Moneywise's ultimate personal finance jargon buster

7 May 2020
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The Moneywise team rounds up all the confusing and commonly misunderstood financial jargon - and gives simple explanations of what they mean. 

Accrual rate - if you have a final salary or defined benefit pension, look out for this term on your pension statement. It shows the rate at which your pension savings build up for each year you are a member of the scheme. It is usually represented as a proportion of your pensionable earnings, for example 1/60th or 1/80th. The lower the bottom number, the higher the income you will get.

Additional permitted subscription - should an Isa holder die their Isa can be inherited by their spouse or civil partner. The value of the deceased's Isa is added on to the Isa allowance of their surviving partner in the year in which they die. This sum is called the additional permitted subscription and means if someone dies leaving an Isa or Isas worth £10,000, the surviving spouse receives an Isa allowance that tax year of £30,000 - their own £20,000 allowance plus the £10,000 they have inherited. 

AER – the annual equivalent rate shows you what rate of interest your savings will earn over a year, regardless of whether the account pays interest monthly or yearly.

Annuity – this allows you to trade all or part of your pension savings for a guaranteed income for the rest of your life. You don’t have to buy an annuity, but it can help provide certainty in retirement.

Annual allowance - this is the maximum you can pay into a pension each year tax-free and is currently set at £40,000 a year. Since April 2016, the government has also introduced a tapered annual allowance that affects those with a threshold income of more than £150,000 a year (including pension contributions) and an income of more than £110,000 (excluding pension contributions). A person's annual allowance is reduced by £1 for every £2 of 'adjusted income' earned over £150,000, up to a maximum reduction of £30,000, leaving a minimum tapered annual allowance of £10,000. Non-earners can also get tax relief on contributions up to £3,600 a year.

APR – the annual percentage rate shows how much you are charged for borrowing, making it easier to compare products. This includes the interest rate and other charges, such as arrangement fees.

Auto enrolment – to help people save for retirement, the government has made it compulsory for companies enrol employees in a pension scheme. This happens automatically, but you can opt out if you wish.

Balance transfer – this allows you to move your debt from one credit card to another. This can be a good way to minimise interest payments as most providers offer an interest-free period when you transfer a balance, however bear in mind that fees may eat into your savings.

Bankruptcy - this is an option for individuals or businesses that are not able to repay their debts. It is a legal process that will see most of your debts written off, but you may have to sell assets such as your house or car. Bankruptcy usually lasts for 12 months and enables bankrupts to make a fresh start, however it will remain on your credit record for six years making it harder to get a mortgage or take out a credit card.

Base rate – set by the Bank of England’s Monetary Policy Committee (MPC), many financial institutions use the base rate to set the interest rates they charge customers. When the base rate rises expect savings and mortgage rates to increase - and vice versa.

Bear market - this bit of investment jargon is used to describe falling stock markets.

Bed and Isa - this is a process by which you can fund your stocks and Shares Isa using existing investments. If you have investments outside of an Isa and you would like to make them tax-free, you can ask your provider to sell your investments and buy them back at the same time within your Isa. If the two trades take place at the same time you remove the risk of your investments changing value in the meantime.

Bitcoin – the most popular cryptocurrency, a digital currency without a central bank - such as the Bank of England – behind it. It works in the same way as a traditional currency as you can make payments and transfer money. However, the value of Bitcoin can rise and fall unpredictably.

Bull market - describes rising or rallying stock markets.

Capital gains tax – this tax is levied when you sell an asset that has increased in value since you bought it. You only pay tax on the gain itself, i.e. the amount its value has increased. It applies to most personal possessions worth £6,000 or more (apart from your car), property that isn’t your main home and shares not held within an Isa or tax-free account.

Cashback website - these websites allow you to get paid for shopping or buying services like insurance, mobile phone or broadband contracts online. Users simply have to visit the website before linking through to their chosen retailer and will have a small percentage of their spend paid back into their cash back account. Quidco claims its members claim an average cash back of £280 a year.

Cash Isa - this is a savings account that allows your money to grow free of tax. In the 2020/21 tax year, you can save a maximum of £20,000 in an Isa each year.

Cash plan – these plans cover the cost of everyday healthcare, such as dental and optical check-ups and treatment. You pay a monthly fee and the insurer reimburses you for the cost. How much cover you receive depends on the individual policy.

Claim moratoriums – these exclusions normally apply to insurance policies when you have a pre-existing condition. It means you can’t claim for certain illnesses within a specified time.

 

Commodities - these are raw or primary products that are traded on an exchange. 'Hard' commodities include gold, silver, copper, oil and gas, while wheat, sugar and cocoa beans are 'soft' commodities. Investors usually buy commodities to diversify their portfolio either by physically purchasing a commodity, buying shares in a commodity company or indirectly through a fund or investment trust.

Compound interest - this is when you earn interest on the interest you’ve already earned. For example, if you have £100 in a savings account paying 10% a year, after one year you will earn £10, leaving a balance of £110. In the second year you will earn £11 in interest as you are earning interest on the first year’s interest.

Consumer prices index - this is the official measure of inflation, the growth in prices over time, for the UK. It measures changing prices of a basket of goods and services that reflect UK spending habits. It is published every month by the Office for National Statistics.

Corporate bond - these bonds are essentially loans to companies which pay a fixed rate of return to investors. Risk varies according to the company in question and its ability to repay its loan, but corporate bonds are usually considered to be lower risk than stocks and shares. Investors can buy corporate bonds directly but it usually makes more sense to invest in a corporate bond fund, where managers invest in a portfolio of bonds and manage the holdings on your behalf.

County court judgment (CCJ) - this is a court order that will be issued if you repeatedly fail to pay a debt. The court will either instruct you to repay the whole debt immediately or in instalments, depending on your circumstances. CCJs will be held on your credit record for six years, unless you repay it in full within 30 days, making it harder to get a mortgage or credit card.

Defined benefit pension – this is a type of pension where the benefit you'll receive in retirement is known at outset. The income payable will be based on the accrual rate (see above), your earnings and length of service. Your income will be paid directly once you retire and start drawing benefits. These may be based on your final salary or a career average. Public sector pensions are defined benefit but they are becoming increasingly rare in the private sector because they are so costly to run.

Defined contribution pension – here you (and your employer if it is a workplace scheme) pay into your pension and invest that money into one or a number of investment funds. The value of your pot at retirement will depend on the amount of money paid in and performance, less any charges. When you retire it is your responsibility to turn your pot into an income.

Dividends - these are payments made made by companies to their shareholders from their profits. If you hold shares or funds you may receive dividend payments. You have to pay tax on any dividend payments above £2,000 in any one tax year, unless the investment is held in an Isa. All dividend payments within Isas are tax free. 

Easy access Isa - this is a tax free savings account, that allows you to make withdrawals instantly, whenever you like, without it impacting the rate of interest you earn. Watch for accounts that may limit the number of withdrawals you can make.

Equity release - equity release plans enable you to unlock some of the equity that has built up in your property. The most common type is a lifetime mortgage, which involves taking out a loan secured to your home. Interest is rolled up and repaid alongside the loan when the property is eventually sold.

ESG - this acronym stands for environment, social, governance and refers to a style of investing or way of running a business that takes a range of ethical criteria into account. In addition to environmental factors (such as consideration of climate change) it also extends to social issues (like a firm's labour practices or safety record) and matters relating to its governance (for example executive pay, diversity on its board and its overall business ethics).

ETF – exchange traded funds invest in a portfolio of assets in much the same way as funds. Unlike funds, they can be traded throughout the day.

Ear marking order - in the event of a divorce or the dissolution of a civil partnership, an earmarking order permits a portion of one person's pension income to be paid to their ex on retirement. The original pension member retains control over the pension.

Enhanced annuity - also known as an impaired life annuity, these policies pay a higher rate of income to people who have health problems or have aspects of their lifestyle (for example, they smoke) that means they are likely to have a reduced life expectancy.

Estate - the name for everything you own - your home, possessions as well as your savings and investments.

FCA – the Financial Conduct Authority is the independent regulator of the UK’s financial services industry. It sets the standards providers need to meet to protect consumers and the power to take against those that don't. It does not investigate individual complaints. Consumers should complain directly to a firm and then to the Financial Ombudsman Service if the provider’s response is not sufficient.

Final salary pension - this is the most common form of defined benefit pension (see above). Often referred to as gold-plated pensions these workplace schemes pay members a guaranteed income for life when they retire, with benefits linked to their final salary and the length of time they were in the scheme.

Fixed term annuity - this is an annuity that pays a guaranteed income for a designated period, providing flexibility for those that do not want to commit to a lifetime annuity. It also provides a guaranteed maturity amount at the end of the term.

Flexi-access drawdown or FAD - you may see drawdown plans with this moniker. It means you can take out as much or as little of your pension as you like, in contrast to capped and flexible plans that were sold prior to the pension freedoms in April 2015.

Flexible Isa - these individual savings accounts let you withdraw money and then put it back in, in the same tax year, without it counting towards your Isa limit. So, for example, a flexible Isa would allow you to pay in £20,000, withdraw £20,000 and then pay another £20,000 back in within the same tax year. Not all Isas are flexible.

Freehold – if you are a freeholder you own both the property and the land it stands on. Detached houses are generally sold on a freehold basis, whereas flats are leasehold.

Fund – this is an investment vehicle which invests in a portfolio of assets. They are managed by a fund manager and individuals can buy into the fund through a stockbroker. Some funds target growth in value while others deliver a regular income to their investors.

Guaranteed annuity rate - some older pensions (sold when interest rates were much higher than they are today) will offer you a rate on your annuity that is much higher than rates payable on annuities now. However they may require you to retire and start taking benefits on a specific date.

IFA – an independent financial adviser searches the whole market to find the best financial products for their clients. They charge clients a fee for their services.

Income drawdown – in retirement you can choose to take an income out of your pension pot on an ongoing basis or ad hoc lump sums, rather than buying an annuity. There are no caps or limits on how much you can withdraw following the introduction of the pension freedoms in April 2015. As your savings remain invested there is the opportunity for your pot to carry on growing but there is the risk it may fall in value too.

Inflation – measures the change in the cost of goods and services. As inflation increases, the cost of goods and services rises. In the UK, the consumer prices index (CPI, see above) tracks inflation and is published by the Office for National Statistics each month.

Interest-only - a mortgage where the borrower only pays the interest on the loan each month, rather than paying down the debt itself. Customers must have an alternative repayment vehicle in place, so they can repay the initial loan when the mortgage term ends.

Innovative Finance Isa - these Isas allow you to invest your money in peer-to-peer landing. Peer-to-peer landing bypasses traditional banks and connects people who have money to lender with individuals and businesses that need a loan. The returns on P2P can be higher than a savings account, however the risk is higher. Your rate of return could be impacted if borrowers miss repayments and your money is not protected by the Financial Services Compensation Scheme.

Investment trusts – are companies which invest in a portfolio of assets. These companies are listed on the stock exchange and individuals can then buy shares in each investment trust. Unlike funds, there are a finite number of shares available in each trust – this is called being ‘closed ended’.

Isa allowance - this is the amount of money you are able to save tax free into an Isa each year. For 2020/21 the Isa allowance is £20,000. There are four different types of Isa and you can save into one of each kind in any one tax year so long as you don't pay in more than £20,000 in total.

Isa transfer- this is when you move funds from one Isa provider to another. The key here is not to withdraw your cash and then deposit it with a new provider as it will lose its tax-free status, instead contact the Isa provider you wish to switch to and fill out an Isa transfer form to move the money for you. Not all cash Isas will accept transfers.

Junior Isa - these are tax free accounts for children aged under 18. Cash and stocks and Shares junior Isas are available and you can pay in as much as £9,000 a year (2020/21 tax year). Parents or guardians can open the account but the money belongs to the child. Once the child turns 16 they can start managing the account but they cannot withdraw any money until they turn 18.

Lasting power of attorney- this legal document gives your chosen representative/s the power to make decisions about your finances and or your health and welfare on your behalf if you lose your physical or mental capacity. To be enforced it needs to be registered with the Court of Protection.

Leasehold – if you own a leasehold property you have a legal agreement with the freeholder which tells you how long you own the property for. You will generally pay a ground rent to the freeholder and other service charges may apply. Most flats are sold on a leasehold basis and the freeholder is usually responsible for maintaining the communal areas of the building.

Lifetime allowance - this is the maximum you can save in your pension during your lifetime before taxes apply. For the 2020/21 tax year the lifetime allowance is £1,073,100.

Lifetime Isa - these Isas are designed to help people buy their first home or save for later life. You can save up to £4,000 in one of these in each tax year and the Government will top it up by an extra 25%.  That means if you save £4,000, the Government will add £1,000. The money can only be accessed to buy a home or once you have reached age 60. Withdraw your cash for any other reason and you will be hit with a severe 25% penalty. You must be 18 or over but under 40 to open a Lifetime ISA, but can continue to pay into one until you reach age 50.

LTV – the loan to value of a mortgage tells you what percentage of a property’s cost you’re borrowing from a bank. If you borrow £150,000 for a property worth £200,000 your loan to value will be 75%. In general, providers offer lower mortgage rates to smaller LTVs.

Marginal rate of income tax - this is the highest rate of tax that you pay on your income. Different rates of income tax are charged depending on your income. This starts at 20% rising to 40% and 45% for the highest earners. However, if you pay one of the higher rates of income tax, you will only pay this rate on the portion of your income that exceeds the threshold, meaning your income may be taxed at more than one rate. It may also be referred to, more simply, as your highest rate of tax.

Maturity - this what happens when a fixed term savings product comes to an end. Once the product has matured you are free to cash it in, if you leave your money where it is, it's likely that the interest rate will be reduced. For this reason it's worth make note of your savings' maturity date and shop around for a better deal unless you need the money.

Money mule - a form of money laundering where a criminal transfers money into an innocent person’s bank account, which in turn is transferred to another account, to disguise the source of the money.

Money purchase annual allowance - this kicks in as soon as you start taking money out of a defined contribution pension and sees the amount you are able to pay in each year fall from £40,000 to £4,000. This is particularly important for savers that wish to dip into their pension while they are still working. The MPAA won't apply if you are taking tax free cash and put the remainder of your fund in income drawdown, if you are purchasing an annuity or if your pension is worth less than £10,000.

Money transfer – this type of credit card works much like a balance transfer, but you receive the cash into your current account rather than the debt being paid off. Beware of high fees.

Negative equity – a property enters negative equity if it is worth less than the outstanding mortgage. For example, if you have a £150,000 mortgage balance but the value of your home is only £130,000.

No negative equity guarantee - this is a feature of equity release plans which ensures that you will never owe more than the value of your home.

Notice account/Isa - this is when you need to tell your savings provider that you want to make a withdrawal before you need the money. This could be anything from 30 day to a number of months. As a rule the more notice you need to give, the higher the rate of interest you will earn.

Open banking – an initiative to increase competition in the banking sector by allowing smaller third-party companies to access your banking data, if you give them permission to do so. Proponents of open banking say it will make it easier for consumers to understand their spending, budget and shop around for financial services.

Passive investing – rather than using a fund manager to actively manage your funds, passive investors use tracker funds which move in line with an index, such as the FTSE 100. They are usually cheaper than actively managed funds.

Personal allowance – this is the amount most people can earn before being subject to income tax. The allowance is £12,500 for the 2020/21 tax year.

Personal savings allowance – basic rate taxpayers can earn up to £1,000 in savings income tax-free each year. Higher rate taxpayers will be able to earn up to £500 but additional rate taxpayers receive no allowance.

Robo advice – a form of advice which uses computer algorithms to recommend products or create investment portfolios, based on your stated financial attitudes and circumstances. Robo advice is generally cheaper than traditional alternatives.

Pension sharing order - this allows a portion of a person's pension to be transferred to a former spouse in the event of divorce (or the dissolution of a civil partnership). These are now used more often than an earmarking order (see above) because the transfer is made into a new contract, under the new member's name, giving them control over the pot of money.

Rolled up interest – this occurs when you do not pay off the interest on your loan each month, instead it is added to the overall amount you owe. This means you’re being charged interest on the interest and the costs can mount quickly. This type of agreement is common with equity release mortgages.

Section 75 of the Consumer Credit Act – if something goes wrong with a credit card purchase, your card company is legally obliged to refund you, even if it is the retailer’s fault. This protection only applies to credit card purchases of between £100 and £30,000, and these can’t be made through a third party such as PayPal. Even if you partially paid using a credit card, the card company is liable for the whole refund.

Shared equity – the government or a housebuilder loans you a portion of the cost of a home, buyers contribute a cash deposit and get a mortgage on the remainder. You must pay back the shared equity loan eventually, but are not required to pay it off each month like a mortgage.

Shared ownership – you purchase part of a property (typically between 25% and 75%) using a shared ownership mortgage while another party – usually a housing association - owns the rest. You pay rent each month on the portion you don’t own, but you can increase your ownership over time.

Stocks and shares – also known as equities, they allow you to invest in individual companies. The value of your shares will rise or fall depending on the performance of the company. You may also receive an income from the shares if it pays a dividend.

Stocks and Shares Isa - also known as investment Isas, these allow you to hold individual shares, funds and investment trusts within an Isa wrapper to enjoy tax-free growth.

Tax code - this combination of letters and numbers that you'll see on your payslip tells your employer or pension scheme how much tax to take from your pay or pension. 1250L is the most common code for individuals with one job or pension but it may 

Tax wrapper - this term refers to a product that can be wrapped around your savings to shelter them from tax. Both Isas and pensions are commonly referred to as tax wrappers.

Trust – a vehicle to hold assets on behalf of others. An attraction of using a trust is that it can minimise inheritance tax liabilities and reduce the time and cost of transferring assets after death.

Uncrystallised funds pension fund lump sum (UFPLS) - this is when a lump sum is withdrawn from a pension without moving the remaining funds into flexi access drawdown or to buy an annuity. There is no tax to pay on the first 25% of any withdrawal but the remaining 75% will be taxed as income at your highest rate. It is only available with defined contribution pensions.

VCTs - venture capital trusts invest in smaller, higher risk companies that are not quoted on the main stock exchange. Individuals investing in VCTs can get 30% income tax credit on investments of up to £200,000 each year and are not liable to pay tax on capital gains or dividends.

First published on 11 January 2018

In reply to by anonymous_stub (not verified)

Very helpful. I'll put this one in the favourites for future reference!

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