August 14^th saw the observation of Financial Awareness Day, an annual event intended to promote financial literacy amongst individuals, from pension and retirement options to savings and budgeting.

Given the overwhelming myriad of terms, acronyms, and financial products a consumer is presented with, it’s perhaps no surprise that over 20 million UK Adults are considered to have poor financial literacy. It’s a startling stat when considering that those with good financial literacy are £20000 better off on average.

With Pension Awareness and UK Savings Awareness days on the horizon for September, here at Danbro Financial Planning we’ve broken down some of the common jargon in the world of personal finance. Here’s what you need to know.

Economy

What is Inflation?

Inflation is when the price of goods and services increases over time. The Bank of England aims to control the inflation rate (how quickly it rises) to about 2%. It can be affected by a variety of factors, such as availability/demand of goods and materials, oil prices etc.

What is an Interest Rate?

The interest rate is the cost of borrowing, or the reward for saving. Also referred to as the base rate, it is controlled by Bank of England and can be used to control inflation. This is because by raising the interest rate, it encourages people to save money as there is a greater reward for doing so. However, it also makes things like mortgages and loans more expensive, which further discourages spending on other things. This reduces demand for products and services which can lead to an easing in inflation.

Saving

What is Compound Interest?

Compound Interest is when you earn interest on the original pot of money, plus any previous interest. For example, if you started with a pot of £1000, and earned 10% interest on it per year, you’d have £1100 by the end of year 1. Then, in year 2, you’d earn 10% interest on the new total amount, meaning you’d have £1210 by end of year 2, £1331 by end of year 3, etc. It’s for this reason that starting as early as possible is almost always the most effective way to save. Many mistakenly believe that they can delay paying into a pension pot until later in life, and then catch back up by making large contributions, but this is rarely the case.

Remarkably, according to the Department for Work & Pensions, a person who begins saving at 21 and stops at 30 might have a larger pension fund at retirement than someone who starts saving at 30 and continues until they retire.

If you’re older than 21, don’t worry—it’s never too late to start. The earlier you begin contributing, the more time your savings have to grow. Speak to Danbro Financial Planning today.

What is an ISA?

ISA stands for Individual Savings Account, and it’s a tax efficient account for savings and investments. The main appeal of ISAs is that their tax benefits are more generous than other accounts such as GIAs, as you don’t have to pay tax on any interest, investment growth or capital gains on cash or assets you hold in an ISA. There are limits of course; as of the 2024/25 tax year, you can save up to £20,000 per year across the various types of ISAs available. Speaking of which, what are the differences between each ISA type?

What is a Lifetime ISA?

The Lifetime ISA, (or LISA, for short) is a savings account that can be used for purchasing your first home, or saving for retirement. In addition to enjoying the tax benefits of other ISAs, LISAs have a nifty perk of receiving a 25% Government Bonus on top of your contributions, up to a value of £1000 per year. Out of your £20,000 total annual ISA allowance, up to £4000 per year can be paid into a LISA.

An additional feature of LISAs is that they can contain either cash, stocks and shares or a bit of both. What this means is explained below.

What is a Cash ISA?

A Cash ISA is an account for saving, you guessed it, cash. As with any other savings account, you earn interest on cash in a cash ISA, except you don’t have to pay tax on this interest. As the funds in the account aren’t invested, you can’t lose money, however your pot could lose value (or buying power) if the rate of inflation overtakes the interest rate you receive. This is because the same amount of money won’t be able to buy as much.

What is a Stocks and Shares ISA?

Unlike Cash ISAs, Stocks and Shares ISAs do carry the risk of losing money, as they are invested in shares in company shares, bonds and funds. However, this also means they have the potential earn money if the investments grow. And remember, due to compound interest, that growth then gets invested again. Which investments your Stocks and Shares ISA gets invested in will depend on your attitude to risk (ATR), with more cautious investment portfolios typically containing more cash, while high ATRs can often include more emerging markets.

It’s crucial to speak to a reputable Independent Financial Adviser if you’re interested in any investments, including Stocks and Shares ISAs. They’ll work with you to establish your goals, assess your suitability and capacity for loss, and agree your attitude to risk level. They’ll then, with your agreement, set up the plan for you, process any contributions, and continue to review its progress with you each year to ensure it remains suitable for your circumstances.

As an Appointed Representative of the award-winning Sense Network, which is Authorised and Regulated by the Financial Conduct Authority, you’re in safe hands with Danbro Financial Planning. We’ve even got the ‘Top Rated Adviser 2024’ status, and 5/5 Star Rating on VouchedFor to show for it! Book a No-Obligation Consultation Today.

What is a GIA?

GIA stands for General Investment Account, and as the name suggests its an account you can use for investments. It has a similar purpose to a Stocks and Shares ISA, although there are a couple of differences. Chiefly, they don’t get the same tax benefits as ISAs, meaning you’ll pay Capital Gains Tax upon the sale of your investments if they’ve gained value. However, they aren’t limited by the same £20000 allowance that ISAs are, meaning you could use them to invest if you’ve used up your ISA allowance.

Speak to an Adviser to work out the best option for you.  

Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Mortgages

Fixed Rate vs Variable/Tracker Mortgage: What’s the Difference?

A fixed rate mortgage is one where regardless of what the base interest rate does, your mortgage rate remains at the level you agreed with your lender for that period. Variable rates, meanwhile, can change during the term, largely at the provider’s discretion. Tracker mortgages can also change, however these are in response to changes to the national base rate, as they are set at a fixed percentage above the base rate and track it’s changes.

Each type comes with its pros and cons, and the correct option for you is a crucial one. To ensure you get the most suitable and cost effective mortgage type and lender, allow Danbro Financial Planning’s team of independent mortgage specialists broker a bespoke mortgage deal for you. Get in Touch.

What is an Agreement in Principle?

The agreement in principle is a document provided by a mortgage provider explaining how much they would be willing to lend you. It can be used as evidence that you can afford to buy the property. You might also hear it called a ‘Decision in Principle’ or ‘Mortgage in Principle’.

What is a Remortgage?

Remortgaging is where you swap your existing mortgage for a different one, usually to get a better deal or one that fits your circumstances better. This can be with a different lender, or a new deal with the same lender. If you’re thinking about remortgaging, book a call with Danbro Financial Planning today.

Your home may be repossessed if you do not keep up repayment on your mortgage.

Insurance & Protection

The Protection market offers comprehensive choices to fit your needs and budget, with a wide range of different providers, levels of cover and benefits. Here’s a few of the main ones.

What is Life Insurance?

Life Insurance is a plan that pays out in the unfortunate event that the policyholder passes away during the cover period. The policy benefits, and the beneficiaries, or purpose of said benefits, depend on your circumstances such as budget. You can also choose whether you want level cover, for example to allow the beneficiaries to maintain their lifestyle or costs, or decreasing cover, which could be used to pay off a mortgage for example. As the amount left to pay on a mortgage usually decreases over time, the cover can decrease as well. As a result, they can be cheaper to take out. An IFA can help you set up the correct plan for your circumstances.

Want to Learn More? Click Here to Watch Our video on Life Insurance.

Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

What is Relevant Life Cover?

Relevant Life Cover is for employees of a company, which means they can also be an option if you’re a contractor who contracts through your own limited company.

Although Relevant Life policies are similar to Life Insurance, in that they cover you, the individual, the policy premiums are actually paid for by the limited company, upon which it can claim tax relief. What’s more, policy pay-outs do not form part of your estate for inheritance tax, and there’s no P11D tax charge on you as the life assured. This makes them a tax-efficient route to reassurance for you and your loved ones should the worst happen.

There are a vast array of Relevant Life policies available to suit your needs. At DFP, we can help navigate these choices and find the policy that best suits you, your family, and your limited company.

Relevant Life plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

What is Critical Illness Cover?

Critical Illness Cover (CIC) is intended to provide support for you and your family by providing a lump sum to mitigate the financial pressures caused by long term illness or disability. While many take out life insurance policies that pay out in the event of death, it’s worth considering how your family’s finances would cope in the event of critical illness.

Which illnesses are applicable, and how much the plan will pay out, will depend on the plan you choose. Book a call with Danbro Financial Planning to work out the most suitable cover for you.

Plans may not cover all the definitions of a critical illness. The definitions vary between product providers. Critical Illness plans typically have no cash in value. If premiums stop, then cover will lapse.

What is Income Protection? What is the difference between Income Protection and Critical Illness?

Income Protection, like critical illness cover, provides support that eases financial pressure in the event that you are unable to work. However, in works slightly differently. Whereas CIC pays a lump sum should you be diagnosed with a particular illness from a set list, income protection pays out a percentage of your monthly earnings until you can return to work. Furthermore, income protection generally has a broader range of illnesses or injuries which are covered, whereas Critical Illness is usually only for life threatening conditions.

Your plan and its cost will depend on level and length of cover, your medical history, your work and more. Ensure you get the right cover at the right price by discussing it with DFP.

Income Protection will usually pay up to 60% of your monthly income – up to your retirement date or the end of the policy term. If premiums stop, then cover will lapse.

Questions? Get in Touch.

We hope this guide helped de-mystify some of the many phrases and terms relating to personal finance, however we understand it can still be overwhelming. That’s why our team of friendly experts are on hand to listen, understand, and support. By working with DFP, you can find clarity and peace of mind.

Get started by booking a free, no-obligation chat.

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