A-Z Glossary of Financial Terms
At Lucent, we keep things clear and jargon-free—but some financial terms are useful to know. From Annuity to Zero Coupon Bond, our A-Z glossary breaks down key terms in plain English, helping you understand the language of financial planning with ease.
Financial Terms in Plain English
For each financial term in our A-Z glossary, you’ll find a brief explanation along with a link to an external resource for a deeper dive. Click the links to explore detailed insights and expert guidance on key financial concepts.
Note: When clicking a link to an external website, Lucent Financial Planning Ltd cannot be held responsible for the content of the external website.
Annual Allowance
The annual cap on tax-relieved pension contributions you can make in a tax year. For most people, this is set at either £60,000 (2023/24) or 100% of your earnings, whichever is lower, but high earners and those drawing from their pension may see this reduced. Exceeding this allowance could land you with a tax charge.
Annuity
A financial product that guarantees you an income for life or a set period in exchange for a lump sum, typically from your pension pot. Annuities come in various forms—fixed, variable, or inflation-linked—giving you flexibility based on your retirement goals and risk appetite.
Asset Allocation
This is about spreading your investments across different asset types like stocks, bonds, and cash. It’s crucial for balancing risk and growth, helping you weather market ups and downs while maximising your returns in line with your financial objectives.
Base Rate
The interest rate set by the Bank of England. It influences borrowing costs, savings returns, and broader economic stability. When the base rate moves, expect changes in mortgage rates, loan interest, and investment yields.
Bond
A type of loan you give to a company or government in exchange for regular interest payments and the repayment of the loan at maturity. Bonds are considered less risky than equities and are a popular choice for those seeking steady, reliable income.
Beneficiary
A person or organisation that you’ve named to receive assets from a will, trust, insurance policy, or pension after you pass away. Designating beneficiaries is key to making sure your assets go where you want them to, without long probate delays.
Capital Gains Tax
A tax on the profit you make when selling an asset that’s increased in value—whether that’s shares, property, or other investments. The good news? Certain allowances apply, and savvy planning can help you minimise the CGT hit.
Cash Flow Planning
A way of predicting your future income and expenses to ensure you’ve got enough liquidity to meet both short-term needs and long-term goals. It’s vital for keeping your finances healthy and avoiding unnecessary debt or surprise shortfalls.
Collective Investment Schemes
Investment vehicles like unit trusts or OEICs (Open-Ended Investment Companies) that pool money from multiple investors to create a diversified portfolio. They offer access to broader investments, spreading risk while keeping things manageable for individual investors.
Defined Benefit Pension
A pension that guarantees you a fixed income for life, based on your salary and years of service. Often called a final salary pension, it’s a predictable way to fund your retirement but is becoming rarer due to its high cost for employers.
Defined Contribution Pension
A pension where the amount you get in retirement depends on how much you (and your employer) have contributed and how well your investments perform. Unlike a defined benefit pension, your income isn’t guaranteed, so market performance plays a bigger role.
Diversifications
An investment strategy that involves spreading your money across different assets or sectors to reduce risk. By diversifying, you protect your portfolio from being too reliant on any one asset, making it a safer long-term strategy.
Equity Release
A way for homeowners aged 55 and up to unlock cash from the value of their property, while still living in it. It’s one of many options to consider for funding retirement or big expenses, but it’s worth remembering that it could reduce the inheritance you leave behind.
Estate Planning
The process of organising your assets so they’re passed on smoothly after your death. Good estate planning minimises inheritance tax, avoids lengthy probate, and ensures your wishes are carried out, whether through a will, trusts, or lifetime gifting.
Enterprise Investment Scheme (EIS)
A UK initiative designed to encourage investment in high-risk, early-stage companies. It offers some excellent tax reliefs, including income tax relief and capital gains deferral, and is an option for investors looking to grow wealth in a tax-efficient way.
Fiduciary
Someone who has a legal obligation to act in another’s best interests. In finance, fiduciaries like advisers or trustees must prioritise their clients’ needs over their own—offering unbiased advice that benefits you, not them.
Fixed Interest Investments
These investments, such as bonds, provide a regular, predictable income. They’re considered lower risk than equities and are ideal for those looking for steady income, especially in retirement.
Fund
An investment vehicle that pools money from various investors to buy a diversified portfolio of assets. Managed by professionals, funds allow investors to access a broader range of investments than they might be able to manage individually.
Gilt
A bond issued by the UK government. Gilts are seen as low-risk, as they’re backed by the government, and are often favoured by cautious investors seeking a reliable income stream, particularly in retirement.
Growth Stocks
Shares in companies that are expected to grow at a faster-than-average rate. They tend to reinvest profits back into the business, meaning they don’t pay dividends, but they offer greater potential for capital growth.
Gross Income
Your total income before taxes and deductions. It’s the number that determines your tax bracket, pension contributions, and eligibility for various tax reliefs—making it an important figure for your financial planning.
Hedge Fund
An alternative investment fund that uses complex strategies—like short selling and leverage—to aim for high returns. Hedge funds are high-risk and are generally only available to sophisticated investors or institutions.
HMRC
Her Majesty's Revenue and Customs, the UK government department responsible for collecting taxes, administering certain benefits, and ensuring compliance with tax regulations. For both individuals and businesses, HMRC plays a crucial role in shaping financial obligations.
High-Net-Worth Individual (HNWI)
A person with investable assets exceeding £1 million, excluding their primary residence. HNWIs often need bespoke financial planning services to handle complex issues like tax efficiency, investments, and estate planning.
Inheritance Tax (IHT)
A tax charged on the estate of a person who has passed away, currently set at 40% on assets above the £325,000 Nil Rate Band threshold. There are various ways to minimise IHT, such as gifting, trusts, and using the residence nil-rate band (RNRB).
Individual Savings Account (ISA)
A tax-free savings or investment account that allows all returns—whether interest, dividends, or capital gains—to be sheltered from tax. ISAs are available in various forms, including Cash ISAs, Stocks and Shares ISAs, and Lifetime ISAs, catering to different savings needs.
Income Drawdown
A way of accessing your pension savings while keeping the remaining pot invested. It provides flexibility in how you take income, but the downside is that your money remains exposed to market fluctuations, so careful management is essential to ensure you don’t run out of funds.
Junior ISA (JISA)
A tax-free savings or investment account for under-18s. Parents or guardians can contribute up to an annual limit, and the funds grow tax-free until the child gains access at age 18, making it an excellent way to start building wealth early.
Joint Tenancy
A form of property ownership where two or more people own the property equally. If one owner dies, their share automatically passes to the surviving owner(s), bypassing the will and probate process. This contrasts with "tenants in common," where ownership can be divided unequally.
Job Retention Scheme
Introduced during the COVID-19 pandemic, the Job Retention Scheme was designed to protect UK jobs by covering a portion of wages for furloughed employees. It helped keep businesses afloat during economic hardship while maintaining employment levels.
Key Person Insurance
A life insurance policy taken out by a company to protect itself financially against the loss of a key employee, such as a director or senior executive. This coverage ensures the business can recover from the financial impact of losing a crucial figure.
Knowledge and Understanding (K&U)
A required level of expertise and awareness that financial professionals must possess to offer informed advice. Regulators assess advisers' K&U to ensure that they are qualified to guide clients through complex financial decisions, ensuring compliance with industry standards.
Know Your Client (KYC)
A regulatory requirement that financial professionals must follow to verify a client’s identity, financial situation, and investment goals. KYC helps ensure that the advice or products provided are suitable, while also helping to prevent fraud and money laundering.
Liability
A debt or financial obligation that an individual or business owes to another party, such as loans, mortgages, or unpaid bills. Managing liabilities is crucial for financial stability and wealth preservation, especially for high-net-worth individuals and businesses.
Lifetime Allowance
As of 2024, the lifetime allowance for pension savings has been abolished in the UK. Prior to this, it capped the amount you could accumulate in pensions without facing additional tax charges, making it a key consideration for retirement planning.
Liquidity
The ability to quickly convert assets into cash without significantly affecting their value. Liquid assets—like savings or stocks—can be accessed easily, while illiquid assets—like property—can take time to sell. Maintaining liquidity is essential for financial flexibility.
Marginal Rate of Tax
The tax rate applied to your next pound of income. In the UK, as your income increases, so does your marginal rate of tax. Understanding this is vital when planning your income and investments to optimise tax efficiency.
Market Capitalisation
The total value of a company’s shares, calculated by multiplying the share price by the number of shares outstanding. It’s a key measure of a company’s size and provides investors with insights into its growth potential and market presence.
Means Testing
An assessment to determine eligibility for certain government benefits based on an individual’s or household’s financial situation. Means testing ensures that assistance is provided to those who need it most, taking into account income, savings, and assets.
Net Worth
The total value of an individual’s assets minus their liabilities. For high-net-worth individuals, managing net worth involves balancing investments, property, and debt while considering future goals like retirement or passing on wealth to the next generation.
National Insurance (NI)
A tax paid by UK workers and employers to fund state benefits like the State Pension and NHS. Contributions are based on income and employment status, and they play a crucial role in retirement planning and entitlement to state benefits.
Nil-Rate Band
The threshold above which inheritance tax becomes payable on an individual’s estate, currently set at £325,000. Effective estate planning can help minimise IHT through the use of allowances like the nil-rate band and the residence nil-rate band (RNRB).
Open-Ended Investment Company (OEIC)
A type of collective investment fund in which shares can be created or redeemed in response to investor demand. OEICs offer flexibility and diversification, allowing investors to spread their risk across a wide range of assets, managed by professionals.
Offshore Trust
A trust established in a jurisdiction outside the UK, often used for tax planning, asset protection, and estate planning. Offshore trusts can offer certain tax advantages but are subject to strict regulations to prevent misuse or tax evasion.
Occupational Pension
A pension scheme offered by an employer, typically providing retirement benefits based on your earnings and length of service. These schemes can either be defined benefit or defined contribution, playing a vital role in your overall retirement strategy.
Pension Commencement Lump Sum (PCLS)
Also known as tax-free cash, this is the portion of your pension pot—usually 25%—that can be taken as a lump sum without paying tax. The rest of your pension withdrawals are taxed as income.
Power of Attorney (PoA)
A legal document that allows one or more persons to make decisions on your behalf if you’re unable to do so. In financial planning, it ensures that your finances can be managed smoothly in case of illness or incapacity, safeguarding your interests.
Private Equity
Investments made in companies that aren’t publicly traded. Private equity typically involves high-risk, high-reward strategies, such as buying undervalued businesses, improving them, and selling them for a profit. It’s a popular option for experienced investors seeking strong returns.
Qualifying Recognised Overseas Pension Scheme (QROPS)
A pension scheme established outside the UK that meets HMRC's requirements. UK pension holders who move abroad may transfer their UK pensions into a QROPS, which can offer tax advantages and flexibility. It’s crucial to consider this option carefully due to tax and regulatory implications.
Qualifying Investment
An investment that meets the criteria for certain tax reliefs, such as those available under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). These schemes offer generous tax incentives to encourage investment in small, high-risk businesses.
Quantitative Easing (QE)
A monetary policy tool used by central banks to stimulate the economy by increasing the money supply. The central bank purchases financial assets like government bonds to lower interest rates and encourage lending and investment. QE can boost economic activity but may also contribute to inflation if overused.
Residence Nil-Rate Band (RNRB)
An additional inheritance tax allowance in the UK, introduced in 2017, which applies when passing on a family home to direct descendants. As of 2025/26, the RNRB offers an extra £175,000 in inheritance tax-free allowance, making it a valuable tool in estate planning.
Risk Tolerance
An investor’s ability and willingness to endure fluctuations in the value of their investments. Risk tolerance depends on factors like financial goals, time horizon, and personal comfort with market volatility. Understanding risk tolerance is key to developing an investment strategy that balances potential returns with acceptable risk levels.
Rollover Relief
A capital gains tax relief for business owners who reinvest the proceeds from the sale of qualifying business assets into new assets. This allows the tax on the gain to be deferred until the new assets are sold, making it a useful tax planning tool for entrepreneurs.
Self-Invested Personal Pension (SIPP)
A type of personal pension that offers greater control over investments. Unlike traditional pensions, SIPPs allow individuals to choose where their money is invested, including stocks, bonds, and property. They are particularly suited for experienced investors seeking flexibility and control over their retirement funds.
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Succession Planning
A strategy for transferring ownership or leadership of a business or assets to the next generation. Succession planning is crucial for family-owned businesses and high-net-worth individuals, ensuring a smooth transition while minimising tax liabilities and preserving wealth for future generations.
Stamp Duty Land Tax (SDLT)
A tax paid on property and land transactions in England and Northern Ireland. The amount of SDLT depends on the property value and the buyer’s residency status. Planning for SDLT is important in managing the cost of property purchases, especially for high-value properties.
Tax Relief
A reduction in the amount of tax owed, often used as an incentive for saving or investing. Examples include pension tax relief, VCT relief, and charitable donation relief. Understanding available tax reliefs can significantly improve tax efficiency for high-net-worth individuals.
Trust
A legal arrangement in which one party (the trustee) holds and manages assets for the benefit of another (the beneficiary). Trusts are commonly used in estate planning to protect assets, minimise inheritance tax, and ensure that wealth is distributed according to the creator's wishes.
Tax-Efficient Investing
A strategy designed to minimise tax liabilities on investments, helping to maximise net returns. Techniques include using ISAs, pensions, and tax relief schemes like VCTs and EIS. Effective tax-efficient investing is crucial for wealth preservation and long-term financial growth.
Uncrystallised Funds Pension Lump Sum (UFPLS)
A way of withdrawing money from a pension without entering into income drawdown or purchasing an annuity. With UFPLS, 25% of each withdrawal is tax-free, and the remainder is taxed as income, offering a flexible way to access pension savings.
Unsecured Loan
A loan that doesn’t require collateral, such as property or investments, to back it. Unsecured loans usually carry higher interest rates due to the increased risk to the lender. These loans are commonly used for short-term borrowing or smaller amounts.
Unit Trust
A collective investment fund that pools money from multiple investors to buy a diversified portfolio of assets. Unit trusts are open-ended, meaning that units are created or cancelled as more people invest or withdraw. They provide individual investors with access to professionally managed portfolios.
Venture Capital Trust (VCT)
A tax-efficient investment scheme designed to encourage investment in smaller, high-risk companies. Investors can benefit from 30% income tax relief, tax-free dividends, and no capital gains tax on profits, making VCTs an attractive option for high-net-worth individuals seeking growth opportunities.
Volatility
The degree of fluctuation in the price of an asset over time. High volatility indicates larger price swings, while low volatility suggests more stable prices. Volatility is a key factor in assessing risk and potential return in investments, and understanding it is crucial for sound financial decision-making.
Variable Rate
An interest rate that fluctuates over time, often based on an underlying benchmark, such as the Bank of England base rate. Variable rates are common in loans and mortgages, meaning your payments can go up or down depending on market conditions.
Wealth Management
A comprehensive service that addresses the financial needs of high-net-worth individuals. Wealth management typically covers investment management, tax planning, estate planning, and retirement planning, all designed to preserve and grow wealth across generations.
Whole of Life Insurance
A life insurance policy that provides coverage for the insured’s entire lifetime, rather than a specified term. The policy pays out a lump sum upon the policyholder's death, often used to cover inheritance tax liabilities or provide financial support to beneficiaries.
Will
A legal document outlining how a person’s assets should be distributed after their death. A will is a key component of estate planning, ensuring that your assets are passed on according to your wishes and helping to avoid disputes or lengthy probate processes.
Wrapper
In financial planning, a wrapper is an investment account, like a pension or ISA, that holds your assets. It offers tax benefits and simplifies management, helping you grow wealth efficiently while aligning with your financial goals.
Exchange-Traded Fund (ETF)
A type of investment fund that is traded on stock exchanges. ETFs provide diversified exposure to a wide range of assets or market indices and are popular for their low fees, liquidity, and flexibility. ETFs are ideal for investors seeking cost-effective access to diversified markets.
Ex-Dividend
A stock trading term indicating that a company has declared a dividend, but anyone buying the stock from that point on is not entitled to the next dividend payment. The stock price typically drops by the dividend amount on the ex-dividend date.
Exit Strategy
A planned method for exiting an investment, business, or financial position, often to realise profits or limit losses. Exit strategies are important in private equity, venture capital, and business ownership, ensuring smooth transitions and maximising returns.
Yield
The income generated from an investment, expressed as a percentage of the investment’s cost or current market value. Yield is commonly used to measure income from bonds, dividends, or rental properties and is a key consideration for income-focused investors.
Year-End Tax Planning
The process of reviewing your financial affairs before the end of the tax year to ensure tax efficiency. Year-end tax planning typically involves maximising allowances—such as pension contributions and ISA limits—to reduce tax liabilities and optimise financial outcomes.
Young Investor
A term used to describe individuals in their 20s or 30s who are starting their investment journey. Young investors typically have a long time horizon, allowing them to take on more risk and focus on growth-oriented investments like equities to build wealth over time.
Zero-Coupon Bond
A bond that doesn’t pay periodic interest but is issued at a discount to its face value. Investors receive the full face value at maturity. Zero-coupon bonds are often used for long-term financial planning, providing a predictable lump sum at a future date.
Z-Score
A statistical measure that shows how far a data point, such as an investment return, deviates from the average in terms of standard deviations. Z-scores can help assess the performance of investments relative to historical trends, offering insights into market conditions and volatility.
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