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Allocation rate

Describes how the money paid into a plan is used. The company you invest with may take some of your money for charges (eg administration fees). The amount remaining is the allocation rate.

For example, you have £100 to invest:

if the allocation rate is 100% - £100 will be applied to your plan;

if the allocation rate is 97% - £97 will be applied to your plan; and if the allocation rate is 105% - £105 will be applied to your plan.


An annuity converts a lump sum (usually from a pension fund) into income.

Appropriate Personal Pension

A pension plan that can be used to contract out of (leave) the State Second Pension (formerly SERPS).

AVC – Additional Voluntary Contributions

A pension top-up for an occupational pension. You pay contributions into a scheme run by your employer to boost your main pension.

Basic State Pension

A government-administered pension, based on the number of qualifying years gained through National Insurance contributions (NICs) you've paid or been credited with throughout your working life.

Bid Price

The price at which an investment can be sold.

Bid offer spread

The difference between the purchase price (offer) and the sale price (bid).

Collective investment scheme (CIS)

A way of pooling contributions from lots of people into a single investment fund. Examples of collective investment schemes are unit trusts, investment trusts, OEICs or SICAVs.


Up to 25% of a pension fund can be taken as a tax-free cash lump sum from age 55. Commutation is simply a term to explain taking tax free cash from a pension fund.

You must be at least 55 to do this. The remaining portion of your pension fund is used to provide retirement income and is taxable. See also Trivial commutation.

Contracting out

An agreement between you and a pension provider to have part of your National Insurance contributions paid into their scheme, which will pay you a pension instead of the State Second Pension.

Funds made up of contracted out benefits must currently be used to buy a ‘protected rights annuity’.

Contracting out is to be abolished from 6 April 2012. Anyone contracted out at that time will automatically be contracted back into the State Second Pension. Protected Rights benefits built up from contracting-out will become the same as any other benefits in the scheme.

Corporate Bond

A certificate of debt issued by companies – essentially an IOU. Corporate bonds pay a fixed income at regular intervals. The amount of income will depend upon the creditworthiness of the company. So, the riskier the company the higher the income as the company is more likely to default.

At maturity, the original investment amount will be paid back to the investor. Corporate bonds can be sold ‘second hand’ and the market value may be more or less than the original cost.

Deferred pension

The pension benefits (in a defined benefit scheme) that you leave behind when you leave employment. They will be paid to you when you reach pension age.

Defined benefit

An occupational pension that is worked out on your salary and the number of years of membership of the scheme. Final salary and career average are both defined benefit schemes.

Defined contribution

Also known as money purchase – a pension that you or your employer pays contributions into. This builds up a personal fund which is converted into an income at retirement. Available through work or you can start one yourself.


A sum of money paid by a company to its shareholders out of its profits.

Drawdown facility (income withdrawal) - pensions

You can take a taxable income direct from your pension fund while the remainder remains invested.

Capped drawdown – income subject to limits set by HMRC

Flexible drawdown – unlimited withdrawals can be taken from the pension fund providing that you have a minimum amount of guaranteed income in place.

EIS – Enterprise Investment Scheme

An EIS is a tax efficient scheme for investing in small, unquoted businesses. EISs are not traded on a stock exchange so withdrawing cash can be difficult or, at times impossible.

EISs offer tax incentives for wealthy, adventurous investors who can afford to lock their money away for the long-term.

Execution only

A broker who gives no advice, but merely executes your instructions.

Final salary pension

A type of defined benefit pension scheme, this is a pension available through your employer. The amount of pension you get is worked out on your salary at or near retirement, or when you left employment, and your pensionable service.

FCA – Financial Conduct Authority

The FCA is the regulator of the financial services industry in the UK.

FSAVC – Free Standing Additional Voluntary Contributions

A pension top-up policy for an occupational pension, but separate from your employer’s pension scheme and normally run by an insurance firm.

Fund Supermarket

Fund supermarkets allow the investor to buy, sell and switch between funds from different fund companies in the one place.

Most fund supermarkets offer ISAs, collective investment accounts, bonds and pension wrappers so that you can hold all your different funds in the one place in tax wrappers too.


A bond issued through the United Kingdom Treasury and guaranteed by the British government

Government Actuaries Department (GAD)

GAD produces tables of annuity rates, on behalf of HM Revenue & Customs, which are used to calculate the maximum drawdown pension that can be taken from a drawdown pension fund (otherwise known as income drawdown or income withdrawal).

Group personal pension

A type of personal pension offered by some employers but not classified as an occupational pension.

Guaranteed Annuity Rate

At a certain maturity date your pension provider will provide an annuity at a guaranteed rate.

ICVC (Investment Company with Variable Capital)

A type of OEIC (Open-ended investment company).

Impaired life annuity

An ‘impaired life’ annuity pays a higher-than-normal income if you have a health problem that threatens to reduce your lifespan.

Investment Bond

An investment bond is a single premium life insurance policy. Your money is invested in a pooled investment and a small element of life insurance is provided. This is paid out after your death.

Investment Trust

A pooled investment. You are buying shares in a company that invests in other investments. It has shares and is quoted on the stock exchange. It is a closed-ended fund as there are a set number of shares available.

ISA – New Individual Savings Account

A tax free savings scheme. Cash and a broad range of investments can be held in ISAs. There is no restriction on when or how much money can be withdrawn. Subject to annual subscription limits, which start at the beginning of each tax year (6th April)

Cash ISA – A savings account in which you can only invest cash or cash like investments.

Equity ISA – A savings account in which you can invest in a broad range of different investments such as funds, individual shares and bonds. Any cash held will be taxed at 20% in an equity ISA.

Junior ISA – A new savings account for those under 18 who did not previously qualify for a child trust fund.

Key features document (KFD)

A document which provides Important information about the financial product that you’re buying. It describes the main aspects of the product, such as its aims and the risks.

Lifetime allowance

The maximum pension fund that a member can accumulate without incurring a tax charge.

Offer price

The price at which an investment can be purchased.

Money purchase pension

A pension where your contributions are invested in, for example, the stock market. The size of your fund depends on your contributions and how well your investments do. At retirement, you have a choice of options to provide you with a retirement income.

Occupational pension

A pension which is only available through employers and run by pension scheme trustees. There are two types – salary-related (also called ‘defined benefits’ or ‘final salary’) and money purchase (defined contribution).

OEIC – Open Ended Investment Company

A type of collective investment in the UK that is structured to invest in other companies. The company’s shares are listed on the London Stock Exchange, and the price of the shares are based largely on the underlying assets of the fund. There is no bid-offer spread on OEIC shares; buyers and sellers receive the same price.

Open-market option

The option to shop around to compare annuity rates and arrangements offered by other insurance companies and buy an annuity from another provider if you find a better deal.


A tax efficient investment vehicle that you pay into over time to provide you with an income when you retire.

Personal Pension

A pension that you take out yourself say if you’re self-employed or your employer does not offer access to one. On retirement, a lump sum is available for the purchase of an annuity that provides weekly or monthly payments. Or, you can transfer to an arrangement which will allow you to draw an income direct from the fund.


State Earnings Related Pension Scheme. Part of State retirement pension paid for directly out of a member’s earnings-related contributions and additional to the basic pension. Now replaced by the State Second Pension (S2P).

SICAV – Société d’investissement à capital variable

A type of open-ended collective investment fund.

SIPP - Self Invested Personal Pension

A very flexible pension with access to lots of different types of investments. Ideal for people who want to manage their own pension fund by dealing with, and switching, their investments when they choose.

Stakeholder Pension

A low cost pension that meets government standards for charges, access and flexibility.

Tax free lump sum

HM Revenue & Customs (HMRC) limits how much you can take as a tax-free lump sum from your pension. This is currently up to a quarter (25%) of your fund – before converting the fund into income. You cannot take the tax free lump sum before age 55.

Trivial commutation

Taking all of your pension fund as a lump sum. You can only take your entire pension pot as a lump sum if it is less than £30,000 2017/18. The minimum age is 55 and the pension must be defined benefit or certain employers defined contribution pensions.

Unit Trust

Unit trusts are pooled, open-ended investments. Unit trusts get bigger as more people invest and smaller when they take money out. Each fund has a specified investment objective to determine the management aims and limitations.

VCT – Venture Capital Trust

VCTs are companies listed on the London Stock Exchange, and are similar to investment trusts. Investors can subscribe for, or buy, shares in a VCT, which invests in trading companies, providing them with funds to help them develop and grow.

VCTs offer tax incentives for wealthy, adventurous investors.

With-profits fund

A type of fund where investments are pooled with other with-profits policyholders. Everyone in the fund shares the profits and losses. Profits are declared as an annual or ‘regular’ bonus and a non guaranteed final bonus may apply on maturity or surrender. A Market Value Reduction (MVR) penalty may be applied if a withdrawal is made before the maturity or surrender date to protect other investors funds.

CommShare doesn't give investment advice. If you're unsure about suitability, you should seek professional advice. Past performance of an investment is not a guide to future performance. The value of investments or income from them can go down as well as up. You might not get back the amount you invest. Current tax levels and reliefs will depend on your individual circumstances.

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