Active. A fund that uses managers and analysts who use their expertise to decide what investments to make. They will usually adjust the holdings on a regular basis.
Alpha. Is a statistical measure used when measuring investments. It refers to the excess returns earned on an investment above a benchmark. Ie: represents the % performance above over or below an index.
Annuity is where a client “gives away” their pension funds in return for a guaranteed income for life. If they die sooner the lump sum is lost, if they die later they will receive the income for life and possibly way more than the lump sum used.
Asset Allocation. Is an investment strategy that balances out risk by apportioning a % of an investment to be placed in various assets (such as shares, property, gilts etc) in order to achieve a desired risk tolerance or goal.
Base Rate. The Bank of England is responsible to set UK interest rates which ultimately effects the cost of borrowing money. It is set by the Monetary Policy Committee and is regarded as a key lever of controlling inflation. If inflation is too high, interest rates would usually rise to combat it.
Beta. Is a statistical measure used when measuring investments. It is a measure of volatility (fluctuations) experienced by a specific stock when compared to the market as a whole. If Beta is 1.0, a beta of above indicates that specific stock is more volatile than the broader market. A beta of 1.5 means if the market moved 1%, it would move 1.5% over the timescale.
Bonds. Usually called corporate bonds, these are loans to companies from an investor. Their risk can vary as a loan to a huge multi-national may be deemed as low risk, whereas a loan to a small emerging business will increase the risk. A bond also usually pays an interest rate between their issue and maturity.
Cappped drawdown has not been available to new plans since 6/4/2015 so no new plans can be entered into. Existing plans can be maintained until converted to a flexible drawdown plan. The amount of income you may draw is linked to something called the “GAD rate” therefore you have limits on how much you can draw.
Commodities. Are basic goods that can be bought and sold to generate returns. Examples of commodities are tangible, for example oil, gas, metals and food.
Conventional gilt are the most common type of debt issued. The loan itself (principal) is a specified amount to be repaid on a specific date whilst the coupon is also fixed. For example an investor may hold £1,000 nominal of 1% Treasury Gilt 2045. Meaning the investor will receive 1% per year (paid 6 monthly) and the capital sum back in 2045.
Correlation. Is a statistical measure of how 2 different markets behave in a similar way. For example, 2 stock markets may have high correlation meaning if one goes up by 10%, the other one does also.
Coupon. Is another name for the interest payment made by a bond or a gilt.
Crystallised is how money is classed after any tax-free cash has been taken from your fund. Simply put, it is “the taxable money left in your pension after having drawn your tax-free cash” – in other words the remaining 75% that is taxable!
Defined Benefit is a pension scheme, run, paid for and sponsored by an employer. Instead of each member having their own “pot of money”, for each year you worked at the company, you accrued a future promise of income which was expressed as a % of your (as yet unknown) final salary when you ultimately leave. It is your ex-employers responsibility to pay your income for the rest of your life and is therefore considered very secure (you have no investment risk).
Defined contribution is a pension scheme where each member has their own “identifiable” pot of money. Usually the members (or their employers or 3rd parties) put money in and it is invested to provide growth. At retirement, the owner then draws the money out to provide income. It is your responsibility to arrange your income for the rest of your life, could run out if it spent too quickly, investments are poor or you live too long and is therefore considered very unsecure (you have the investment risk).
Deviation. Is a statistical measure used to determine how far something could move away from what it is trying to track. Usually associated with passive funds that try to track (or exactly replicate) an index. For example, a FTSE 100 tracker with 0 deviation, replicated exactly the returns of the FTSE 100.
Discretionary Fund Manager. A fund management team that has additional permissions that allows them to exercise their discretion when buying and selling assets on behalf of individual investors.
Diversification. Is the investment strategy used to manage risk by investing money across different asset classes, countries, sectors, currencies and companies. The idea is to spread eggs into different baskets and reduce overall risks.
Dividends. These are distributed and paid to the owners of a company and are in effect the profits the company has made. As a shareholder of a business, you become entitled to the dividend. Not all companies will pay dividends.
Enhanced tax-free cash is where a plan has been around for many years and a client is able to draw more than the standard 25% as a tax-free lump sum. This will have been calculated on 05/04/2006 so is only available with older plans. Upon subsequent transfer, the “enhanced” bit is lost and you become subject to the usual 25%.
Equities. Also known as shares. They are shares in an actual company that is traded using a stock market. When buying shares, their price can fluctuate and as the owner of the company, you become entitled to any profits via a dividend.
Exchange Rate. Different currencies are traded and will fluctuate according to market conditions. For example, the £ sterling fluctuates against the $ dollar. If you are buying something in dollars with sterling, an additional risk involved is the “exchange rate fluctuations”.
Final Salary is another name given to “defined benefit” pensions.
Fixed Income. Is the collective name given to fixed interest investments. Gilts, Treasuries and Corporate bonds would all be classed as fixed income investments.
Fixed protection of which there are many (2012, 2014, 2016 for example). When the lifetime allowance was reduced in previous budgets (was £1.8million to £1million), you were able to protect the value of pensions against the (previously higher) lifetime allowance if it was needed.
Flexible drawdown is the strategy of drawing your pension through a series of withdrawals (either lump sums or income) rather than using the whole lump sum at outset to buy an annuity or guaranteed income for life.
FTSE 100. A stock market index consisting of the UK’s largest listed companies on the London Stock Exchange.
GAD Rates are published by the Government Actuary Department and are used in the calculation of potential withdrawals in a Capped drawdown plan. They normally use FTSE 15 year gilt yields and members can then withdraw between 0 and 150% of the published GAD rate.
GDP. Or Gross Domestic Product is the total output of an economy. Ie: the total value of the products and services that country produces and sells. For example the UK in 2022 was $3.198 trillion which calculates to $47,318 per person in the UK.
Gilts or “Gilt-edged Securities” are essentially loans made by the UK Government from investors. In return for borrowing the UK Government (via the Bank of England) money, the Government guarantees to repay the loan on a set date in the future (known as the “principle”) plus an income (known as the “coupon”) usually every 6 months until maturity. Gilts are regarded as “low risk” as the UK Government is seen as a secure borrower.
Index. There are lots of stock market indexes
Index linked gilt first issued in 1981 and make up around 25% of UK debt. The loan itself (principal) is a specified amount to be repaid on a specific date whilst the coupon is also specified but revalued for inflation. For example, an investor may hold £1,000 nominal of 1% Index-linked Treasury Gilt 2045. Meaning the investor will receive 1% per year (paid 6 monthly) but revalued for inflation with RPI being used since start plus the capital sum back in 2045.
Inflation. The term used to describe rising prices, i.e.: how quickly prices of goods and services may be increasing. If a bottle of bleach costs £1 in 2022 and £1.10 in 2023. The annual rate of inflation would be 10%.
Money purchase is another name given to “defined contribution” pensions.
Multi-asset fund. An investment strategy that combines different types of assets (for example Shares, Bonds, Property or Cash) to provide a diversified portfolio. A Multi-asset fund is usually managed by one company.
Passive. A fund that attempts to track (or emulate/copy) a specific market or index. An example could be the FTSE 100.
Pension commencement lump sum (PCLS) is another word for tax-free cash. It will usually be no more than 25% of the uncrystallised pension pot. It can however be higher where someone has “protected tax-free cash”.
Platform. The name given to the “technology” that is used to buy and sell investments. Usually, a platform will allow someone to buy and sell investable assets online.
Portfolio. Is the collective name given to multiple investments that a person holds. For example, my portfolio could include shares and property.
Protected tax-free cash is where a member had more tax-free cash rights at 5/4/2006 in excess of £375,000. This is a form of lifetime allowance protection and will protect the sum from the additional tax charge when drawn.
S&P 500. A stock market index consisting of the US largest 500 publicly listed companies
Sectors. Describe a section (or group) of the economy that is specific. For example, the “finance sector” would include banks and insurance companies whereas the “energy sector” would include companies that generate and supply electricity. Diversification across sectors can help reduce overall risk in a portfolio.
Shares. Also known as equities. They are shares in an actual company that is traded using a stock market. When buying shares, their price can fluctuate and as the owner of the company, you become entitled to any profits via a dividend.
Sharpe. Is a statistical measure used when measuring investments, it is a measure of an investments risk adjusted performance when compared to the return of a risk-free asset.
Stand alone lump sum is found in final salary schemes. Rather than generating tax-free cash using commutation factors (or reducing the income to generate a lump sum) some schemes had a stated and specific value instead. You effectively accrued a “income” and “lump sum” benefit separately during your membership in the scheme.
The Monetary Policy Committee. Or MPC is the decision-making body of the Bank of England. Their mandate is to promote UK economic stability and maintain inflation at 2% per year. The MPC is made up of 9 members and usually meets 8 times per year.
Treasuries. Are the US equivalent to Gilts. They are essentially loans made to the US Government and are regarded as very safe given the US Government has never reneged on debt obligations. Given they are regarded as low risk, their yield (or interest payments) is usually fairly low.
Uncrystallised is how all pensions start before drawdown. Simply put, it is “money in a pension from which no tax-free cash has been taken”. You are usually able to draw up to 25% tax-free with the remaining 75% subject to tax.
Undated gilt is a gilt but where the repayment of the principal was undated. These have now all been repaid as at 05/07/2015 so longer remain relevant.
Volatility. Is the “ups and downs” that can be experienced when investing. Greater (increased) volatility means the particular stock will generally increase or decrease in value faster then the average.
Yield. Is the term to describe any kind of income that is paid by an asset. Shares pay dividends, gilts pay interest and property pays rent. The total of income generated by an investment is called its yield.
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