Key terms that may come up in conversation at Chartwell Financial Planners.
Annuity
At retirement – but before you reach age 75 – you have to buy an annuity with your pension fund. It’s a payment that’s usually paid monthly, which you’ll receive as a guaranteed regular income during your retirement.
Asset allocation
Asset allocation is the process of putting your investment into a range of different investments such as equities, gilts, property and bonds. By diversifying the assets into which you invest, you can protect against any reduction in value of any one or more asset class. Asset allocation depends on your investment plans and attitude to risk.
Basic state pension
This is the pension you receive from the government as a result of paying National Insurance (NI) contributions throughout your working life.
Commission
This is the payment that’s made to a financial adviser for services that he or she provides, based on a percentage of the value of the investment or premiums paid. It’s paid to the adviser by the product provider. If your adviser takes a commission, you may not need to pay any fees.
Corporate bonds
These are Bonds that are issued by companies when they need to borrow money. As an investment, they often offer higher rates of return than banks and building societies but with a varying amount of risk depending on the financial security of the company issuing the bond.
Critical illness cover
This is an insurance policy that you take out so that you can rely on having a lump sum paid if you’re diagnosed with a specified critical illness.
Defined benefit
In this type of pension scheme, members receive a set pension income on retirement – based on their final salary, how many years they’ve been working for the company. It’s also known as a final salary scheme.
Defined contribution
In this type of pension scheme, the amount of money you will have in your retirement fund depends on the amount of money you put in, where the money was invested and how much it grows. It’s also known as a money purchase scheme.
Diversification
This is the process of spreading – or ‘diversifying’ – your investments over a range of assets, so that you reduce your exposure to risk. By diversifying your investment, if one type of investment falls in value, then the remaining ones may not fall at the same rate, or at all.
Dividends
These are payments that are made to shareholders by a company from any profits that the business has made.
Equity
This is a term that’s used to describe a company’s issued stocks and shares. If you own shares in a company you own some of the company’s equity. It can also be used to describe the amount, or value, of your home that you own. If you ‘have equity’ in a property, it means that you own a portion of it above the value of any debts secured on that property, such as a mortgage.
Fees
Fees are one of the ways you can pay your adviser for their advice and services. They’re usually fixed and agreed before the financial or legal advice and service is provided.
Final salary schemes
A final salary pension scheme is another description of a defined benefit scheme.
Financial Ombudsman Service
The Financial Ombudsman Service has been set up by law to help settle individual disputes between consumers and financial firms. It gives consumers a free, independent service to help resolve disputes, but you usually have to have first taken your complaint to the financial firm yourself before the Ombudsman can step in.
Fixed interest security
This is another name for a ‘bond’. The amount of interest you receive, when you invest in a fixed interest security, is stated at the time of purchase. These are usually regarded as a lower risk investment than stocks or shares.
Gilts
These may also be called gilt-edged or Treasury bonds. They’re bonds that are issued by the UK government. They’re regarded as being very low-risk, secure investments because it’s the government that promises to pay you back.
Income protection
This is an insurance policy that pays you a monthly income if you’re unable to work due to illness or injury, until you are able to return to work, or you retire, whichever is the sooner.
Income tax
This is the tax paid on your income. Generally, all income is taxable. The exceptions are for income falling within personal allowances and income that’s generated from certain tax-efficient investments such as ISAs.
Independent financial adviser
Independent financial advisers (IFAs) are professionals who give financial advice about products and services across the whole market. They act on your behalf, and may charge a fee or be paid by commission.
Joint life
A ‘joint life’ policy is one that’s taken out by two or more people. Joint life policies can be useful for protecting a family in the event of either or both parents dying.
Life Insurance Cover
Life insurance can pay your dependents money as a lump sum or as regular payments if you die. It’s designed to provide you with the reassurance that your dependents will be looked after if you’re no longer there to provide.
Money laundering
The government has introduced tough money laundering laws in a bid to combat international crime and terrorism. This means that solicitors and other professionals need to check that you are who you say you are when you first instruct them. They may also ask for proof of identity if you have not instructed them for some time. Usually, identity is provided with a form of photographic document – such as your passport.
Money purchase pension
Occupational pensions, personal, group personal, stakeholder, Free Standing Additional Voluntary Contributions (FSAVCs) and Additional Voluntary Contributions (AVCs) can be called money purchase pensions. You can choose where your contributions are invested. The size of your fund depends on your contributions, over what time period you invest them, and how well your investments grow.
Personal pension
This is a pension policy that’s taken out through a pension company, into which you pay contributions and will at retirement provide some or all of your pension income. These are invested in funds, which you can choose according to your attitude to risk and plans for the future. A personal pension is set up on a money purchase (defined contribution) basis.
Risk
Some investments are riskier than others. For example, an investment in the stock market is riskier than money put into savings accounts – there’s more chance of something going wrong and you losing money. Riskier investments tend to offer potentially higher returns as compensation for the risks involved.
Self Invested Personal Pensions (SIPPs)
A Self Invested Personal Pension is a type of plan that allows you, or your appointed fund manager, to make choices from a wider range of investments than other personal pension schemes offer.
State Pension
Your basic State Pension is based on your National Insurance contributions. You may also qualify for the additional State Second Pension if you are employed, based on your earnings and National Insurance contributions.
Tax-efficient investing
Tax-efficient investing is the process of investing in such a way as to minimise the amount of tax paid. This could mean using tax-efficient investments such as making contributions to your pension.
Unit trusts/Collective Investments
These are ‘open-ended’ investments in which the underlying value of the assets is directly calculated by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. There are many different unit trusts available, all investing in different assets.
