Do you know the difference between a SIPP and a SSAS? We like to talk to our clients in an easy-to-understand, non-jargon way, but many financial terms still need to be explained. So, we decided to bust through some typical financial acronyms and jargon to give you greater clarity when discussing your financial planning.
First, let’s talk pensions. Here’s a list of the most common types of pension schemes:
- State pension – this is the pension provided by the Government. Contributions are made through your national insurance. You will be eligible to receive state pension income depending on the year you were born and after a qualifying period.
- Private or personal pension – this is a pension that you pay into privately to save money towards your retirement. The money you receive will depend on the amount you have paid in.
- Defined benefit pension – also known as a final salary pension, this is a special workplace pension scheme. It provides you with a guaranteed income for life based on your final or average salary.
- SSAS – this is a small, self-administered pension scheme. It’s usually a type of defined contribution workplace pension with greater flexibility for investments.
- SIPP – this is a self-invested personal pension. Similar to how a private or personal pension works, this type of pension gives you a wide choice of investments.
Savings and investment terms
Next, let’s look at some common investment jargon:
- Diversify – financial planners will usually recommend switching to a well-diversified portfolio to help mitigate your exposure to market risk. This could involve spreading your investments among various asset classes, such as stocks, bonds, cash, etc.
- Gilt – this is a type of investment fund. Gilt funds are pooled investment vehicles that hold government bonds. This is usually a low-risk and low-yield way to invest.
- Bonds – this is a ‘debt investment.’ An investor loans money to an entity that borrows the funds, for example, from the Government for a defined period at a fixed or variable interest rate.
- Stocks – this is a type of security indicating ownership in a company, for example, a claim of the company’s earnings and assets.
- Shares – this is a unit of ownership in a company or a financial asset, where the profits are split equally from the earnings in the form of dividends.
Now, let’s explain some common investment acronyms:
- ISA – is an Individual Savings Account that offers tax-free savings. There are several types of ISA – Cash, Stocks and Shares, Innovative Finance, Lifetime, Help to Buy, Junior, and Flexible. All have different criteria, terms, and conditions but share the same total ISA allowance – £20,000 maximum across all ISAs in a tax year.
- IHT – stands for inheritance tax. When someone dies, a percentage of their estate is taxed; this varies depending on certain factors and the estate value.
- CGT – stands for Capital Gains Tax. You must pay tax on certain assets that increase in value, such as property. There is a tax-free threshold, which is currently £12,300, and certain exemptions can apply in different circumstances.
- ESG – stands for Environmental, Social, and Governance. It’s a socially responsible way to invest and includes ‘green’ or ‘ethical’ investment opportunities.
- SEIS – is a Seed Enterprise Investment Scheme. Designed to help smaller start-up businesses attract investors and raise equity finance, it offers up to 64% tax relief.
- EIS – is an Enterprise Investment Scheme designed to help more established companies attract investors with up to 30% tax relief.
- VCT – this stands for Venture Capital Trust. This is a company listed on the London Stock Exchange that invests in other companies, usually focusing on SEIS and EIS-eligible businesses. The VCT manages your investments on your behalf, which can offer tax-efficient opportunities.
There are other notable terms; however, the above are the most commonly used in financial planning. As financial planners, we know it can be challenging to understand all the jargon out there. So we prefer explaining things in plain English to our clients. But, of course, you’re welcome to ask us anything about financial planning, and we’re more than happy to clarify any terminology.
If you need advice on any aspect of financial planning, please get in touch to speak to our financial planners.