Financial Jargon Buster
Financial terms and phrases can be confusing and daunting, which is why we have developed this Jargon Buster to help you understand your financial needs.
The following is a summary of some key terms you may come across and is only to be used as a guide. It is not an exhaustive list of all the financial phrases you may come across.
AER (Annual Equivalent Rate); EAR (Equivalent Annual Rate)
Some savings accounts pay interest once a year, others monthly or quarterly. The AER shows the 'true' annual interest rate if you leave all your interest in the account and can be useful in comparing accounts that pay interest at different times or frequencies.
AMC (Annual Management Charge)
This is a charge which is automatically deducted by the fund manager on certain types of investment. Note that many funds may also have other fees, so it is worthwhile checking other charges such as administration fees.
Annuity
An annuity converts a lump sum into income which is taxed, usually payable for life. Annuities are typically used for converting pension funds into a retirement income.
APR (Annual Percentage Rate)
This is the overall cost of borrowing per year if you owe money on a credit card or loan. This is expressed as a percentage, such as 7.9% APR and can be useful in comparing accounts that charge interest at different times or frequencies.
AVC (Additional Voluntary Contribution)
A pension top-up for members of occupational pension schemes. You pay contributions into a scheme run by your employer to increase your main pension.
Bank of England Base Rate
The rate of interest set by the Bank of England that is followed by almost all lenders and will influence variable rate loans.
Bid-offer spread
The difference between the buying price and the selling price of an investment. The bid/offer price is quoted either in pence, or as a percentage.
Beneficiary
A person who benefits from a trust set up on his/her behalf, anyone who benefits from the proceeds of a will, or a person who benefits from the proceeds of a life insurance policy.
Blue chip
One of the UK's biggest companies, which are usually considered to be a safer investment than smaller firms.
Bond
A bond is an agreement under which a sum is repaid to an investor after an agreed period of time. It can be issued by anyone but is usually issued by governments or public companies to repay money borrowed. These loans normally repay a fixed rate of interest over a specified time and also repay the original sum in full after an agreed period - when the bond matures. The word bond is also sometimes used to mean Investment bonds, sold by life insurance companies. They allow you to invest in a variety of investment funds managed by professional investment managers.
Broker
A person who sells financial products, such as insurance or pensions. A stockbroker is a middleman who buys and sells shares on behalf of clients or customers.
Capital
Capital is a sum of money. Capital can describe a lump sum investment or a lump sum loan. The capital is the monetary amount you have invested or borrowed as distinct from any return you may get from an investment or any interest you may be required to pay.
Capped Rate Mortgage
A mortgage where the rate cannot exceed a certain limit. For example, a capped rate of 6% means that a borrower will never pay more than 6% for this loan.
CGT (Capital Gains Tax)
A tax paid on the profits you make from investing when your gain exceeds a certain allowance. CGT does not apply to ISA investments.
Credit Scoring
The systems used by banks and other loan companies to judge whether you are creditworthy. Depending on how many points you score when your personal details are run through their rating system, the bank or loan company will either give you a loan/mortgage or turn you down.
Each lender has its own scoring system, but they also share information which is held by credit reference agencies. They will usually ask one of these agencies about you when you apply to borrow money.
Dividend
Cash (or, occasionally, shares) distributed to shareholders, usually when a company makes a profit. You get interest on your savings, so companies have to pay you dividends in order to make it worth your while investing in their businesses. If you are investing for growth, not income, you may not receive a dividend. Growth companies believe they can create a higher return of investment for shareholders by reinvesting profits to expand the business.
Early Encashment
The penalty you pay if you want to escape from a special mortgage deal or investment within a specified time period. For example, if you pay off your five-year fixed-rate mortgage in year three. This can also be applied when encashing lump sum investments in the early years.
Endowment
An insurance policy that pays out a lump sum at the end of a set period or on death, whichever comes first.
Equity
Equity has 3 different meanings in financial terms. It can refer to shares or stock. It can also mean the part of your home that you own (the difference between your home's value and your mortgage). Or, it may mean the ownership stake you have in a partnership or joint venture.
Equity Release
A way in which you can benefit from the value of your home without having to move out – by borrowing on it or selling all or part of it for a regular income or a lump sum.
Excess
The amount you agree to pay on an insurance policy before your insurer pays the rest of the bill (for example, with a £100 excess you pay the first £100 of any claim you make).
Fixed Rate
An interest rate that is fixed (ie it doesn't move up or down) for a set period of time.
FOS
The Financial Ombudsman Service (FOS) can help with most financial complaints covering products and services such as credit cards, mortgages, stocks and shares and much more.
FSA (Financial Services Authority)
The regulator responsible for managing the conduct of firms and individuals involved in investment activities and other financial services.
FSAVC (Free-standing AVC)
A pension top-up policy for members of occupational pension scheme, but separate from the employer's scheme and normally run by an insurance firm.
FSCS (Financial Services Compensation Scheme)
This scheme has the power to compensate consumers in the event of the failure of any authorised firm under the Financial Services and Markets Act, and covers mortgage brokers, mortgage lenders, insurance companies, deposit-takers and investment firms.
FTSE (Financial Times/Stock Exchange)
FTSE provides indices for a number of international markets. In the UK, the most well-known indices are the FTSE 100 (the 'Footsie', tracks the value of the UK's hundred largest listed businesses), the FTSE 250 (the next 250 largest companies after the FTSE 100) and the All-Share, which includes around 700 firms.
Gearing
A measure of how much a company is funded by borrowing.
Gross
Before deductions of, for example, tax or charges.
IFA (Independent Financial Adviser)
A person who is authorised to give you advice on the financial products offered by a wide range of companies, not just a single provider.
Inflation
Rising prices of goods and services cause the value of your money to fall over time. This effect is known as inflation.
Interest-only mortgage
A mortgage where you only pay the interest charges of the loan each month. This means you are not reducing the loan amount (or capital) itself, and this will need to be repaid in some other way at the end of the mortgage term.
Investment Trust
A company that buys shares in other companies and is quoted on the Stock Exchange. It has a similar aim to a unit trust and OEIC, that is, it pools money from small savers and then invests it, so providing savers with a spread of risk.
ISA (Individual Savings Account)
Savings and investments accounts with limits on how much you can pay in and what types you can have. ISAs offer a shelter from income and capital gains tax on amounts up to an annual limit. You can choose to save into a Cash ISA or invest in a stocks and shares ISA, or both.
LSE (London Stock Exchange)
The biggest stock market in the UK and one of the largest in the world.
Maturity
The date at which the capital repayment and final interest payment of a bond is due. Bonds are often described as having ‘five years to maturity', for example. When referring to economies, markets and companies, ‘mature' means that it is well established. Maturity could also refer to when a savings plan ends after a set term.
Money purchase pension
A pension where the contributions you make are invested, for example, in the stock market. The size of your pension fund depends on your contributions and how well your investments do. At retirement, you have a choice of options to provide you with a retirement income.
No claims discount ( NCD )
A discount if you haven't made a claim on your insurance policy within a specified period of time. Note: it does not mean the premiums to which the discount is applied do not rise
Occupational pension
Only available through employers and run by pension scheme trustees. There are two types – salary-related (defined benefit) and money purchase (defined contribution).
OEIC (Open-Ended Investment Company)
OEICs are investment funds with some of the features of an investment trust and some of a unit trust. Like investment trusts, OEICs are companies that issue shares on the London Stock Exchange, and use the money raised from shareholders to invest in other companies. Unlike investment trusts, they are open-ended. This means when demand for shares rises the manager just issues more shares. With an investment trust, if demand exceeds supply, the response may be a rise in the share price. The price of OEIC shares is more like a unit trust, in fact, with the key factor being the value of the underlying assets of the fund. But in contrast to unit trusts, there is no bid/offer spread with OEICs, so the price of the shares should be the same whether you are buying or selling.
Option
The right – though not the obligation - to buy or sell an asset at a pre-determined price and within a pre-determined time period in the future.
Payment Protection Insurance (PPI)
An insurance policy that can pay an agreed amount if you're unable to earn because of illness or redundancy.
Personal pension
A pension policy you take out yourself from an insurance company or another financial institution and into which you pay contributions. It may also be offered by employers.
Redemption penalty
The penalty you pay if you want to escape from a special mortgage deal within a specified time period. For example, if you pay off your five-year fixed-rate mortgage in year three.
Repayment mortgage
A mortgage that pays off both the home loan and the interest at the same time.
Return
The percentage change (usually after the deduction of fees) in the value of investment between two dates. Return can also be expressed as a monetary amount.
Salary-related pension scheme (final salary or defined benefit)
A type of occupational pension. The amount of pension you get is worked out on your salary at or near retirement, or when you left employment, and your pensionable service.
Share
A unit of ownership in a corporation, mutual fund, or, less commonly, some other type of financial investment.
SIPP (Self-Invested Personal Pension)
A type of personal pension. With a SIPP, you have full control over where your pension savings contributions are invested. SIPPs may be used to invest in stocks and shares, government securities, unit trusts and investment trusts. SIPPs may also be used for commercial property, insurance company funds, traded endowment policies, deposit accounts with banks and building societies, and National Savings products.
Stakeholder pension
A stakeholder pension aims to provide a low-cost, transparent and flexible way for people to save for their retirement. Money invested in a stakeholder pension is invested in the stock market. It must also meet certain government standards.
Stamp Duty
A tax on the purchase of shares - at 0.5% of the value. For shares the tax is a flat rate. For residential property purchasers, there is a range of tax rates applied at different thresholds.
TAR (Total Amount Repayable)
When you're looking for a loan, APRs don't always reveal the total amount you will need to repay. It's best to compare TARs, which include all monthly repayments, fees and charges.
Term Assurance
Life insurance giving protection for a specific amount of time (the 'term').
Tied financial advice
A financial adviser that is authorised to advise only on the products of a single company.
Tracker mortgage
This is a type of variable mortgage that is either above or below the Bank of England's Base Rate by a set percentage within a set period. As the Bank of England base rate changes the tracker mortgage rate moves up or down with it.
Unit Trust
A pool of money from savers that is used to buy shares or other investments. This limits the risk for the savers since their money goes into a balanced spread of investments, chosen by a professional fund manage.
Variable Rate Mortgage
A mortgage whose interest rate is raised or lowered at periodic intervals according to the prevailing interest rates in the market.
With-profits fund
This is a fund where your premiums for your with-profits policy are pooled with other with-profits policyholders. The fund invests in areas such as stocks and shares, property, deposits and gilts (government bonds). You share the return from these investments and the profits and losses of the company (if it's a mutual) or the with-profits business fund (if it's a plc).
With-profits policy
Policies such as a pension, endowment, bond or whole-of-life policy which is invested in a with-profits fund.
Yield
The income from an investment, expressed as a percentage of its current market price. For example, an annual dividend of 10p on a share worth 250p means a yield of 10/250 = 4%.