Glossary of financial terms

Category: Explanations


Accumulation Units

A type of fund where any income generated (dividends/savings interest) is used to purchase more units in the fund. An accumulation unit will have ‘Acc’ at the end of the fund name. This differs from Income Units.

Allocation Rate

The insurer may decide to allocate more or less than the contribution to the plan, depending on the facilities of the scheme.


The historically common way of taking retirement benefits in the form of exchanging the value of unused pension funds in return for a taxable lifetime income.

Asset allocation

The selection of various assets within your investment portfolio. The allocation of your portfolio will not only determine the level of risk you are exposed to but will also, to a very large part, determine the potential returns. This is the basic principle that for every risk level there is an optimal combination of asset classes, which will maximise returns.


Bid/offer spread

This is essentially the difference between the cost of buying units from the insurer and the cost of selling them back and is applied as an initial charge on contributions.


Capacity for Loss

The ability to absorb falls in the value of your investment. If any loss of capital would have a materially detrimental effect on your standard of living, this would be an important factor in determining the level of investment risk you are able to take.


Providers can take charges in a number of ways from your plans. Also see individual listings for Allocation Rate, Bid/offer spread, Initial Units and Ongoing Charges Figure (OCF).


Defined Benefits

A type of pension plan (final salary) in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age.

Defined Contribution

A type of pension plan (Personal Pensions/Stakeholders/SIPPs) where the amount available at retirement is dependent on personal contributions and growth on the underlying funds. At retirement benefits can be taken through an Annuity or through Drawdown.


Flexi Access Drawdown

The name for the new drawdown flexibilities offered by legislation in 2015. Under Flexi Access Drawdown, there is no restriction on the withdrawals that can be made from a pension fund.


Income Units

A type of fund where the income generated (dividends/savings interest) is paid out to the investor directly or from the Platform cash account. An income fund will have ‘Inc’ at the end of the fund name. This differs from Accumulation Units. Initial Units In the first few years of a plan, the insurer may purchase ‘initial/capital’ units, which are then deducted throughout the term of the policy.


Lifetime Allowance

The maximum amount of pension savings available to you before an additional tax charge is applied on the excess. In the current tax year, this allowance is £1,073,000. This increases by the rate of the Consumer Price Index (CPI) inflation each year. o

Ongoing Charges Figure

This is the cost of managing the investment funds (the AMC) plus the additional underlying costs for the activity within the fund. This is the new term for what was previously known (and still quoted as) the Total Expense Ratio (TER)



The general principle of risk and reward is, the greater the risk, the greater the potential reward. In terms of ‘investment risk’, this means the more risk you expose your capital to, the more chance you have of losing part, or even all of it.


SIPP Self Invested Personal Pension

A type of personal pension which has a very flexible approach to investments and typically offers the widest investment options available in personal pensions.


Transactional Charges

Investment funds make transactions (buying and selling) within the fund. The transactional charge is an estimate, based on prior transactions, of the annual cost the transactions incur for investors. These charges are based on prior fund management decisions and actions and so represent an estimate.


Uncrystallised Fund Pension Lump Sum (UFPLS)

New pension flexibility provided by legislation in 2015. The value of a pension policy (full value or partial if the provider permits) can be withdrawn as a lump sum payment. 25% of the payment will be taxfree with 75% added to your income for the year and taxed accordingly. Pension funds need not be designated to drawdown or annuity purchase under this option.



These are investment funds offered by insurance companies. The fund is managed the costs of running it are deducted from the fund. What is left over, the profits, is paid out in the form of bonuses. Profits in good years can be retained to provide a return in negative years. This makes the structure complex, difficult to understand the exact asset allocation and difficult to determine the true costs of the fund.

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