What the words mean

Money has a vocabulary problem: the ideas are simple, the words are not. Here is every term the planner and the guides lean on, in plain English, each with a pound example. Inside the planner, dotted-underlined words show these definitions on tap.

Bonds and gilts

Gilt

A loan to the UK government. You pay a price today; in return it pays a small fixed interest each year (the coupon) and repays exactly £100 per unit on a fixed date (maturity).

The name comes from the gilt-edged certificates they were once printed on. The Debt Management Office publishes the list of gilts in issue; any UK platform that deals in shares can buy them.

Bond

A loan to a government or a company: it pays fixed interest and repays a set amount on a set date. UK government bonds are called gilts.

A bond fund holds hundreds of bonds and never matures, so its price moves with interest rates; a single bond held to its repayment date does not care what rates do in between.

Coupon

The fixed interest a bond pays each year, set when it was first issued, as a percentage of its £100 face value. A 0.5% coupon pays 50p a year per £100 — however much you paid for it.

The coupon is not your return; that is the yield. A gilt issued when rates were near zero has a tiny coupon and trades well below £100, so nearly all its return is the gain at maturity — which for gilts is tax-free.

Maturity

The date a bond repays its £100 face value and stops existing. A "five-year gilt" is one that matures in five years.

Held to maturity, a gilt's return is fixed on the day you buy it. Sold before maturity, the price depends on interest rates at the time.

Yield

The total return a bond gives per year if you buy at today's price and hold to maturity: the coupons plus the difference between what you paid and the £100 repaid, spread over the years. Pay £82.40 for a gilt repaying £100 in five years with a 0.5% coupon and the yield is about 4.5% a year.

Prices and yields move in opposite directions: when a gilt gets cheaper, the fixed £100 at the end represents a bigger return, so the yield rises. This figure is sometimes called the yield to maturity (YTM) or redemption yield — they are the same idea.

Clean and dirty price

The clean price is what platforms quote: the price without the coupon interest built up since the last payment. The dirty price is what you actually pay — clean plus that accrued interest. Two months after a 4% gilt's half-yearly coupon about 67p per £100 has accrued, so a clean £98.00 costs £98.67.

Yields are always worked out from the dirty price, because that is the money that changes hands. Index-linked gilts issued since 2005 quote a real clean price per £100 which is multiplied by the index ratio — inflation since issue — to give the cash price; the older ones quote the cash price directly.

Net yield after tax

What a gilt returns a year once income tax has been taken off its coupons, with the gain to £100 left whole because gilts are exempt from capital gains tax. A 0.25% coupon gilt yielding 4.4% keeps about 4.3% for a 40% taxpayer; a 4.5% coupon gilt yielding the same keeps about 2.6%.

That is why low-coupon gilts are the ones higher-rate taxpayers hold outside an ISA or pension. Sometimes called the net redemption yield. The personal savings allowance (£1,000 basic rate, £500 higher rate, nothing at 45%) can shelter part of the coupon and is not in the figure; inside an ISA or pension the gross yield is the net yield.

Duration

How much a bond's price moves when yields move. A modified duration of 5 means a 1-point rise in yields cuts the price about 5%, so £10,000 of that gilt falls to about £9,500 — and rises by as much if yields fall a point.

Also the money-weighted average time until the bond's payments arrive: a five-year zero-coupon gilt has a duration of five, a five-year 4% gilt about 4.6, a forty-year gilt over twenty. Longer maturities and lower coupons mean higher duration. Held to maturity none of it matters — the £100 arrives whatever the price did in between; it matters when you might need to sell early.

Yield curve

Today's yields at different maturities lined up: what lending to the government for 1, 5, 10 or 20 years pays. The Bank of England publishes it each weekday.

The planner prices every gilt off the Bank's full spot curve — the rate for money due at each date — and shows the 5, 10 and 20-year "par" yields, the coupon a new gilt of that length would need to sell at £100. The curve's date is shown wherever the figures appear.

Spot rate

The yield on a single payment due at one date, with nothing paid in between — a zero-coupon rate. A 5-year spot rate of 4.6% means £100 due in five years is worth about £80 today.

A gilt is a bundle of such payments (each coupon and the £100 at the end), so its price is the sum of each one discounted at the spot rate for its own date. That is why two gilts maturing in the same year can show different yields: a low-coupon gilt has more of its value at the far end of the curve.

Index-linked gilt

A gilt whose coupons and repayment rise with inflation (RPI today, CPIH from 2030). What it promises is buying power rather than pounds: a real return.

Quoted by real yield — the return above inflation. A real yield of 1% and inflation of 3% gives about 4% in cash terms; if inflation runs at 8%, about 9%. The index rises with a three-month lag on gilts issued since 2005 (eight months on older ones), so the last few months before maturity are known in advance. Gains are tax-free like any gilt; the inflation uplift on the capital is a gain, not income.

Real yield

A return measured above inflation. Index-linked gilts are quoted this way: a real yield of 1.5% means your money grows 1.5% a year faster than prices, whatever inflation turns out to be.

The Bank of England publishes a real curve from index-linked gilt prices; the planner's real yields come from it. Compare it with your own "investment growth less inflation" assumption.

Breakeven inflation

The inflation rate at which a conventional gilt and an index-linked gilt of the same length would pay the same. It is the inflation the market is pricing.

A 10-year gilt yielding 5.0% and a 10-year linker with a real yield of 1.8% imply breakeven inflation of about 3.2% a year (RPI). If you expect inflation above that, the linker does better; below it, the conventional. It is a market price, not a forecast — it includes a premium for the insurance.

Forward rate (the expected path of Bank Rate)

The interest rate the market has priced for a future date — for example, where Bank Rate is expected to be in twelve months' time, read from swaps that settle on it.

The Bank of England publishes this path each day from overnight index swaps (OIS). It is what the market is prepared to bet on, not a promise: fixing a savings rate or a mortgage is a wager against it. The planner shows the path and the rate one, two and three years out.

Gilt ladder

A set of gilts chosen so that one matures in each year you need money: a known amount on a known date, whatever markets do in between.

Used for the years between retiring and a pension or the state pension starting, or for the first years of retirement so a market fall does not force selling.

Barbell, bullet and ladder

Three shapes for the same £100,000 of gilts. A bullet puts it all in one maturity; a ladder spreads it evenly, one gilt a year; a barbell splits it between very short and very long gilts with nothing in the middle. Built to the same average duration, a 1-point rise in all yields costs each about the same — around £5,000 at a duration of five.

They part company when the curve changes shape rather than level: if short yields fall and long yields rise, the barbell's long half loses most; and the barbell's short half returns cash soonest, which matters if you might need it. The ladder is the one that pays out on a fixed schedule.

Convexity

Duration is a straight-line guess at how a bond's price moves; the true line is curved. Prices rise a little more than duration predicts when yields fall, and fall a little less when they rise. On £10,000 at a duration of 10, a 2-point rise costs about £1,800 rather than the £2,000 duration alone would say.

Longer bonds and lower coupons have more of it, so a barbell (very short plus very long) has more convexity than a bullet of the same duration — a small, free-looking advantage that the market usually prices in through a slightly lower yield. The site's rate-rise figures are duration only and say so.

Funds and shares

Equities

Shares in companies — the word the industry uses. Equities are where long-run growth has come from, and also where the big short-term falls happen.

"70% equities" describes a mix, not a pick: it says how much of the money rides with company shares rather than bonds or cash.

Index fund (tracker)

A fund that simply holds every company in an index — the FTSE All-Share, the world market — instead of paying a manager to pick. Charges are a fraction of managed funds', which is most of why they win over time.

An ETF is an index fund that trades on the stock exchange like a share; for most purposes the difference is plumbing.

Ongoing charge (OCF)

The fund's yearly running cost, taken invisibly out of the fund, as a percentage. An OCF of 0.2% on £100,000 is £200 a year; 1% is £1,000. Over a retirement the difference compounds into tens of thousands.

OCF stands for ongoing charges figure; it is printed on every factsheet. The platform's fee comes on top — the two together are what the planner calls total charges.

Accumulation and income units

Two versions of the same fund: accumulation ("acc") rolls dividends back into the fund; income ("inc") pays them out as cash. In a taxable account the dividends are taxed either way, paid out or not.

Acc units suit money that is growing; inc units suit money being lived on.

Asset mix

How money is split between shares, bonds, property and cash. The mix — not the choice of fund — is the main driver of both the return to expect and how far a bad year falls.

Also called asset allocation. A "60/40" fund is 60% shares, 40% bonds.

Volatility (spread)

How widely returns swing from year to year. A spread of ±10 points around a 5% average means most years land between −5% and +15%. Swings only become losses if a fall forces you to sell.

The planner writes it as "spread" and in percentage points (pp). Cash has almost none; a balanced mix around ±10pp; all-equities nearer ±18pp.

Earnings yield

A company's (or an index's) profits as a percentage of its share price — the price/earnings ratio turned upside down. A P/E of 12.5 is an earnings yield of 8%: £100 of shares is backed by £8 a year of profit, whether paid out or reinvested.

It is the share market's nearest equivalent to a bond's yield, which is why it is set against the 10-year gilt on the market page. Unlike a gilt's yield it is not a promise: profits change, and only part is paid as dividends (the dividend yield, about 3–4% for UK shares in most years).

Equity risk premium

The extra return shares are priced to pay over a safe government bond, for taking the risk. Measured the simple way: the earnings yield less the 10-year gilt yield. An 8% earnings yield against a 5% gilt is a premium of 3 points — on £10,000, £300 a year of expected extra return for accepting that shares can halve.

The market page shows today's figure as arithmetic, without saying whether it is high or low: the long-run realised premium in UK history is about 3–4 points a year over gilts (the planner's assumptions use 3.5), but any single year can be −40 or +40. The dividend yield against the gilt is the older, simpler version of the same comparison.

Factor (value, quality, size, momentum, low volatility)

A characteristic that groups of shares share and that has, over long periods, been associated with a different return from the market as a whole: cheap shares (value), profitable and stable ones (quality), small companies (size), recent winners (momentum), steady ones (low volatility). A fund with a factor tilt holds more of that kind than the index does.

A plain index fund already holds every factor in market weights; a tilt is a deliberate extra bet, with stretches of a decade or more behind the index. On £10,000, a tilt that adds 1 point a year is worth about £1,050 more after 10 years — if it delivers, and the well-documented ones have gone missing for longer than that. The guide on factors explains each one.

Pensions and retirement

Defined benefit (final salary)

A pension that promises an income for life — so much a year, rising by the scheme's rule — rather than a pot of money. There is nothing to invest, nothing to run out, and nothing that enters your estate.

Also called final salary or career average (CARE). Its opposite, where you have a pot, is defined contribution — what most workplace pensions now are.

Revaluation

How a defined-benefit pension you have left behind grows between leaving the job and taking it — usually with inflation, capped at 5% or 2.5% a year depending on when you earned it.

The cap is why high inflation quietly shrinks a deferred pension's buying power: 10% prices against a 5% rise is a real-terms cut.

Floor and upside

The floor is the essential part of your spending — council tax, energy, food, insurance, the mortgage while it lasts — and the upside is everything above it. The idea: cover the floor with income that does not depend on markets (state pension, final-salary pensions, annuities) and let the pots pay for the upside.

A household spending £30,000 a year with £20,000 of essentials and a £12,000 state pension has a floor gap of £8,000 a year; a final-salary pension or an inflation-linked annuity of that size closes it for life, and a gilt ladder bridges the years before the state pension starts. The planner checks this year by year.

Commutation

Swapping part of a defined-benefit pension for a bigger tax-free lump sum, at a rate the scheme sets — the commutation factor. A factor of 12 means £12 of lump per £1 a year of pension given up, for life.

Whether it is a good trade depends on the factor, your tax rate (the pension is taxed, the lump is not) and how long you live; the planner's calculator does the arithmetic.

Drawdown

Leaving your pension invested and drawing an income straight from it, rather than handing it to an insurer for an annuity. The money stays yours and keeps growing — and keeps its risk.

Confusingly, market commentary also uses "drawdown" for a peak-to-trough fall in an investment; where the planner means that, it says "largest fall".

Annuity

An income for life, bought from an insurer with a lump sum. The income is guaranteed however long you live; the capital is spent and does not come back.

Rates depend on age and gilt yields at the time of purchase — which is why they changed so much after 2022.

Tax-free cash

Usually a quarter of a pension can be taken free of income tax (capped in the rules), from age 55 — 57 from April 2028. The rest is taxed as income when drawn.

The official name is the pension commencement lump sum. It can be taken all at once or in slices alongside taxable withdrawals.

Wrapper

The account an investment is held in: a pension, an ISA, or a plain taxable account (a GIA — general investment account). The wrapper decides the tax; the investments inside can be identical.

The same fund is untaxed in an ISA, taxed on the way out of a pension, and taxed year by year on dividends and gains in a GIA.

Marginal rate

The tax rate on your next £1 of income — what an extra £1,000 of pension withdrawal or salary actually costs. It is often higher than the headline bands: between £100,000 and £125,140 the vanishing personal allowance makes it 60%.

The planner's tax ladder shows your bands and how much headroom is left in each.

Inheritance tax

Nil-rate band

The first £325,000 of an estate, taxed at 0% — everyone's basic inheritance tax allowance. The residence nil-rate band adds up to £175,000 more when a home passes to children or grandchildren.

Anything a spouse or civil partner did not use passes to the survivor, so a couple can have up to £1m of allowances between them. Estates over £2m lose the residence band at £1 for every £2 over.

Taper relief

If you die between three and seven years after making a large gift, the tax on the gift shrinks on a sliding scale — 20% off after three years, up to 80% off after six.

It reduces the tax on the gift, not the gift's value — so it only helps on gifts big enough to be taxed at all, above the nil-rate band.

Potentially exempt transfer

The official name for an ordinary gift to a person. Nothing is due when you make it; live seven more years and it leaves your estate entirely — hence "the seven-year rule".

Gifts into most trusts follow different rules (chargeable lifetime transfers), which is where the fourteen-year trap comes from.

How the planner works

Real terms (today's money)

Figures with future inflation stripped out, so an income in 2050 can be compared with one now. £30,000 "in today's money" buys in 2050 what £30,000 buys today.

The planner shows almost everything this way, because a 2050 pound is not a 2026 pound: at 2.5% inflation it is worth about 55p of one.

Nominal

The opposite of real terms: the raw cash figure of its own year, inflation included. A "6% nominal" return during 3% inflation is about 3% real — the part that buys more.

Monte Carlo

Running the plan hundreds of times with the returns varying each run, then counting how often the money lasts. Here each run strings together blocks of real UK market years since 1871, so the bad runs are shaped like actual history.

Named after the casino. "The plan holds in 85% of runs" is this count.