share of the total fund growth is less than the regular bonuses added to date. The purpose of the MVR is to make sure that investors get a fair share if they leave with-profits funds early and to protect the interests of the continuing investors. You can get more details are provided in the With-Profits summary.

Maturity date

The time when a financial security, for example a bond, is redeemed and the par/face value is paid to the lender.

Mid-cap

Companies with a market capitalisation smaller than large-cap companies but larger than small-cap companies. Stock exchanges will usually define the financial size ranges for capitalisation.

Minimum income requirement

Flexible drawdown allows you to take as much as you like from your fund, but you have to demonstrate that you can meet a Minimum Income Requirement (MIR). Not all income you may receive will qualify as MIR, but the following examples will qualify State pension, most final salary pensions and most lifetime annuities. This requirement only applies up to April 2015.

Money market

Market for short-term loans and debt instruments.

Money market funds

Typically invest in safe, short-term money market instruments such as commercial paper, bank deposits and other short-term financial instruments. They're considered low risk relative to other investible assets and typically provide lower returns than riskier assets such as corporate bonds and shares.

Money market instruments

See money market funds.

Multi-manager fund

An investment fund that allocates assets to a number of investment managers in order to meet the overall fund objective.

Mutual funds

Pools of money from many investors that are invested by professionals or according to indices and which aim to meet clear objectives.

National Insurance Contributions

You pay National Insurance contributions when your earnings reach a certain level.  Your contributions build up your entitlement to benefits, including the State Pension. How much you will pay depends on how much you earn and whether you're employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age.

National Insurance Credits

If you are unable to work, and therefore unable to pay National Insurance contributions, you could receive National Insurance weekly credits for the basic State Pension and the Second State Pension.  To qualify you need to meet certain conditions.

NAV (net asset value)

The book value of a company's assets, divided by the number of shares in issue.

Near cash

Deposits or investments with similar characteristics to cash.

Non-protected rights

Non-protected rights referred to funds built up from pension contributions paid by you, your employer or by any third party on your behalf. Protected rights were funds that built up from contracting-out contributions paid to your pension plan. The contributions were made as a result of you contracting-out of the State Second Pension (formerly the State Earnings Related Pension Scheme). There used to be a difference in the benefits available from non-protected rights and protected rights funds. However, contracting-out for money purchase schemes ended on 6 April 2012 so non-protected rights and former protected rights funds are now treated the same.

Non-contracted out benefits

If you are contracted-in to the State Second Pension  (ie you're not contracted out) then you pay the full, contracted-in rate of National Insurance contributions and are entitled to full benefits from the State Second Pension for the period that you are contracted in. Non-contracted out benefits are the benefits from these contributions.

Occupational pension scheme

An occupational pension scheme is basically a company pension plan set up by your company to provide you with pension and other benefits.

Offer price

This is the price you can buy units at (the buying price).

Open-ended investment company (OEIC)

A type of collective investment vehicle that can issue more units if demand increases from investors.

Option

A contract giving one party the right, but not the obligation, to buy or sell a financial instrument, commodity or underlying asset at a given price, at or before a specified date.

Overvalued

An asset a fund manager perceives to be worth less than its current market price based on specific criteria.

Overweight

When a fund invests in a particular asset, sector or country to a greater degree than its relevant benchmark index.

Pacific Rim

Far Eastern markets and markets bordering the Pacific.

Passive managed fund

The fund manager aims to match the performance of a benchmark index or fund by investing in the same, or highly comparable, assets in the same proportions as the index. See full replication approach and stratified sampling.

Pension fund(s)

Fund(s) set up for a pension plan.

Pension savings

These are the savings you have made over the years in pension plans. Most people will have built up their pension savings through schemes run by the companies they’ve worked for, but some people may have paid into individual pension plans such as personal pensions (PPs) during their career.

Personal Allowance

Almost everyone in the UK qualifies for a personal allowance. This is the amount of income you can earn each year without having to pay any tax.

Pooled funds

See mutual fund.

Portfolio

A collection of investments, for example funds, shares, bonds, mutual funds, savings accounts or property.

Postcode annuities

Postcode annuities pay more if you live in certain parts of the country.   

Pound cost averaging

An investment strategy where money is invested at regular intervals rather than as a single lump sum. The strategy works best when the price of units is fluctuating up and down a lot as it 'averages' out the price at which you buy units and returns will generally be smoother.

Promissory note

A written promise to pay an amount of money to someone at a given time or on demand.

Property

Physical property (bricks and mortar) or securities linked to the value of physical property.

Protected rights/Former protected rights benefits

Protected rights were funds that built up from contracting-out contributions paid to your pension plan. The contributions were made as a result of you contracting out of the Second State Pension (formerly State Earnings Related Pension Scheme) under a previous plan. They are often referred to as former protected rights now as contracting-out for money purchase schemes ended on 6 April 2012. 

Protected rights contributions

This term relates specifically to contracting out and means the contributions the National Insurance contributions office pays to an appropriate scheme when a member decides to contract out. They're also known as Rebates.

Please note that the option to contract out on a money purchase basis will no longer be available from 6 April 2012.

Purchased Life Annuity

This is an annuity you can buy with your non-pension savings. It can be a very tax efficient product. Each income payment is assumed to represent partly the return of your original capital (the amount you paid for the annuity) and partly the growth the insurance company make by investing your money. Only the latter is taxable.   

Put option

An option giving the holder the right, but not the obligation, to sell a specific quantity of an asset for a fixed price during a specific period.

Qualified Recognised Overseas Pension Scheme (QROPS)

A QROPS is a pension scheme set up outside the UK. It is regulated by the country in which it is established and must be recognised for tax purposes in the country in which it is established. You can transfer your pension savings into a QROPS if you plan to retire abroad. Your pension savings will then be subject to the tax regulations in the country you choose, rather than the UK tax regulations.

Qualitative analysis

An approach to investment management based on subjective information such as the quality of a company's employees, business strategies and systems.

Quantitative analysis

An approach to investment management based on statistical or numerical methods to assess potential investments.

Quarterly

Every three months.

Quartile

A measure of a fund's performance against its relevant sector or universe if the funds within that sector or universe are divided into four.

Rally

A small rise in a market that has been generally falling.

Ratings

Provided by independent rating agencies based on a range of investment criteria. The best known ratings agencies are Moody's, Standard & Poor's, Citywire and Morningstar OBSR. The first two provide credit ratings on debt issued by governments, corporations and other institutions while the latter rate fund managers and funds respectively. 

Real estate investment trust (REIT)

A business that aims to buy and manage income producing properties or mortgages on income producing properties, and pays a high proportion of that income as a dividend.

Real return

The inflation-adjusted return on an investment.

Rebalancing

Making regular adjustments to a portfolio to maintain the desired split between the different types of investment, which will change over time due to differences in the performance of each. Without rebalancing a portfolio may end up being riskier or less risky than an investor intended, which may lead to returns that aren't in line with their expectations among other things.

Redemption

The repayment of the par/face value of a security at the maturity date.

Relative return

The return of an asset or fund over a period of time comparative to a benchmark or peer group (other similar funds or assets).

Retail Price Index

Like the Consumer Price Index (CPI), the Retail Price Index (RPI) tracks the change in the price of a basket of goods and services that a typical household might buy or use.  However, there are differences between the two. For example, the RPI includes mortgage interest which is not included in the CPI.

Retail Prices Index (RPI)

A measure of general inflation for the economy as a whole.

Retail property

Retail warehouses, shops, distribution centres and so on.

Retirement age

This is the selected retirement age. This is the age the member expects to retire at.

Retirement date

This is the selected retirement date. This is the date the member expects to retire at.

Risk

A measure of how much the performance of an investment fluctuates in comparison with a relevant indicator. Generally measured by standard deviation. The higher a fund's risk, the greater the likelihood that its performance will fluctuate.

Risk averse

An investor who would prefer to accept lower returns rather than lose money.

Scheme pension

This is an entitlement to a lifetime pension provided for you under a registered pension scheme that can’t be reduced year on year (except in certain very limited circumstances).    

Sectors

The names make it clear how much can be invested in shares but there are other requirements funds must meet to be included in the sectors. Funds are often grouped into different sectors depending upon the type of asset or sector they invest in. Grouping them in this way can make it easier to compare their performance. The two main bodies that determine sector classifications in the UK are the ABI and IMA. They stipulate various requirements that funds must meet in order to be part of that sector. In the UK for example, since 1 January 2012 the ABI and IMA managed sectors have been known as:

  • Mixed Investment 0-35% Shares
  • Mixed Investment 20-60% Shares
  • Mixed Investment 40-85% Shares
  • Flexible Investment

Security

A financial asset, for example a share or a bond.

SEDOL

Stock Exchange Daily Official List. This is a unique code that allows investors to identify the correct fund.

Self-invested element transfer

The self-invested element transfer value is for illustration only. The actual transfer value may be less than this.

Self-invested element value

The current value of the self-invested element of the plan. This only includes trades that have been settled. If there are any pending transactions, these won’t show until the transaction is complete.

Self-investment

This is when part of the pension fund is invested in assets used in connection with the employer's business. For example, this could include buying property to lend to the employer's or member's business. There are limits on the amount that can be self-invested under certain types of scheme.

Self-invested SIPP

In this type of personal pension scheme the member has a say in the scheme's investments. They may employ somebody to make these decisions for them. The member can have freedom to control investments if they want.

Shares

Shares, or equities, offer part-ownership in a company, unlike bonds, which are loans. Shares are generally considered the most risky type of investment as their value tends to go up and down more than other investment types, in some cases quite dramatically. However, shares are widely considered to offer the greatest potential for returns. Due to the potential for significant gains or losses in value, shares are better suited to investors who are prepared to invest for the medium to long term.

Short position

The sale of a borrowed commodity, currency or security in anticipation that the value will fall in the future.

Single life option

If you choose a single life option when you buy an annuity the income payments will stop on your death. They will not continue to be paid for the life of any spouse or partner after your death.

Single priced

The same price applies for buying, selling and valuing units.

Small-cap

Companies with a market capitalisation smaller than large-cap and mid-cap companies. Stock exchanges will usually define the financial size ranges for capitalisation.

Smoothing adjustment

A smoothing adjustment might be applied in certain exceptional circumstances. To maintain fairness between all with-profits investors, it might be necessary to apply a 'smoothing increase' or a 'smoothing decrease' to the sums paid out on withdrawal. Any adjustment might vary according to the nature of the withdrawal (for example switches, regular income, death). This might happen, for example, when a large number of investors leave the fund at a time when the (smoothed) unit value is significantly different from the actual value of the underlying assets.

Socially responsible investment (SRI)

Ethical investing in companies which are seen to contribute to the well-being of society.

Spouse

This is the other partner in the marriage who can either be the husband or the wife. Please note that 'common-law spouse' isn't a spouse except in very limited circumstances in Scotland.

Standard & Poor's

An organisation that publishes independent credit ratings for debt issued by sovereign, municipal, corporate and financial sector entities based on their financial strength.

Standard deviation

A statistical measure of the volatility (how much returns deviate up and down from its average return) of a portfolio or asset based on its historical performance. It's the main measure of risk used by the investment industry. The larger the standard deviation, the more volatile the fund over the period measured and therefore the riskier it's considered to be.

State Earnings Related Pension Scheme

As well as the basic State Pension, you may qualify for an additional pension from the State.  Any additional pension is payable from a scheme called the State Second Pension. This was introduced in April 2002.  Before that it was known as the State Earnings Related Pension Scheme.

State Second Pension

As well as the basic State Pension, you may qualify for an additional pension from the State.  Any additional pension is payable from a scheme called the State Second Pension.

Stock exchange

A stock exchange is a market for stocks and shares. Organisations can raise capital by selling securities through a stock exchange.

Stock selection

Method used in active investment management where the manager selects stocks (company shares) they believe will outperform.

Stocks

Another word for equities or shares. See shares.

Switching

Moving money from one fund to another.

Switching costs

The costs incurred by performing a switch.

Tax free cash

You can take a proportion of the pension funds you’ve built up as a tax free lump sum after age 55. This is usually limited to 25% of the total fund (though it may be less than this if the total fund exceeds the Lifetime Allowance). If you’re in a defined benefit scheme the formula is different.

 

Tax-free cash sum

You have the right to take a proportion of the pension funds you’ve built up as a tax free lump sum after age 55. This is usually limited to 25% of the total fund (though it may be less than this if the total fund exceeds the Lifetime Allowance), but in some cases it may also be greater than 25%. If you’re in a defined benefit scheme the formula is different.        

Terminal bonus

The bonus paid on a with-profits plan at the end of its life. Also known as final bonus.

Top 10 holdings

The 10 largest holdings within a portfolio expressed as a percentage of the overall portfolio.

Top-down investing

An investment approach that looks to identify trends in the overall economy and then selects investments that could potentially benefit from those trends.

Total return

The sum of all gains and losses (capital plus income) of an investment over a period of time.

Tracker

See index tracker.

Tracking error

The extent to which a tracker fund's return differs from the benchmark fund or index it's aiming to track.

Transfer value

If you want to move the value of your retirement benefits from one pension scheme to another, the scheme you are moving your benefits away from will quote you a transfer value.  This is their estimate of the cash equivalent of the value of the benefits you built up during your membership of the scheme.

Triviality

If the total value of all your pension fund savings is below a certain level, you can take the whole amount as cash.  Only 25% of it is tax free.

Underlying assets

The assets (for example, shares or other funds) a fund invests in.

Unit price

Value of a pooled fund unit. May be expressed as the 'bid', 'mid', or 'offer' price.

Unit trust

An open-ended pooled fund which creates new units as demand from investors increases.

Universe

Term used by investment professionals to describe the total number of assets available from which a portfolio can be constructed. So, for example, a traditional UK equity fund can generally invest in all companies listed on the UK stock market whereas an ethical equity fund investing in UK equities has a smaller universe to choose from because it can only invest in companies in the UK that meet its ethical criteria.

Upper Earnings Limit

The maximum amount of earnings on which National Insurance contributions are payable by employees at the main rate. 

Value investment

An investment style that aims to buy assets that are felt to be undervalued in relation to the market and take the profits when they appear overvalued.

Variable annuities

These products offer a number of features, but usually pay a guaranteed income (commonly around 4% of your capital at age 65) and still allow you to invest in a mix of equities and other investments. However, please note that the construction of these products does vary considerably from one insurance company to another.

Volatility

The extent to which an investment fluctuates in value. Usually measured by standard deviation.

Waiver of contribution

An insurance benefit which will pay a member's contributions to their pension plan if the member is unable to work due to illness or injury. The member will pay an additional premium along with the pension contribution to pay for this benefit.

Warrants

Securities issued by a company (often an investment trust) which give their owners the right to purchase shares in the company at a specific price at a future date.

With-profit annuities

With-profits annuities are invested in the company’s with-profits fund. With-profits funds generally invest in a mix of assets (including equities).  To try and avoid sharp increases or decreases in the value of the fund, one of the distinctive features of with profits is ‘smoothing’.  This simply means the insurance company will hold back some of the gains from investment returns in the good years to subsidise returns when investments perform poorly. Like all lifetime annuities, these products will pay you an income for life.

Yield

The income from an investment given as a percentage of its price.

Zero coupon bond

A bond that doesn't pay regular interest but is instead issued at a discount below its par/face value. However, it is redeemable at par/face value, giving a capital gain.