The ultimate glossary of financial planning terms
When you first start exploring financial planning or working with a financial adviser, it is easy to feel overwhelmed by jargon. From “asset allocation” to “inheritance tax,” the financial world is full of terms that can be confusing if you are not familiar with them.
This glossary of financial planning and investment terms is designed to clarify things. Whether you are just beginning your investment journey, reviewing your retirement plans, or simply want to feel more confident when speaking with a financial adviser, this guide explains the key language of money management.
General financial planning terms
Financial Adviser
A professional who provides advice on money matters, including investments, mortgages, life assurance, retirement planning, tax, and estate planning.
Financial Planning
The process of setting financial goals and creating a strategy to achieve them - covering areas such as savings, investments, pensions, insurance, and estate planning.
Assets
Anything of value you own, such as cash, property, investments, or possessions.
Liabilities
Your financial obligations or debts, such as mortgages, loans, or credit card balances.
Net Worth
The difference between your assets and liabilities - a snapshot of your overall financial position.
Cash Flow
The movement of money in and out of your personal finances, including income, expenses, savings, and investments.
Budgeting
The process of creating a plan for how to allocate your income towards expenses, savings, and investments.
Investment Terms
Asset Allocation
How your portfolio is divided between different asset classes (shares, bonds, property, cash).
Diversification
Spreading investments across different types of assets to reduce risk.
Equities (Shares/Stocks)
Ownership in a company. Holding shares means you are a part-owner (shareholder).
Bonds
Loans made by investors to governments or corporations, typically paying a fixed interest.
Investment Fund
A collective fund that pools money from many investors, managed by professionals.
Exchange-Traded Fund (ETF)
A fund that trades on stock exchanges, combining features of shares and mutual funds.
Index Fund
A fund designed to replicate the performance of a market index, such as the FTSE 100.
Volatility
The degree to which the value of an investment fluctuates.
Investment Risk
As opposed to ‘volatility’, the ‘risk’ of losing money on an investment
Yield
The income return on an investment, typically expressed as a percentage.
Dividend
A share of a company’s profits is paid out to shareholders.
Capital Gains
The profit you make when you sell an investment for more than you paid.
Liquidity
A measure of how easily an investment can be converted into cash.
Retirement planning terms
Pension
A savings plan designed to provide income in retirement.
Defined Contribution Pension
Where you (and often your employer) contribute to a pension pot that is invested to provide future income.
Defined Benefit Pension
Also called a final salary scheme, this pays a ‘defined’ income in retirement based on your salary and years of service.
Annuity
A product that turns pension savings into a guaranteed income for life or a set period.
State Pension
A regular payment from the UK government once you reach State Pension age, based on National Insurance contributions.
Retirement Age
The point at which you plan to stop working and begin drawing income from pensions.
Drawdown
Taking money from your pension pot while leaving the rest invested.
Tax & savings terms
ISA (Individual Savings Account)
A tax-efficient savings or investment account in the UK.
Capital Gains Tax (CGT)
Tax payable on the profit made when you sell an asset above the allowance.
Inheritance Tax (IHT)
Tax on the estate of someone who has died.
Income Tax
Tax paid on earnings, pensions, property and certain types of investment income.
Tax Relief
A reduction in the amount of tax you owe, such as on pension contributions or charitable donations.
Allowance
An amount of income or gains you can receive tax-free (e.g., Personal Allowance, ISA allowance).
Dividend Tax
Tax is applied to dividends received from shares.
Risk & strategy terms
Attitude to Risk
The level of risk you are comfortable with when investing.
Capacity for Loss
The corollary of ‘attitude to risk’, how much you can afford to lose.
Time Horizon
The period you expect to hold an investment before needing the money.
Inflation
The rate at which prices rise over time erodes purchasing power.
Diversification Strategy
Reducing risk by spreading investments across industries, sectors, and geographies.
Hedging
A strategy used to offset potential losses, often through derivatives.
Benchmark/Index
A standard against which the performance of an investment or portfolio is measured (e.g., FTSE 100).
Estate & protection planning terms
Estate Planning
Preparing for the management and transfer of your wealth after death often involves wills, trusts, and tax planning.
Will
A legal document setting out how you want your estate distributed after you die.
Trust
A legal arrangement where assets are held by trustees for the benefit of beneficiaries.
Life Insurance
A policy that pays a lump sum or regular income to dependents if you die.
Power of Attorney
A legal document giving someone authority to manage your financial or health affairs if you are unable to.
Beneficiary
A person or organisation entitled to receive benefits from a will, trust, or insurance policy.
Conclusion
Financial planning does not have to be intimidating. By understanding these common terms, you will feel more confident when discussing your finances, making investment decisions, and working with a financial adviser.
These concepts form the foundation of good money management - from protecting your family with insurance and estate planning, to growing wealth through investment and pension planning.
If you would like to see how these terms apply to your personal situation, speaking with a qualified, regulated Financial Advisor can help you develop a clear plan to reach your goals.
If you would like more information on these terms or would like to know how you may put this into practice, please contact us.
