Demystifying the jargon

 The industry is packed with specialist terminology, acronyms and phrasing that realistically only trained specialists will be able to unpick and decipher. That being said, we understand the importance of speaking in the same language as our clients – that way we can make sure that we’re working together in the most optimum way. In order to try and break down the barriers that these terms can sometimes present, I’ve listed the top four phrases that seem to cause the most confusion.

  1. ‘Flexi Drawdown’

Income drawdown is all about pensions. You can use your pension pot to provide you with a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. The main type of income drawdown is Flexi drawdown.

Flexi drawdown was introduced in April 2015 and it means there is no limit on how much income you take from your drawdown funds[1]. Although you can choose how much money you want to take out of these funds, there can be significant income tax implications. Forward financial planning will help you plan for these tax repercussions.

  1. Pension ‘Carry Forward’

Every year you’re allowed to contribute £40,000 to your pension pot. Once you have made this payment in a current year you can then add up to £120,000, but only if you haven’t made a contribution in the last three years. This is because the unused relief of previous years is still available to pay into the pot and this is what is meant by carry forward.

However, from April 2016 there will be restrictions for high earners that are receiving more than £110,000 per year. If you earn over this amount, your annual allowance will be reduced depending on how much more over the £110,000 you’re earning. Advice is critical in determining how much you can legally add into your pension pot. 

  1. ‘Nil Rate Band’

Is a term that is used for Inheritance Tax (IHT) purposes and will affect those whose estate (including a main residence) with total assets above the IHT threshold (or nil rate band) of £325,000[2]. The nil rate band is the value of an estate that cannot be subject to the UK’s IHT regulations. However, it is possible to reduce and mitigate IHT liabilities with careful planning.

  1. ‘Active’ and ‘Passive’ Investments

Investors often have to decide whether to take an active or passive approach when making investments, but there has been much debate around which is the most impactful. In order for investors to make the right decision, we’ve outlined below the key difference between active and passive investments:

  • Active investment management – these fund managers will make a judgement on a potential investment opportunity by taking a personal view of the market or the prospect of an individual stock[3]
  • Passive investment management – these fund managers don’t tend to take a view on the market, but instead track an index. They then buy into shares across an index, such as the FTSE100, or by using complex financial instruments to create a similar effect[4]

There are, of course, benefits to both approaches and a blend of both strategies can be achieved. We can help our clients determine what route is going to best suit them and help them achieve the outcome they desire.

It’s important for both small business owners and for those making personal financial plans to understand these terms, so that you can make the best possible decisions. Our team at Cameron Chase understands that the terminology and jargon used within the finance industry can often confuse and intimidate our clients, but that’s why our team of experts is here to help.

[1] The Money Advice Service – https://www.moneyadviceservice.org.uk/en/articles/income-drawdown

[2] Gov UK – https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band

[3]This is Money – http://www.thisismoney.co.uk/money/investing/article-3300109/Should-opt-passive-active-management-style.html

[4] This is Money – http://www.thisismoney.co.uk/money/investing/article-3300109/Should-opt-passive-active-management-style.html

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