Glossary G – K terms used in Financial Services

Gearing: The debts of a company expressed as a percentage of its equity capital. If a fund is geared it means that it has the ability to borrow money and therefore take advantage of greater investment opportunities. Therefore it has the ability to benefit when another fund might not have the available cash to do so. When a market is rising this means that investors will be in a position to gain more than those not in a geared fund. Conversely, when a market is falling investors are likely to be at greater risk. Also known as leverage.
General Insurance: Insurance of (non-life) risks where the policy offers cover for a limited period, usually one year.
General Liability: Covers the policyholder’s legal liability for injury, property damage or financial loss caused to others.
Gifts on Marriage: Gifts in consideration of marriage are, under Inheritance Tax rules, exempt lifetime transfers within certain monetary limits, and depending on the family relationship of the donor and recipient.
Gift with Reservation: A transfer of value in which the donor retains an interest. e.g. the donor gives a house to a friend, on condition the donor continues to live in the house.
Gilt edged security: Gilts are bonds issued by the UK Government which pay a fixed rate of interest for a set period of time. Therefore, you know at the time of purchasing the bonds what income you are going to receive for the life of the bond.
Goodwill: The value of a business over and above its book value of assets, which may literally represent the goodwill of customers.
Gower Report 1982: A government sponsored report into investor protection.
Graduated Scheme: The forerunner of SERPs which ran between 1961 and 1975. Related to earnings but not dynamised during the contribution period, nor inflation proofed in payment.
Grant of Probate: A certificate issued by the court validating a will and authorising the executors to administer the estate.
Green Card: A document issued to policyholders motoring abroad as evidence that they have the minimum insurance cover required by the law of the country visited. Not essential for European travel, because minimum legal cover is automatically included in UK policies.
Gross and Net Interest Rates: The gross interest on an account is the amount paid before any tax has been deducted. The net figure is the amount paid after Savings tax of 20% has been taken off. When comparing savings accounts with competing products it is important to make sure they are compared on the same basis. Most bank and building society accounts quote gross rates whilst guaranteed income bonds and other types of insurance bonds are quoted net of basic rate tax.
Grossing Up: Converting a net amount into its corresponding gross amount e.g. calculating a rate of return; anticipating a tax deduction on a gift or will bequest.
Group Life: A term that relates to the provision of lump sum death in service benefits for groups of employees.
Group Pension: An arrangement made for the employees of a particular employer to participate in a personal pension scheme on a group basis. This is not a separate, or occupational, pension scheme, but merely a collecting arrangement.
Group Permanent Health Insurance: Policies arranged by employers for their employees, providing for the payment of income during a period of incapacity due to ill health or accident. The benefit is usually payable until retirement. Unlike personal Permanent Health Insurance, there may be an element of free cover, and any claim is paid to the company, which continues to pay the employee via the PAYE system.
Group Sponsored Schemes: Scheme set up by employers for the benefit of their employees to provide life cover or a pension on retiring, or both.
Guaranteed Minimum Pension (GMP): When a group occupational pension scheme contracts out of SERPs, the scheme must provide a minimum pension in respect of the amount of state pension foregone. This is the GMP.
Guaranteed Death Benefit: A minimum amount of life assurance paid out under a unit-linked policy if the fund value is not higher.
Headroom Test: ‘Maximum benefit’ test for FSAVCs to ensure that FSAVC plus main occupational scheme benefits together do not produce more than the maximum benefits permitted by the Revenue. Operates when contributions to FSAVC exceed £2400 p.a.
Hedging: Protecting an existing position or commitment by using one type of investment (e.g. a future or option) to cover adverse market movements.
Higher Rate Tax: Any rate of income tax in excess of basic rate tax.
Historic Pricing: Price quoted for units based on existing valuation of underlying fund assets.
Holding: Is the term to describe the amount of shares an investor owns (for example, my holding in XYZ company is 200 shares).
Holdover Relief: Relates to gifts of business property where no CGT becomes payable at the time of the gift. As a result, the value in the recipient’s hands is deemed to be reduced by the amount of gain, so that the amount of gain will be high on subsequent disposal.
Holiday Insurance: A policy covering certain risks connected with holidays. Usually includes cover for the costs of unavoidable cancellation, personal accident, medical treatment abroad and lost or stolen luggage.
Home Foreign: Home foreign policies are issued to provide insurance where the business is written in one country, although the risk is actually situated abroad.
Home Service: The provision and servicing of life and non-life insurance by company agents calling regularly at policyholders’ homes. (See also Industrial Branch)
Hospital Report: This may be requested during the underwriting of a life assurance or Permanent Health Insurance proposal, when relevant information relating to hospital treatment may not be available from the GP.
Household Business: Includes insurance of both structure and contents, along with any “add-ons” included within the policy such as legal expenses.
Hybrid Schemes: Usually seen in connection with small self administered pension schemes marketed by life offices, because an element of the investment strategy must be through the insurance company’s own investment funds. Hence hybrid, because the resultant contract is neither fully ‘insured’ nor fully self administered.
ICS Levy: General term for payment into the Investors Compensation Scheme.
Illustration: Figures showing projected costs and/or returns from various packaged products in a format often determined by a regulator.
Immediate Annuities: Annuities that commence immediately, or shortly after, purchase.
Impaired Lives Register: Lists individuals who have been refused, or charged more for, life insurance, for medical reasons.
Income: Money received from employment (earned income) or investments (unearned).
Income shares: Some investment trusts issue more than one type of share. They are called split-capital investment trusts and they form about 10% of the whole market. The simplest ‘split’ is divided between capital and income shares. The capital shares receive no dividends over the life of the trust, but receive the benefit of the market growth of the shares at the end of the investment. Income shares receive all the income generated by the whole fund but do not benefit from any increase in the value of the shares. These two choices are valuable because they enable private investors to select precisely the sort of investment they need. Some investors want income alone so they can opt for ‘income shares’. Other investors want growth so they can opt for ‘capital shares’.
Income Tax: Direct tax levied on income, whether earned or unearned.
Increasing Term: A term insurance policy in which the sum insured increases each year by a fixed percentage of the original sum insured. Designed to increase policyholders’ life cover as their earnings increase.
Indemnity: The principle by which policyholders are put in the same financial position after a loss as they were immediately before it.
Independent Financial Adviser: A broker or other intermediary authorised to sell or advise on the policies of any life insurance company, as well as other financial products (e.g. unit trusts).
Index: The indicator of the value of a sector of shares in a market. The most common index is the “Footsie” (the FTSE 100) which is an indication of the performance of the top 100 UK companies’ shares.
Indexation: Price adjustment that allows capital or income to take account of, or benefit from, inflation.
Indexed: Also Index-linked. Growth in income or capital which follows one of the many growth or performance indices e.g. Retail Prices Index, Average Earnings Index.
Index funds: Unit trusts which track the performance of an index. This is usually carried out by either investing in the shares computerising the index or by buying a sample of shares making up the index or a derivative based on the likely performance of the index. The value of the fund is linked to the chosen index so that if the index rises so will the value of the fund. Conversely, if the index falls so will the value of the fund.
Index-linked Insurance: This is where the amount of cover changes automatically in line with an index. Examples are the cost of rebuilding a house or replacing its contents.
Independent Financial Adviser (IFA): Someone qualified by experience and examination and not working for any single product provider company.
Independent Taxation: Separate taxation of husband and wife introduced in April 1990.
Individual Policy: Insurance taken out by an individual on his or her own life or by an individual or legal person on the life of another.
Industrial Assurance: Low value (must be under £1000 sum assured) life assurance and savings policies issued by life companies and friendly societies. Premiums used to be collected by hand, door to door, but may now be paid by monthly bank mandate.
Inflation: In simple terms, when production costs increase for the same level of production, the result is often an increase in the product price. This in turn results in a reduction in purchasing power, because more is needed to buy the same goods. This leads to higher wage demands, which leads to higher production costs, and so on. The results of this cycle is price inflation, which is what is generally meant by the term inflation.
Inheritance Tax (IHT): Tax payable on certain gifts and transfers during lifetime and upon death.
Initial Units: With some unit linked products, management expenses are recouped by having two types of unit. Initial or capital units are purchased by new contributions for one or two years, then accumulation units are purchased thereafter. The initial units have a higher charge to help offset expenses.
Insider dealing: Is dealing in the shares of a company on the basis of unpublished price sensitive information such as bad results, a change in management, new technology or a new product, or to advise or enable others to deal on this basis. An insider dealer will be privy to this sensitive information and use it to advantage to gain from the expected increase in the share price once the information becomes known to the market. This is a criminal offence that can carry a penalty of seven years in jail and/or an unlimited fine.
Insurable Interest: A principle of insurance which states that someone may only take out insurance if he/she stands to suffer a financial loss from an event covered by a policy. Individuals have an unlimited insurable interest in their own life and that of their spouse.
Insurance: A service that offers financial compensation for something that may or may not happen. Originally the term assurance was generally used for life insurance, but now the two words are interchangeable.
Insurance Brokers Registration Council: A body established under the Insurance Brokers Registration Act 1977 to register and regulate all those who wish to be known as Insurance Broker.
Insurance Broker: Someone registered with the Insurance Brokers Registration Council whose income comes mainly from selling general insurance.
Insurance Company: A company that takes on risks under the policies it sells in return for the payment of premiums. Companies may be “mutual” (owned by the policyholders) or “proprietary” (owned by the shareholders). Insurance Ombudsman Bureau. A body established by insurance companies in 1981 to investigate consumer complaints.
Insurance Premium Tax: A tax imposed on most non-life insurance premiums.
Insured: A person covered by an insurance policy.
Insured Pension Scheme: Something of a misnomer because the scheme is not ‘insured’ in the accepted sense. The term is used because the pension scheme is administered by an insurance company, and to help differentiate from a self administered scheme.
Insurers: General term for insurance companies.
Interest in Possession: An entitlement to the income from trust property. Interim Deed. A temporary measure whilst waiting for the full and final version to be engrossed. Often used when establishing group pension arrangements
ICR: The Income Cover Ratio is part of the basic affordability calculation that is typically applied to buy to let mortgage applications. The ICR is the minimum ratio between the expected rental income of the property and a notional interest rate Stress Test. For example, a typical buy to let mortgage product for a limited company applicant might require that the property can yield rent worth at least 125% of the notional interest rate. The ICR in this example is 125%. If the expected yield does not sufficiently exceed the notional interest rate, lenders may choose to examine additional sources of income to assess affordability.
Intermediary: Person or organisation that offers advice and arranges policies for clients. Intermediaries may be either “tied” – representing one company in the case of life business or a limited number of companies for general business, or “independent” – with no limit on the number of companies with which they can deal.
Inter Spouse Transfers: A tax-free transfer under Inheritance Tax rules.
Intestacy: The result of having died intestate i.e. without a valid will.
Intestate: Without a valid will.
Introducers Agreement: An agreement used where a non-registered individual introduces a potential client to a registered financial adviser. Necessary where the introduction is to a tied agent, as the inference of the introduction is that not only is the adviser being recommended, but also the advisors limited range of products. In general use with Independents also. In both cases such agreements formalise the relationship to ensure the introducer does no more than introduce.
Investment: The act of allowing someone else to have use of your money in return for payment of interest and/or a share in profits that may be made.
Investment Business: Under the Financial Services Act 1986 this phrase has a specific meaning, covering all life assurance, pensions, investments, but not covering most Permanent Health Insurance, term assurance and medical insurance contracts. The common link is the investment element.
Investors Compensation Scheme: The scheme is an industry-wide safety net designed to protect private investors from financial loss as a result of the default of an authorised (i.e. regulated) investment company.
Investment Income: Income earned on the money held by insurers on behalf of policyholders, having been received in premiums but not yet paid out on claims.
Investment Managers Regulatory Organisation (IMRO): Self-Regulatory Organisation under the SIB that regulates the activities of fund managers.
Investment Trust: A company whose sole function is to invest in the shares of other companies.
Investor Protection: The sole purpose of the Financial Services Act 1986.
Invitation to Treat: A pre-offer and acceptance stage which may lead to formulation of a contract e.g. goods displayed in a window are deemed an invitation to treat, not an offer for sale.
Irrevocable: Cannot be rescinded or changed. An irrevocable trust is a necessity for exempt approval of a group pension scheme.
Joint Life: Life policy option. A policy is taken out by two (or more) individuals, the pay-out coming with either the first or final death.
Joint Tenancy: Where a property is in the names of two owners, on the death of the first owner, the property passes in its entirety to the survivor.
Key Employee: An individual who makes a significant contribution to the business activity and profitability of a company, and whose loss would have an effect on the continued profitability of the business.
Key Employee Insurance: In the event of the death of a key employee on whom the business depends for its continued profitability, or even existence, this type of cover provides a sum of money which can be used to pay for the cost of finding and training a successor, and to compensate for reduced profitability.
Knock-for-Knock: An agreement whereby each motor insurer paid for damage to its policyholder’s car, regardless of which driver was to blame, providing the policy covered damage to the policyholder’s own car. Currently rarely applies.

Glossary G – K terms used in Financial Services

Legals