Are you sick of reading money terms that mean absolutely nothing to you? Quite right – don’t put up with it any longer! Here’s our (not at all definitive) finance and banking glossary with all those confusing money terms explained, so that you can understand what it’s all about!
Professional number-cruncher. Come tax return time they can be your best friend, taking the headache out of your financial form-filling and saving you serious amounts of money.
Someone who finds accountancy too racy. They tend to deal with the risks involved in business decisions.
Additional Voluntary Contribution (AVC):
Extra payments you can choose to make into your pension, on top of what your employer asks you to pay.
Annual Percentage Rate (APR):
A common way of expressing how much borrowing money will cost. It’s the amount of interest you will be paying, over a year, on a sum you have borrowed. When it comes to borrowing, the APR shows you, essentially, how much your loan will cost you per year including any charges. For savings, it is the rate that is normally quoted showing how much you should make each year on your savings.
Annual Equivalent Rate (AER):
The amount of interest your money will earn in a savings account if you leave it alone for a year. Really, it shows what the interest rate would be if the interest were paid annually instead of monthly or quarterly. Sometimes the AER is different from the APR because, say, the bank has a six-month introductory offer (to get themselves into the ‘best-buy’ tables).
That might be 7% for the first six months then 5% after that. This means that they can say they have a 7% APR but, as they have to be honest about it now, they have to admit that over the whole of the first year, the Annual Equivalent Rate (taking an average) is actually 6% (7% for six months then 5% for another six months).
An income you’re paid after you retire, until you die. You buy the annuity from a company, which then agrees to give you a fixed sum every year.
Bankruptcy is a way of dealing with debts you can’t pay. Usually not nice, and to be avoided. You can voluntarily declare yourself bankrupt, or you can be forced to declare by a creditor to whom you owe more than £750. You’re then bankrupt for a certain amount of time (normally a couple of years, though this can vary), during which you lose control of your assets and are stopped from doing lots of things like getting credit or acting as a company director.
Nothing to do with James. More like an IOU: lenders hand over their money to a business or the government and expect to get it back, plus interest, in the future. There are many different kinds of bonds – they may be short term or long term and interest may be paid at a fixed or variable rate.
A broker is basically a middleman who brings together two parties for a financial transaction, e.g. by selling customers insurance policies or shares. Now you can use much cheaper online brokers for buying and selling shares quite cheaply.
Ker-ching! A load of money! Or the value of your assets. Essentially, another word for ‘money’.
The profit you make when you sell an asset, e.g: the proceeds you get from selling shares, minus the cost of the shares. You have to pay Capital Gains Tax on this profit if it goes above a certain threshold.
See ‘interest’. Compound interest is a bigger version as it is calculated both on the sum, and on the interest that has accrued on the sum in previous periods. Basically a get rich slow scheme.
Defined Benefit Scheme:
An occupational pension scheme with no surprises. Rules specify what you’ll get when you retire, e.g: depending on what your salary is, or how many years you’ve worked there.
Defined Contribution Scheme:
An occupational pension scheme with surprises. Your contributions are fixed, but the amount of pension you finally receive will depend on things like the size of the fund that you’ve built up.
Money that companies give out to shareholders. British companies usually fork out a couple of dividends a year, one larger and one smaller. You usually get an amount for each share; the company can decide how much cash to share out, and how much to keep in the business.
The dividend expressed as a percentage of the share value.
When you go for a mortgage, the lender looks at what you earn and multiplies it by a certain number to work out how much they think they can lend you. The norm is about 3.5 times your salary. A higher earnings multiple could be 5 times your salary. As house prices have gone up in recent years, the earnings multiple mortgage companies are willing to use has gradually crept up.
A combination of life insurance policy and investment – you or your dependants are guaranteed a payout either on your death or on a fixed date, whichever is sooner. Generally expensive and poorly-performing, and a better money-maker for the person who sold it to you than for you.
A word for a plain old share in a company. Can also mean the amount of your house that you own (i.e. the value of the property minus any mortgage you still have to pay on it).
Exchange-Traded Funds (ETFs):
A relatively new kind of investment fund which can be bought through most stockbrokers. They are similar to tracker funds as effectively, they track the stock market. A cheap way to get into the stock market, as admin charges tend to be very low.
Final Salary Scheme:
A rather nice little pension scheme, where you get an annual payout of a percentage of whatever your salary was when you retired. Expensive for employers to run, and consequently disappearing fast.
Financial Conduct Authority (FCA):
The independent, non-governmental body that regulates the finance industry, including mortgages.
A friendly society (also sometimes called a mutual) is a non-profit making organisation whose profits are shared with its policyholders (minus running costs), instead of paying dividends to shareholders like a high-street bank does. They’re an old and established type of financial organisation that stretches back centuries. The idea is to give members life assurance and help them out during times of illness or unemployment. Now that’s what friends are for! A friendly society is a good option for many people – especially those who want to feel included and part of a financial community.
Nothing to do with washing machines, or any kind of domestic appliance for that matter. A front-end load is the initial admin and/or commission charge made when you invest in a unit trust, life-assurance company, or any other kind of investment fund.
FTSE All-share Index:
Includes around 700 of the top companies in the country.
FTSE 100 Index (pronounced Footsie):
A share index of the 100 biggest companies listed on the London Stock Exchange (LSE). The FTSE 250 tracks the big firms ranked at 101 to 350.
They are a bond (see above) where you lend money to the government, rather than to a company. Gilts should be a low-risk investment – governments rarely go bust – which is why you don’t get that much money back.
HM Revenue and Customs:
Quite possibly the most exciting government department. It has responsibility for all sorts of taxes, VAT, customs and excise, national insurance, tax credits, child benefit and child trust funds, among other things. Find out more at the HMRC website.
Independent Financial Adviser (IFA):
Someone with a posh Mercedes and a second home in Marbella. IFAs are licensed to advise you on financial products offered by a range of different companies. Some earn commission for selling particular products, which might lead you to question just how independent they really are.
An index is, quite simply, a way of measuring how well a stock market is performing by comparing the performance of shares in a group of different companies. An index tracker fund is basically a little baby microcosm of the index – shares in the same companies and in the same proportions they are found in the index. The idea is that the tracker will emulate the performance of the index, and hopefully get bigger as the market goes up.
Individual Savings Account (ISA):
A way of saving money without having to pay tax on it. There are different types: Cash, Innovative Finance, Lifetime, Alternative Finance, and Stocks and Shares (also called Equities ISAs). You can put in up to £20,000 each year to save, split across different ISAs (or all into one).
The tendency of prices to rise over time, particularly housing and hairdressers. This means the value of your money can drop if you don’t keep up, e.g. by investing.
(see HM Revenue and Customs).
A group of individuals who have got together to invest their cash collectively. This way they can invest in a range of different stuff, making it a bit less risky than going it alone but it can be an exercise in trust.
It’s up to you whether or not you trust them. A company that invests its shareholders’ funds in the shares of other companies. This might sound a bit Kafkaesque, but it means people without a lot of money can invest in a wide range of companies without incurring massive trading fees.
The stuff of a million murder mystery motives, this started off as a way to cover your funeral expenses, but these days can be a way of getting some tax breaks on your savings. A type of policy where you pay a premium in order to get a lump sum paid out in the event of your death.
The term is often used interchangeably with life assurance, although technically, insurance protects holders from all events that might happen.
A mutual is a company that has no issued stocks or shares. Instead, investors own these.
A nasty little thing that can happen when house prices crash. If the value of your house falls below the value of your mortgage, you are said to have negative equity.
Occupational Pension Scheme:
A pension scheme for employees of a particular company, or possibly a trade. Also known as the workplace pension scheme – which your employer must auto-enrol you for if you’re eligible.
A civil servant in The Insolvency Service and an officer of the court who is responsible for administering the first stages of an insolvency (bankruptcy) case. This includes collecting and protecting any assets and investigating the causes of the bankruptcy or winding up.
Open-ended Investment Company (OIEC):
A US idea that came over to the UK in 1997. A bit of a hybrid between a unit trust and an investment trust, OEICs sell shares in themselves then use that cash to invest in other companies. They usually operate as umbrella funds, often having a few different smaller funds. They’re known as open-ended because, if demand for their shares rises, they simply issue more. Unlike in a unit trust, OEICs tend to just have one share price, whether you’re buying or selling.
Personal Pension Plan (PPP):
A pension scheme for those without occupational pensions, i.e. the self-employed, or those who want an alternative to their workplace pension. An employer can contribute to your PPP, but they don’t have to – even if you’ve opted out of the workplace pension, they don’t have to pay contributions to an alternative pension provider. You can take a PPP with you when you change jobs. PPP contributions get tax relief, and you can buy life assurance, which may also be eligible for tax relief.
If you buy a share, then you own a part of a company. Usually, of course, you’d buy lots of shares in the hope that they’ll go up and up in value – one on its own is unlikely to be much of an investment. Roughly speaking, market forces determine a company’s share price: if a lot of people want to buy shares, their value will go up; if a lot of people want to sell shares, their value will fall. So in theory, there’s a lot of money to be made, but it’s always a risk and if company goes bust, shareholders are last in line to get any of the cash.
As the name suggests, anyone that holds shares in a company. Shareholders are also entitled to do stuff like receiving the company’s accounts and voting at their Annual General Meeting. Most companies pay regular dividends to their shareholders.
Self-invested Personal Pension (SIPP):
A kind of DIY personal pension for people that know a bit about the stock market themselves. Rather than letting an insurance company decide where to invest your cash, you can choose what to invest in – including shares, property, art and antiques. Fees and charges for a SIPP usually work out at about 2% a year, though (they’re capped at 1% in a stakeholder pension), so they’re best reserved for those with lots of money to invest.
Another way the government punishes us for making investments. It’s a fixed tax you pay when you buy shares (0.5%) or property above a certain value (1% to 5%, depending on the value of the property).
A type of low-cost, flexible pension. Even if you’re not earning, you can pay in up to £40,000 a year and get tax relief on this. Most employers now use stakeholder pensions as the workplace pension scheme.
The basis of many a good soup. Also, what Americans call shares. In the UK, it is a fixed-interest financial asset like a government bond.
Stocks and shares are traded on a market, such as the London Stock Exchange. The other big ones are in Tokyo and New York.
An agent who does the trading on the stock exchange for their client. Think Wolf of Wall Street (only a little more regulated these days).
Money paid to the government, which is used to pay for useful things like the nation’s health, education and politicians’ lunches. There are many different kinds, e.g: income tax comes out of your pay packet, and VAT added to many goods that you buy.
A system of extra tax free allowances. Certain groups of people have some tax taken off their bill, e.g: some couples with children under 16.
A system whereby someone doesn’t have to pay tax on part of their income. Always worth snapping up, if you qualify.
The annual income from an investment, expressed as a percentage of the value of that investment. The amount a buy-to-let property would earn a landlord in rent each year, for example.