Actively Managed Funds
Actively managed funds mean that the fund manager buys and sells holdings as required to maximise gains and minimise losses. This allows the manager to adapt to changing market conditions.
Annual Management Charge (AMC)
This is a charge made by fund managers to cover the costs of running a fund, and normally forms part of the total Ongoing Charge. Details of each fund’s charges can be found in its Key Investor Information Document (KIID).
Annual Pension Allowance
For pensions, the annual allowance is the maximum amount that can be paid into all your registered pension schemes before tax charges arise. If the amount paid is more than the annual allowance, you’ll be taxed on any excess. For the 2018/19 tax year, the annual allowance is £40,000.
A pension annuity is an income for life, or for an agreed period, from an annuity provider with the proceeds of a pension fund. This is normally after the payment of any tax-free cash.
A fund manager’s decision on what assets and what proportion of each will be held in a fund.
Your money, and anything else you own which is worth money, such as property or shares.
Every employer in the UK, starting with the largest employers and working down by size, must put eligible employees into a pension scheme. You are eligible if you are between the age of 22 and State Pension Age, earn £10,000 a year or more, are an employee, and work in the UK. All employers are expected to be covered by October 2018 and the employer must contribute to the scheme. You can, if you wish, opt out of joining the scheme after you have been automatically enrolled.
Additional Voluntary Contributions made by you into your occupational pension scheme to increase the value of the benefits you’ll receive.
The price at which you sell shares.
A bond is a loan that you make to a company or the government for a fixed period, during which they pay you a fixed rate of interest. At the end of the period, you get your original investment back. During that period, bonds can be bought and sold on the market. Their price changes according to how attractive their interest rate is compared to other available rates.
Capital Gains Tax
A tax paid on any profit you make by cashing in some types of investments. There is an annual threshold for capital gains (£12,000 this tax year); if your profits exceed this you’ll pay 18% or 28% Capital Gains Tax. Sometimes CGT will be paid if you gift an investment to someone who is not your spouse or civil partner.
Career average pension scheme
A career average scheme (career average revalued earnings - CARE), works in a similar way to a defined benefit scheme. You typically receive an income in retirement based upon your average earnings, after adjusting for inflation, over the whole period of membership of the scheme. Like a defined benefit scheme, some schemes won’t count additional earnings such as overtime.
Child Trust Fund
These were savings and investment schemes for children born on or after 1st September 2002 and before 1st January 2011 and have now been replaced by Junior ISAs. Contributions can be made to existing Child Trust Funds of up to £4,368 this tax year, and money will be available to the child when they reach 18.
Collective investments are schemes such as unit trusts, investment trusts and OEICs, where investors’ money is pooled. The main advantage of such schemes is to give investors access to a wider range of investments than they would have as individuals.
The amount you are paying in to a plan.
Crystallisation is when you start to draw your pension. This could be when you draw all or part of your pension arrangements, or if you die before pension benefits have been taken.
Defined benefit pension scheme
Defined benefit pension schemes provide pensions based upon your earnings, your age and length of time you have been a member of the pension scheme. Your earnings are defined by the scheme and may not include payments such as overtime, bonuses or other benefits. Your employer will be able to explain this to you.
Defined contribution pension scheme
Defined contribution pension schemes invest the contributions made by you and your employer. The contributions build over your working life, and you’ll normally be given a choice about how your contributions are invested. The benefits you receive at retirement are based upon how much has been contributed, how long it has been invested and how well the investments have performed.
Defined contribution pension consolidation
Pension consolidation means combining your pensions into fewer pots.
The distribution of part of a company’s profit earnings to its shareholders. Dividends are usually paid twice a year in the form of a final dividend and an interim dividend, although some companies pay dividends quarterly.
Final Salary Scheme
This is a type of occupational scheme, also known as ‘defined benefit’, where the employer makes a promise to pay a scheme member a pension, which will be determined by their final salary, years of service, and a rate of accrual (or build up of rights). The accrual rate is normally expressed as a fraction e.g. 1/60th for each year of service.
Financial Conduct Authority (FCA)
An independent body set up by the government to regulate investment business, deposit taking and insurance.
Fixed interest security
Another name for a bond.
FTSE All-Share Index
The Financial Times Stock Exchange’s measure of the performance (or ‘index’) of more than 800 companies listed on the London Stock Exchange. FTSE is pronounced ‘footsy’.
FTSE 100 Index
The index of the top 100 companies listed on the London Stock Exchange.
FTSE 250 Index
The index of the top 250 companies listed on the London Stock Exchange.
A fund pools together the money from many individuals and then the fund manager uses it to invest in a broad range of assets. Fund managers invest in different asset types like cash, bonds, equities and property - exactly what they buy depends on the investment objective of the fund.
These are also known as ‘gilts’ when they are issued by the UK government. When you, or a fund manager, invest in a gilt, this is effectively a loan to the government. In return, the government pays a fixed rate of interest based on the ‘nominal value’ of the gilt. For example, if an investor holds a gilt with a nominal value of £100 and a fixed interest rate of 5%, the government pays the investor £5 a year in interest. This is normally until a specified date in the future (the maturity date), when the government repays the nominal value of the investment. Gilts are normally regarded as relatively low-risk investments because there is almost no risk of the UK government being unable to repay its debts.
Group Money Purchase Scheme
This is a type of occupational pension scheme where the employer and usually the employee make contributions into the pension arrangement. The amount to be contributed is normally defined in the contract of employment, which is why they’re also classified as ‘defined contributions’.
Income drawdown is a way of using your pension to provide you with a retirement income. You do this by investing your pension pot and the income you’ll get will depend upon the performance of the investments. Unlike an annuity, it isn’t guaranteed for life, so your pension could run out. New rules from April 2015, sometimes called ‘pensions freedoms’, means that there is no limit on the income you can take. But it also means that you may pay more tax and your pension will run out faster, the more you take out.
Income Tax is a tax you pay on your income.
Please note, Scottish rates of income tax may be different.
An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. Indices can be grouped by market cap, business type, sector or other characteristics.
An annuity which increases over time. It could be linked to the Retail Prices Index or a chosen annual percentage.
Index-linked Tracker Fund
Index-linked tracker funds aim to track the performance of a particular index. The fund may invest in all the individual stocks within a fund, or aim to mimic its performance by choosing a representative range of investments.
Inflation is the increase in prices over time and the corresponding fall in buying power.
A type of collective investment scheme. An investor buys shares directly in the investment trust and the trust managers invest this money in various other company shares according to the investor's fund choice. Investment trusts differ from unit trusts in that they can take on debt in order to buy more assets to try to exploit upward movements in the market. Of course, this can work the other way if the market goes down. They also deal in shares rather than units and are a public limited company, not a trust.
ISA is short for Individual Savings Account, and these products can provide holders with tax benefits.
HM Treasury set an annual allowance for contributions to ISAs each tax year (tax years run from 6th April one year to 5th April the following year). You can choose whether you invest your full ISA allowance into a stocks and shares ISA, save it in a cash ISA, use it in an innovative finance ISA, or split your allowance in any combination of the three types of ISA.
Alternatively you can split your allowance by investing up to £4,000 in a Lifetime ISA and the remaining allowance between any combination of the other three types of ISA, as long as you don’t exceed £20,000 in total across your ISAs.
The official term for the manager of ISA products.
This is short for International Securities Identification Number. This is a 12 digit unique code which is used internationally to identify a security.
Key Investor Information Document (KIID)
A document which gives a detailed explanation of how a fund works, including any charges you may incur. You should always read the Key Investor Information Document carefully before you choose a fund.
The Lifetime Allowance is the maximum amount of pension saving you can build up over your life that benefits from tax relief. If you build up pension savings worth more than the Lifetime Allowance you'll pay a tax charge on the excess. From 6th April 2016, the Lifetime Allowance stands at £1,055,000. The current rate of tax payable on crystallisation of benefits is 55% for lump sums or 25% if to be taken as income.
The mid-market price, or mid price, is halfway between the bid (selling) price and the offer (buying) price for securities, and is usually the price quoted as the value of the security.
Multi asset funds invest in a range of assets, which can minimise risk for investors. This is also known as diversification. The type and proportion of assets held in a multi-asset fund varies.
New State Pension
The new State Pension came into effect for those reaching State Pension Age on or after 6th April 2016. The full new State Pension is £164.35 per week. The amount you actually get can be higher or lower than this and is based on your National Insurance record. If you already have your state pension, this is not affected by the new State pension.
An Open-Ended Investment Company (OEIC) is a type of collective investment scheme, similar to a unit trust except that an OEIC is incorporated as a separate legal entity and issues shares rather than units.
This is the term given to certain types of pension schemes set up by employers on behalf of their employees and would include all final salary schemes and many money purchase schemes.
The price at which a share is bought.
A sum of money you put into a bank, a building society, or National Savings is said to be ’on deposit’.
Ongoing charges are all the charges associated with the management of the fund. You can find details of a fund’s ongoing charges in its Key Investor Information Document (KIID).
Managed funds have target allocations for particular sectors or asset types, such as 50% equities. If the fund held 52% in equities it would be described as overweight in equities.
Pay As You Earn is the system whereby Income Tax and National Insurance contributions are deducted from your salary before you receive it.
A tax efficient savings plan for retirement, which can be accessed once you reach minimum pension age, which is currently 55 (rising to 57 from 2018). Pensions can be provided by your employer or you can save into your own personal pension. Most pension schemes let you take 25% of your pension pot tax-free.
New pension rules came into effect on 6th April 2015. They provide much more flexibility on how you can take your defined contribution or money purchase pensions. You can still take 25% tax free cash as a lump sum, but now you can also take all of your pension fund in cash, or you can take cash in lump sums as and when. You can also now leave your money invested in your pension or, you can buy an annuity. You still need to be aged 55 or over to access your pension and any cash you take out over the 25% tax free cash is taxed as income.
A personal pension fund is set up as a number of segments, generally speaking a thousand, allowing you to take benefits from segments in stages over a number of years. This is done by either buying an annuity with a segment (or segments) or taking advantage of an unsecured pension from a segment (or segments). The benefit of phased drawdown is that you do not have to take your entire pension in one go and the remaining segments stay invested with the potential to grow (or drop in value). This is also sometimes referred to as staggered vesting. Whilst still available, this facility has generally been overtaken by the new pension freedom rules.
Pooled investments are collective investment schemes, which combine the capital of a large number of investors, allowing investors access to a far wider range of assets than they would be able to reach individually. This can help to spread risk and reduce costs. Examples include OEICs and Unit Trusts.
The full spread of investments held by an individual or a fund.
Pound cost averaging
Pound cost averaging is a way of smoothing returns on your investment over time without having to predict when markets will rise or fall. You make regular fixed contributions to an investment, such as a unit trust or OEIC. When prices are low your money buys more shares or units, and when prices are higher it buys fewer. The effect of this is that you pay the average share or unit price over time.
Protected Rights Funds
Pension funds which have been built up from National Insurance rebates as a result of contracting out of the State Second Pension - formerly known as SERPS.
Rebalancing is the process carried out by fund managers to make sure the fund doesn’t stray far from its target asset allocation. This could involve selling over-weighted securities, buying under-weighted securities, or a combination of the two. Rebalancing is used in actively managed funds to maintain the level of risk expected by investors in the fund.
This is the term given to the tax payable on any amount over the Lifetime Allowance when retirement benefits are crystallised. The scale of this charge (25% if the excess is used to provide taxable income and 55% if taken as cash) is designed to take back the benefits of tax relief and growth on the part of the fund in ’excess’.
This is the return on a bond at its maturity date in relation to the price at which it was purchased and the interest payments received by the bondholder.
Regular investments involve investing smaller amounts on a regular basis rather than investing a single lump sum. This can help to smooth the ups and downs of the stock market due to pound cost averaging.
Retail Prices Index
Also known as RPI. A measure of inflation based on how the prices of a wide range of goods, including housing costs, have changed over the previous financial year. The RPI is the most widely known measure of inflation in the UK. Tax allowances, benefits and pensions are often increased line with RPI.
This refers to the gain or profit on an investment, and does not include the original capital invested.
A stake in a company listed on a stock exchange entitling you to a proportion of any profits made by the company.
Single asset funds
Single asset funds invest in one asset only, which can make them riskier than multi-asset funds as no one asset consistently outperforms all others on a regular basis.
SIPP stands for Self Invested Personal Pension, and is a pension that you manage yourself, making your own contributions, choosing your own investments.
A personal pension fund is set up in a number of segments, generally a thousand, allowing you to take benefits from segments in stages over a number of years. This is done by either buying an annuity with a segment (or segments) or taking advantages of an unsecured pension from a segment (or segments). The benefit of phased staggered vesting is that you do not have to take your entire pension in one go and the remaining segments stay invested. This is also sometimes referred to as phased retirement. Whilst still available, this facility has generally been overtaken by the new pension freedom rules.
A type of pension introduced by the Government in 2001 in order to make it easier for people to save for their retirement. Stakeholder pensions are designed to be straightforward, flexible, and inexpensive.
State Pension Credit
State Pension Credit is an income related benefit. It’s in two parts, ‘guarantee credit’ and ‘savings credit’. Guarantee credit tops up your weekly income if it’s below a certain level and savings credit is an extra payment if you have saved some money towards your retirement. State Pension Credit is also the gateway to other benefits such as housing benefit or council tax reduction. If you reach state pension age on or after 6th April 2016 you will be entitled to the new State Pension and may not be eligible for savings credit.
State Second Pension (S2P)
If you qualify for the State Second Pension (S2P), you are entitled to a supplementary pension from the state when you reach the state retirement age. This replaces SERPS.
A general term that can cover gilts and corporate bonds, essentially meaning fixed term, fixed interest loans to the government (gilts) or companies (bonds).
A stock exchange is where stocks and shares are bought and sold.
Stocks and Shares ISA
Stocks and Shares ISAs (Individual Savings Accounts) are a simple, flexible and tax-efficient way of investing in the stock market through portfolios or funds.
Synthetic performance is used when a new fund is created. As it has no previous data, the underlying assets are used to reproduce the artificial performance.
A term used to describe investments which offer tax benefits or tax relief. The Government will normally give you tax relief that helps increase the value of your plan. If the basic rate of tax is 20%*, for every £80 you pay into your plan each month, the Government will automatically top up your pension with an additional £20. If you are a higher or additional rate taxpayer, you may be able to claim additional tax relief via your annual tax return.
* If you are resident in Scotland for tax purposes the tax relief you will be entitled to will be at the Scottish Rate of income tax, which may differ from the rest of the UK.
This is the mechanism by which successive Governments have encouraged individuals and corporations to make private provision for retirement. For example, for individuals, it means that tax can be reclaimed on pension contributions at the highest rate(s) at which it is paid.
A tax year runs from 6 April one year to 5 April the following year.
A low-cost form of life insurance. If you die within a given period (the ’term’), it will pay out, however, if you survive the term nothing will be paid out.
Also known as 'index funds', tracker funds are designed to track (as closely as possible) the performance of a Stock Exchange index such as the FTSE All-Share Index. Tracker funds are passively managed, which means there is no manager making investment decisions and will usually have lower charges than actively managed funds.
An arrangement whereby control over an asset is transferred to a person or organisation (known as the ’trustee’) for the benefit of someone else (known as ’the beneficiary’).
A share in a unit trust.
The generic term for policies whose value is determined by the performance of a portfolio of stocks and shares. A unit linked investment can therefore go up and down in value.
A type of collective investment, where investors pool their money to buy units in a choice of fund.
The value of an investment can fall as well as rise, and you may get back less than you invest. If you are not sure about investing, seek independent advice.