Understanding investment and insurance jargon isn’t easy. Here’s a list of some frequently used financial terms.
Age Pension: a social security benefit paid by the Federal Government to people who have reached the qualification age. The amount of pension paid (if any) is determined by the income test and the asset test.
Allocated pension: also known as an ‘account-based pension’. This type of pension allows you to withdraw regular income payments until your balance is reduced to zero. Allocated pensions are usually established using your super savings to fund your retirement, but may also be commenced using a non-preserved cash benefit, total and permanent disability payment, terminal illness benefit, or a death benefit.
The value of your account moves up and down according to the investment earnings you receive and the amount of income you withdraw. If you are 60 or over, you pay no tax on the income payments you withdraw. You are required to withdraw a minimum percentage as income each year, based on your age. Your capital can be withdrawn at any time as a lump sum (provided eligibility criteria are met). There is no guarantee that your account balance will last your lifetime.
Annuity: a regular income stream paid in return for a lump sum investment, usually for the purposes of retirement income.
Assessable income: income earned before allowable deductions.
Assets: possessions or property.
Asset test: The assets test is used to reduce the amount of age pension that a person is entitled to receive where the value of their assets counted for assets test purposes (generally all assets other than the principal home) exceeds a certain threshold. A person’s age pension entitlement will reduce to nil on a sliding scale based on the amount by which the person’s assessable assets exceed the threshold.
Beneficiary: a person entitled to receive funds or property under a trust, will or a binding/non-lapsing death benefit nomination held within a super fund.
Binding death benefit nomination: a legally binding nomination a member can make to the trustee of a super fund in relation to their benefit (where the trustee has elected to accept nominations). The nomination outlines to whom a death benefit will be paid in the event of the member’s death.
Capital: the total wealth owned or used by an individual or business.
Capital gain/growth: the increase in the market value of an investment.
Centrelink: an Australian Government statutory agency that helps people become self-sufficient and supports those in need.
Compound interest: interest that is calculated on the amount invested plus interest previously earned and left in the account. This is sometimes called ‘earning interest on your interest’.
Concessional contributions: taxable contributions made to a super fund. Concessional contributions may include employer contributions (including the 9.5% super guarantee contribution), salary sacrifice contributions and personal deductible contributions. Concessional contributions are subject to contributions tax and count towards your concessional cap.
Concessional tax rate: a reduced tax rate applying to a certain category of investment.
Conservative: moderate or cautious.
Contribution: a deposit into a super fund.
Death benefit: a benefit equal to your super account balance paid to your dependants or legal personal representative when you die.
Debt: the amount of money owed – including mortgages, personal loans and credit card balances.
Diversification: spreading your money across a range of investments rather than just one (eg various asset classes such as shares, property, fixed interest securities and cash) with the aim of reducing risk.
Earning rate: the percentage return (income and/or capital growth) earned on an investment.
Employment termination payment (ETP): a lump sum payment made from an employer to an individual upon their termination of employment, including genuine redundancy, disablement, death or early retirement. Such payments can be taken in cash or, if eligible, may be directed to a super fund.
Equity: the value of an asset after deducting any money owing on it.
Estate: property and possessions of a deceased person.
Fixed interest: an interest rate that stays the same through the term of the loan.
Fund manager: a firm that provides investment management services or an individual who directs investment management decisions.
Gearing: investing with borrowed money.
Growth assets: assets, such as shares and property, that are expected to increase in value over the long term.
Income stream: an investment product that provides regular payments, made up of the capital you invested and earnings on that amount.
Income test: the income test is used to reduce the amount of age pension that a person is entitled to receive where their assessable income for income test purposes exceeds a certain threshold. The age pension entitlement will gradually reduce to nil on a sliding scale based on the amount by which the person’s assessable income exceeds the threshold.
Inflation: an increase in the general level of prices.
Interest: money paid in return for the use of borrowed funds. If you have money in a savings account, your bank pays you interest while it ‘borrows’ your money. If you have a loan, you pay your bank interest while borrowing its money.
Investing: purchasing assets with the aim of making your money grow in value. For example, buying property or shares.
Life cover: an insurance policy that pays a specified amount of money when the policyholder dies.
Lump sum: an amount of money, eg a superannuation benefit, taken as a single cash payment rather than being transferred into a pension or annuity.
Non-concessional contributions: contributions made from your after-tax income. These may include personal contributions, spouse contributions and child contributions. Contributions tax is not deducted from these contributions when they are invested into a super fund, nor are they taxed when they are withdrawn, because tax has already been paid. These contributions count towards your non-concessional cap.
Offset: a tax rebate that reduces the amount of tax payable.
Pension: a regular income stream paid to an individual, either by the government (such as the Age Pension) or by a superannuation/pension fund.
Policy document: a document that sets out the terms and conditions on which the insurer provides cover to the client.
Pre-retirement pension: a pension designed to supplement your income in the later years of your working life before you retire. Like an allocated pension, you must take a minimum pension payment each year. However, unlike an allocated pension, there is also a maximum permitted pre-retirement pension payment, which is calculated as a percentage of your account balance. If you are aged 60 or over, no tax is payable on your pre-retirement pension.
Preservation age: the minimum age at which you can access your superannuation. Your preservation age depends on your date of birth. If you were born before 1 July 1960, your preservation age is 55. The preservation age increases on a yearly basis until 1 July 1964, with all those born on or after this date having a preservation age of 60.
Retired: for the purposes of receiving a retirement benefit, you are ‘retired’ when you satisfy one of the following conditions:
Return: the amount of money your investment earns.
Risk: the possibility that your investment may fall in value or earn less than expected.
Rollover/rolling over: the transfer of some or all of the balance of your superannuation money from one fund or product to another. You can rollover your super irrespective of your age or work status. A rollover does not count towards any contributions cap. No tax is withheld from your rollover.
Salary sacrifice: an amount of pre-tax salary that an employee contributes to super instead of taking it as cash salary. This is in addition to the compulsory super contributions the employer makes on behalf of the employee.
Self managed super fund (SMSF): a fund that is controlled and managed by the members of the fund. The members, as trustees, make all the decisions about how the fund is run, the investments it holds, and the type of benefits it can pay.
Spouse contribution offset: a tax offset of up to $540 may be claimed if you make a contribution to your spouse’s super fund. To receive this offset your spouse’s assessable income plus reportable fringe benefits must be less than $13,800 pa, with the full $540 offset payable if you contribute $3,000 and your spouse earns less than $10,800 pa.
Superannuation: money that you and your employer put aside in a concessionally taxed trust fund during your working life for you to use when you retire.
Superannuation fund: a concessionally taxed trust fund created to accept the investment of superannuation savings and contributions. A super fund can be operated by an employer as a corporate fund, by a fund manager as a personal fund, as an industry fund, or it can be self-managed.
Super Choice: legislation that enables many, but not all, employees to choose the super fund into which their employer makes compulsory contributions.
Tax file number (TFN): a unique identifying number issued to each taxpayer by the Australian Taxation Office.
Tax Offset: also known as a tax rebate. Tax offsets directly reduce the amount of tax you have to pay. They are different from deductions, which reduce your total assessable income and therefore your tax by your marginal tax rate. Each dollar of tax offset reduces your tax payable by a dollar regardless of your taxable income.
Will: a legal document that sets out how you wish your assets to be distributed when you die.
Work test: if you are aged between 65 and 74, you must meet the work test to be allowed to make some super contributions. This work test requires you to have worked at least 40 hours within 30 consecutive days in a financial year prior to making the contribution. Generally, a super fund cannot accept super contributions when you reach age 75.