Accrual rate – The rate at which a member builds up pension benefits in a defined benefit pension scheme
Annual Allowance – The maximum amount of pension savings that can be built up in any one tax year before liability to an annual allowance charge, which is a tax charge levied by HMRC
Asset Allocation – is the rigorous implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.
Compound Interest – Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
Consumer Price Index (CPI) – An index of UK price inflation. It is the UK’s version of the Harmonised Index of Consumer Prices (HICP), which is a Europe-wide standardised measure of inflation.
Corporate Bond – A bond with a fixed interest rate issued by a company for a fixed period of time
Coupon – The fixed rate of interest paid at prescribed intervals to the owner of a bond. The value of index-linked gilts increases each year with inflation, which has the effect of increasing the amount of the interest paid.
Cryptocurrency – A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets
Defined Benefit Scheme – A scheme in which the benefits are defined in the scheme rules and accrue independently of the contributions payable and investment returns. Most commonly, the benefits are related to members’ earnings when leaving the scheme or retiring, and the length of pensionable service.
Defined Contribution Scheme – A scheme in which a member’s benefits are determined by the value of the pension fund at retirement. The fund, in turn, is determined by the contributions paid into it in respect of that member, and any investment returns. Also known as a money purchase scheme
Dependent – A person who is financially dependent on your income, typically a child or an adult relative you may support.
Dividend – A distribution of profits made by a company to its shareholders, usually half-yearly. The company usually has total discretion as to the size of the dividend and even whether or not to pay a dividend.
Exchange Traded Fund (ETF) – An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange
Financial Conduct Authority (FCA) – The FCA is responsible for regulating the standards of conduct in retail and wholesale, financial markets and for supervising the infrastructure that supports those markets. The FCA also has responsibility for the prudential regulation of firms that are not regulated by the PRA.
Financial Services Compensation Scheme (FSCS) – The Financial Services Compensation Scheme is an independent body, established under the Financial Services and Markets Act 2000 as the UK’s statutory compensation fund of last resort, for customers of financial services firms authorised by the FCA.
Illiquid – An asset is said to be illiquid if it cannot be traded quickly and easily. For example, property.
Index Tracking – The process of replicating the returns on a given index. Also known as passive management.
Inheritance Tax (IHT) – Tax paid upon death. If the value of your estate is above £325,000; then the part of your estate that is above this threshold will be liable for tax at the rate of 40%.
Life Policy – A life policy is a type of pooled investment vehicle offered as an investment option under a life insurance policy. Access to this type of arrangement is restricted typically to certain types of investors, for example pension scheme trustees.
Lifetime Allowance (LTA) – The lifetime allowance is an overall ceiling on the amount of tax-privileged savings that any one individual can draw.
Mortality Rates – Statistics relating to the ages at which people die.
National Employment Savings Trust (NEST) – NEST is the name for the personal accounts scheme established following the Pensions Commission’s review of the UK pensions system.
It is run by NEST Corporation, which is a public body accountable to the government via the Secretary of State for Pensions and the Department for Work and Pensions. NEST will be the default pension scheme for those employees whose employer does not offer an appropriate alternative arrangement.
National Insurance Contributions (NIC’s) – contributions made by nearly all employees working in the UK
Pension Commencement Lump Sum (PCLS) – A lump sum that may be paid to a member of a registered pension scheme when they start taking their benefits from the scheme. Generally, a pension commencement lump sum (PCLS) can comprise up to 25% of the capital value of the member’s pension entitlement
Pension Protection Fund (PPF) – Established to pay compensation to members of eligible defined benefit pension schemes, whose sponsoring employers become insolvent. The PPF is funded by a levy on all eligible DB schemes. The PPF became operational on 6 April 2005.
Preserved Benefit – Benefits arising on an individual ceasing to be an active member of an occupational pension scheme, payable at a later date (e.g. a member who leaves that employment before retirement date)
Rebalancing – is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation
Retail Prices Index (RPI) – The index of retail prices (for all items) published by the Office of National Statistics, which is used to determine the rate of inflation over the previous 12 months. Increase to state pensions and index-linked gilts are equal to the rate of change in the RPI, while increases to private pensions in payment are dependent on the rate of change in the RPI
Salary Sacrifice – A written agreement between the employer and employee whereby the employee forgoes part of his/her future earnings in return for a corresponding contribution by the employer to a pension scheme.
Sponsoring Employer – The employer with responsibility for meeting the liabilities of a DB pension scheme. In DC schemes, typically the employer who sets up and/or assumes responsibility for the running of the scheme, and meets the expenses.
Targeted Return – A particular absolute return agreed between the trustees and the fund manager.
The Pensions Advisory Service (TPAS) – An independent organisation which gives free advice to the public about occupational or personal pension scheme. It does not give financial advice or advice on state scheme benefits.
Transfer Value – The amount of money which a scheme will pay to another pension arrangement in lieu of benefits which have accrued to a member. Sometimes referred to as a CETV (cash equivalent transfer value).
Total Expense Ratio (TER) – is another way of expressing the costs and charges that apply to an investment fund or pension scheme. The TER will always include the AMC but it is worked out on a historic basis for the previous year and is therefore also able to include other fees and charges such as legal and audit costs, custodial fees and investment administration fees which have been applied.
Yield – A measure of the annual income earned on an investment.
- For shares this is normally the annual value of the dividends expressed as a percentage of the market price of the share.
For bonds, the yield will be the annual interest rate divided by the price paid for the bond, which may be more or less than the nominal value.