Financial jargon buster: financial terms explained

Financial jargon can be confusing, so we've put together a handy jargon buster to help you keep track of what common financial terms mean.

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Accrual rate

If you have a final salary pension, this refers to the rate at which pension benefits build up in it each year.

Affinity card

A credit card which lets you support a charity or other organisation. The credit card provider donates a small portion of what you spend on your card, at no extra cost to you.

Age allowance

An additional personal tax allowance for people over 65.

Annuity

An annuity converts your pension fund into retirement income. Shop around for the best deal as, once purchased, you can’t change your annuity provider.

AER

The AER (Annual Equivalent Rate) shows the rate of interest earned in a year on savings or investments. The higher the AER, the better the return. All adverts for interest-bearing savings accounts quote the AER, so you can compare returns.

APR

The APR (Annual Percentage Rate of change) shows the overall cost of borrowing on a credit card or loan. Generally, the lower the APR, the better the deal for you. Use it to compare different credit and loan offers.

Arrangement fee

The fee that you pay a lender to set up a mortgage for you.

Arrears

This term describes falling behind with regular payments (for example, monthly mortgage or rent payments) or not paying the amount that is required.

AVCs

An AVC (Additional Voluntary Contribution) is an extra contribution you can pay into an occupational pension.

Banker’s draft

A cheque issued by your bank, often used when someone is making a large purchase such as a house deposit or a car. Funds come directly from the account of the bank rather than your account, so they are more secure than a normal cheque. Banks usually charge a fee to issue one.

Bridging loan

A short-term loan that covers the shortfall between buying one property and selling another. They are commonly used when you find a place you want to buy before managing to sell your current home. They are expensive and you should only get one if you can repay it within six months.

Capital Gains Tax

If you sell or give away an asset that has increased in value, you may have to pay Capital Gains Tax (CGT) on the profit. This typically applies to shares and other investments.

Capped rate

A capped rate mortgage is a mixture between a variable and fixed rate mortgage. You agree to have a limit on the maximum amount of interest you will pay over a particular period of time. You will pay the variable rate while it’s less than the cap, and the capped rate if it exceeds the cap.

Cashback credit cards

A reward scheme where your card provider gives you cash every time you use your card.

Cashback websites

Cashback websites pay you if you click a link on a cashback website to a retailer or product provider and spend money. This is paid into your cashback site account and you can withdraw it when you reach a set threshold.

Compound interest

Any interest you earn or owe is added to the original amount that interest is calculated on. You are effectively earning interest on interest. This can help your savings grow quicker, but will accelerate your debts.

Cooling off period

The amount of time you have to change your mind and get your money back after buying something or signing a contract. Check the paperwork to find out how long you have.

Credit report

A record of your past borrowing and how you managed the repayments.

Credit score

Helps your lender decide whether to lend you money. The lender uses your credit record and the information on your application form to award you with a credit score.

Default

The failure to pay back a loan.

Deflation

The opposite the inflation, deflation is a decrease in the price of goods and services, and the value of wages. It usually happens during a recession.

Dividend

Payments that a company makes to its shareholders.

Endowment policy

An investment plan that you pay into monthly for a fixed period of time. It pays out a lump sum either at the end of the term or if you die before the plan finishes. Some policies also pay out in the case of critical illness

Equity release

A way to release cash against the value of your home without having to move out, either by borrowing on it or by selling all or part of it for a regular income or lump sum.

Exit fee

A fee paid when you choose to close an account or investment before it is supposed to end.

Final salary scheme

A type of occupational pension scheme. The amount of pension you get is worked out on your salary at retirement or when you left the job, and how long you were a member of the scheme.

FSA

The FSA (Financial Services Authority) is the financial services regulator in the UK.

Flexible mortgage

A mortgage that gives you some options to overpay or underpay the monthly repayment.

Fund manager

Runs an investment scheme, such as a trust or pension, and decides what shares, gilts or bonds the scheme should invest in.

Income drawdown

A type of pension where you withdraw money directly from the fund while the pension fund remains invested. Also known as income withdrawal.

IFA

An Independent Financial Adviser (IFA) will advise you on the best financial products for you after researching the whole market. You have the option to pay a fee for their service (as opposed to commission).

Index linked

An investment can be linked to an inflation index (CPI – Consumer Price Index, or RPI – Retail Price Index). If it is, it ensures that your return will stay in line with increases and decreases in that index.

ISA

Stands for Individual Savings Account. These are savings or investments that earn tax-free interest. There is a limit to the amount you can invest each year.

Inheritance Tax

A tax paid on your estate (everything you own, minus your debts) after you die, if it’s valued over a certain amount.

Initial charge

A charge made on an investment product or insurance policy to cover the costs of selling it to you.

Interest only mortgage

A mortgage where you only repay the interest each month. This means you are not reducing the loan itself, and must find a way to repay it at the end of the mortgage term.

IVA

An Individual Voluntary Arrangement (IVA) is a way to avoid bankruptcy. It is a formal arrangement through the county court to pay an agreed amount off your debts.

Mis-selling

If a salesperson misrepresents what a product or service offers, or misleads you about what it can do, they are mis-selling it. Contact the FSA if you think you were mis-sold a financial product or service.

Money purchase

A type of pension where your money is invested in, for example, the stock market. The size of your retirement fund depends on how much you pay in and how well your investments do.

Mortgage indemnity guarantee

A type of mortgage insurance that you pay for but that benefits the lender. It protects them against loss if you borrow a high proportion of your property’s value and can’t repay the mortgage.

Negative equity

When the value of your home is less than the amount you owe the mortgage lender.

Net asset value

The value of the underlying assets in an investment trust.

Payment protection insurance

An insurance policy that helps you keep up loan repayments if you can’t pay them because of redundancy, accident or illness.

Permanent health insurance

Gives you a regular income if you can’t work because of illness or disability.

Personal pension

A pension you take out yourself, for example, if you’re self-employed.

Premium bonds

A lottery bond issued by the Government’s National Savings and Investments Scheme. There is a monthly draw with prizes ranging from £25 to £1,000,000. You don’t risk the money you put in as you can sell them back to the Government at any time, but they can have low rates of interest.

Recession

A significant economic decline, when unemployment rises and the GDP (Gross Domestic Product – the value of all the goods and services a country produces in a year) goes down.

Remortgage

When you change your mortgage deal without moving house. You may be able to save money if you remortgage, but remember you may have to pay a fee to your old and new lenders.

Repayment mortgage

A mortgage where you pay off both the initial loan and the interest that accumulates each month. It is a clear and simple way to repay the amount you owe.

Retail Prices Index (RPI)

Measures inflation in the UK. It is calculated each month by taking a sample of goods and services that a typical household might buy. This includes food, heating, housing, bus fares and petrol.

SAYE

An employee savings scheme that stands for Save As You Earn. You can save up to £500 of your salary each month for a set period of time. At the end of that set period, you can use the savings to buy shares.

Secured loan

A loan that is secured on your home or other asset,, meaning that if you fail to keep up with repayment, the asset could be taken by the lender to cover the loan. A mortgage is a type of secured loan.

Smart card

A card with a small electrical chip in it (most credit and debit cards have one). The information stored on the card is encrypted so only systems that know the code can unlock the information.

Stamp duty

A tiered tax that home buyers must pay on properties over a certain value.

Standard variable rate

A loan at the lender’s normal mortgage rate. The lender may choose to move it up or down.

Tax code

Used by your employer or pension provider to calculate the amount of tax to deduct from your salary or pension. If you have the wrong tax code, you could end up paying too much or too little in tax.

Transfer value

The figure you get if you transfer your pension from one company scheme to another, or to a personal pension. By law, this must be fair to you.

Unsecured loan

A loan that isn’t secured against your home or other asset you own. You agree to pay back the loan within a set period. The lender is taking a bigger risk than with a secured loan, so interest rates tend to be higher.

Waiver of premium

A feature on a personal pension plan or life insurance plan that guarantees your contributions will be paid for a period of time, usually by the insurer, if you are ill or lose your job. It usually costs extra.