We hope you find this list of common financial terms useful
Throughout the financial advice process, our team will often provide explanations or more detail about a specific financial term. We believe that interactive and open communication is an important part of the process. It is essential to delivering quality, tailored advice.
If you are unable to find what you are looking for below, please feel free to contact us. We would be happy to discuss your query with you.
Account based allocated pension
An account based allocated pension provides a regular income from a superannuation fund. A person can nominate the amount of income that suits them but they must take at least a minimum pension amount as set by the government. An account based allocated pension provides flexibility as the income may be changed and lump sums can be withdrawn.
However income payments only continue until the account balance is depleted – income from these types of income streams are not guaranteed.
The value of the investment depends upon: the original amount invested; the market-linked investment earnings; fees and charges; and the amount of income withdrawn from the account. Income payments may be increased in line with inflation changes.
Benefits of investing your superannuation into an allocated pension:
- If you are under age 60, the portion of your income that relates to your tax free component will not be subject to tax. The balance of the income will be taxable, but if you have reached preservation age, you will receive a 15% tax offset on this taxable amount (element taxed).
- Income payments from a taxed superannuation fund you receive on or after reaching age 60 will be completely tax free and will not need to be included in your tax return.
- Earnings within the fund are taxed the same as your superannuation fund at a maximum rate of 15%. Capital gains on assets held for longer than 12 months within the fund will be taxed at 10%.
- Income levels may be adjusted (above government minimum levels) to suit your changing needs.
- Lump sum commutations are available.
- When you die, the remaining value of the pension can revert to your spouse (and certain other dependants), or lump sum payments can be made to eligible beneficiaries. Where the dependant is considered a tax dependant (eg spouse), this lump sum is generally tax free.
- A portion of your income that relates to a return of your capital won’t be counted as income under the Centrelink income test.
Aggressive investor/aggressive investment mix
The investor’s objective is to achieve high long-term growth. They are prepared to accept higher risk and volatility of returns in exchange for greater long-term returns.
AMP accredited financial planner
In addition to professional financial planning qualifications, all AMP planners complete an AMP accreditation program as part of their ongoing professional education. AMP planners complete the accreditation assessment annually.
Gross income including salary and wages, dividends, interest and rent before any deductions are allowed. Assessable income also includes net capital gains, Eligible Termination Payments (ETP) and other amounts that are not ordinarily classed as income. Source: Australian Taxation Office (ATO)
MoneySmart, Australian Securities & Investments Commission’s (ASIC) consumer website, defines assets as ‘Something you own. It may be a financial item like money, bonds, shares or a bank account or physical item like a house, land or car.’
Australian Bureau of Statistics (ABS)
The central statistical authority for the Australian Government. The ABS provides the official national source of statistics for use by the government and the community.
MoneySmart is the consumer website of the Australian Securities & Investments Commission (ASIC).
Australian Securities & Investments Commission (ASIC)
The Australian Securities & Investments Commission (ASIC) is an independent Australian government body that regulates financial markets, securities, futures and corporations. ASIC enforces and regulates company and financial services laws to protect consumers, investors and creditors.
Average Weekly Ordinary Time Earnings (AWOTE)
Average weekly ordinary time earnings – a measure of average wages used by the Australian Bureau of Statistics.
A fund or portfolio that invests across major asset classes ie cash, fixed interest, property and shares, domestically and internationally. It provides long-term capital growth and a reasonable level of income.
Balanced investor/balanced investment mix
The investor’s main objective is to achieve balanced returns to meet their medium to long-term financial goals. They are prepared to accept some risk and some volatility of returns to achieve their long-term goals.
Before tax annual income for individuals
Business overheads insurance generally provides a reimbursement of up to 100% of the fixed and ongoing expenses of your business that you are responsible for if you are unable to work due to illness or injury, and meet the policy conditions for payment. It is important to understand how this policy works. Here are some features to be aware of.
Capital gains tax
Capital losses (the difference between the disposal price and the reduced cost base) can only be offset against capital gains. If your total capital losses for the year are more than your total capital gains, the difference is carried forward until it can be offset against future capital gains.
It follows that efforts should be made to offset capital losses against capital gains as quickly as possible, as the value of the loss diminishes over time with inflation. Where a capital gain is made in an income year, disposing other assets (with a capital loss) could be considered.
You should obtain specific taxation advice from your accountant with respect to the application of capital losses
Conservative investor/conservative investment mix
The investor’s main objective is to achieve stability in their portfolio. They are prepared to accept lower returns in exchange for maintaining low risk and capital stability to achieve their goals.
Assets that typically provide lower levels of risk than other assets. The trade-off is usually lower returns over the long term. An example of a defensive asset is investing in cash.
The process where funds are spread across classes of assets, geographies and managers to distribute and control risk. As a result, the return on the portfolio as a whole varies less than the return on smaller lots of individual holdings.
Dollar cost averaging
Early retirement scheme payment
‘Today’s dollars’ is what an item or goal costs today. ‘Future dollars’ is an expression used to indicate the future cost of the same item or goal eg retirement. The cost of the goal is adjusted to reflect the increase in the price of items over time due to inflation. It is an estimate based on current information.
Genuine redundancy payments
Growth assets/growth investment mix
Assets that typically provide higher levels of risk than other assets. The trade-off is usually higher returns over the long term. An example of an aggressive asset is international shares or property.
Taxation credits shareholders may be entitled to when they receive franked dividends.
Income protection insurance generally provides a regular income while you are unable to work due to illness or injury, and meet the policy conditions for payment. The maximum level is typically 75% of your wage. This lessens the need to draw on other sources such as your savings; home equity or relying on government benefits such as Centrelink.
An increase in the volume of money and credit relative to available goods and services, resulting in a continuing rise in the general price level.
The mix of assets your money is invested in to achieve your financial objectives. The mix is based on the time you have to achieve your objective and your risk tolerance.
An investment strategy is the combination of assets you invest in to achieve your goals within the timeframe you specify. The appropriate strategy will depend on your goal, the length of time you have to achieve the goals and your tolerance for risk (that you might lose money as well as grow your money). A professional adviser can analyse these considerations and recommend the right strategy for you.
Also known as risk profile. An individual’s or an investment manager’s willingness to trade off the risk of losing money in exchange for higher returns over time.
Life insurance pays a lump sum on the death of the life insured whilst the cover is in place. Many policies also pay in the event of terminal illness. By getting adequate life cover, you can make sure your debts will be repaid and dependants supported if you die prematurely.
Line of credit
Loan to value ratio
Generally, a period of five years or more.
An investment that generally matures in more than five years or is to be made over a period of five years or more.
Lump sum contributions
An amount of money paid into your superannuation fund in one payment. It can be a before or after-tax payment.
The fees and costs for managing your product, specifically the amount you pay for specific investment options. This is money paid to the investment manager for managing your money.
Margin loans are where a financial institution lends an investor a percentage of the market value of the investments nominated by the investor and approved by the financial institution. The difference between the market value of the investments and the amount of the loan is the margin. The investor must contribute the margin.
An environment which is organised to facilitate exchange of products and services between buyers and sellers.
A charge of 2% paid by resident taxpayers to fund the Australian national health system, known as Medicare.
Your Medicare levy is reduced if your taxable income is below a certain threshold. In some cases you may not have to pay the levy at all.
Medicare levy surcharge
The Medicare levy surcharge (MLS) is levied on Australian taxpayers who do not have an appropriate level of private hospital insurance and who earn above a certain income.
It is designed to encourage individuals to take out private hospital cover, and where possible, to use the private hospital system to reduce demand on the public Medicare system.
The MLS is payable in addition to the Medicare levy.
The base income threshold (under which you are not liable to pay the MLS) is $90,000 for singles and $180,000 for families. However, you do not have to pay the MLS if your family income exceeds the threshold but your own income for MLS purposes was $21,655 or less.
If you do have to pay the MLS, it will be included with the Medicare levy and shown as one amount on your notice of assessment called Medicare levy and surcharge.
An individual who contributes to a superannuation plan.
Moderately aggressive investor
The investor’s main objective is to accumulate assets by targeting capital growth over the medium to long-term. They are prepared to accept higher volatility and moderate risks to achieve these returns.
Moderately conservative investor
The investor’s main objective is to maintain relatively stable returns. Capital stability is still a priority, however, they are willing to accept some volatility to achieve these returns.
The Australian Taxation Office describes ‘non-concessional contributions’ as contributions that are made from a person’s after-tax income. The terms ‘non-concessional contributions’, ‘post-tax contributions’ and ‘after-tax contributions’ are often used interchangeably. Source: Australian Taxation Office (ATO).
Contributions made by an individual to their superannuation fund. For employees, personal contributions are amounts put into superannuation over-and-above the compulsory superannuation guarantee contributions (SGC) that an employer makes on behalf of the employee. Contributions can be made using before or after-tax money.
Power of Attorney
A Power of Attorney is a document whereby one person appoints another to perform certain tasks on their behalf.
There are 2 basic approaches to Powers of Attorney:
Non-enduring Power of Attorney.
Enduring Power of Attorney.
A Non-enduring Power of Attorney can be set up so the attorney can cover a specific event for a fixed period of time. For instance, it can be granted for the duration of your absence (for example, if you are going overseas).
If you’re going to be absent from your normal place of residence for a considerable period, you may want to consider who will look after your financial affairs. Given that you can limit the powers granted under a Power of Attorney, you may wish to grant a close relative a limited Power of Attorney to look after your financial affairs whilst you are away.
Non-enduring Powers of Attorney become invalid if the person who granted the power becomes mentally incapacitated.
An Enduring Power of Attorney is suited to looking after the financial affairs of a person when they are not in a position to look after their affairs themselves. Unlike a general Power of Attorney that stops once a person who granted the power becomes mentally incapacitated, an Enduring Power of Attorney continues to operate when a person becomes mentally incapacitated. However, in most states, an enduring power of attorney does not allow the attorney to make lifestyle and medical decisions for the donor. This would be covered in most states by appointing an Enduring Guardian.
Granting an Enduring Power of Attorney can help to make sure your financial affairs are handled on your behalf should anything happen to you.
Because of its legal effect, an Enduring Power of Attorney can only be signed after obtaining the advice of a solicitor.
The age at which a person may acquire access to accumulated preserved superannuation benefits.
Product Disclosure Document (PDS)
An offer document for a financial product. It contains information that a person would reasonably require to make a decision to acquire a financial product. This includes information about the product features, fees that apply, any adviser commission, benefits and risks of investing and what to do if you have a complaint.
An estimate of the outcome of an event or situation (such as a financial outcome) based on a specified set of conditions, specific data or trends.
Real rate of return
The rate of return on an investment in excess of inflation. For example, if the rate of return is 10% but the inflation rate is 3%, the real return is 7%.
An amount of money refunded to an individual if a particular event occurs or a condition is fulfilled. or example if someone’s superannuation balance exceeds a specified amount.
The total earned from an investment including capital growth, or loss, and income.
A reverse mortgage is a loan, which enables asset rich, cash poor individuals to access the equity in their home without selling their homes.
The reverse mortgage is aptly named because the payment stream is reversed. Instead of making monthly payments to a lender, as with a regular mortgage or home equity loan, the lender makes payments to the client.
The loan proceeds may be taken as a lump sum, fixed periodic payments or a combination of these. Generally the funds can be used for any purpose.
As in a regular mortgage the property is collateral for the loan with the difference being that repayments on the loan are not required and interest plus fees are added to the loan.
Generally, the total amount owing (ie borrowed amount plus interest and credit fees and charges) become due if the borrower/s:
Dispose of the home.
Move out of the home.
Is in default of the loan contract; or
In investment terms, risk is a measure of the volatility of returns.
Also known as investor profile. An individual’s or an investment manager’s willingness to trade off the risk of losing money in exchange for returns over time.
An amount paid to someone in exchange for services e.g. money in exchange for work services.
When an employer makes contributions into a super fund from an employee’s salary before deducting Pay As You Go (PAYG) tax. The contributions are made at the employee’s request. The employee’s contribution is maximised by using pre-tax dollars and the fund is taxed at only 15%, instead of your marginal rate of up to 45% plus 1.5% Medicare levy.
Self managed super fund
A self-managed superannuation fund must meet all of the following broad requirements:
There is a maximum of 4 members at any one time.
All members are trustees (or directors of a corporate trustee) and there are no other trustees/directors (except for a single member fund).
No member of the fund is an employee of another member of the fund, unless the members concerned are relatives.
No trustee or director of a corporate trustee receives any remuneration in respect of duties or services as trustee of the fund.
To remain a complying superannuation fund (and be eligible for tax concessions), a SMSF must also meet the requirements of an Australian superannuation fund for the entire year.
A potential problem may occur when SMSF trustees elect to temporarily work overseas. Short-term temporary absences from Australia by SMSF trustees may not of itself create significant problems. However, if SMSF trustees depart Australia for an extended period, the fund might no longer meet residency requirements. If a SMSF is faced with losing its residency status, it should consider appointing an enduring power of attorney to act as trustee in that member’s absence. We recommend you seek legal advice in this area.
Further, if a member becomes a non-resident of Australia in a year, trustees should carefully consider whether or not to accept contributions or rollovers on behalf of that member, in order to protect the fund’s eligibility for tax concessions.
SMSF sole purpose test
SMSFs must be maintained for the sole purpose of providing members with retirement benefits, or providing members’ beneficiaries with benefits if the member dies before retirement. Other ancillary purposes are permitted, including payment of disability benefits for a member’s retirement due to ill health or in other approved circumstances.
SMSFs can’t use superannuation savings to provide pre-retirement benefits to members, employer sponsors or for estate planning purposes. The retirement income objective is paramount.
SMSF trustees must ensure the sole purpose test is complied with at all times. A person who breaches the test is guilty of an offence and significant penalties may apply. Failure to comply with the sole purpose test may also result in the fund becoming a non-complying superannuation fund for taxation and superannuation guarantee purposes.
An investment that generally matures or is intended to operate for less than two years.
A tool, calculation or experiment to recreate a specific situation in test conditions to model or monitor the outcome/what happens.
My super simulator is a calculator tool that takes information from the user, based on a range of questions, and estimates the superannuation outcome over time, subject to certain assumptions, such as economic and market performance conditions.
Small business superannuation clearing house
The Small Business Superannuation Clearing House is a free online superannuation payments service that helps small businesses with 19 or fewer employees, or have an annual aggregated turnover of $10 million of less, meet their superannuation guarantee obligations.
If you make contributions to a complying superannuation fund or a retirement savings account (RSA) on behalf of your spouse (married or de facto) who is earning a low income or not working, you may be able to claim a tax offset.
You will be entitled to a tax offset of up to $540 per year if you meet all of the eligibility conditions.
Super contributions splitting
Super contributions splitting allows you to split certain super contributions with your spouse, made during the previous financial year. To be eligible, your spouse must be under 65 and not retired.
Up to 85% of concessional contributions may be split to your spouse’s super account. This includes employer contributions (including superannuation guarantee and salary sacrifice) and personal deductible contributions.
An application to split super contributions must be made in the financial year after the contributions have been made. However, if you leave the super fund during the year that the contributions are made, you can apply to split the current year’s contributions prior to transferring your total super balance to another super fund.
The benefits of splitting your super contributions are:
Your super benefits can be divided more evenly between you and your spouse.
A couple can split the funding of their superannuation and take advantage of 2 low tax thresholds on the taxable components of any superannuation benefit received in cash before age 60.
Splitting contributions in favour of an older spouse, who will reach retirement sooner, will allow earlier access to these funds.
Splitting contributions in favour of a younger spouse may improve Centrelink benefit entitlements.
Please note: the split contributions in your spouse’s super account cannot be accessed until they meet a condition of release such as retiring after reaching preservation age.
Splitting contributions can utilise the pension balance transfer cap for the couple if the cap is likely to be reached by one person in the couple.
A pension or payment to a person retiring from work on reaching the preservation age. The term also refers to the accumulating contributions by employers and employees to a superannuation fund.
Amounts invested into a superannuation fund.
Superannuation Guarantee Charge
The Superannuation Guarantee Charge (SGC) is a mechanism to ensure that employers contribute at least 9.5% of an employee’s salary to a superannuation fund or Retirement Savings Account (RSA). The SGC is the penalty imposed on an employer if they do not pay the required superannuation guaranteed contributions.
A contribution made by people to fund the services provided by the government, such as transport, education or health services. The most common tax is income tax, which is a contribution made from income. The amount is usually a percentage of income that is determined by the amount of income earned.
The amount of money required for paying for something today, at current prices. The term is often used when referring to something that will happen in the future – when the same thing is likely to cost more in actual dollars – to give the user a sense of the relative cost, using today’s prices as a reference guide.
Total and Permanent Disablement
Total and Permanent Disablement (TPD) cover will provide a lump sum should a person suffer an illness or injury which totally and permanently incapacitates them from working. Proceeds from a TPD cover can be used to pay off debts, meet the costs associated with medical treatment / rehabilitation, provide support for dependents or establish an income stream to replace earnings.
Transition to retirement
Transition to Retirement is a superannuation condition of release that provides greater flexibility for you in structuring your work arrangements prior to retirement. For example, you could reduce your hours of work and use your super to start a non-commutable income stream to supplement your reduced salary.
Your superannuation fund may not offer non-commutable income streams and/or may apply additional restrictions. We recommend you contact your fund for further details.
There are 2 broad types of non-commutable income streams:
Account based allocated pensions with temporary commutation restrictions.
Non-commutable lifetime income streams (pensions and annuities).
Note: If you start a transition to retirement income stream, you will not be able to access your superannuation benefits as a lump sum cash payment until you meet a condition of release (for example you retire, or reach age 65). At that time, a non-commutable allocated pension will become fully commutable, and benefits can be taken as a lump sum if desired.
Trauma insurance or crisis benefits are paid when a specific condition or event occurs, for example a heart attack, cancer, or a stroke. Unlike TPD or income protection, a lump sum crisis benefit is paid upon diagnosis, and survival, of the defined condition. This benefit gives the insured a financial boost when it is needed most – in a time of crisis.
Having adequate crisis cover in place allows you to plan for expenses and gives you every opportunity to recover, both physically and financially.
Working test/work test
A government test for people aged 65 to 74 that stipulates the minimum number of hours a person must work in a year in order to be eligible to make non-concessional superannuation contributions.
- Members under 65 years of age:
You may accept all types of non-mandated contributions. However, you can only accept personal contributions made by the member if you have their tax file number (TFN).
- Members aged 65 or over but under 70:
You may accept all types of non-mandated contributions if you have the member’s TFN and the member is gainfully employed on at least a part-time basis*.
- Members aged 70 or over but under 75:
You may only accept employer contributions and personal contributions made by the member. You must have the member’s TFN and they must be gainfully employed on at least a part-time basis*. For a member turning 75, the contribution must be received no later than 28 days after the end of the month that the member turns 75.
- Members aged 75 or over:
You generally can’t accept non-mandated contributions.
* ‘Gainfully employed on at least a part-time basis’ means the member is gainfully employed for at least 40 hours in a period of 30 consecutive days in each financial year in which the contributions are made. Unpaid work does not meet the definition of ‘gainfully employed’.