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Finance - Unit Trusts

The Unit Trust side of personal finance is a minefield of products and services all with their own attitude to risk and reward. Unit trust jargon tries to describe some of these financial products and many are now commonly known about.

Your attitude to risk in gaining growth or income from these financial products will usually determine which part of the unit trust jargon sphere you will be encountering.

Some terms or phrases within this unit trust jargon directory are like friendly old uncles - all very familiar and warm sounding while others are more niche oriented to the risk taking person seeking greater reward in exchange for potential greater losses.


Unit Trust Jargon

Additional Voluntary Contribution - an extra amount a member can pay to their employer's pension plan to increase their future pension benefits.

Annual Management Charge - this is a charge deducted from the value of unit trusts or unit-linked funds. This is reflected in the unit prices.

Annuity - an income-producing investment bought from insurance companies, usually with the proceeds of a pension fund, which pays you a guaranteed regular income either for a fixed term, or throughout your lifetime. Actuary - actuaries are professionally qualified people, who use statistical information to set premium rates and charges for financial services products.

Basic state pension - also referred to as the 'old age pension'. It is a flat rate weekly payment you receive from the State when you retire. The amount paid depends upon the National Insurance contributions you have made.

Beneficiary - a person receiving benefits from a trust arrangement or Will, or who will do after a particular event occurs (such as death).

Bid-offer spread - the difference between the price at which you can buy an investment (offer price) and the lower price at which you can then sell it (bid price).

Bid-Offer spreads do not apply to Lincoln's Unit Trust range, which are known as as single-priced.

Bond - a bond is a certificate of debt or IOU issued by companies and governments to raise cash. UK government bonds are known as gilts, or gilt-edged securities. Also, a type of investment product offered by insurance companies - see Investment Bond.

Capital Gains Tax (CGT) - the tax payable on any profit you make from the sale of assets - for example, unit trusts, shares, unless held in an ISA or PEP.

Carry back - pension contributions can sometimes be treated as having been paid in an earlier tax year for tax relief purposes.

Carry forward - unused pension contribution reliefs could sometimes be used in a later year to get tax relief. Abolished from April 2001.

CAT standard - a set of standards for the Charges, Access and Terms offered on certain financial services products by some providers.

Commission - a payment made by a life insurance or investment company to a sales person or independent financial adviser (IFA) who sells one of its investments.

Commutation - this is giving up part, or all, of your pension in return for an immediate cash sum. Contract out - the decision to opt out of the State Earnings Related Pension Scheme (SERPS). Contribution holiday - a period during which contributions (to a savings scheme or pension fund) are stopped for a time. Contribution - money paid to a savings scheme or pension fund by a member or their employer. Or, to an insurance policy by the policyholder (also known as 'premiums').

Critical illness insurance - insurance, which pays out if you receive a diagnosis of any of a range of specified serious medical conditions.

Deed of covenant - an agreement made in a deed to transfer income from one person to another in a tax efficient way. Often used as a mass of donating funds to a charity.

Declaration of trust - a document to create a trust.

Dividend - the distribution of part of the earnings of a company to its shareholders, normally expressed as an amount per share.

Distribution - when any income that has been generated, whether interest or dividend, is paid out to the holder of the shares/units.

Endowment policy - a life insurance savings policy which pays a specified amount of money on the death of the person insured, or the accumulated savings at the end of an agreed term, whichever is sooner.

Equities - the ordinary shares of publicly owned companies.

Estate - a person's estate comprises the land, personal property and any liabilities owned by them. On death, their estate will be distributed according to their last Will and Testament. (If there is no Will - see 'Intestate'.)

Executor - a person appointed to administer someone's estate after their death. Usually executors will be nominated by the person.

Free Standing Additional Voluntary Contributions (FSAVC) - extra payments that you can make to a pension policy run by an insurance company to boost the pension you get from your company pension scheme.

Fund - a reserve of money or investments held for a specific purpose - for example to be divided into units for investors to buy (as in a unit trust) or to provide a pension income (as in a pension fund).

Final salary pension scheme - in this type of company pension scheme, the benefits paid in retirement are related to the member's final salary or earnings. (Also called a defined benefit scheme.)

Flotation - the process when a company decides to launch its shares on the stock market.

FTSE 100 index (or 'Footsie') - the most commonly quoted stock market index in the UK - monitors the performance of the top 100 publicly quoted companies on the UK stock market.

Futures - these are binding agreements to buy or sell commodities, currencies or gilts at a fixed date in the future, at a fixed price.

Gilt-edged security (or GILT) - a fixed interest bond or security issued by the British Government.

Higher rate tax - if your total taxable income (gross income less personal allowances) exceeds a certain level, the part which exceeds that level will be subject to the higher rate of income tax.

Independent Financial Adviser (IFA) - an adviser committed to offering products from the full range of financial products offered in the marketplace. IFAs are normally regulated by the Financial Services Authority.

Index-linked policy - an insurance policy in which the benefits depend on the performance of a specified financial index, such as the Retail Price Index.

Income drawdown - a facility available with company and personal pensions that allows you to defer buying an annuity with your fund, up to the age of 75, and to draw an income direct from the fund, subject to certain rules, while you wait. Individual Savings Account (ISA) - a tax efficient savings plan that has replaced TESSAs and PEPs and which can accept, in year, up to £7,000-worth of cash deposits, stock market investments and life insurance policies, with no tax to pay on interest and capital gains and with a 10% tax credit on any share dividends until 5 April 2004. Inheritance tax (IHT) - tax payable on an individual's estate upon death or transfer of capital.

Inflation - how much the price of goods and services has increased, relative to a basic point. Expressed as a percentage. Usually measured by the increase in the RPI (Retail Prices Index), this is the relative price increase of a standard basket of goods and services.

Insider dealing - an illegal practice where shares are traded, using knowledge that is not available publicly, and which could affect prices of shares.

Intestate - the legal description of someone who has died without making a Will. In this situation, the Intestacy Court divides up the estate according to prescribed rules. These rules differ in Scotland.

Investment bond - a cash lump sum, which has been invested in a single premium life assurance contract. A small amount of the lump sum pays for life assurance protection.

Investment Trust - Investment Trusts are companies which invest in other companies and investors buy shares (rather than units as in a unit trust).

Joint life - joint life plans cover two (or more) people, usually a husband and wife. Benefits can be paid following the first death, or following the death of both.

Keyman insurance - this provides cover, in the short term, against the loss of profits a company is likely to suffer following the death of a key employee.

Liability - a debt, or amount of money, owed to others. Listed company - a company whose shares are quoted on a recognised stockmarket.

Managed funds - these funds act as the investment world's all-rounder. The investment managers will spread your money between shares, property, the money market and gilts. They will switch it around, as appropriate, depending upon market conditions.

Money purchase pension scheme - these are either company or personal pension schemes where benefits are related directly to the contributions paid by or on behalf of each individual member. The value depends upon the contributions paid, and the growth over the period of time during which they were invested. (Company schemes are also sometimes called defined contributions schemes.)

Mortgage Indemnity Guarantee (MIG) - usually, when you take out a mortgage for more than 75% of the property's value, the lender will require you to pay a MIG premium. This insurance covers the lender in the event that you default on your repayments and the house has to be sold for less than its mortgaged value. It does not provide cover for you. Mutual insurers - mutual life offices are owned by their with-profits policyholders.


National Insurance (NI) - mandatory payments made to the Government out of earnings which entitle you to a State pension and other benefits.

National Savings - National Savings provide a variety of Government savings schemes. Local post offices should have leaflets explaining the options.

Negative equity - where the current market value of a property is less than the outstanding mortgage.

Offshore funds - funds based outside the UK for tax reasons.

Occupational Pension Scheme - an arrangement made by an employer to provide a group of employees with retirement and other benefits.

Open Ended Investment Company (OEIC) - a type of collective investment fund. It is similar to a unit trust. Many unit trusts have converted to OEICs.

Open Market Option - most pension policyholders have the right to purchase their pension on the open market at the time of commencing their pension. They are then able to choose from the annuity rates being offered by other insurance companies and select the best rate available at the time they retire.

Options - the right, but not obligation to buy or sell a specific quantity of a specific asset at a fixed price at or before an agreed future date.

Ordinary shares - the most common form of shares in a company. The shareholders own the company and if the company is profitable, may receive dividend payments. The value of the shares will fall or rise reflecting the success, or otherwise, of the company.

Paid-up policy - status of policy whereby no further premiums are paid and the sum assured is either reduced, expressed solely as the bid value of units or remains in force with the cost being met by the cancellation of units (dependant upon policy terms and conditions). The policy will still have a value, and may possibly be put back into force by reinstatement. In effect, the policy is "on hold". Pay As You Earn (PAYE) - the system whereby employers collect tax from employees and pass it on to the Inland Revenue.

Permanent Health Insurance (PHI) - insurance which replaces income lost due to long term illness or injury and pays benefits relative to the size of a salary. Also known as income protection benefit. Phased retirement - the facility to use small segments of your personal pension to buy annuities as and when you need more income, rather than having to buy one annuity with your whole fund. Pension - a savings scheme designed to provide you with an income to live on in retirement.

Portfolio - term used to describe a variety of different investments, each designed to provide part of the answer to your financial needs.

Probate - the official go-ahead to distribute the money and property left in a Will. It comes from the

Probate Registry (part of the Inland Revenue), once they are satisfied that all the assets have been valued and taxes paid.

Premiums - premiums are the payments you make under an insurance policy to pay for life and health benefits. Also known as 'contributions'.

Retail price index (RPI) - the official measure of inflation calculated by weighting the cost of goods and services to approximate a typical spending pattern.

Redemption penalty - a charge payable if you terminate a plan or mortgage early. Repayment mortgage - with a repayment mortgage, you pay back part of the capital borrowed and the interest due on the outstanding amount each month. In the early years the majority of your repayments cover the interest due, however as each year passes more of your repayments go towards reducing the capital. Reserves - money put aside for future use, from the profits of a company, or a nation.

Securities - another term for investments such as shares or bonds.

Self-Invested Personal Pensions (SIPPs) - a type of personal pension plan, which allows you to choose the investments used to generate your pension fund. Share - an investment in, and usually part ownership of, a company, conferring a right to part of the company's profits (usually by payment of a dividend).

Shareholders' fund - the money belonging to the shareholders in a publicly quoted company. Single premium pension - a pension made up of a single lump sum investment.

Stakeholder pension - a new type of low cost pension plan with charges capped under Government regulators. Designed primarily for lower/middle income earners who don't have access to a company scheme.

State Earnings Related Pension Scheme (SERPS) - a state pension in addition to the Basic State Pension, based on earnings. Stamp duty - a tax charged on certain transactions such as the purchase of a house or shares in a company.

Stockmarket - a market for the sale and purchase of shares, Government bonds and other securities. Sum assured - the death benefit guaranteed by an insurance policy.

Superannuation scheme - another name for a pension plan. Now mainly used for a government run pension scheme for State employees.

Surrender value - the cash-in value of a life assurance policy when it is discontinued. Surrender values may be small in the early years of a policy - commonly nil over the first year or two.

Term assurance - life insurance policy, the term of which is decided at the outset. The sum assured will be paid only if the insured dies before the end of the term. A surrender value is not usually payable on this type of policy.

Trust - trusts are legal arrangements set up under a Trust Deed or Will. They have many uses, but usually involve the gifting of property or money. Trusts are administered by the Trustees. One of the most common trusts is a unit trust.

Trustees - trustees are the people appointed to ensure that a Trust actually does what the Trust Deed says.

Unit linked - an investment plan whose value is linked to the performance of assets held in a particular fund.

Unit trust - a pooled fund of stock market investments divided into equal units and supervised by trustees.

Value Added Tax (VAT) - a form of indirect taxation borne by traders and consumers, levied on goods and services at the point of sale.

Waiver of premium - ensures that premiums continue to be paid on your insurance policy if you are ill and unable to work.

Whole of life policy - a life insurance policy which pays a specified amount on the death of the person insured, whenever that occurs.

Will - a will lays down how you want your property to be distributed after your death by your executors.

With profits policies - life assurance contracts which have as their base a guaranteed sum assured. Each year, insurers will usually announce a bonus which is added to the policy's value and represents the policyholder's share of the profits made by the insurer itself or through its policyholders' investment funds. At the end of the policy's term a terminal bonus will often be paid, boosting the value of the policy further





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