Investments Glossary

A

Actively Managed Funds
An ’actively managed’ fund is one where the fund manager buys and sells holdings with the intention of maximising gains and minimising losses. The key element of active management is that it allows the manager the flexibility to adapt to changing market conditions.

A-Day
A-Day (6th April 2006) was the date when new pensions simplification legislation, within the Government’s 2004 Finance Act, came into force in Britain. From that date, all pensions are now subject to a single set of taxation rules, which replaced all those that existed previously.

Alternatively Secured Pension
This is available as an alternative to annuity purchase at 75. An Alternatively Secured Pension operates in a similar manner to an Unsecured Pension but with income reviews held annually. There are minimum and maximum limits of income. There is no upper age limit for an Alternatively Secured Pension and the arrangement can continue until the death of the original planholder.

Pension and inheritance tax are complex areas. For more information we recommend a discussion with a Bank of Scotland Investment Service (BoSIS) Client Manager. Find out more about Bank of Scotland Investment Service

Annual Allowance
The annual allowance is the maximum amount of input an individual can benefit from in the tax year before a tax charge arises.

In the case of Pensions, if the input is more than the annual allowance, the member will be taxed at a rate of 40% on any excess.

For the Child Trust Fund (CTF ), there is a limit of £1,200 that can be invested per tax year (over and above the Government voucher).

From 6th April 2008 there are two types of ISA. You can have a cash ISA or a stocks and shares ISA or both.  Mini and Maxi ISAs have been abolished. A tax year runs from 6th April one year to 5th April the following year. You can invest up to £7,200 each year, with up to £3,600 in cash. Anything you do save in a cash ISA will be taken from your overall ISA allowance of £7,200.

The table below shows how this could work:

Annuity
A pension annuity is an income for life purchased from an annuity provider with the proceeds of a pension fund. This is normally after the payment of any tax-free cash. An annuity can be considered as ’insurance for living too long’ since income will be paid for as long as you or any nominated dependant lives. For more information about annuities, we recommend a discussion with the Bank of Scotland Annuity Service (BoSAS).

Assets
Your money, and things that you own which are worth money, such as a house or shares.

Assurance
A name used for life policies life policies should be defined to differentiate them from other types of insurance.

AVC
Additional Voluntary Contributions made by you into your occupational pension scheme to increase the value of the benefits you will receive.

B

Base rate
The interest rate set by the Bank of England, which loan and mortgage rates may be linked to.

Basic rate tax
From 6th April 2008 the basic rate of tax will be reduced to 20%. A new 10% starting rate for savings income will be introduced. Where an individual's taxable non-savings income is above the savings starting rate of £2,320, the rate will not be applicable.

Bond
Essentially a loan that you make to a company or 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 the 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.

C

Capital
Your assets minus your liabilities; i.e. the money you have minus the money you owe.

Capital Gains Tax (CGT)
A tax you pay on any money you make by cashing in some types of investments. At present, you will pay CGT when your ’gain’ is more than £9,600 for the 2008/9 tax year.

Cash ISA
A tax-free savings account in which you can invest up to £3,600 cash per tax-year.

Child Trust Fund  (CTF)
A Government initiative, introduced in April 2005, which aims to help parents educate children about the benefit of saving. For children born on or after 1st September 2002, the Government will issue a voucher for at least £250 per eligible child. This voucher will enable a tax-efficient Child Trust Fund  account to be opened in the child’s name, which can be contributed to by anyone (up to £1,200 per tax year) with the money available to the child when they turn 18.

Collective investment schemes
The name given to schemes such as unit trusts, investment trusts, and OEICs, where investors’ money is pooled. The aim of collective investment is to give investors an interest in a wider range of securities than would be available to them if they were to invest individually.

Contracting out
A way of withdrawing from the State Second Pension (S2P) and contributing to a private pension scheme.

Contributions
When referred to in the Stakeholder Pension Calculator, contributions means the amount which you are thinking of paying to the plan; it doesn't include any contributions from your employer or any transfer payments which you may have from other pension schemes. Please enter the amount you want to pay - we would add tax relief to this and invest the total contribution into your pension plan.

Crystallisation
This is simply the new term for when you draw your pension. Under the Finance Act of 2004, HM Revenue & Customs has defined a number of ’crystallisation’ events. These events include drawing all or part of your pension arrangements and if death occurs before pension benefits have been taken. When benefits are crystallised, they must be tested against the Lifetime Allowance. 

D

Dividend
The distribution of part of a company’s earnings to shareholders. The dividend is usually paid twice a year in the form of a final dividend and an interim dividend.

E

Enhanced Protection
This is a method of protecting both pension benefits built up before A-Day and any growth in these benefits post A-Day. Enhanced protection is available for any value of funds or pension rights. To benefit from enhanced protection you must register for this with HM Revenue & Customs between 6th April 2006 and 5th April 2009.

Equities
Shares in a company, entitling you to a proportion of any profits made by the company.

F

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). This is normally expressed as a fraction e.g. 1/60th for each year of service.

Financial Services Authority (FSA)
An independent body set up by the Government to regulate the financial services industry. Visit the FSA website  here.

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 one hundred companies listed on the London Stock Exchange.

FTSE 250 Index
The index of the top 250 companies listed on the London Stock Exchange.

G

Gilt
A bond issued by the Government.

Government Actuaries Department
A Government department which operates as an actuarial consultancy along commercial lines. The Government Actuaries Department gives independent professional advice within the public service.

Group Money Purchase Scheme
This is a type of occupational scheme where the employer and usually the employee make a contribution into the pension arrangement. The amount to be contributed is normally defined in the contract of employment - hence these schemes are also classified as ’Defined Contribution’.

Gross Annual Earnings
The amount of money an individual has earned before tax, national insurance and other deductions during the 12 months of a tax year (6 April to 5 April the following year). This excludes ’payments in kind’ otherwise known as ’benefits in kind’.

Growth
An increase in the value of an asset.

I

Illustration
An estimate of how much a particular investment may be worth in the future.

Impaired Life
A person with a reduced life expectancy due to the existence of known health conditions and/or lifestyle (e.g. smoking).

Income Drawdown
This is an old reference which was previously available to holders of personal pension arrangements. It offered an alternative to purchasing an annuity where a variable income could be drawn directly from the pension fund.

Income yield
The amount of income generated by a fund’s investments in relation to the price at which they were bought.

Index linked annuity
An annuity which increases over time. It could be linked to the Retail Prices Index or a chosen annual percentage, e.g. 5%.

Investment Company with Variable Capital (ICVC)
Another name for an Open Ended Investment Company (OEIC).

Investment funds
The generic name for unit trusts and OEICs.

Investment trusts
A type of collective investment scheme. 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.

ISA
Short for Individual Savings Account, which is a way of investing up to £7,200 a year tax-efficiently. Can be either a cash ISA or a stocks and shares ISA.

ISA manager
The official term for the manager of ISA plans

K

Key Features Document
A document which gives a detailed explanation of how a financial plan works, including any charges you may incur. You should always read the Key Features Document carefully before proceeding.

L

Lifestyle Option (An investment option available for our Stakeholder Pension Plan)
The Lifestyle option can be used if you do not wish to choose how your contributions are invested. For more information on the Lifestyle option please review the bullet points below: 
• If you are more than five years away from your selected retirement age, we invest 38% of each payment in the Gilt and Fixed Interest Pension Fund, 26% in the Pelican Pension Fund, 25% in the High Income Pension Fund and 11% in the International Growth Pension Fund. 
• When you are five years away from your selected retirement age, your accumulated investments in the three equity funds are switched in monthly amounts into the Gilt and Fixed Interest Pension Fund. 
• This transfer takes place over four years, so that by the time you are one year from your selected retirement age, all your investment is held in the Gilt and Fixed Interest Pension Fund. 
• All payments you make once the switch starts are automatically paid straight into the Gilt and Fixed Interest Pension Fund. 
• If you start the Lifestyle option within five years of your selected retirement age, all your payments are invested straight into the Gilt and Fixed Interest Pension Fund. 
• There are no extra charges for using the lifestyle option.

Lifetime Allowance
The Lifetime Allowance is effectively the total amount of pension benefit that can be taken before tax is charged in either a single scheme or several different schemes.

Lipper
Lipper is a Reuters company and a provider of financial information and performance.

M

Maturity
When an investment plan reaches the end of its fixed term.

Mid-market price
The mid-market price is half way between the bid price and the offer price for securities, and is usually the price quoted as the value of the security.

Money market investment
A general term for short-term investments in either cash, or bonds which are very close to maturity.

N

National Average Earnings
If you are making monthly contributions to your Stakeholder Pension Plan, you can choose whether you would like those contributions to increase each year in line with the change in the National Average Earnings Index. This Index shows the growth in national average earnings across all sectors of the UK economy.

O

OEIC
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 seperate legal entity and issues shares rather than units.

Occupational Pension
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.

Offer price
The price at which a share is bought.

On deposit
A sum of money you put into a bank, a building society, or National Savings is said to be ’on deposit’.

P

PAYE
Pay As You Earn is the system whereby income tax and National Insurance contributions are deducted from your salary before you receive it.

Payment in kind
Payment made in the form of goods and services, rather than cash. Sometimes referred to as ’Benefit in Kind’.

Pension
A tax-efficient financial plan whereby you save money to provide benefits which can be taken at any time after age 50 until April 2010.

PEP
Short for Personal Equity Plan, was a tax-efficient method of investing which has now been superseded by the ISA.

Personal pension plan (PPP)
A type of pension originally designed in order that people who were not part of an occupational scheme could save while taking advantage of the available tax relief.

Phased Retirement
This is where a pension fund is drawn in stages, typically annually, rather than the whole of the fund being used immediately. Although complex to operate, this has the potential of creating higher annual net income by using the tax-free cash for expenditure. However, it does prevent tax-free cash being maximised as a lump sum at the outset.

Portfolio
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.

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.

R

Recovery Charge
This is the term given to the tax payable on any amount over the Lifetime Allowance when 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’.

Redemption yield
The total expected yield from a bond in relation to the price at which it was purchased.

Retail Prices Index
A measure of how far the cost of a wide range of goods (from a loaf of bread to a mortgage) has increased in a month. The Retail Prices Index is used to calculate inflation in the UK.

Return
The gain or profit on an investment; does not include the original capital invested.

S

Securities
The generic term for shares and bonds.

Share
A stake in a company listed on a stock exchange.

Staggered vesting
Most personal pensions are set up as a number of segments, generally a thousand. Staggered vesting allows 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 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.

Stakeholder Pension
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
The State Pension Credit was introduced on October 6 2003 to replace the Minimum Income Guarantee. It is a means tested benefit available to people over State Pension Age and the amount depends on age, income and savings. The stated intention is to reward savers rather than penalising them as tended to happen before.

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.

Stock
A general term that can cover shares, gilts and corporate bonds.

Stocks and Shares ISA
An ISA invested in the stock market  in which you can invest up to £7,200 of your annual ISA allowance.

Stock exchange
A stock exchange is where stocks and shares are bought and sold.

Superannuation
Another name for an occupational pension scheme .

T

Tax-efficient
A term used to describe investments which offer tax benefits or tax relief. For example, a stakeholder pension is tax-efficient because tax relief means that for every 80p you contribute, the Government adds 20p, such that £1.00 is invested in total.

Tax Relief
This is the mechanism by which successive Governments have encouraged individuals and corporations to make private provision for retirement. For individuals, it means that tax can be reclaimed on pension contributions at the highest rate(s) at which it is paid.

Tax Year
A tax year runs from 6th April one year to 5th April the following year.

Term assurance
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.

TESSA
A Tax Exempt Special Savings Account was a five-year cash savings plan, free of income tax. Like PEPs, TESSAs have been superseded by ISAs.

Today's Money
When using the Stakeholder Pension Calculator today's money refers to the fact that future inflation will reduce the buying power of your pension in the future. The calculator will aim to take this into account so please choose the amount of target pension as if it began to be paid today.

Tracker
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.

Transitional Protection
These are measures introduced as part of the A-Day changes to enable individuals with significant (or with the expectation of significant) pension benefits to reduce or avoid a recovery tax charge by registering for either Primary or Enhanced Protection. It also includes the protection of pre A-Day cash rights of greater than 25% in some contracts.

Trust
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’).

U

Unit
A share in a unit trust.

Unit-linked
The generic term for policies whose value is determined by the performance of a portfolio of stocks and shares.

Unit trust
A type of collective investment, where investors’ pool their money to buy units in a fund.

Unsecured Pension
This is the A-Day term for what is essentially Income Drawdown but there are key differences. There is no requirement to draw any income and the maximum level of income you can take is set by the Government legislation. This level will be reviewed every five years.

Y

Yield
The amount of income generated by an investment, expressed as a percentage of the value of the investment.