A system of remuneration provision that provides core benefits e.g. minimum salary, leaving the balance of benefits to be chosen by the individual from a suitable list within an agreed budget.
Option providing its holder with the right to buy an investment at a future date at a price agreed now.
Used in conjunction with unit linked funds, whereby units are sold or cancelled to pay for certain expenses of the fund or the linked contract.
Imposes an upper limit. It can be used in a number of ways. E.g. Mortgage Cap – an upper limit to mortgage rate fluctuations or an Earnings cap – an upper limit to earnings used to calculate pension benefit. Applied to pension, cash and contributions, and affects personal pensions and occupational pensions.
Capacity is the measure of an insurer’s ability to write new business. It depends on the maintenance of adequate reserves.
Capital should be distinguished from income. Generally refers to cash reserves and assets convertible to cash.
Firms conducting investment business are required to have sufficient funds of their own. The European Union’ Capital Adequacy Directive, which sets minimum levels of capital for UK financial services companies, came into effect on 1st January 1996.
A capital gain is the increase in value of an asset or investment.
Capital Transfer Tax
Preceded Inheritance Tax as the tax on transfers from estates.
Capital Gains Tax (CGT)
A tax levied on net gains of an individual in a tax year provided any gains exceed the current exemption. Husband and wife pay the tax separately and have separate allowances.
An insurance company set up by an industrial or commercial company, for example an oil company, to provide insurance to that company only.
Carry Back Rules
Provided an election is made within 3 months after the end of the tax year, it is possible to make a payment into a Personal Pension Plan during that tax year but relate the payment to the previous tax year so that tax relief is ‘carried back’ to that year.
During a tax year in which an individual has Net Relevant Earnings, contributions may be made to a Personal Pension Plan in line with a set contribution table related to age and the earnings cap. If the whole of the contribution allowance is not used, the unused balance may be ‘rolled over’ and accumulated for up to six, or possibly seven, years. The phrase ‘carry forward’ may be somewhat misleading as the accumulated, unused contributions are usually considered in retrospect. From that perspective, they are not so much carried forward as retrieved from the past. In reality, of course, the unused element is rolled over or carried forward.
Cash Sum at Retirement
For most people with a personal or occupational pension, an option at retirement is to forego an amount of pension for its equivalent in cash. The cash is paid, up to permissible levels, free of tax.
Under normal buying/selling contractual arrangements, this is taken to mean ‘let the buyer beware’, and usually no greater duty of care is due. Because of the greater duty of care required when dealing with investments, however, caveat emptor is not taken as a guiding principle. The onus in financial transactions lies with the adviser, and the ‘best advice’ principle.
Document issued by insurers as evidence that insurance is in force to meet the requirements of the law (notably for motor and employers’ liability insurance).
Chargeable events occur when certain payments are made from packaged life and investment products. They may or may not give rise to a tax charge. Any tax liability that might arise falls within income tax rules.
A chargeable gain is the (income) taxable element of a gain arising from a chargeable event. Any gain can be said to be the ‘excess’ of returns over investments into certain packaged products. There is no income tax liability for basic rate, nor any CGT liability. The maximum rate chargeable will be 17%, being the difference between basic rate tax and higher rate tax; any gains being assumed to have already attracted tax at basic rate.
This is a transfer or gift of value that does not attract any Inheritance Tax relief, nor is it covered by any Inheritance Tax allowance. It is a transfer that does not qualify as an exempt transfer.
Most investments and investment products incur expenses to develop, manage and sell. To ensure that each stage of the product is properly costed, expenses are deducted at different stages to reflect the expenses of that particular element e.g. bid/offer spread, policy fee, annual management charge.
A moveable object, usually taken to be a personal possession. You can receive up to £6,000 p.a. on the sale of personal chattels each year without affecting the CGT allowance.
Chief Medical Officer
Many large insurance companies appoint a senior medical consultant to oversee their medical underwriting guidelines. This is intended to help with consistency of approach, maintaining up to date knowledge, and providing expert guidance in difficult cases.
When a policyholder or beneficiary seeks payment or settlement under the terms of a policy.
Class of Potential Beneficiaries
Under certain types of trust, such as flexible trusts, it is possible to have a general reference to beneficiaries, as well as specific appointments as beneficiary.
Generally taken to mean someone with whom you do business; more specifically, it should be used to refer to someone whom you know, and with whom you do business on a regular basis.
A Client Agreement is an extended version of the Terms of Business letter, but used as a long-term notice where business is transacted regularly. Two copies are generally used, both client and adviser keeping a signed (by both parties) and dated copy with their respective papers.
Company controlled by five or fewer individuals, and not traded on the stock exchange.
There are special tax calculation rules governing opening and closing years of a business.
Some policies, e.g. flexidowments, are sold as multiples or clusters of small policies, rather than one large, single policy. This provides extra flexibility for the policyholder when deciding to surrender, hold to maturity or extend the policy.
An arrangement whereby a number of separate insurance companies share in the cover of one particular risk.
An option on some mortgages which prevents interest rate payments dropping below an agreed minimum rate.
Collective Investment Schemes
These are funds that take money from a number of private investors and pool it together in one fund. This enables investors to invest in a larger number of individual investments than would otherwise be the case and therefore to avoid the risk of investing only in a few companies’ shares. See Unit Trust and Open Ended.
Collective Life Policies
Group life policies that do not relate to schemes established by an employer for the benefit of employees. Commonly used by credit companies to cover loans made.
Any policy taken out by a company, partnership or organisation to cover their business. Would include fleet policies for motor business.
Charge made by a firm or individual for their services.
Commission Disclosure by financial advisors
Since the beginning of 1995, independent financial advisors and tied agents have had to disclose the level of commission they will earn from selling financial products to their clients. The city regulator of retail financial services, the Personal Investment Authority (PIA) implemented the move. The SIB Central Register maintains a list of all authorised firms.
Generally taken to refer to investments involving future pricing of raw materials in foodstuffs and metals.
An agent appointed by a life insurance company who is authorised to sell only that company’s products.
The end of a transaction, and generally used in property purchase transactions to signify the point at which the ownership of property changes hands.
A word taken to indicate the process of following agreed procedures; e.g. compliance with FSA 1986 and related regulations means that things are being done ‘by the book’.
A company which transacts both life and non-life insurance.
A policy covering a number of types of loss or damage. The name is used mainly in motor insurance.
Part of a policy stating that certain rules must be followed, for example, the duty to take reasonable care to protect property, or to report claims to the insurance company promptly.
Conduct of business rules
Rules that the watchdogs are required, under the Financial Services Act (FSA), to have in place and which prescribe how firms must conduct their business. These mainly apply to the relationship between the firm and its client.
Scottish equivalent of letters of representation.
Scottish equivalent of grant of probate.
One of the requirements of a legally binding contract is ‘consensus ad idem’, or agreement on the same thing, being of the same mind.
Insurance covering the loss of profits of a business and certain other costs resulting from fire or other insured event (also known as Business Interruption).
A policy covering the contents of a home or other building against a number of different risks. Contingent Annuities. Annuities paid if a certain event (events) happen.
Contingent Life Policy
A policy where payment is made on death only if certain preconditions (contingencies) are met e.g. death before another person.
Essentially opting out of the earnings related part (SERPS) of the State pension arrangements.
Contracting Out Incentive
To encourage individuals to contact out of SERPS’s, the Government offered, until April 1993, an additional 2% contribution, paid for a fixed short period, into the pension arrangement of those who were eligible. Currently, a 1% incentive is offered to those age 30 or over, and contracting out into a PPP.
This is sent out to an investor by firms such as fund managers and stockbrokers when a transaction has been completed. It is a legal document that provides the client with all the details of the deal that was made on his behalf.
The principle of contribution applies where a risk is insured on more than one insurance policy (for example on a travel and household policy), and the two insurers concerned may share the cost of any claim.
Contributions into personal pension plans are limited by payment ceilings related to age bands. Personal contributions to an occupational scheme are fixed at a maximum of 15% of remuneration.
Payments into group pension schemes are dependent on a number of factors, such as ages, balance of sexes in the group and certain financial projections. Rather than change the payment level each time one of the assumptions changes, the actuary will recommend a fixed rate to be paid for, say, three years. This will be the contribution or funding rate, and will usually be expressed as a percentage of the total payroll of all the scheme members.
A method of estimating the size of the pension fund needed to secure the pension benefit of members of a group pension. It operates on the basis that the scheme is invested only to the extent that its expected liabilities (i.e. scheme withdrawals, retirements, deaths) can be met, plus an allowance for flexibility. Members in the scheme do not have ‘earmarked’ funds as with PPPs or EPPs, so being a general fund, sums can be taken out as and when needed.
A phrase relevant to pension planning for a company director who owns or who has control of 20% or more of the ordinary shares in a company. The definition is wider for a director joining a pension scheme on or after 1st December 1987.
A term insurance policy which gives the policyholder an option to convert the policy to a whole life or endowment insurance without giving further evidence of health.
A document, usually a deed, that transfers an interest in property.
Cooling Off Period
A period of 14 days from receipt of the statutory cancellation notice during which a policyholder may cancel the policy. For policies not covered by the Financial Services Act cancellation rules e.g. term assurances of less than 10 years, the relevant cooling off period is 10 days.
The SIB adopts a three-tiered approach to regulation, the second tier being the core rules, which effectively act as a code of conduct and provide an outline for the SRO’s own rule books.
Similar to Government Stock (Gilt edged securities) but with higher risk profile. They are loans to corporate bodies, usually on fixed rate for a fixed period.
Tax on companies, levied on trading profits and capital gains. Tax rates applicable to Financial Year 1/4 to 31/3.
An offer which replaces and supersedes a previous offer.
A document giving temporary evidence of cover while the policy and certificate are being prepared.
Payment of an outstanding sum of money over a period of time rather than immediately; payments may or may not include compensatory interest.
Is a new electronic near-paperless settlement system. It has been introduced to speed up the time it takes to settle purchases and sales of shares. Under the old settlement system, cheques must be paid or received five working days after the trade takes place. Once CREST is fully operational it is proposed that this process will shorten to three days and bring the UK more in line with the other world stockmarkets.
Critical Illness Insurance
Also known as ‘dread disease’. It pays out a lump sum on the diagnosis of certain life-threatening illnesses specified in the policy. Such policies can be stand alone or written as an add on to a variety of other contracts e.g. whole of life.
Also called Double Option or Put and Call Option. A flexible form of buy and sell agreement whereby e.g. in the event of death of a partner the estate of the deceased has the option to sell and the surviving partners have the option to buy. When one option is exercised, the other must follow.
In Inheritance Tax terms this refers to the build up of chargeable transfers over a seven year period e.g. if chargeable transfers are made each year 1990 to 1996, in 1997, those made in 1990 drop out of calculation, and so on. P.E.T.s only come into the calculations if the transferor dies within seven years of the transfer.
Customer – Private
An individual who is not experienced in investments and therefore is given more protection under the regulators’ Conduct of Business Rules.
Customer – non-private
A customer who is assumed to understand the workings of the investment world and therefore gets less protection from the Conduct of Business Rules than a private customer.
Long term loan to a company, usually at a fixed rate of interest and for a specific term. Debenture holders are creditors of the company. In the event of liquidation debenture holders have a preferential claim on the assets. Debentures are marketable securities.
Declaration of Trust
Written (usually) statement to the effect that certain property is to be held in trust. No specific form is required, provided the intention is clear.
A term insurance policy, in which the sum insured is reduced by a fixed amount each year, decreasing to nil at the end of the term.
Deeds of (Family) Arrangement
A formal document used under the terms of the Inheritance Tax Act 1984 to override the directions of a will after death.
Deep Discount Bonds
An investment bond issued at a large discount. The bond does not pay interest, but is repaid at par.
Annuities that commence after a specified number of years or at a specified age (usually on retirement), usually continuing through the policyholder’s life.
A waiting period e.g. under Permanent Health Insurance policies there can be waiting, or deferred periods of between 4 and 104 weeks before the policy begins to pay out. Usually, the longer the deferred period, the lower the premium.
Pension schemes that base their final pension calculation on a formula are referred to in this way. Also called final salary schemes.
Another term for ‘money purchase’ pensions. A pension scheme where the final pension will be the result of an agreed premium input, rather than an agreed formula output.
Often, occupational pension schemes are ready to run before the formal documentation is ready. Rather than wait, the scheme is launched with an interim trust deed or a declaration of trust. When all the paperwork has been agreed with the various Revenue departments, the Definitive, or final, Deed, may be issued.
Someone who is reliant upon others usually for financial support in the terms of financial planning.
One of the options with a pension scheme. Usually pre-determined with a company scheme, but a separate decision with a personal pension.
Money on deposit earns interest at a rate relevant to reserves and long term investment conditions. Usually, the interest earned on deposit is not lost, the deposit growing at a slower or faster rate depending on the interest rate, but not reducing in value.
An investment option for occupational defined benefit schemes, whereby an agreed amount of interest is credited to the fund with the possibility of a final declaration of a higher figure but backdated over the interest period e.g. 8% declared at the beginning of the year, an additional 2% granted at the end, backdated.
A director who has actual or potential control of 20% or more of the voting shares of a company.
Derivative products is the collective term applied to certain types of financial instruments such as futures and options. Their value derives from other commodities, indices or individual shares.
Also disablement. In terms of critical illness and Permanent Health Insurance policies, a condition that may give rise to a claim on a policy.
Certain life policies will pay out if the policyholder becomes permanently disabled. No further benefit is paid on the policyholder’s subsequent death. (See also Critical Illness Insurance.)
In financial terms, a business that specialises in buying and selling bills of exchange.
Legal refusal, usually written, to accept responsibility for the action of a third party or an action attributed to the individual concerned.
Disclosure of Information
Also referred to as ‘Utmost Good Faith’ or ‘uberrima fides’. A pre-condition of insurance contracts to disclose all relevant facts to the insurer.
Discretionary Investment Management Agreement
An agreement necessary for managing investments for a third party where there are no directions or supervision.
A trust in which the trustees may exercise their discretion, within a class of beneficiary, as to whom should receive benefit.
A will which confers on the executors overriding powers of appointment in favour of a specified class of beneficiary.
An offshore fund that complies with the Revenues rules on distributing most of the gains, usually up to 85%, as dividends, the dividends then being liable to income tax.
This is the income you receive as a shareholder from a company. It is a share of the profits made by a company that it has chosen to distribute to its shareholders. Returns vary from year to year depending on the company’s profits or operational strategy.
Similar to ‘bonus sacrifice’ in that this may be a way to increase payments into a company pension scheme i.e. the dividend is waived, and the money thus ‘released’ is paid into a pension arranged by the company for the benefit of the individual. The dividend must be waived before the dividend is calculated and known.
The country that a person considers to be, and treats as, a permanent home and which forms the closest ties. An essential element when dealing with legal and taxation matters.
Domicile of Choice
Determined by personal choice after age 16, and proven by intention to stay and form permanent ties.
Domicile of Dependence
Determined by changes in parents domicile until age 16 (or in Scotland 14 for boys, 12 for girls).
Domicile of Origin
Determined for a child by the parents domicile at the child’s birth.
This is what may happen when a person domiciled in country A works in country B. Tax will be deducted in B, and the same income will also feature for tax liability in country A. Most countries have tax treaties, so that provided the Inland Revenue is informed of the tax already paid on income it will not be deducted again.
Generally refers to increases in pension payments in line with the Retail Price or other relevant Index, and related back over the contributory period.
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