Glossary

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Active investment management

- a style of investment management where a fund manager seeks to improve returns or reduce costs by using their expertise to choose which stocks or bonds to buy and sell.

AIC

- the Association of Investment Companies, which is the industry trade body of investment trusts and investment companies.

Alpha

- alpha is the excess return a fund generates above and beyond the return produced by its benchmark after taking into account the fund’s beta. Alpha therefore filters out returns attributable to the market’s overall rise and focuses just on the returns added by a fund manager’s skill.

Alternatively Secured Pension

- an alternatively secured pension (ASP) is considered a more flexible retirement option than a traditional annuity. When you reach 75, if you want to continue drawing an income rather than set up an annuity, your pension funds can be switched into ASP. ASP has the flexible similarities of an unsecured pension (USP) but has more restrictions.

Annualised tracking error

- tracking error shows how much risk a fund has been taking relative to its benchmark. Actively managed funds can take “active positions” by going overweight or underweight in certain stocks compared to their benchmark. The tracking error shows the impact of these active positions by measuring how far the fund manager has deviated from the benchmark to achieve the fund’s returns. A fund’s annualised tracking error is calculated by measuring the standard deviation of its annualised excess returns (i.e. how widely a fund’s annualised excess returns have varied compared to its long term average over time). A large tracking error suggests that there has been a large deviation from the benchmark positions, while a low tracking error suggests that the fund’s portfolio has been quite closely matched to its benchmark.

Annualised volatility

- annualised volatility provides an idea of the risk to capital associated with different funds. A fund with a low historic volatility will have demonstrated fairly smooth returns over time with little variation in price, while a fund with a higher historic volatility will have produced a greater variation in returns over time with quite sharp price movements. However, the trade-off between risk and return means a more volatile fund can have the potential to produce a higher long-term return. A fund’s annualised volatility is measured by looking at the ‘standard deviation’ of its returns over time, or how widely a fund’s annual returns have varied compared to its long-term average annual return. A fund whose annual return hasn’t differed much from its long-term average return has a low standard deviation and has therefore displayed a lower volatility of returns.

Annuity

- a life insurance policy where an insurance company pays regular income to a policyholder or beneficiary, usually until death, in exchange for the payment of a lump sum. Commonly used at retirement when lifetime savings are drawn as a capital sum which is then used to purchase an annuity. At death, there is usually no payment to the estate, although many annuities include a provision to pay an income to the spouse.

APR

- Annual Percentage Rate. This is the compounded rate used to give a standard comparison of the amount of interest you are likely to pay on loans or outstanding credit card balances.

Arbitrage

- profiting from the differences in price when the same security, currency or commodity is traded on two or more markets.

Asset Allocation

- the different classes of investment held by a portfolio - such as shares/equities, bonds and cash.

Average annualised return

- the average annualised return is the annual rate of return that an investor would have earned to achieve the total cumulative return over the review period.

Average Maturity

- the remaining lifetime of all bonds in a fund's investment portfolio, weighted by the amount of money invested in each bond. (See also Bonds)

Base Rate

- the base interest rate determined usually by a country's central bank (such as the Bank of England) upon which all other lending or savings interest rates are based.

Basic State Pension

- flat rate pension paid out irrespective of how much you have earned in your lifetime. To get the maximum pension, you need a full record of National Insurance Contributions. The amount paid is increased if the recipient is married and a spouse or widow(er) may claim on the record of his/her spouse.

Benchmark

- a yardstick (usually a stock market index) against which performance is to be judged. Most commonly used to assess the investment performance of a fund or portfolio.

Beneficiary

- a person who is getting pension benefits, or will do so when a particular event happens.

Benefit Statement

- a statement or estimate of benefits payable in respect of a person's membership of a scheme on the occurrence of specific events.

Beta

- a fund’s beta describes the expected sensitivity of its returns to movements in its benchmark. It therefore tells investors whether a fund is more aggressively or defensively positioned than the overall market, which has a beta of 1.0. Funds that have a beta of less than 1.0 will be expected to produce returns that are less volatile than the benchmark. Therefore, if the stock market rises 10% over the next 12 months a fund with a beta of 0.5 would be expected to return just 5%, assuming such a fund continues to perform similarly to how it has performed in the past. However, if the market is down 20% the fund with a beta of 0.5 would be expected to fall only 10% and so is more defensive in times of market distress. In contrast, higher risk funds will have betas in excess of 1.0. Again they will move in the same direction as the overall market but to a greater extent. So if the market moves 10%, an investment with a beta of 1.5 will be expected to provide a return of 15%. However, if the market falls 20%, the fund would be expected to lose 30% of its value.

Bid-Offer Spread

- the difference between the prices at which you buy units from us and sell them back to us. The buying (offer) price is usually higher than selling (bid) price and the difference between them may vary within the limits of a formula laid down by the Financial Services and Markets Act 2000.

Bonds

- otherwise known as fixed-interest securities, bonds are basically IOUs which are issued by governments, financial institutions and companies. Generally, the issuer undertakes to pay investors either a fixed or floating rate of interest on their principal investment for a fixed number of years (e.g. 7% for 5 years on £100 principal or 2% above base rate for 5 years on £100 principal) after which investors receive back their principal. Income payments on bonds are generally paid before dividends and bonds rank in priority to ordinary shares on a winding up of a company; as a result of which bonds are usually regarded as safer investments than shares. The fact that the interest rate is predetermined makes bonds attractive because income payments are predictable. Bonds are traded in open markets, in the same way as shares. (See also Gilts)

Capital

- a lump sum of money. Usually refers to the amount you invest in a fund at the outset e.g. your original capital.

Capital Share

- ordinary shares issued by split capital investment trusts which are entitled to the capital of the trust but not the income.

Carry Forward, Carry Back

- a way for personal pension customers to fill up unused pension tax/contribution allowance in the previous six tax years.

Cash Option

- this is giving up part or all of a pension in return for getting a one-off payment straight away. It is also called commutation.

Closed-Ended Company

- a company that issues a fixed number of shares at launch and does not create or redeem shares in response to market demand. Investment trusts are referred to as closed-ended companies and contrast with unit trusts and OEICs which are open-ended companies.

Collateral management costs

- the costs incurred in funds which invest in certain types of derivatives known collectively as 'over the counter' (OTC) derivatives. Collateral management is a process which is designed to mitigate counterparty insolvency risk.

Commission

- paid by fund providers to their sales team or independent financial advisers. The amount of commission paid will vary between products and companies.

Commodities

- usually meaning bulk goods traded on an exchange. Examples are gold, platinum, silver, coffee, grain and sugar. Anything mined is a hard commodity, anything grown is a soft commodity.

Company Pension Scheme

- an employer sponsored scheme into which the employer may pay as well as the employee.

Contributions

- the money paid into a pension fund for a member. It can be paid by a scheme member or an employer, or both.

Correlation

- correlation measures the relationship of returns between the fund and its benchmark over different time periods. If the fund’s returns have moved generally in the same direction as the benchmark over time, the fund’s correlation coefficient will be positive. A fund which is perfectly positively correlated with the benchmark (i.e. its returns have moved in the same direction as the benchmark and by exactly the same proportion) will have a correlation coefficient of +1. If the fund’s returns have generally moved in an opposite direction to the benchmark over time, the fund’s correlation will be negative. A fund which is perfectly negatively correlated with the benchmark (i.e. its returns have moved in the opposite direction as the benchmark but by exactly the same proportion) will have a correlation coefficient of -1. The fund’s returns may also not demonstrate any particular relationship to the benchmark – in which case it will have a correlation coefficient at or around zero.

Death Benefit

- this may be paid to a member's dependents if the member dies. It may be a pension or a one-off payment. It could be death after retirement benefit or death in service benefit.

Defined Benefit Scheme

- the 'traditional' type of company pension scheme. The amount you receive as a pension depends on how long you have been a member of your company's pension scheme and the size of your salary when you retire. The most common type of defined benefit scheme is a final salary scheme. (See also Final Salary Scheme)

Defined Contribution Scheme

- also referred to as a money purchase scheme, this type of company pension scheme is increasingly replacing the final salary version in terms of popularity. The amount of income you receive in retirement is directly related to how much you have contributed over your working life and how well your fund has performed.

Discounts and Premiums

- the price of an investment trust’s shares is determined by supply and demand and is, therefore, not necessarily the same as the value of the underlying assets per share. When the price of shares in a trust is lower than the net asset value per share, the trust is said to be trading at a discount and when the price is higher than the net asset value per share it is said to be trading at a premium. The discount or premium varies depending on the demand for shares and represents an additional element of potential risk and reward.

Distribution

- the payments of any investment income generated by a fund, usually made either half-yearly or quarterly. You can choose to have each distribution paid to you or to reinvest it in the fund for greater capital growth.

Drawdown Facility

- traditionally, pensions from personal pension schemes have been secured by buying annuities from insurance companies when the pension age is reached. Up to age 75, you have the choice of withdrawing retirement income direct from your fund instead of buying an annuity or choosing an alternative. The balance of your fund remains invested until better annuity rates can be obtained or you decide an alternative.

Duration

- is a measure of the average life of a bond, weighting each repayment by the time until it will be made and reflecting the fact that money flows in the near future are more valuable than the same money flows at a later date. Duration indicates how changes in interest rates will affect the price of a bond (or bond portfolio). The longer the duration of a bond, the greater the extent to which its price is affected by interest rate changes. As such, duration is used as a measure of risk for bond portfolios.

Earmarking

- the short term solution regarding the division of pensions upon divorce. This allocates a portion of the working spouse's pension pot to the non-working spouse to provide an income in retirement. However, a clean break could soon be on the cards where the pension pot is actually divided on divorce rather than retirement.

Earnings Cap

- the level of all pension contributions are limited. Pension contributions are expressed as a percentage of your salary, which is 'capped' at a certain level. This means you can only contribute a percentage of the amount you earn up to £123,600 (for 2010-2011). This amount is known as the earnings cap and should rise every year in line with prices.

Earnings Per Share

- a widely used indicator of the valuation of an equity investment. EPS represents the total amount of a company's earnings (after deductions) divided by the number of ordinary shares it has issued. (See also P/E)

Equities

- equities is another word for shares. It refers to the ordinary shares of a company. Having an ordinary share means that you own a proportion of that company, and that you have a vote at their annual general meeting.

Exchange Traded Fund - ETF

- Exchange-traded funds (or `ETFs`) are open-ended investment companies that trade throughout the day on a stock exchange similarly to an ordinary share. Typically, ETFs are passive investment vehicles which try to reproduce the performance of reference benchmark such as a stock index, a market sector such as energy or technology, or a commodity such as gold or petroleum.

The Fed

- abbreviation for the United States Federal Reserve Bank, America's central bank and its equivalent to the Bank of England.

Final Salary Pension Scheme

- the 'traditional' type of company pension scheme. The amount you receive as a pension depends on how long you have been a member of your company's pension scheme and the size of your salary when you retire.

Fiscal Policy

- influencing the direction of an economy through the use of taxation (See also Monetary Policy)

Footsie

- the popular name for the FTSE 100 Share Index, the UK stock market's main benchmark index, which measures the daily share price performance of Britain's top 100 public limited companies, ranked by their size (See also Market Capitalisation)

Free Standing AVC (FSAVC)

- this is another type of top up scheme for company scheme members which can be taken out with an independent company to spread your pension investment. They can be more expensive than the AVC offered by your company.

Fund

- general term for any investment vehicle which pools together the money of many small individual investors and invests it in certain markets and securities according to a defined set of investment aims and objectives. Covers such investments as OEICs, investment trusts and pension plans.

Fund Manager

- professional person responsible for the investment management of an individual fund; the person who takes the day-to-day decisions on what investments to buy or sell on behalf of the fund's investors.

Fundamentals

- by looking at the economics of a business, the balance sheet, the income statement, management and cash flow, investors are looking at a company's fundamentals. This helps determine a company's health as well as its growth prospects. A company with little debt and a lot of cash is considered to have strong fundamentals.

Futures

- short for Futures Contract, which is an obligation to buy or sell a specific amount of a commodity, currency or financial instrument at a particular price on a stipulated future date. The price is established between buyer and seller through an exchange. (See also Options)

Gearing

- investment trust companies can borrow money to invest in additional stocks and shares for their portfolio. This is known as 'gearing'. Policy on gearing varies from trust to trust and is explained in each trust's annual report. The ability to gear a portfolio is an advantage that an investment trust enjoys compared to a unit trust. The fund manager will employ gearing carefully with the intention of enhancing returns to shareholders but in a falling market, the share price of geared trusts might be more affected than trusts which are not geared.

Gilts

- short for gilt-edged fixed-interest securities, which are bonds issued by the UK Government (H.M. Treasury).

Hedging

- a strategy used to offset investment risk. Usually makes use of futures or options. An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations. Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

IMA

- Investment Management Association, which is the trade body for the United Kingdom's asset management industry.

Income Drawdown

- is the option which allows personal pension holders to defer their annuity purchase to the age of 75. This enables them to draw an 'income' from their pension fund while waiting for a more favourable annuity environment before making their purchase.

Income Share

- Ordinary shares issued by split capital investment trusts which are entitled to the income of the trust but not the capital.

Income Withdrawal

- this is when a pension member retires, but chooses not to buy an annuity straightaway. Until the member buys an annuity, they take an income from the scheme. Also known as a drawdown facility.

Independent Financial Adviser (IFA)

- an IFA’s remit is to offer you the best possible advice to suit your particular needs. Each company must keep records of the advice they have given you and the reasons why they have recommended certain products to you. They must prove that they are not swayed by commission earnings. Many charge fees instead to ensure their independence.

Index

- a means of continually measuring the movement of a particular set of statistics over periods of time. Most fund managers measure their fund's performance against that of an appropriate 'benchmark' index with the aim of at least matching its progress or, better still, beating it.

Indexation

- a way of measuring changes in share prices or earnings, and adjusting, for example, pensions in line with these changes. For example, if a pension was linked to a price index, and those prices rose by five per cent, then the pension would also rise by five per cent.

Individual Savings Accounts (ISAs)

- ISAs were introduced in April 1999 to replace PEPs. An ISA is a tax-efficient wrapper around your investments, sheltering them from income tax and capital gains tax. They can hold a wide range of investments including investment funds, cash deposits, shares and bonds. There are two main types: a Stocks and Shares ISA and a Cash ISA. Currently you can invest all £10,680 of your annual limit in stocks and shares and up to £5,340 in cash, then the remainder in a stocks and shares ISA.

Inflation

- the amount in percentage terms by which prices rise or fall year on year. In the UK, the primary measure of this is the Retail Price Index (RPI); the underlying rate of inflation is the RPI with mortgage repayment figures stripped out.

Information ratio

- the information ratio measures how much risk a fund takes relative to its benchmark in order to achieve its performance. It is calculated by dividing the fund’s excess return over its benchmark by the risk taken against the benchmark (tracking error). A fund with a high information ratio has achieved strong excess returns relative to the risks taken.

Interim Management Statement

- Interim Management Statements give performance data and portfolio information as at the end of the first and third quarters of a company’s financial year.

Investment account

- this is an account where funds can be ‘parked’ for long-term investment or capital purposes. From here you can invest directly in any investment, for example, within the J.P. Morgan WealthManager+ Investment Range, giving you maximum flexibility.

Investment Company

- an investment company is a company whose main business is holding stakes in other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. The term is often used interchangeably with “investment trust” which is a type of UK investment company.

Investment Trust

- a collective investment vehicle which pools investor's money to offer better buying power and diversified risk. Investment trusts are constituted as companies and are listed on the London Stock Exchange. Their mandates are to invest solely in the shares or securities of other companies with different investment trusts distinguished by different investment objectives. For example, investment trusts may focus on a particular type of company, such as smaller companies, a particular sector, such as technology, or a particular region, such as the Far East or Latin America.

Market Capitalisation

- the value of a company as measured by the total stock market price of its issued and outstanding shares. This is calculated by multiplying the number of shares by the current market price of a share. It is also widely used as a definition of company size - hence, big corporations are usually referred to as large cap stocks. (See also Small Caps)

Micro Cap

- as the name suggests, these are companies at the smaller end of the scale – usually worth less than £60-70m (less than US$100m market capital).

Monetary Policy

- influencing the direction of an economy through control of the money supply. (See also Fiscal Policy)

Money Purchase Scheme

- see Defined Contribution Scheme.

National Insurance

- this is money the government takes from both employees and employers in addition to other forms of tax. The amount taken depends on how much the employee earns. Some government benefits, such as the Basic State Pension depend on how much National Insurance contributions you have paid.

National Insurance Contributions (NICs)

- are paid by all employees to fund State welfare benefits which include the basic State pension. Employers also pay NICs on behalf of every employee.

Net Asset Value

- this is the value of a portfolio of investments held by an investment trust less any liabilities owed by the trust. It is divided by the number of shares in issuance to produce the NAV per share.

Net Income – investments held outside of an ISA

- income distributions are paid with a 20% tax credit. Basic rate income tax payers will have no further liability to tax. If you are a higher-rate taxpayer, you will have an additional income tax liability. If you are a non-taxpayer, you may be able to use the tax voucher supplied at the time of the distribution to support a tax repayment claim where the distribution is an interest distribution. Wherever you see a gross income figure quoted, it means that no tax has been deducted.

Non-Contributory State Pension

- is paid to those who have neither paid enough NICs over their working lifetime to qualify for either level of State pension, nor do they have a partner's pension to rely on.

Occupational Pension Scheme

- a scheme organised by employers to provide pension benefits for their employees. It is sometimes called a company pension scheme.

OEIC

- pronounced as "oik", this stands for Open-Ended Investment Company. OEICs are similar to investment trusts in that they are collective investment funds constituted as companies whose sole business is to invest in shares and securities of other companies. The distinguishing feature of OEICs is that, unlike investment trusts, they are able to create or redeem shares in response to market demand. Investors buy and sell shares in the OEIC from the OEIC manager rather than on the open market.

Offer, Bid and Mid price

- investment trust shares are bought at the ‘offer’ price, sold at the ‘bid’ and for convenience, a ‘mid’ market price (mid way between the offer and the bid price) is often used for indicative or simple valuations.

Open Market Option

- the option to use the money from an insurance contract to buy an annuity from any insurance company at whatever annuity rate they offer. It could apply to a member's share of a pension fund, meaning you can shop around for the best annuity deal available.

Options

- an agreement to buy or sell a stock at a specific price at a specific date in the future. There are basically two kinds of option: a call option gives its buyer the right to buy a specified number of shares at a particular price before a specified date. The opposite of a call option is a put option, which gives the buyer the right to sell a specific number of shares at a particular price within a specified time period. In practice, call and put options are rarely exercised; instead, investors buy and sell options before their expiration, trading on the rise and fall of premium prices.

Ordinary Shares

- within the context of investment trusts are the most basic form of investment trust share capital. Ordinary shares are entitled to all the income and capital of a trust after any obligations to secured or unsecured creditors have been met. Returns to investors from ordinary shares are usually in the form of annual dividends and capital gains.

Pension Fund

- this is the pot of money you build up tax free over your working lifetime as you contribute to your pension scheme. When you retire, the size of your pension fund will reflect the amount of money you / your employer have paid in, plus investment returns achieved. The amount of income you receive will depend on the size of your pension fund and is only relevant for money purchase company pensions and all personal pensions.

Price/Earnings Ratio (P/E)

- the price/earnings ratio (PE) is the most commonly used valuation measure. It is calculated by dividing the market price of a company's ordinary shares by its earnings per share figure. So, if the current share price is £10 and EPS is £1, the p/e ratio is ten.

Passive Investment Management

- this is a method of investment that tries to limit risk by following a particular market or index. For example, when a fund manager builds a well-diversified portfolio without making an effort to seek out mispriced securities. This could involve using a tracker or an index fund. (See also Tracker/Tracking Fund)

Pensions Ombudsman

- the Pensions Ombudsman is an independent person who settles disputes between pension scheme members and the pension schemes. Pension schemes must abide by the ombudsman's rulings, but they have the right to challenge them in court if they wish.

Personal Pension

- introduced in 1988 for those individuals who are not entitled or do not want to join their company pension scheme. Personal pensions are a cost-effective, risk-diverse and highly flexible way of saving for your retirement.

Personal Equity Plan (PEP)

- Introduced in 1987 by the then Chancellor Nigel Lawson as part of an initiative to broaden ownership in shares in the UK. They were sold until 6 April 1999 when they were replaced by ISAs. After the introduction of ISAs, PEPs were no longer available for investment of new money, until 6 April 2008, when all PEPs became stocks and shares ISAs and subject to exactly the same rules and tax breaks.

Property

- in investment terms this is investment in land and buildings. Usually let out for a rental income to retail and industrial/office tenants. Investors can gain access directly by buying property, through property funds or by investing in shares of property companies.

Public Limited Company (PLC)

- a public limited company is a type of limited liability company in the United Kingdom and the Republic of Ireland which is permitted to offer its shares to the public. Their shares are usually traded on a stock exchange.

Quartile

- most UK funds are grouped into specific sectors, with each sector being divided into four quarters or quartiles. When investment funds are ranked on the basis of performance, their positioning is summarised on the basis of which quartile the results fall into, with the first quartile being the best.

Rights Issue

- a means whereby a company may raise capital from its own shareholders. It does this by offering additional newly-issued shares to the shareholders at a discount on the price at which they will later be offered to the public, usually on the basis of a certain amount of new shares for every old share held. Most rights issues are handled by investment banks who also underwrite the issue by agreeing to buy any of the newly-issued shares which are not taken up by shareholders.

Securities

- another name for stocks and shares but also applies to any approved or registered financial instrument, such as bonds.

Shares/Equities

- an ownership share in the assets of a public limited company (PLC). Shares/equities can be purchased on stock exchanges but can also be invested in through such vehicles as ISAs, OEICs, investment trusts and pension funds.

Sharpe Ratio

- the Sharpe ratio measures how much risk a fund takes in absolute terms in order to achieve its performance. It is calculated by dividing the fund’s excess returns over a risk-free investment, such as cash or government bonds by the risk taken in absolute terms (annualised volatility, or standard deviation of the fund’s returns). The Sharpe Ratio is a useful tool because it lets you compare the risk/reward profiles of different types of funds with different benchmarks.

SICAV

- Sociéte d'Investissement Collectif à Capital Variable. This an open-ended investment fund frequently used in France and Luxembourg.

SIPP

- a Self Invested Personal Pension (SIPP) allows you to save for retirement in a tax-efficient way. It gives you greater choice and control over how and when you take your pension fund benefits giving you various options. One of the most flexible retirement options within a SIPP is an unsecured pension (USP). This gives you the ability to use your pension assets to provide a regular income, while also providing the potential to further grow your overall retirement pot. An alternatively secured pension (ASP) is considered a more flexible retirement option than a traditional annuity. When you reach 75, if you want to continue drawing an income rather than set up an annuity, your pension funds can be switched into ASP. ASP has the flexible similarities of an unsecured pension but has more restrictions.

Small Caps

- another name for smaller companies, as measured by their market capitalisation. There are no fixed rules about where the thresholds lie. Small cap, for instance, might refer to companies with market capitalisations of just £50m or as much as £500m.

Split Capital Trusts

- these are investment trusts with two or more classes of share capital and are designed to cater for investors with different investment objectives. Recent launches have been composed of, typically, two classes of share that can either be bought individually or as a unit; zero dividend preference shares which involve a lower risk and have no right to dividends but give the investor priority to the capital growth up to a predetermined amount; and ordinary income shares which provide a higher dividend yield but also carry a higher risk.

Spread

- within investment trusts the spread is the term used to describe the difference between the offer price and the bid price.

Stakeholder Pensions

- stakeholder pensions aim to provide a low-cost, transparent and flexible way for people on low incomes to make additional provisions for their retirement. Money invested in stakeholder pensions is invested in the stock market. On retirement a quarter of the accumulated capital can be taken as a tax-free cash sum, and the rest must be used to buy an annuity.

Stamp Duty

- is a government levy of 0.5 % which is imposed on all purchases, but not disposal, of shares. The levy is automatically deducted from your funds.

State Earnings Related Pension Scheme (SERPS)

- the second tier pension offered by the government which is paid in addition to the basic State pension. The amount of pension you receive is based on how long you have paid your National Insurance Contributions and how much you have earned over your working life. They were replaced by the State Second Pension in April 2002.

State Pensionable Age (SPA)

- the age people normally start getting the Basic State Pension. As at 2010, the SPA is set at 65 for men and 60 for women. Between the years 2010 and 2020, the age for women will gradually rise to 65.

Subscription Shares

- these are listed and tradable securities issued by investment trusts (usually on a bonus basis to existing investors) which give the holder the right but not the obligation to subscribe for new shares in the investment trust at a given price. As such they are economically similar to warrants, with the exception that they may be held in a stocks and shares ISA.

Superannuation

- a means of setting aside funds during working life for use as retirement income. This is a word which some pension schemes, particularly those in the public services sector, use to describe a member's contributions.

Switching

- refers to moving an investment (or part of it) out of one fund and into another within a range of funds.

Tax-Free Cash Lump Sum

- is the proportion of your pension sum which you can take out as a lump sum as soon as you retire. It is paid out to you tax free and you can spend it as you wish. Taking a lump sum will reduce the level of income you receive in retirement.

Total Return

- total return is the change in value of an investment over a given period, including income from dividends and interest, as well as any capital gains or losses, expressed as a percentage of the initial investment.

Tracker/Tracking Fund

- an investment fund whose portfolio is based on the shares of a particular index. The funds performance will then track the performance of the index.

Tracking Error

- tracking error is a measure of how closely a fund follows its index (eg, FTSE 100), so it is the difference between the return on a fund and the performance of the stock index. Tracking error is often used as a measure of risk taken against the fund benchmark, with a larger tracking error indicating that greater risks were taken relative to the benchmark in achieving the return of the fund.

Transfer Value

- the calculated amount you receive from your pension fund (minus penalties and administration charges) if you decide to move your pension to another provider. It applies to employees moving from one company pension scheme to another, or moving their company fund into a personal pension as they approach retirement, for the greater choice and flexibility it gives them.

Trust

- under a trust, appointed people (called trustees) hold assets or property on behalf of other people (called beneficiaries). The trustees themselves can be beneficiaries.

Trustee

- a person or a company appointed to monitor what a trust must do. They must follow the statutory laws that apply to trusts.

Unit

- an instrument representing an interest in a unit trust. In the context of a split capital trust, a unit describes a standardised combination of different share classes that can be held and traded as a single holding. An example might be two income shares and a capital share. Units combine the features of constituent share class to create a holding with a unique profile.

Unit-Linked

- a type of long-term savings plan where premiums are used to buy units in an investment fund, such as an investment trust. The assets in the fund can be a mix of stocks, shares, bonds, property or other securities. The value of the units and the return from them can fluctuate in line with the investment performance of the assets in the fund, and there is no guarantee your full capital will be returned.

Unit Linked Annuity

- an annuity whose rate of return depends on the performance of the unit-linked fund. This may mean that your levels of income vary from year to year and can go down as well as up.

Unit Trusts

- these are open ended collective investment funds which pool investor monies for investment by professional managers in a range of shares, gilts, bonds or other securities. Investors’ proportionate interests are represented by units in the fund. Managers create or redeem units in response to market demand at prices reflective of the net asset values of funds.

Unsecured Pension

- an unsecured pension (USP) is a flexible retirement option (often held within a SIPP) that gives you greater choice and control over how and when you take your pension fund benefits. This gives you the ability to use your pension assets to provide a regular income, while also providing the potential to further grow your overall retirement pot.

Upper Earnings Limit (UEL)

- this is the highest amount of earnings on which employees pay National Insurance contributions. The employer still pays his share of National Insurance contributions on all the employee's earnings over this limit.

Vested Rights

- these are benefits for pension plan members that are set in stone. The employee has an absolute right to the entire amount of money in the account. The portion vested cannot be reclaimed by the employer, nor can it be used to satisfy the employer's debts. Any portion not vested may be forfeited under certain conditions, such as termination of employment.

Volatility

- the degree by which share prices in a particular stock market or sector go up or down (but can also donate the variability of a market or asset class). Usually measured by the movement in a particular index: the greater the extent of price movements the greater the volatility. It is used as a measure of investment risk as it aims to quantify the likelihood of an asset or portfolio falling in price just before it is sold.

Wage Inflation

- the rate of increase in wages and salaries as measured by the Average Earnings Index.

Waiver of Premium

- an essential form of insurance which protects your pension contributions if you are out of work for a prolonged period of time or if you can never work again. The insurance cover will pay your premiums for you. It is the only means by which you can pay into a pension scheme if you are not earning a taxable salary.

Warrants

- are securities issued by companies which give investors the right but not the obligation to subscribe for ordinary shares in the issuing company on a fixed date(s) and at a fixed price. Warrants are not themselves shares but rather options to acquire shares and are typically issued by companies on initial public offerings or as part of subsequent changes to share capital. Warrants are geared investments and are generally considered to be more risky than ordinary shares.

With-Profits

- a type of managed investment fund which invests in a combination of shares, fixed interest property and cash. The type of fund smoothes out the volatility of the stock market by paying you more than the gains generated during poor years, and by holding some of the extra back in extremely good years.

With-Profits Annuity

- an annuity whose rate of return is dependent upon the performance of the with-profit fund. Lower risk than a unit-linked annuity, the idea is that your income should grow steadily year on year, although your income can still fall.

XD

- ex-dividend is the interval between the announcement and payment of a stock or share’s next dividend. Someone who invests during this period is not entitled to the dividend so a stock quoted ex dividend has the amount of the dividend due deducted from the price – usually about eight weeks before its distribution date.

Yield

- the amount of income an investment delivers after deduction of charges (but not tax) expressed as a percentage of the amount invested. Usually expressed as an annual figure - e.g. "the fund's estimated gross yield is 5.9% p.a."

Yield to Maturity

- the yield provided by a bond which is held to its maturity date, taking account of both interest payments and capital gains or losses and assuming that the interest received is reinvested at this same rate.

Zero Dividend Preference Shares (ZDPs)

- preference shares issued by split capital investment trusts which have limited lives and pay no dividends during their lives but are instead designed to provide a pre-determined, but not guaranteed, capital entitlement on expiry. As preferred capital, entitlements of ZDPs rank higher than ordinary capital and combined with their pre-determined growth are considered to carry below-average risk.