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 and…let’s face it…boring… money terms so that you can understand what it’s all about!
Accountant: Professional number-cruncher. Traditionally much maligned for having about as much charisma as a dial-tone, but 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.
Actuary: Someone who finds accountancy too racy.
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. AER used in descriptions of savings accounts and how much you can make on them. 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).
Remember to look at the APR or AER for each product you are comparing (whether it’s saving or borrowing) rather than getting confused by other figures that may be advertised, such as the monthly interest rate. This way you can compare all products on the same basis and work out how much they would cost you or earn you over the same amount of time.
Annuity: 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. Worth putting off pushing up the daisies for as long as possible or you’ll lose out.
Bankruptcy: A way of dealing with debts you can’t pay. Usually to be avoided. You can voluntarily declare yourself bankrupt, or you can be forced to 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 much credit or acting as a company director.
Bond: 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.
Broker: So-called because if you use one of the posh ones with expensive offices, you are. 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.
Capital: Ker-ching! A load of money! Or the value of your assets.
Capital Gain: The profit you make when you sell an asset, eg 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.
Compound Interest: 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, eg 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.
Dividend: 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 decided how much cash to share out and how much to keep in the business.
Dividend Yield: The dividend expressed as a percentage of the share value.
Earnings multiple: 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, so the earnings multiple mortgage companies are willing to use has gradually crept up.
Endowment: 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.
Equities: 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 Services Authority (FSA): Not to be confused with the similarly acronymed Food Standards Agency. The independent, non-governmental body that regulates the finance industry, including mortgages.
Friendly Society: The place to go when you’re feeling lonely. No, not really. A friendly society is a non-profit making, mutual organisation whose funds (after running costs are deducted) are owned by its policyholders. They’ve been kicking around for hundreds of years – 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. However, as a place to put your money they lag behind various other organisations as their charges tend to be high and performance low.
Front-End Loading: 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.
Gilts: So-called because the government should be ashamed at the returns. They are a bond (see above) where you lend money to the government, rather than to a company. Should be a low-risk investment – governments rarely go bust – which is why you don’t get that much money back.
Guilt: What banks should feel about the way they treat their customers.
HM Revenue and Customs: Quite possibly the most exciting government department in the world. 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 Merc 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.
Index Tracker: 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. A 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. From 16 April 2017 you can save up to £20,000 in a cash ISA, a stocks and shares ISA or a mixture of the two.
Inflation: 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.
Inland Revenue: (see HM Revenue and Customs).
Investment Club: 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 lead to arguments and the ending of friendships.
Investment 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.
Life assurance: 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.
Life insurance: The term is often used interchangeably with life assurance, although technically, insurance protects holders from all events that might happen.
Management consultant: Someone who has read a book by an American.
Mutual Society: A mutual is a company that has no issued stocks or shares. Instead, it is owned by its investors.
Negative Equity: 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.
Official receiver: A civil servant in The Insolvency Service and an officer of the court who is responsible for administering the first stages of an insolvency (banruptcy) 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 and people whose employers don’t have a group pension scheme. An employer can contribute to your PPP, but there’s nothing to say they have to. 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. Apart from Stakeholder pensions, though, PPPs tend to be expensive, opaque and badly-performing.
Share: 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, a company’s share price is determined by market forces: 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.
Shareholder: 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.
Stamp Duty: Another way the Government punishes us for doing well. 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).
Stakeholder Pension: A fairly new type of low-cost, flexible pension. Even if you’re not earning you can pay in a limited amount each year, and get tax relief on this. Anyone in a company pension scheme earning less than a certain amount a year (set by the HMRC) can pay into a stakeholder pension as well, and employers with five or more employees must give them access to a stakeholder scheme if the company doesn’t have any other kind of pension fund set up.
Stock: The basis of many a good soup. What Americans call shares. And, in the UK, a fixed-interest financial asset like a government bond. There is usually a redemption date and, in the meantime, they are traded on stock exchanges.
Stock Exchange: A market on which securities are traded, such as the London Stock Exchange. The other big ones are in Tokyo and New York.
Stockbroker: An agent who does the trading on the stock exchange; usually far from broke.
Tax: Money you have to pay to the Government which, in theory at least, is then used to pay for useful things like the nation’s health, education and politician’s lunches. There are many different kinds, eg income tax comes out of your pay packet and VAT which is charged on many goods that you buy. Basically, if you make a bit of money out of anything the government wants a cut of it. Also know as ‘daylight robbery’.
Tax Credit: A well-intentioned but rather bureaucratic system of extra tax free allowances. A tax credit is an amount taken off the tax bill of certain groups of people, eg some couples with children under 16, so the lucky souls don’t have to pay as much.
Tax Relief: A system whereby someone doesn’t have to pay tax on part of their income. Always worth snapping up, if you qualify.
Yield: The annual income you get from an investment, expressed as a percentage of the value of that investment. The interest rate on a savings account, for example.