Financial Glossary



Annuity – A financial instrument provided by an insurance company that pays a guaranteed annual income to the holder, typically until death. Members of defined contribution pension schemes generally purchase annuities to secure an income.

Asset classes – The underlying investments – shares, bonds, property and cash deposits.


Bonds – A loan to a company or a government.


Child Trust Funds – Tax-free investment vehicles for children born on or after September 1st, 2002.

Close or price – This is the level at which the company’s shares stood when the markets closed the previous day. In most cases it is expressed as a number midway between the buying and selling prices.

Coupon – Another word for a bond’s fixed rate of interest, expressed as a percentage of its nominal value.

Critical Illness – Insurance that pays out a lump sum on the diagnosis of a specific critical illness covered by your policy.

Current account – A general bank account enabling people to deposit money, get out cash and have access to an overdraft


Debit card – A card issued by a bank that you use to pay for goods and services. Usually, the money is taken out of your account immediately.

Defined benefit scheme – A pension scheme in which the rules specify the amounts paid. The most common defined benefit scheme is a salary-related scheme in which the benefits are based on the number of years of pensionable service; the accrual rate; and the final salary.

Defined contribution scheme – A pension scheme in which the benefits are determined by the contributions paid into the scheme, the investment return on those contributions, and the type of annuity purchased upon retirement. It is also known as a money purchase scheme.

Dental insurance – A specialist health cash plan that focuses on dental care expenses.

Discounted mortgage – A mortgage which has a discounted variable rate of interest for a set period, after which the rate charge will rise.

Diversification – Spreading your investments across different asset classes, or types of investments within a particular class.


Fixed interest rate – Monthly payments are set at a certain level for an agreed period. At the end of this period they will either switch to another fixed rate or go on to the standard variable rate.


Health cash plans – These provide limited cash sums to help pay everyday healthcare bills.


Income Protection – Policies that pay out a regular sum – for as long as required – to help cover your living costs if you are on long-term sick.

Individual Savings Account (ISA) – Vehicles which allow people to earn tax-free returns on a variety of assets, including cash, life insurance, stocks and shares. There are limits to how much you can save in any one tax year.

Inflation – When prices go up. Inflation effectively erodes the value of money in your pocket which means the same amount will buy less each year.

Interest rate – The rate of interest you will have to pay. This is usually linked to the base rate set by the Bank of England’s monetary policy committee and rates can move up and down.

Interest-only mortgage – A mortgage where you only pay the interest charges of the loan each month – and won’t be reducing the loan amount. This will need to be repaid in another way.


Market Capitalisation – This is the value of a company, normally expressed in millions of pounds. This is calculated by multiplying the current share price by the total number of shares that have been issued.


Nominal value – The price at which a bond will be redeemed at maturity.


Permanent Health Insurance – See Income Protection.

Personal pension scheme – A scheme where the contract to provide contributions in return for retirement benefits is between an individual and an insurance firm, rather than an employer or the state.

Premium – The sum that an insurer will require you to pay for the cover provided.


Redemption – The organisation that issued the bond will redeem it at the end of its life and pay the bondholders the agreed nominal value.


Stakeholder Pension – Available since 2001, this is a flexible, portable, defined-contribution personal pension arrangement (provided by insurance companies) with capped management charges. They can be taken out by an individual or facilitated by an employer.

Standard variable rate – Mortgage Payments move up – or down – with the lender’s own mortgage rate, which in turn, is usually dictated by the Bank of England’s base rate.

State Pension Age (SPA) – The age at which an individual can claim their state pension - although people can choose to defer their pension. Currently it is 65 for men and 60 for women but will gradually increase for women to 65 between 2010 and 2020.


Total Expense Ratio – The total costs associated with buying into a fund.

Tracker rate – A variable rate which tracks the amount set by the Bank of England. This means it will increase when the Bank’s rate goes up and falls when it goes down.

Travel insurance – A policy that pays out if you fall ill while away, accidentally injure someone, lose your possessions or have to cancel your holiday.


Unit trusts – A ‘pooled’ investment fund in which new units are created when a new investor joins the fund – and cashed in when an investor leaves. It uses the cash raised from investors to buy shares in a number of different companies.


Yield % – The return on your investment – or dividend – that you can expect, expressed as a percentage of the company’s share price.