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 (6 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.

Annual Allowance
For pensions the annual allowance is the maximum amount you can pay into all registered pension schemes of which you are a member before a tax charge arises. If the amount paid in is more than the annual allowance, you will be taxed at 40% on any excess. The annual allowance is subject to review by the Treasury each year.

You can have a Cash ISA or a Stocks and Shares ISA or both.  You can now invest up to £11,280 in the 2012/13 tax year with up to £5,640 in a cash ISA. Anything you do save in a cash ISA will be deducted from your overall ISA allowance. A tax year runs from 6 April one year to 5 April the following year.

ISA limit examples below: 

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. 

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 to differentiate them from other types of insurance. Essentially it is the insurance of a person (their life, health, income) as opposed to insurance of things such as cars, property and travel.

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
The basic rate of income tax is currently 20% for people earning up to £37,400. There is a 10% starting rate for income drawn from savings, up to a limit of £2,440 (2010/11 tax year). If your non-savings income is above this limit then the 10% rate will not apply.

Bond
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 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 accumulated wealth 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/profit you make by cashing in some types of investments. At present, you will pay 18% or 28% CGT when your 'gain' is more than £10,100 for the 2010/11 tax year. You sometimes pay capital gains tax even if you do not cash in the investment – for example, if you gift an investment to someone who is not your spouse or civil partner because this is still considered a disposal of the investment. Any qualifying investments within an ISA are free from CGT.

Cash ISA
A tax-free savings account in which you can invest up to £5,640 in the 2012/13 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 1 September 2002 and before the 1st January 2011, the Government will have issued 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 year) with the money available to the child when they turn 18.

Collective Investments
The name given to schemes such as unit trusts, investment trusts, and OEICs, where investors’ money is pooled. An advantage of a collective investment is to give investors a wider range of fund types 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 via government and employer NIC rebates.

Consumer Price Index (CPI)
Usually known as CPI. A measure of inflation based on how the price of a wide range of goods, excluding housing costs, have changed over the previous year. The Government's inflation target is based on the CPI and used by the Bank of England when it sets interest rates. Also see RPI.

Contributions
The term contributions means the amount you are paying in to a plan. When referred to in the Stakeholder Pension Calculator, 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 gross contribution into your pension plan.

Crystallisation
The term for when you start to 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 to assess potential for additional tax liability. 

D

Dividend
The distribution of part of a company’s profits earnings to its 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 have registered for this with HM Revenue & Customs between 6 April 2006 and 5 April 2009.

Equities
A stake in a company listed on a stock exchange, 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). The Accrual rate 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 i.e.101-350 listed on the London Stock Exchange.

G

Gilt
Please see government bonds below.

Government Actuary's Department
A Government department which operates as an actuarial consultancy along commercial lines. The Government Actuary's Department gives independent professional advice within the public service and sets the minimum and maximum incomes allowable from an unsecured or alternatively secured pension.

Government Bonds
Commonly known as gilts when they are issued by the UK government. When you or a fund manager invests 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 - £100 in this case. Gilts are normally regarded as relatively low risk investments. This is 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 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 that shows you 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. It is now known as an unsecured or alternatively secured pension.

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), which offers collective investments through purchasing of shares in a variety of fund types.

Investment funds
We have a range of funds or portfolios that you can invest in, click the links to find out more: Funds, Portfolios

Investment Seminars
We no longer conduct investment seminars but you may wish to discuss your needs with a Financial Adviser.

Investment trusts
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 plc not a trust.

ISA
Short for Individual Savings Account. You can have a Cash ISA or a Stocks and Shares ISA or both. The annual allowance for ISAs is £11,280. Up to £5,640 can be saved in a cash ISA with one provider. The remainder of the £11,280 can be invested in a Stocks and Shares ISA with either the same or another provider. Alternatively, the full £11,280 can be invested in a Stocks and Shares ISA with one provider.

ISA manager
The official term for the manager of ISA plans

ISA Investor share price
Take a look at our fund prices and performance.

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 and/or pension commencement lump sum (tax-free cash) that can be taken before tax is charged in either a single scheme or in total across several different schemes. The current Lifetime Allowance stands at £1.8m. Any unprotected amount of pension above the LA is taxable immediately on crystallisation of benefits at a current rate of 55% for lump sums of 25% if to be taken as income.

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 (selling) price and the offer (buying) 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
This Index shows the growth in national average earnings across all sectors of the UK economy . 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.

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’.

One year Savings Bond
We currently do not offer a 1 year bond. If you are looking for investments a long-term view should be taken of at least 5 years. Alternatively take a look at our range of savings accounts.

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 savings plan whereby you save money to provide benefits which can not be touched until you reach minimum pension age (50+ until April 2010 and 55+ after 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
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.

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 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.

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
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. Also see CPI. .

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 entitling you to a proportion of any profits made by the company.

Staggered vesting
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.

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. This replaces SERPS.

Stock
A general term that can cover gilts and corporate bonds. Essentially a fixed term, fixed interest loan to the government (gilts) or companies (bonds).

Stocks and Shares ISA
Our Stocks and Shares ISAs (Individual Savings Account), provided by Scottish Widows, are a simple, flexible and tax-efficient way of investing in the stock market through our portfolios or funds.

All eligible ISA customers can invest up to £11,280 this tax year.

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 example, 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 6 April one year to 5 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.

Tracker funds
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 were 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. To benefit from enhanced protection you must have registered for this with HM Revenue & Customs between 6 April 2006 and 5 April 2009.

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. A unit linked investment can therefore go up and down in value.

Unit trust
A company which allows investors to poole their funds  collectively and have them invested by a professional fund manager. A type of collective investment, where investors’ pool their money to buy units in a choice of 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 Actuary's Department. This level of income drawdown is reviewed every five years.

Y

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