Sometimes the terms used in the financial planning industry can be confusing. To help you understand some of the jargon used we have introduced a glossary of terms page. If there are any additional terms you would like us to add please contact us.
Annual Exempt Amount (AEA)
Each tax year nearly everyone who is liable to Capital Gains Tax gets an annual tax-free allowance – known as the ‘Annual Exempt Amount’. You only pay Capital Gains Tax if your overall gains for the tax year (after deducting any losses and applying any reliefs) are above this amount.
Annual Management Charge (AMC)
Fund Managers apply an Annual Management Charge (AMC) which is deducted directly from the fund to cover on-going management services. It excludes costs such as fund administration services and custodian charges which form part of the Total Expense Ratio (TER).
Capital Gains Tax (CGT)
When you sell or give away an asset for more than you paid (or it’s worth more than when you were given it) you have made a capital gain. An annual tax-free allowance (known as the Annual Exempt Amount) allows you to make a certain amount of gains each year before you have to pay tax. If the total of any gains realised in the year, minus any losses, exceeds your Annual Exempt Amount the excess is liable to CGT. Every individual, including husband and wife, have their own limit. So if an asset is owned jointly, husband and wife can each use their own Exempt Amount. For individuals, the Annual Exempt Amounts are currently £11,100.
It is generally the amount by which the value of a policy exceeds the amount paid into it. Chargeable Gains can also arise when the amount withdrawn from certain policies exceeds certain allowances.
Corporate Bonds are issued by companies to raise capital. They are an alternative to issuing new shares on the stock market.
Discretionary Fund Management (DFM)
A Discretionary Managed Portfolio is managed on a client’s behalf according to agreed investment objectives and risk criteria. Within the agreed criteria, the Manager has absolute discretion to make changes to the assets held within the portfolio – increase, reduce or remove existing assets – and to buy new assets. DFM portfolios can be more expensive than other methods of holding assets but can be attractive to clients who wish to have a professional management service that is more personalised.
A Fund Supermarket is an organisation which can provide a convenient way of investing in collective investment funds. The ‘supermarket’ term reflects the way in which they operate; a variety of funds can be purchased from a number of different management groups in one online place.
Gilts are fixed income or index-linked bonds issued by the UK Government. When you buy a gilt, you are lending the government money in return for regular interest payments and the promise that the nominal value of the gilt will be repaid (redeemed) on a specified later date.
In specie Transfer
This is the transferring of customer assets from one platform or provider to another without the customer having to sell and re-purchase their investment. This is sometimes referred to as ‘re-registration’.
Investment (Insurance) Bond
This is a non-qualifying single premium whole of life policy. A single payment is made and units are purchased in a fund or funds of the investors’ choice.
Please note an investment trust company is a company listed on the London Stock Exchange and by investing, you become a shareholder in a public limited company. Investment trusts own equities which are also listed and are subject to market fluctuations. Investment Trusts can borrow to buy additional investments. This is called gearing. The idea is to make enough return on the investments purchased to cover the costs of the loan and to give a profit on top. If a Trust ‘gears up’ and the markets rise, then the returns for investors should rise. However, if the markets fall, losses could be magnified. Not all Trusts do gearing and most only use it to a small extent. However, funds which do a significant amount of gearing can be subject to sudden and large falls in value.
Junior ISAs were introduced in November 2011 to replace the Child Trust Fund (CTF). They are a long term, tax free savings account for children who are under the age of 18, resident in the UK and weren’t entitled to a Child Trust Fund (CTF) account. There are two types of Junior ISA, a Cash Junior ISA and a Stocks & Shares Junior ISA. Junior ISAs are effectively a tax-efficient wrapper in which you can hold either stock market-based investments or cash, on behalf of the child as the registered contact. The overall annual subscription limit is currently £4,080 and this full amount is permitted to be held in cash, stocks and shares, or any combination of the two. Individuals are permitted to transfer any funds previously invested in stocks and shares into cash outside of annual subscription limits.
The Key Investor Information Document (KIID)
KIID’s have been introduced by law as part of an effort to improve investor information. European Legislation states that fund managers communicate important information about the relevant characteristics of a fund in consistent and plain terms. KIID’s must include the fund’s objective, investment policy, past performance where available, charges and a ‘synthetic risk reward indicator’, which assigns each fund a risk level of between one and seven based on volatility over the previous five years. KIIDs only have to be provided for direct investments in collectives, such as NISA’s, Junior ISA’s and collectives. KIIDs are not mandatory for investments through a life wrapper, such as a bond or pension.
National Savings Certificates
National Savings Certificates are regarded as a safe home for your money. They are backed by HM Treasury and therefore guarantee absolute security for your cash. There is a range of different types of products depending on whether you want income or capital growth, and whether you are a taxpayer or not. It includes index-linked and fixed-interest certificates, savings bonds and income bonds.
New Individual Savings Accounts (NISA)
ISAs were introduced by the UK Government in April 1999 to promote saving and investment among individuals in the UK. From 1st July 2014 the ISA was reformed into a simpler product, known as the New ISA (NISA). There are two types of NISA, a Cash NISA and a Stocks & Shares NISA. NISAs are effectively a tax-efficient wrapper in which you can hold either stock market-based investments or cash. The attraction is that any gain in the value of the investment is free of either income tax or capital gains tax, making them particularly attractive to higher and additional rate tax payers. NISAs have a general overall annual savings limit which increases annually in line with inflation. The overall annual subscription limit is currently £15,240 (increasing to £20,000 in April 2017) and this full amount is permitted to be held in cash, stocks and shares, or any combination of the two. Individuals are permitted to transfer any funds previously invested in stocks and shares into cash outside of annual subscription limits.
If an ISA saver in a marriage or civil partnership dies, their spouse or civil partner inherits their ISA tax advantages. Surviving spouses are able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance.
Ongoing Charges Figure (OCF)
OCF is essentially the same as the TER (see below) but includes some charges that might be charged on an adhoc basis, for example performance charges made by the fund manager.
‘OEICs’ are hybrid investment funds which have some of the features of an investment trust and some of a unit trust. Like investment trusts, OEICs are companies which issue shares on the London Stock Exchange, and which use the money raised from shareholders to invest in other companies. Unlike investment trusts, they are open-ended which means when demand for the 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.
An offshore wrapper in which you can hold a variety of investment funds such as unit trusts and open-ended investment companies (OEICs)
Personal Equity Plan (PEP)
A PEP was a form of tax-privileged investment account. From 6th April 2008 all PEP accounts became stocks and shares ISAs and as such PEPs ceased to exist.
Reduction in Yield (RIY)
The term ‘Reduction in Yield’ – or RIY – is a way of expressing the impact of all charges and deductions on a policy over a period of time. It sets out the reduction in the yield or return that would otherwise have been provided if the policy carried no charges at all. The RIY has the effect of reducing the growth rate shown in your illustration which means lower returns for you. Examining the RIY is an excellent way of judging whether a policy is good value.
This is the transferring of customer assets from one platform or provider to another without the customer having to sell and re-purchase their investment. This is sometimes referred to as ‘in specie’ transfer.
Total Expense Ratio (TER)
The Total Expense Ratio (TER) provides investors with a clearer picture of the total annual costs involved in running an investment fund. The TER consists principally of the manager’s annual charge, but also includes the costs for other services paid for by the fund, such as the fees paid to the trustee (or depositary), custodian, auditors and registrar. Collectively, these fees are known as the ‘additional costs’. TER’s are typically between 1% and 2% (this figure may be in excess of 2% when investing in Fund of Funds). It is likely that large funds will have lower TER’s than small funds, that funds investing in overseas markets have higher TER’s than UK funds and that new funds will show higher costs than old funds. However, the principal difference in TER’s is whether the fund manager has a higher or lower annual charge.
Unit Trusts are collective funds which allow investors to pool their money in a single fund, thus spreading their risk, getting the benefit of professional fund management, and reducing their dealing costs.
Wrap Accounts help provide a fully holistic approach to financial planning. A wide range of various investments are held with one administrator with one central point of contact. The account is relatively easy to administer and usually internet based; paperwork is therefore kept to a minimum. Depending on individual circumstances, Wrap Accounts can have cost savings.