Financial Terms

You can find an explanation of common financial terms listed alphabetically below.



Administrator – a person who is appointed by a probate court to manage the settlement of an estate of someone who has died intestate or without making a will.

Annual Equivalent Rate (AER) – interest calculated under the assumption that any interested paid is combined with the original balance and the next interest payment will be based on the slightly higher account balance.

Annual Allowance – the maximum amount you can pay into your pension in a tax year and still claim tax relief.

Annuity – A financial instrument provided by an insurance company that pays a guaranteed annual income to the holder, typically until death. Members of defined contribution pension schemes can purchase an annuity to secure an income. See also ‘Drawdown’ below.

Annual Percentage Rate (APR) – the annual rate charged for borrowing as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Asset Allocation – an investment strategy that aims to balance risk and reward by adjusting the percentage of each asset in an investment portfolio according to the individual’s goals, risk tolerance and investment time frame.

Asset Classes – the underlying investments – shares, bonds, property and cash deposits.

Assignment – an act of making a legal transfer of a right or liability.


Basic Rate Tax – the amount of tax you pay on your income as long as you earn less than the higher rate tax threshold. Basic rate tax is currently at 20%.

Basic State Pension – this is the amount you will receive from the government at retirement as a result of paying National Insurance (NI) contributions throughout your working life.

Beneficiary – a person who gains and advantage/profits from something. For example: Trust, Will or life insurance policy.

Benefits in Kind – is a benefit which is paid to you outside of your annual wage. For example: a car allowance or mobile phone.

Bid Offer Spread – the difference between the bid price (the amount at which the holder can sell shares) and the offer price (the amount at which the holder can buy shares).

Bonds – a loan to a company or a government.

Budget – an estimate of costs and revenues over a specified period, reflecting financial goals.


Capital Gains Tax – if your assets increase in value then you may need to pay Capital Gains Tax (CGT). You receive an annual allowance for capital gains and only pay CGT on any gains above this amount.

Child Trust Funds – is a long term savings or investment account for children in the UK. New accounts cannot be created as they have been replaced by Junior ISAs. Existing accounts can still receive new money.

Close or Price – this is the level at which the company’s shares stood when the markets closed the previous day. In most cases it is expressed as a number midway between the buying and selling prices.

Corporation Tax – the amount that the company must pay on the taxable profits.

Coupon – another word for a bond’s fixed rate of interest, expressed as a percentage of its nominal value.

Critical Illness – insurance that pays out a lump sum on the diagnosis of a specific critical illness covered by your policy.

Consumer Price Index (CPI) – is a measure of inflation used by the British Government.

Current Account – a general bank account enabling people to deposit money, get out cash and have access to an overdraft.

Credit – a contractual agreement in which a borrower receives a value now and agrees to repay the lender over a specified period of time including any interest owed on the original amount.

Credit Score – is the score you receive based on how credit worthy you are. Banks use this to calculate the interest rate on any money you borrow.


Debit Card – a card issued by a bank that you use to pay for goods and services. Usually, the money is taken out of your account immediately.

Debt – the amount of money you owe to another party. This also includes the interest you owe as well as the amount initially borrowed.

Defined Benefit Scheme – a pension scheme in which the rules specify the amounts paid. The most common defined benefit scheme is a salary-related scheme in which the benefits are based on the number of years of pensionable service; the accrual rate; and the final salary.

Defined Contribution Scheme – a pension scheme in which the benefits are determined by the contributions paid into the scheme, the investment return on those contributions, and the type of annuity purchased upon retirement. It is also known as a money purchase scheme.

Dental Insurance – a specialist health cash plan that focuses on dental care expenses.

Discretionary Trust – gives the trustee the power to decide which beneficiary receives the funds and up to what amount.

Discounted Mortgage – a mortgage which has a discounted variable rate of interest for a set period, after which the rate charge will rise.

Diversification – spreading your investments across different asset classes, or types of investments within a particular class.

Dividend – the amount of money paid by a company to shareholders out of its profits. This is usually paid annually.

Domicile – your primary residence for tax purposes.

Drawdown – a decline in an investment or fund. Usually quoted as the percentage between the peak and the trough.


Endowment Policy – a life insurance policy designed to pay a lump sum at the end of a specified term or on death. These were usually taken out alongside a mortgage in order to pay the remaining capital at the end of the mortgage term.

Equity – the value of the shares issued by a company. If you own company shares then you own some of the company’s equity. It can also be described as the amount, or value that you own of your home.

Equity Release – this is the process of using the value of your home to raise cash i.e. releasing the equity.

Estate Planning – an individual’s estate is calculated as being the total amount of assets, less any liabilities at the time of death. Proper estate planning can save the family money in inheritance tax (IHT). IHT is due at 40% of all assets over the IHT threshold.

Ethical Investment – these are funds offered by businesses or companies that avoid certain types of assets. For example companies who trade in arms, cigarettes, alcohol, or animal research are unlikely to be considered ‘ethical’. Ethical investments can also be known as ‘green investments’ or ‘socially responsible investments’.

Exchange Traded Fund (ETF) – is an investment fund traded on stock exchanges. It tracks an index, commodity or basket of assets like an index fund but can be bought and sold during the day like common stocks.

Executor – is a named person in a will who is in charge of administering the deceased’s estate and the distribution of assets to the named beneficiaries.


FCA – Financial Conduct Authority (FCA) is the UK’s financial services regulator.

Fees – this is the amount you pay for advice or services. These are usually fixed and agreed before the advice or service is provided.

Fixed Interest Rate – monthly payments are set at a certain level for an agreed period. At the end of this period they will either switch to another fixed rate or go on to the standard variable rate.

Fixed Rate Mortgage – some lenders offer a fixed rate mortgage for a period of time, usually 2-5 years. This means the amount of interest you pay is fixed for that period of time. After this time you will then pay the Standard Variable Mortgage Rate (SVR).

Fraud – wrongful or criminal deception intended to result in financial or personal gain.


Gilt – long term fixed interest debt security (bond) issued by the UK Government and traded on the London Stock Exchange.

Guaranteed Minimum Pension (GMP) – is the minimum pension which a United Kingdom occupational pension scheme has to provide to those employees who were contacted out of the State Earnings-Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997.


Health Cash Plans – these provide limited cash sums to help pay everyday healthcare bills.

Higher Rate Tax – is the amount of tax you pay on your income if you are earning over the higher rate tax threshold. This is currently 40%.


Income Drawdown – income drawdown/unsecured pension is the facility to keep your retirement savings invested whilst taking an income each year instead of purchasing an annuity.

Income Protection – policies that pay out a regular sum – for as long as required – to help cover your living costs if you are on long-term sick.

Indexation – a technique used yo adjust the payments by means of a price index in order to maintain the spending power of the public after inflation.

Individual Savings Account (ISA) – vehicles which allow people to earn tax-free returns on a variety of assets, including cash, stocks and shares. There are limits to how much you can save in any one tax year.

Inflation – when prices go up. Inflation effectively erodes the value of money in your pocket which means the same amount will buy less each year.

Interest Rate – the rate of interest you will have to pay. This is usually linked to the base rate set by the Bank of England’s monetary policy committee and rates can move up and down.

Interest-Only Mortgage – a mortgage where you only pay the interest charges of the loan each month – and won’t be reducing the loan amount. This will need to be repaid in another way.

Inheritance Tax (IHT) – is charged on the estate of the deceased for any amounts above the IHT threshold 40% tax will be charged.

Investment Trust – type of investment formed of holding securities in other firms and obtaining its capital from public issues of shares that are traded on the stock exchange.


Joint Life – this is a policy which is taken out by two or more people. These policies can be useful in protecting a family in the event of either or both parents dying.

Junior Individual Savings Accounts (JISA) – these offer a choice of thousands of funds that can be held tax efficiently. Parents of children under 16 can open a JISA in their child’s name.


Key Features Document – this is the document that all firms and product providers authorised by the FCA have to give you to explain their services or products.


Lifetime Allowance – this is the maximum amount of money you can as pension savings throughout your lifetime and still receive tax relief. Anything over the lifetime allowance is taxable.

Lifetime Annuity – this is the vehicle by which you receive your pension savings over the remainder of your life. There are various types of annuities that you can buy to suit your needs and circumstances.

Loan – this is the amount of money that a company agrees to lend you over a set period of time. The amount of interest you pay on the loan will vary depending on your circumstances.


Market Capitalisation – this is the value of a company, normally expressed in millions of pounds. This is calculated by multiplying the current share price by the total number of shares that have been issued.

Mortgage – is a loan for the purpose of buying a property. The lender may be able to take ownership of the property if you do not keep up with the terms of the mortgage.


National Insurance Contributions (NI) – this is an amount of money which is taken as a percentage of your income and paid to the government from age 16 up until the pension age. The amount you pay goes towards state-provided benefits.

Net Relevant Earnings – the amount of income used to assess the maximum contribution that can be made into a personal pension plan.

New Individual Savings Account (NISA) – tax-efficient savings and investment accounts which allow you to save cash or invest in stocks and shares. This new savings account allows you to save £15,000 annually in either all cash, all stocks and shares or a combination of the two. You do not pay income tax on the interest your receive from the ISA and the profits are exempt from Capital Gains Tax.

Nominal Value – the price at which a bond will be redeemed at maturity.


Occupational Pension Scheme – a pension scheme set up by an employer for the benefit or its employees.

Open Ended Investment Company (OEIC) – a type of company/fund structured to invest in other companies with the ability to adjust constantly its investment criteria and fund size.

Open Market Option (OMO)– is the term used to describe the choice you have to buy your annuity from another provider, who is not currently your own.


Pay As You Earn (PAYE) – is a method of paying income tax and national insurance contributions. Your employer deducts tax and national insurance contributions from your earnings before paying you.

Personal Allowance – is the amount of income you can earn in any given year before you start having to pay tax.

Personal Pension Ccheme – a scheme where the contract to provide contributions in return for retirement benefits is between an individual and an insurance firm, rather than an employer or the state.

Power of Attorney (POA) – the authority to act for another person in specified or all legal or financial matters.

Premium – the sum that an insurer will require you to pay for the cover provided.

Private Health Insurance (PHI) – a type of insurance that pays for medical and surgical expenses incurred by the insured. Some employers offer this to their employees as part of their employment benefits.

Probate – is the process of gaining legal authority to deal with the affairs of the deceased. Including getting the Will certified to allow the executors to carry out the wishes of the deceased in winding up the Estate.

Prospectus – a legal document which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. It should contain the facts that an investor needs to make an informed investment decision. (Also can be know as an ‘offer document).


Qualifying Policy – a life insurance policy whose terms meet a set of conditions meaning the proceeds from the policy are free of tax.

Qualifying Years – the tax years in which you have paid National Insurance contributions. You must work for a minimum number of years before you will be eligible for the full basic state pension.


Redemption – the organisation that issued the bond will redeem it at the end of its life and pay the bondholders the agreed nominal value.

Repayment Mortgage – is a mortgage in which you pay both the interest and the capital off at the same time.

Rights Issue – an issue of shares offered at a special price to its existing shareholders.

Risk – refers to the investment and the amount of risk you will take on by investing in that asset. Some investments are a lot riskier than others and although they can potentially offer higher returns they can also lose you money.


Security –a deposit/pledge as a guarantee of the fulfilment of an undertaking or repayment of a loan to be forfeited in case of default

OR a certificate attesting credit/ownership of stocks or bonds connected with tradable derivatives.

Self-Assessment – the calculation of your tax liabilities.

Self-Invested Personal Pensions (SIPP) – is a type of pension that allows you to manage and make choices from a wide range of investments including the shares of any company listed on the stock exchange. They provide you with a wider range of investments than other personal pension schemes can offer.

Stakeholder Pension – available since 2001, this is a flexible, portable, defined-contribution personal pension arrangement (provided by insurance companies) with capped management charges. They can be taken out by an individual or facilitated by an employer.

Shares – one of the equal parts into which the company’s capital is divided entitling the holder to a proportion of the profits.

Share Capital – the part of the company capital that comes from the issue of shares.

Stamp Duty – HMRC tax that is levied on the transfer of certain types of assets. Home buyers must pay stamp duty on properties with a value above a set figure. Anyone buying shares also needs to pay stamp duty.

Standard Variable Rate – mortgage Payments move up or down with the lender’s own mortgage rate, which in turn, is usually dictated by the Bank of England’s base rate.

Stockbroker – a broker who buys and sells securities on the stock exchange on behalf of clients.

Superannuation – the amount deducted regularly from employees incomes and invested in a company pension scheme.

Surrender Value – the amount payable to the policy holder of a life insurance policy if they decide to exit before the policy matures.


Tax Allowance – concessions by the government that can be used to reduce your taxable income. The main allowance for UK tax payers is the personal allowance (an amount set by the government each year which is tax free).

Tax Avoidance – the arrangement of your financial affairs to minmise tax liabiltiy within the law.

Tax Evasion – is the illegal non-payment or underpayment of tax.

Tax Year – the financial year for taxation. (UK tax year runs from the 6-April)

Term – this is the length of the contract you make with a mortgage, policy or investment provider.

Term Assurance – is a life insurance policy which provides cover at a fixed rate of payments over a limited period of time (term).

Terminal Bonus – an additional bonus paid to the policy holder at the policies maturity (time the policy is to be paid).

Total Expense Ratio – the total costs associated with buying into a fund.

Tracker Rate – a variable rate which tracks the amount set by the Bank of England. This means it will increase when the Bank’s rate goes up and falls when it goes down.

Travel Insurance – a policy that pays out if you fall ill while away, accidentally injure someone, lose your possessions or have to cancel your holiday.

Trust – an arrangement whereby a person (trustee) holds property or assets as its nominal owner for the benefit of the beneficiaries.


Underwriting – the process that a lender or other financial service uses to assess the risk of a potential customer and accept the liability under the terms of the policy.

Unit Linked – relates to a life assurance policy or other investment in which the premiums or payments are invested in a unit trust.

Unit Trusts – a ‘pooled’ investment fund in which new units are created when a new investor joins the fund and cashed in when an investor leaves. It uses the cash raised from investors to buy shares in a number of different companies.

Upper Earnings Limit – the maximum earnings on which National Insurance contributions are payable by employees.


Waiver of Premium – a clause in an insurance policy under which the policy will be kept in force when the policy holder is not paying premiums due to illness or disability.

Will – a legal document which outlines how you wish your estate to be distributed after death. Also known as a ‘will and testament’.

With Profits Policy – an insurance policy or investment which pays an annual bonus and is linked to the annual profits of the issuing company. A bonus is also usually paid at maturity.

Whole of Life Insurance – a life insurance policy with level premiums which has both an insurance and an investment component. The insurance component pays a stated amount upon the death of the insured.


Yield % – the return on your investment – or dividend – that you can expect, expressed as a percentage of the company’s share price.