Annual Allowance – The total amount that can be paid into Defined Contribution pension schemes each year before a tax charge is applied. The current limit is £40,000 each tax year. Those with a total taxable income that exceeds £200,000 may have a reduction applied to their available annual allowance referred to as a taper. The minimum tapered annual allowance an individual can have is £4,000.
For members of Defined Benefit pension schemes, a formula is used to calculate the value of any increase in benefits each year. It is the value on any increase in benefits rather than contributions that are tested against the member’s available annual allowance.
Members of a pension scheme can normally carry forward any unused annual allowances from up to the 3 previous tax years.
Annual Equivalent Rate (AER) – All accounts are required to show an AER. This is a way of expressing the accounts interest rate over a one year period and includes the impact of any compound interest and bonus that may be received. The AER is a useful way of comparing the interest rate of two different savings accounts.
Annuity – An insurance product that enables you to use your pension savings at retirement to guarantee an income for the rest of your life. These products can offer a number of additional features, including an income to a dependent on your death.
APR – Annual Percentage Rate (APR) is the figure that includes interest rates and any associated charges such as administration or redemption fees that may be applied to money you borrow. The APR shows the cost for comparison of borrowing money over a 1 year period. This figure can be used to compare costs between different lenders.
Authorised Overdraft – These are arranged in advance with the bank or building society that provide your current account. Your bank or building society will allow you to borrow money up to a limit. Fees and interest are often charged and you should review the terms of the overdraft before using it.
Automatic Enrolment – A policy that applies to all UK employers and requires them to enrol their employees into a workplace pension. There are certain employees that are exempt from being automatically enrolled into a pension. All employees have the option to opt out once they have been enrolled.
Balance Transfer – Transferring either all or part of the money owed on one credit card over to another credit card.
Balloon Payment – A large payment due at the end of a loan contract. If you wish to buy your car at the end of a PCP agreement, you will need to make a balloon payment.
Beneficiary – A person or group of people that you would like to receive your pension savings in the event of your death. You can indicate who you would like to be the beneficiary of your pension and change this at any time.
Bonds – The word bond is often used to refer to either corporate bonds or government bonds. Both are a type of investment that involves lending money to either a large company or government for a defined period of time at a fixed interest rate. Returns are normally expected to exceed the interest from a savings accounts but this is not guaranteed. There is always the risk of default i.e. companies may not be able to meet their debt obligations.
Bonus Account – A type of savings account that offers a bonus payment after a certain period of time. This is often in addition to an interest rate that may be paid. You will normally miss out on the bonus if you withdraw your savings before the end of the specified savings period.
Cash Lump Sum – This refers to receiving part or all of your pension in the form of a cash lump sum. The first 25% of your pension savings can normally be taken tax-free but tax is applied to the remainder.
Contracted Out (National Insurance Contributions) – Members of a pension scheme who were ‘Contracted Out’ paid lower National Insurance contributions and, in return, didn’t earn the Additional State Pension. It is no longer possible to be ‘Contracted Out’ however; members with historic periods of ‘Contracting Out’ may receive a lower State Pension as a result.
Credit Card – A credit card can be used in a similar way to a debit card. Unlike a debit card, which is linked to your current account, a credit card allows you to pay for goods or services on credit. Each month you’ll be sent a statement showing all of your credit card purchases. You can choose to pay off the debt immediately or pay it off over a period of time. If you don’t pay it off immediately you will normally be charged interest, which can be high.
Credit Default – Failure to make an agreed repayment on time. For example a borrower failing to make the monthly repayments.
Credit Score / Credit Rating – A number that indicates whether you may be considered a high or low risk by credit providers such as banks and other lenders. This number is based on information including your previous credit history and applications.
Death Benefits – The benefits that are paid from a pension scheme in the event of your death.
Defined Contribution (DC) Pension Scheme – A type of pension where contributions are made by you (the member) and possibly by your employer. These contributions are invested and you can choose how you would like to receive your savings at retirement. As the money held in this type of pension is invested there is no guarantee of how much the pension will be worth at retirement.
Defined Benefit (DB) Pension Scheme – A type of pension scheme that provides members with a guaranteed income for life at a specific retirement age.
Deferred Member – A member of a pension scheme who has stopped building up benefits in the scheme but whose pension savings are held securely for them to access in the future. Employees of a company who end their employment usually become deferred members of the employer’s pension scheme.
Easy Access Account – A type of savings account that provides immediate access to your savings without any penalty or loss of interest.
Final Salary Scheme – See Defined Benefit Pension Scheme.
Fixed Interest – An interest rate that is agreed when a loan is first taken out and will remain unchanged throughout the term of the agreement. Where the interest rates is not fixed, monthly repayments on a loan may be higher or lower in the future.
Fixed Rate Account – A type of savings account that provides a guaranteed rate of interest for a specified term. Penalties often apply for withdrawing funds before the end of the agreed term.
FSCS – Stands for Financial Services Compensation Scheme. This is the scheme that protects your savings up to certain limits, in the event that your bank or building society fails.
Gross Income – Your income before any deductions such as income tax, National Insurance and any pension contributions or student loan repayments you may be making.
Gross Interest – The interest that is received on a savings account before deducting any tax that may be due.
Hire Purchase (HP) – A method of car finance where you pay a deposit up front and pay the balance of the car cost plus interest in fixed monthly instalments. You will not own the car until you’ve made the last payment.
Income Drawdown – A method of drawing money from Defined Contribution pension savings at retirement. This normally involves drawing a regular amount on a monthly basis to create an income. It is your responsibility to ensure you do not spend your pension savings too quickly.
Income Tax – The tax that is applied to any income you receive above your Personal Allowance. This is likely to apply to your earnings from the University of Lincoln, but can also apply to pension or investment income you receive.
Inflation – The rising cost of goods and services over time. Where the cost of the things you buy increases and the amount you can buy with your savings reduces.
Inheritance Tax – A type of tax that is charged at the point an individual dies. This tax is applied to the value of a person’s estate above a threshold called the nil rate band but there are a number of exemptions that could result in no tax being due. The value of any pension savings when someone dies are normally exempt from Inheritance Tax.
In-Store Finance – In-store finance is a popular way to purchase items and spread the cost over a period of time, it is often referred to as ‘buy now pay later’ credit. You may be offered an interest free period meaning you won’t pay any interest if you pay back the loan before this ends. If you haven’t paid off the debt at the end of the interest free period you will start to pay interest, normally at a high rate. This will make paying off the debt even harder.
Interest rate – The return that will be paid on savings you hold in a bank or building society. Interest rates are always shown as a percentage.
Investment Growth – The term used to refer to how much an investment rises in value. As investments can also fall in value, the holder of an investment can experience an investment loss.
Investment risk – Sometimes referred to as market volatility, this is a term used to describe how much an investment is likely to rise and fall in value. High risk investments are expected to make large rises and falls in value over a short space of time. They represent the greatest potential returns but also the greatest risk of loss.
ISA – ISA stands for Individual Savings Account. This is a type of account that shelters your savings from any tax that may ordinarily be due on your returns. There are a number of different types of ISAs with each having a limit on the amount that can be paid in each tax year.
Lifetime Allowance – The maximum that someone can hold across all of their UK pension savings before incurring a tax charge.
Lifetime ISA – A specific type of Individual Savings Account (ISA) that benefits from a 25% bonus from the government. This type of ISA is intended for people who wish to save towards their first home or retirement, with penalties applying to those who use the savings for any other purpose. There are strict rules relating to the maximum age to qualify for this account and the amount that can be contributed each tax year.
Money Purchase Annual Allowance (MPAA) – The amount that can be made in Defined Contribution pension savings by an individual after they have begun drawing taxable money from a Defined Contribution Pension through a flexible arrangement. This excludes purchasing a lifetime annuity or income withdrawn from a Defined Benefit pension scheme.
National Insurance Contributions – National Insurance is a form of tax that is paid on income you earn from employment. You and your employer pay National Insurance Contributions to qualify for certain benefits and the State Pension. You may be able to get National Insurance credits if you’re not paying National Insurance contributions, for example when you’re claiming benefits because you’re ill or unemployed.
Net Income – Refers to your income after all deductions that are taken from your salary. This would include any income tax and National Insurance that is deducted from your salary, together with any other deductions such as pension contributions and student loan repayments you may be making.
Overdraft – An overdraft allows you to spend more from your current account than your balance. This is referred to a being ‘overdrawn’. There are two types: Authorised Overdrafts and Unauthorised Overdrafts – look up these definitions for further information.
Payday Loan – Payday loans are short-term loans with extremely high interest rates, intended to fund small purchases (normally under £1,000) until your next payday. If you don’t repay the debt on time it can quickly spiral out of control. Due to the high interest rates often applied to pay day loans these should usually only be considered as a last resort.
Percentage – A percentage means ‘out of 100’. For example, 20 out of 100 is 20%. Equally 20p out of £1.00 is 20%.
Personal Contract Purchase (PCP) – A method of car finance where you pay a deposit and make monthly payments for a fixed period of time. At the end of the contract you have the option to make a balloon payment and keep the car, return the car to the dealership and walk away or start a new PCP agreement.
Personal Loan – A loan made to an individual, usually for a fixed amount of money over a fixed time period. Personal Loans are normally offered by banks and building societies, however, other high street retailers have begun to offer personal loans.
Personal Savings Allowance – This is a tax-free allowance that can be used against any interest you receive from savings. This means that up to £1,000 of interest from savings will be tax-free for basic rate tax payers.
Salary Exchange – Sometimes referred to as salary sacrifice, this is a special way of making contributions into your workplace pension scheme. This is where you “exchange” part of your salary in return for your employer making your pension contributions on your behalf. By using Salary Exchange, the contributions paid into your pension scheme are free from income tax and National Insurance. However, there are certain rules that limit the amount you can contribute without paying any tax.
Secured Loan – These loans are borrowed against assets such as your home or car. If the terms of the contract are broken, the lender could seize the asset.
Shares – Also referred to as equities, this is a way of investing into a company by becoming a shareholder (buying a share of the company). The returns are then linked to the future profitability of the company. There is the risk that you could receive back less than you paid in.
State Pension – The pension you may receive from the government at your State Pension Age. The amount you may receive is determined by the number of years of National Insurance Contributions you have. Those who have less than 10 years of National Insurance Contributions will not receive a State Pension.
State Pension Age – This is the age that you can start receiving a State Pension and is determined by whether you are male or female and your date of birth. You can choose to delay receipt of your State Pension but cannot receive it before your State Pension Age.
Tax code – A code used by your employer or pension provider to work out how much income tax to take from your pay or pension. Your tax code is provided by your tax office and will be based on your personal tax situation. You will be able to see your tax code on your pay slip and will usually receive a letter from HMRC when your tax code changes.
Tax-Free Lump Sum – All pension schemes allow you to receive part of your pension tax-free at retirement. In most cases, this is a lump sum up to 25% of the total value of the pension.
Tax Relief (on contributions) – This refers to the special tax treatment that applies to contributions made to a personal pension arrangement.
Unauthorised Overdraft – This is unplanned borrowing that your bank or building society has not agreed to. An unauthorised overdraft also applies when you exceed the borrowing limit on an authorised overdraft. You will pay additional charges and interest which are considerably more than apply for an authorised overdraft.
Unsecured Debt or Loans – A type of loan or debt not secured against any assets. Personal loans, credit cards and in-store credit are typically unsecured.
Variable Interest – An interest rate that may go up or down during the term of the loan.
Variable Rate Account – A type of savings account that offers an interest rate that could increase or decrease in the future. These types of accounts do not normally apply penalties for early access to your savings, however you should always check the terms before opening an account (e.g. 90 day accounts).