Glossary of financial terms

A

Accumulation unit

A fund unit where income is reinvested automatically rather than paid out, so the unit price rises instead.

Active management

An investment approach where a fund manager chooses investments with the aim of beating a benchmark, usually for a higher fee than a passive fund.

Agricultural property relief (APR)

An inheritance tax relief on qualifying farmland and farm buildings. From April 2026, 100 percent relief is limited to a combined 2.5 million pounds with business relief, and 50 percent applies above that.

Annual allowance

The maximum amount that can be paid into pensions each tax year with tax relief, currently 60,000 pounds for most people or 100 percent of earnings if lower.

Annual exemption (IHT)

You can give away 3,000 pounds each tax year free of inheritance tax, and carry forward any unused amount for one year.

Annuity

A financial product bought with pension savings that pays a guaranteed income, usually for life.

Arrangement fee

A fee charged by a lender for setting up a mortgage or loan. It may be paid upfront or added to the loan.

Asset allocation

How an investment portfolio is divided between asset types such as shares, bonds, property and cash.

Attitude to risk

How much investment risk you are willing to take in pursuit of returns. Advisers assess this before recommending investments.

B

Bank Rate

The interest rate set by the Bank of England. It influences mortgage, loan and savings rates.

Beneficiary

A person or organisation that receives money or property from a will, trust, pension or insurance policy.

Bond

A loan to a government (a gilt) or a company (a corporate bond) that usually pays a fixed rate of interest.

Bridging loan

A short-term loan, often for 12 months or less, used to complete a purchase quickly or bridge a gap until longer-term finance or a sale.

Business relief (BR)

An inheritance tax relief on qualifying business assets and shares in unquoted trading companies. Also called business property relief.

Buy-to-let mortgage

A mortgage for a property you intend to rent out. Lenders assess the rent the property can achieve as well as your income.

C

Capital and interest (repayment)

A mortgage where each monthly payment repays some of the loan as well as the interest, so the debt is cleared by the end of the term.

Capital gains tax (CGT)

Tax on the profit made when you sell or give away an asset that has increased in value, above your annual exempt amount.

Cash ISA

An individual savings account holding cash, which pays interest free of income tax.

Chartered Financial Planner

A professional title awarded by the Chartered Insurance Institute to advisers who have reached a high level of qualification and experience.

Critical illness cover

Insurance that pays a lump sum if you are diagnosed with a specified serious illness during the policy term.

Cross option agreement

An agreement between business owners giving each side an option to buy or sell a deceased owner's shares, used with shareholder protection.

D

Death in service

A benefit, usually a multiple of salary, paid to an employee's family if they die while employed.

Decreasing term assurance

Life insurance where the payout reduces over time, often to match a repayment mortgage.

Defined benefit pension

A pension (often called final salary) that promises an income based on your salary and years of service.

Defined contribution pension

A pension where you build up a pot from contributions and investment growth. The value is not guaranteed.

Discretionary trust

A trust where the trustees decide which beneficiaries receive money and when.

Diversification

Spreading money across different investments to reduce the impact of any one of them falling in value.

Drawdown (flexi-access drawdown)

Keeping a pension invested while taking an income or lump sums from it as you choose.

E

Early repayment charge (ERC)

A fee charged by a lender if you repay all or part of a mortgage during an initial deal period.

Equity

Your share of a property's value after deducting any mortgage, or ownership of a company through its shares.

Equity release

A way for homeowners aged 55 or over to take money from the value of their home without moving, usually through a lifetime mortgage.

Estate

Everything a person owns when they die, less their debts. It is the starting point for inheritance tax.

Executor

The person named in a will to deal with the estate, pay debts and tax and distribute what is left.

F

Financial Conduct Authority (FCA)

The UK regulator for financial services firms, including financial advisers.

Financial Ombudsman Service (FOS)

A free, independent service that settles complaints between consumers and financial businesses.

Financial Services Compensation Scheme (FSCS)

The UK scheme that can pay compensation if an authorised financial firm fails. Savings are protected up to set limits per person, per institution.

First-time buyer

Someone who has never owned a home, in the UK or elsewhere. First-time buyers may pay less stamp duty.

Fixed-rate mortgage

A mortgage where the interest rate stays the same for a set period, commonly two, five or ten years.

G

Gift with reservation

A gift where you keep a benefit, such as giving away your home but still living in it rent free. It is usually still counted in your estate.

Gilt

A bond issued by the UK government.

Grant of probate

The legal document that confirms an executor's authority to deal with the estate of someone who has died with a will.

Gross development value (GDV)

The expected value of a property development once it is finished.

Guaranteed annuity rate

A valuable promise in some older pensions to convert the fund into an annuity at a fixed, often generous, rate.

I

Income protection

Insurance that pays a regular income if you cannot work because of illness or injury.

Independent financial adviser (IFA)

An adviser who can recommend products from across the whole market, without restriction to a provider or panel.

Inflation

The rate at which prices rise over time, reducing the buying power of money.

Inheritance tax (IHT)

A tax on the estate of someone who has died, charged at 40 percent above the available allowances.

Interest-only mortgage

A mortgage where monthly payments cover only the interest. The loan is repaid at the end of the term from another source.

Intestacy

Dying without a valid will. The estate is then shared under fixed legal rules.

ISA (individual savings account)

A tax-efficient account for cash or investments. The overall allowance is 20,000 pounds per tax year.

J

Joint life second death

A life policy on a couple that pays out on the second death, often used to pay an inheritance tax bill.

K

Key person insurance

Insurance owned by a business that pays out if a person vital to its profits dies or becomes seriously ill. Often called key man insurance.

L

Lasting power of attorney (LPA)

A legal document that lets people you trust make decisions for you if you lose mental capacity.

Letters of administration

The legal document giving someone authority to deal with an estate where there is no valid will.

Level term assurance

Life insurance that pays a fixed sum if you die during the term.

Lifetime ISA

An ISA for under-40s saving for a first home or retirement, with a 25 percent government bonus on up to 4,000 pounds a year.

Lifetime mortgage

The most common form of equity release. Interest usually rolls up and the loan is repaid when you die or move into long-term care.

Loan to cost (LTC)

In development finance, the loan as a percentage of the total project costs.

Loan to value (LTV)

The size of a mortgage as a percentage of the property value.

Lump sum allowance

The maximum tax-free cash most people can take from their pensions in their lifetime, currently 268,275 pounds.

M

Minimum pension age

The earliest age you can normally take money from a personal pension, currently 55 and rising to 57 from April 2028.

Money purchase annual allowance (MPAA)

A reduced annual allowance of 10,000 pounds that applies once you have flexibly taken taxable income from a defined contribution pension.

Mortgage in principle

A statement from a lender of how much it may be willing to lend, subject to full checks. Also called an agreement in principle.

N

Negative equity

When a property is worth less than the mortgage secured on it.

Nil-rate band (NRB)

The amount of an estate that is free of inheritance tax, currently 325,000 pounds and frozen until April 2031.

No negative equity guarantee

A promise on equity release plans that you will never owe more than the value of your home.

O

Offset mortgage

A mortgage linked to savings, where the savings balance reduces the interest charged on the loan.

Ongoing advice

A regular review service where your adviser checks that your plans and investments are still suitable.

P

Paraplanner

A specialist who researches and prepares financial plans and recommendations to support an adviser.

Passive investing

Investing in funds that track a market index rather than trying to beat it, usually at lower cost.

Pension transfer

Moving pension savings from one scheme to another. Transfers from defined benefit schemes need specialist advice.

Potentially exempt transfer (PET)

A gift that becomes free of inheritance tax if the giver survives seven years after making it.

Probate

The legal process of dealing with the estate of someone who has died.

Product transfer

Switching to a new mortgage deal with your existing lender, without a full new application.

Protected tax-free cash

A right in some older pensions to take more than 25 percent as tax-free cash.

R

Relevant life policy

Life insurance for a director or employee that the company pays for, with the payout going to the family through a trust.

Remortgage

Moving your mortgage to a new lender, or taking a new deal, usually when your current deal ends.

Residence nil-rate band (RNRB)

An extra inheritance tax allowance of up to 175,000 pounds when a home is left to direct descendants. It tapers away for estates over 2 million pounds.

Restricted adviser

An adviser who can only recommend products from a limited range or a single provider.

Retirement interest-only mortgage

A mortgage for older borrowers where only interest is paid each month and the loan is repaid when the property is sold.

S

Salary sacrifice

Giving up part of your salary in exchange for an employer pension contribution, saving National Insurance.

Self-invested personal pension (SIPP)

A personal pension that offers a wide choice of investments, including commercial property.

Semi-commercial property

A building with both commercial and residential parts, such as a shop with a flat above.

Shareholder protection

Insurance that gives remaining owners the money to buy a deceased or critically ill shareholder's shares.

Small self-administered scheme (SSAS)

An occupational pension scheme for up to 11 members, often company directors, that can invest in commercial property and lend to the sponsoring company.

Stamp duty land tax (SDLT)

A tax paid when buying property or land in England and Northern Ireland above certain thresholds.

Standard variable rate (SVR)

A lender's default mortgage rate, which you usually move onto when a deal ends.

State Pension

A regular payment from the government once you reach State Pension age, based on your National Insurance record.

Stocks and shares ISA

An ISA that holds investments such as funds and shares, free of UK income tax and capital gains tax.

Suitability report

A written report from your adviser explaining their recommendation and why it suits you.

T

Taper (RNRB taper)

The reduction of the residence nil-rate band by 1 pound for every 2 pounds an estate exceeds 2 million pounds.

Term

The length of a mortgage, loan or insurance policy.

Tracker mortgage

A mortgage whose rate follows Bank Rate plus a set margin.

Trust

A legal arrangement where trustees hold assets for the benefit of beneficiaries.

U

Unit trust / OEIC

Types of investment fund that pool money from many investors.

W

Whole of life insurance

Life insurance that pays out whenever you die, often written in trust to help pay inheritance tax.

Will

A legal document setting out who receives your estate and who will deal with it after your death.

Written in trust

Placing a life policy in trust so the payout goes to beneficiaries quickly and usually outside your estate for inheritance tax.

Y

Yield

The income from an investment as a percentage of its value.