Financial Jargon

What are additional voluntary contributions and are they worth while?

This is a slightly old fashioned name for extra money you pay into a pension, and very often people are in good schemes with them. Sometimes they're teachers, civil servants or people who work for the national health service or post office. And, they're encouraged to take out extra contributions to boost their pensions. Now, they can be a good idea but you've got to be very clear whether you need them, whether you really do need extra pension, you've got to be sure what the charges alone, and that the pension scheme it's with is a good one. At the end of the day, you'll have to turn that pension into a pension, which also requires financial advice. They've been misled in the past and you do have to be careful, but if you want to boost your pension, yes, take out another one.

What is an investment club?

An investment club is a group of friends who get together and have fun, really. If they make money, that's a bonus. What it involves is you get together with a group of like-minded people, and maybe you don't even know them at the start, but you find them through one of the share club organizations. You meet in the pub or in someone's house and you look at the financial papers and think about shares, and you put a certain amount of money each month into them. Ten, twenty pounds a month, something like that. You invest that money. At the end of the year you look at how that money has done. What's it worth now? Have you made money? Have you lost money? And there's all sorts of competitions that are about trying to do better than other clubs. Of course, during the course of the year, some clubs will do very well and some clubs will do very badly. The important thing, as with any investment, is the money that you put into it. You must be prepared to lose, and it can't be money you really need. You don't go into it with the hope of making a fortune because you almost certainly won't. It's a social thing and I think when you're retired it's a way of perhaps meeting some new people or passing some time, and perhaps a bit more exciting than playing Scrabble.

What is an ISA?

An ISA is, in fact, a number of things. It stands for Individual Savings Account. They started in 1999. Money that's in an ISA, if it earns interest, or if it earns money as an investment, all that growth, and all that interest, is free of tax. So it's just a way of having some money in an account that the government says "no tax on that". There are really two sorts of ISA. There's a cash ISA, which is simply a cash savings account, and the interest that that earns is completely free of tax, and there's what's often called a stocks and shares ISA, but it's an investment ISA, and that's invested either in shares or other things, and again, all the gain or all the profit from that is free of tax. Because the tax advantage is there, there are limits on how much you can put in. And into a cash ISA you can put up to three thousand pounds a year, that's going up in 2008, to three thousand six hundred pounds a year, and into an investment ISA you can put a total of up to seven thousand pounds a year. Again, that's changing in 2008. But the cash ISA counts as part of that. So it's a little bit tricky. But it's a few thousand pounds a year, and whatever that earns is free of tax, whatever rate of tax you pay.

What is equity?

Equity is one of these weird words that is only really used in financial circles. When you talk about equity release, that means the money that's locked up in your home. The equity, the value of it, is somehow released so that you can spend that money rather than living inside it. It's also used in the plural, equities, to mean shares in companies. Often, advisors will talk about equities and most people just wonder what they're talking about. They're talking about shares. It just means the value of something that you own is the equity in it.