This was 6th April 2006. A significant day for the pensions industry in which the overall landscape for pensions was simplified. Prior to this date there existed many different types of pension plan and even more sets of rules that governed each one. On A-Day all of this was set to change with the government ordering a simplified regime to be implemented.
Absolute Return Fund
An absolute return fund aims to produce positive returns every year regardless of stock market movements. They aim to do this by investing in more complex strategies than simply buying shares. They hedge their bets by investing in options, futures and derivatives and use strategies such as shorting, arbitrage and leveraging to achieve their objective of delivering positive returns year on year. The most popularly known type of absolute return fund is probably the hedge fund.
Active investing is what the popular image of a fund manager would be. This involves making active decisions over whether to buy or sell investments based on extensive research. The primary aim of a fund manager is to deliver returns that can beat the market, within the parameters of the fund’s objectives and philosophy.
AIM (Alternative Investment Market)
The alternative investment market is a sub-exchange to the main London Stock Exchange and is there for smaller companies to achieve a public flotation (raise capital via public investment) with less regulatory burden than would be involved with a full stock market listing.
The fund built up inside a pension plan can be used to purchase an annuity. This is a product that promises to pay an income for life in exchange for a lump sum. There are various options and considerations involved with choosing an annuity. For more information about annuities click here.
This describes an investment strategy used by professionals to invest across a range of different investment types or sectors in order to optimise the level of risk and the potential return. It’s basically the opposite of putting all your eggs in one basket.
Bank of England Base Rate
The Bank of England acts as the governments bank and has responsibility for setting the base interest rate for this country. This rate in particular is important as all banks take their lead on interest rate decisions from this base rate.
A bull market refers to a period of time where the prices of stocks and shares are generally rising. It is also associated with investor confidence and increased flows of money into the markets. A bear market is the opposite. That is, a sustained period of price falls leading to low investor confidence around the investment community.
The purchaser of a call option has the right to buy an underlying investment at an agreed price and a set date in the future. They are not obligated to exercise the option to buy, however if the option is not exercised the fee paid for the contract will be lost. A put option is almost exactly the same but provides the purchaser of the contract the right to sell an underlying investment at a price and date agreed at outset. Once purchased the holder of the call or put option will only exercise it if they know they will make a profit from doing so when they are said to be in the money.
Capital Gains Tax (CGT)
This is a tax payable on gains made from investments. If your investments are not held within a tax efficient vehicle such as an ISA or Personal Pension then any profit you make from your investments must be declared and will be liable to capital gains tax.
This is the process of accumulating interest or profits year on year in a way that multiplies the return you can achieve. For example, if you deposit 10,000 in the bank, at the end of the year you will earn interest on that money. Then at the end of the second year you will earn interest not only on the original 10,000 but also on the interest that was deposited at the end of the first year. That way you can earn more and more interest each year. Investments can multiply in the same way when gains are made on top of gains made in earlier years.
When companies that are listed on a stock exchange need to borrow money one of their options is to borrow money from the public. In return they issue an IOU a corporate bond. When you invest in a bond you are lending the company money. These bonds are similar to any other loan in that they pay interest and have a date by which they will be paid back. For more information about Corporate Bonds click here.
These are financial contracts whose price is determined (derived) by the underlying asset. The name derivative is actually used to describe a number of different contracts such as options, swaps, forwards and futures.
This is a product that combines investment with life insurance. It was originally designed to provide the best of both worlds, but because of the complicated way in which it was put together the product has generally failed to provide the best of anything. For more information about Endowment policies click here.
Describes a share of an asset. The amount of equity you have in an asset is the amount of that asset you own. That is why equities are also popularly referred to as shares, because owning equities means you own a share of a public company. Its also why people sometimes ask how much equity you have in your home because that will tell them how much of your home you actually own. For more about Shares click here.
Exchange Traded Fund (ETF)
An Exchange Traded Fund (ETF) is a type of collective investment fund. ETFs are typically index funds, like index trackers that aim to mirror the performance of an index. Where ETFs differ to most funds is that they can be bought and sold on the stock exchange just like any other share. This puts them in a unique position of being easy and cheap to buy and sell. For more information about ETFs click here.
Someone that is authorised by the Financial Services Authority to provide personal financial advice to the public. They can typically advise on a broad range of areas although it is worth bearing in mind that they are likely to be a jack of all trades and a master of none when it come to advising on specialist areas.
A financial planner goes further than any normal IFA and considers your overall picture before making any specific financial planning recommendations. They would consider you, your lifestyle and your future goals and work more in partnership with you to create a plan that you can really work towards. This type of adviser is typically a Certified Financial Planner and/or a Chartered Financial Planner.
FTSE 100 Index
This is an index of the 100 largest companies in the UK. The value of the index itself is used as an indicator of how the wider market in the UK is performing, and in fact represents approximately 81% of the total market in the UK. The value of the index is affected by the price movements of the 100 shares within that index and in proportion to the size of each company included. So larger companies will move the index more than smaller companies even if their respective share price moves by the same amount.
FTSE All Share Index
This is an index that represents 99% of shares listed in the UK and includes all shares of the FTSE 100, FTSE 250 (the 250 companies that are the largest on the market after the first 100) and the FTSE Small Cap indices (the companies outside the largest 350).
In simple terms this refers to a ratio of debt to equity. That is, how much a company has borrowed compared to how much it has in assets. A high level of gearing (a lot of debt in comparison to asset levels) is considered higher risk. Companies might consider a high level of gearing (borrowing relatively large amounts) for future expansion plans.
When the government needs to borrow money one way they do this is to issue gilt-edged securities (gilts) to the public. These are the same as an IOU. So when you buy gilts you are effectively loaning the government money. Just like a normal loan there is a redemption date, the date on which the government will pay you back, and an interest rate, where the government pays you interest for loaning them money. The name gilts comes from when they were originally issued in a physical certificated form and had a gilt-edge (a thin golden layer). For more information about Gilts click here.
Group Personal Pension
This is a personal pension plan that is offered by an employer to their employees. For all intents and purposes it is exactly the same as a personal pension plan you would take out yourself. The only reason it is called a group personal pension plan is because the employer administers the plan as part of a larger company scheme to make it easier for them and the employee to maintain. So it is grouped purely for administration purposes, otherwise it remains an individual personal pension.
This is a type of collective investment fund that uses more sophisticated strategies and leveraging to manage risk and produce returns. Hedge funds use financial instruments such as derivatives to take long and short positions on investments. They are characterised in part by their fees, where its not unknown for funds to charge up to 2% per annum management fee then 20% (of the gain) per annum as a performance fee.
IFA (Independent Financial Adviser)
Someone that is authorised by the Financial Services Authority to provide advice to the public and can recommend any products, if they are deemed to be required, from any provider they can choose the best product to suit your needs. An IFA will be qualified to a minimum standard but its important to make sure that your own IFA has at least attained Certified Financial Planner or Chartered Financial Planner status.
Income Protection Plan
This is a type of insurance policy that protects you when you are unable to work due to illness or injury. It protects you by paying out a proportion of your regular income to help you financially until you are fit enough to work again.
These are low cost, simple collective investment funds that aim to track the performance of an index and provide the investor with a more predictable return. Index tracking funds will, as the name suggests, track an index e.g. FTSE All Share or FTSE 100. But importantly rather than investing to beat the market this automated investment fund aims to track the index, sometimes by just owning all the shares in that index. Because of this passive investment style index funds do not have to pay for expensive fund management teams and so can keep their annual management costs to a minimum.
Individual Savings Account (ISA)
The ISA was introduced by the government in 1999 to encourage more saving and investing by offering tax incentives such as tax free interest and capital gains. Each year every individual over the age of 18 has an allowance that they can choose to take advantage of. At the end of each tax year the allowance for that year is lost forever if it is not used. For more information about ISAs click here.
Inheritance Tax (IHT)
This is a tax charged by the government on death and is based on the value of the deceased’s worldly possessions. The actual calculation can be complicated depending on whether the deceased made a will, gave financial gifts within seven years of death, or had trusts in place. Or the calculation could be very simple if their assets after accounting for debts total within the nil rate band (the amount on which no tax is payable). In the 2009/10 tax year the nil rate band is 325,000 and the tax charged on the excess is 40%.
Since October 2007 married couples and civil partners can effectively double the nil rate band when the second partner dies (so 650,000 in 2009/10) if the band was not used when the first partner passed away i.e. they passed all of their assets to their surviving partner, as is often the case. This is to ensure a couple can make use of both nil rate bands owing to them.
Investment Bank/Retail Bank
An Investment Bank is a company that deals with mainly corporate affairs such as raising capital, managing stock market flotations, dealing with mergers and acquisitions etc. Investment banks may also provide personal financial advice to very wealthy individuals. A retail bank is what we are used to seeing on the high street. They are commercial banks set up to service the mass market with savings and lending amongst other activities.
Multi-Manager Funds & Fund of Funds
This is a type of fund that incorporates different fund managers into the one fund and in particular different management styles or investment focus. The idea is that one fund provides an array of investing styles and asset class diversification so you do not have to.
Describes a situation where the value of an asset has fallen below the amount borrowed to originally purchase the asset. For example, where a house is purchased for 200,000 using a loan of 190,000, then the value of the house falls to 170,000 and the loan outstanding remains at 190,000. This becomes a problem if the owner wishes to sell the house because the sale value might not pay of the mortgage outstanding.
This describes how much a person is worth after adding up all their assets and subtracting all their debts. It provides a snapshot of the true financial position.
OEIC (Open Ended Investment Company)
This is another type of collective investment fund that pools investors money to invest across a broad range of shares or other investments according to the funds objectives. It is an open ended fund, as is a unit trust, which means it can create new shares when there is more demand and redeem old shares when there is less demand. One key difference between an OEIC and a unit trust is that a unit trust is a fund and an OEIC is a company, which means it can run several sub-funds under the umbrella of a company structure.
This describes a type of investment strategy that involves tracking a particular index or set of indices. The main philosophy behind the strategy is to make investing low cost and to earn the market rate of return over the long term. Index trackers are the best known type of passively managed funds although Exchange Traded Funds are now becoming more popular.
Payment Protection Insurance
An insurance policy that guarantees to continue to pay premiums on a plan or instalments on a loan if you are unable to do so due to a specific set of circumstances. In theory this is a good idea but these types of policies have been sold to unsuspecting customers too often by high street banks looking to make some extra commission.
This is simply a company’s share price divided by its earnings per share. The earnings per share definition is broadly a company’s profit divided by the number of shares it has in issue. Typically a high P/E Ratio means the market is expecting the company’s profits to rise in the future. When comparing P/E Ratios it is best to compare only between companies in the same sector.
Personal Pension Plan
This is a type of investment plan that is designed purely for investing towards retirement. There are generous tax breaks available on new contributions into the plan. Money can only be withdrawn from the plan when the plan holder reaches a certain age, at which time they can choose to take a tax free lump sum as well as an income for life. For more information about Personal Pensions click here.
If a company needs to offer more shares to the public in order to raise more funds one way of doing this will be to offer their existing shareholders more shares. This way they have the right to purchase them before anyone else hence the name rights issue. They will usually be offered on attractive terms e.g. below the prevailing market price, to encourage take up of the offer.
This is defined as the possibility of suffering some form of loss. In investment terms it relates to the extent to which you may not get your money back that you invested. The higher the risk you take the higher the possibility of not getting all or some of your money back. For an example of the level of risk associated to different types of investments click here.
Mathematical calculations and history tells us that there is a strong relationship between risk and reward. That is, the higher the risk you take with your investments then the higher the potential reward. Also, the lower the risk associated with an investment then the lower the expected reward. For more on this click here.
This is an agreement made between an employee and employer for the employee to give up an amount of their salary, and instead have that amount paid in to their pension plan. Importantly if the employee is already making contributions they will see no difference to their net pay. However they and the employer will make a saving on National Insurance contributions, which can also then be added to the pension to increase the overall level of contributions being made.
This refers to the proportion of income that is saved. On an individual level it can tell us how good we are at putting money away. At a national level it can tell us how we are behaving as a nation and what the trends might suggest. For example easy credit and high house prices (giving the illusion of wealth) have meant that the savings ratio in the UK has fallen to record lows in recent times.
Shares, as the name suggests, represent a share of a company. Once a company has offered their shares for sale in their initial public offer, they will then be traded on an exchange e.g. the London Stock Exchange. Here the price of the shares will go up or down depending on demand. If the company performs well and can afford to pay a good level of interest (dividend) to its investors (shareholders) then demand for the shares will rise as will the share price.
This is where an investor hopes to profit from a fall in the value of an asset. The investor does this by borrowing an asset from a willing lender, selling that asset to a buyer and then arranging to buy it back from them at a lower price in the future. If the price of the asset has fallen during the term of the contract the investor will buy back the asset at a lower price than they sold it for. In this case they can return the asset to the lender having made a nice profit.
Tenants in Common/Joint Tenancy
There are two ways in which you can legally own a property e.g. a house, as a Joint Tenancy or as Tenants in Common. Under a joint tenancy each person owns the whole property. As tenants in common each person owns a definite share of the house. So for example, if a couple buys a house under joint tenancy they will each own 100% of the house. If one of them dies the other owns the whole house. As tenants in common each owns, say, 50% of the house, which means if one of them dies the other will still only own 50% of the house, the other 50% will be passed to the deceased partners beneficiaries.
Imagine if lots of investors who wanted to invest in a large number of shares got together and pooled their money, then used that total sum of money to invest across a large number of shares and took a portion of the pool according to their original investment amount, then used a professional fund manager to run the money, this is what a Unit Trust does. This is also why Unit Trusts and other funds of this type are known as collective investment funds. By investing even small amounts into a Unit Trust an investor can investment their money in a huge range of shares that they would not otherwise be able to. For more information about Unit Trusts click here.
VCT (Venture Capital Trust)
A VCT is a relatively risky type of collective investment scheme that invests in primarily small, unquoted companies. Because they invest in small companies the government offers excellent tax breaks for investing in a new issue of VCT.