Annual allowance (pensions)

Each year, from 6th April 2006, pension plan holders can invest anything from £3,600 a year to their entire income from employment, profession or trade and receive tax relief on the contributions. However, there is a maximum level each year, which is £50,000, but it will then be possible to carry forward any unused relief from up to three previous years. The annual allowance may increase in line with CPI inflation in future.
 

Annuity

An annuity is a promise made by an insurance company to pay an income (usually) for the rest of life in return for a single lump sum. This is most commonly used to provide a retirement income under a pension scheme, in which case the entire amount is subject to income tax as earned income (see also Pension Commencement Lump Sum).

Some annuities are purchased outside the pension regime in which case part of the income is treated as repayment of capital and not, therefore, subject to income tax.

Asset allocation

Investment portfolios tend to have a diverse range of assets such as property, government and company bonds, deposits and equities from different parts of the world. The ratio in which these assets are held will vary according to the aims of the individual fund or investor. An asset allocation strategy aims at matching individual investment aims with the balance of assets available.

Capital gains tax

Capital gains tax is levied on realised gains during a year, in excess of an annual exemption allowance, at a rate of 18% for those whose income and realised gains in excess of the exemption do not exceed the higher income tax rate threshold. A rate of 28% applies to everyone else*.

The annual exemption for individuals is £10,600 for 2011/12, while the exemption for trusts is £5,300 for 2011/12.

* Entrepreneurial relief is available under certain circumstances which reduces the rate of tax to 10% on the first £10 million of lifetime gains.

Company wills

This is the term used to describe a legally binding agreement between the owners of a business that sets out what will happen under certain defined circumstances. These will normally include the death or long term illness/incapacity of one of the shareholders, directors or partners.

Critical illness

This is an insurance cover, normally arranged alongside life insurance, to provide a lump sum in the event that the insured is diagnosed with one of a list of ‘life threatening’ conditions. See also permanent health insurance.

Drawdown – Basic

Pension plan holders are no longer required to purchase an annuity but can instead draw an income directly from their pension fund. For most people, this will mean that they can access their ‘tax free’ pension commencement lump sum of up to 25% of the fund at any time after their 55th birthday and then draw an income from nothing at all up to 100% of the annuity available to a person of the same age and gender (although the latter will no longer be a factor from 21st December 2012).

In the event of death after any benefits have been taken (and certainly after age 75) a tax sum of 55% will be charged on any remaining funds, unless these are used to provide retirement benefits for a surviving spouse or civil partner. Inheritance tax will not normally apply.

Drawdown – Flexible

Anyone with a guaranteed lifetime income of at least £20,000 a year (including state benefits) will able to draw an unlimited amount from their fund, each year, even if this results in the fund being exhausted.

Employee benefits

This normally includes pensions, death in service benefits, health and medical expenses insurance. It can also include broader issues such as flexible remuneration strategies.

Endowment

This is a savings plan arranged by a life insurance company normally for a fixed period of years. A fixed sum is normally available on death or survival to the end of the term and bonuses may be added throughout the term and at the end, if the plan is described as “with profits”.

A “low cost” version has frequently been used in connection with mortgages, designed to repay the mortgage in the event of death before the end of the period, but where the adequacy of the lump sum available to repay the mortgage at the end of the term is largely dependent on investment returns.

Enhanced protection (pensions)

This relates to the introduction of new pension rules on 6th April 2006 and allows those with funds in excess of the lifetime limit (see below) to grow without a tax charge being levied on the excess. An application must have been made by 5th April 2009, but no contributions of any sort can be made after 5th April 2006, or this protection is lost.

Fees

Historically, Independent Financial Advisers were primarily remunerated by commission paid on insurance policies and investment plans arranged. Modern custom is for them to be remunerated on an agreed fee basis. This can sometimes be partly paid by commission generated on products arranged.

Financial planning

Financial planning is the process of identifying client needs, reviewing the options available and making recommendations based on experience, legal and technical knowledge. Those giving financial advice must be authorised and regulated by the Financial Services Authority.

Financial Services Authority

The FSA is the regulator for financial services in the UK.

HM Revenue & Customs

HMRC is the new name for the combined Inland Revenue and Customs and Excise.

Holistic

In financial planning terms, this relates to looking at all aspects of a client’s financial needs, resources, commitments and aims, in order to give an integrated range of recommendations.

Inheritance tax

Inheritance tax is levied on monies passed to other parties on death. It includes most gifts, other than those Potentially Exempt Gifts (see below), made during the previous seven years and is levied at 40% on estates worth in excess of a threshold set at £325,000 (for 2009/10). From 9th October 2007, however, the "threshold" for married couples or civil partners was increased to £650,000 (less the value of any non-exempt gifts made on the first death) and this will apply even if one partner has already died.

Key person

Someone whose loss would materially affect the ability of a company to continue in operation, or result in significantly increased costs. Such individuals are not always obvious and assistance can be provided in identifying them, for each business.

Life insurance

A benefit payable on the death of the life insured during a specified term of years or at any time, depending on the type of cover arranged. It may also pay out on diagnosis of a terminal illness (this is not the same as a critical illness).

Lifetime limit (pensions)

Under new regulations effective from 6th April 2006 pension funds in excess of the lifetime limit are subject to tax unless enhanced or primary protection applies. The lifetime limit for 2010/11 is £1.8 million. This limit will be reduced to £1.5 million on 6th April 2012, but it will be possible for individuals to apply to have the higher limit preserved, provided that they accrue no further benefits.

Long term care

Professional care is normally required when an individual is no longer able to carry out four out of six “activities of daily living” such as personal hygiene, feeding and so on. Insurance is available to cover the cost of this care.

Mortgage

A mortgage is a primary loan secured on a home; failure to repay a mortgage can result in repossession of the home. Other forms of loan can also be secured against the home with a second or subsequent charge and can also result in enforced sale of the home if not repaid.

Pension Commencement Lump Sum (PCLS)

This is the lump sum available under pension schemes after 6^th April 2006. It represents 25% of the total pension lump sum for most people, although members of older occupational pension schemes may be entitled to a higher amount. This sum is currently free of tax.

From 6th April 2011 the PCLS will be available at any time after age 55, not just up to age 75, as applies before that date.

Permanent health insurance

This is an income payable from the end of a pre-set period after the onset of an injury or illness (typically 4, 13, 26 or 52 weeks) until the person concerned recovers, reaches a pre-determined age, or dies. It normally requires total incapacity.

Potentially Exempt Gifts

PETs are gifts made during the donor’s lifetime within seven years of death. The charge on death is reduced if it was made between three and seven years before the date of death, by up to 80%. Gifts made 8 years or more before the date of death are exempt.

They do NOT include exempt gifts of £3,000 plus small gifts of less than £250, as well as certain gifts on consideration of marriage.

Primary protection (pensions)

This is available to anyone who has a pension fund worth £1.5 million or more on 6th April 2006 and must have been applied for before 5th April 2009. It allows funds to grow at the same rate as the increase in the lifetime limit without generating a tax charge (unless enhanced protection has also been applied for).

If growth exceeds the rate at which the lifetime limit grows, then a tax charge will apply. Contributions can continue provided enhanced protection has not also been applied for.

Re-mortgage

This is when an original mortgage is redeemed and a new mortgage taken out on the same home. It is not the same as a second mortgage, which is an inferior charge on the home as security.

Retirement

From April 2006 it is no longer necessary to stop working for an employer in order to draw a pension from an occupational scheme provided by them.

From this date, anyone can take their Pension Commencement Lump Sum and decide whether or not to draw an income at any time after age 55 and still continue working.

Security

This is the term used to describe anything pledged to a lender, usually a home. An endowment policy may also be used as security, although if used in connection with house purchase it is usually called collateral security, as the home itself is the primary security.