CFP UK (CISI) flashcards

31 cards. Read the term and the definition here. The deck at the top of this page is optional.

Net worth calculation

Total assets including property and pensions minus total liabilities; a snapshot of financial position at a point in time, used to measure progress toward planning goals.

Emergency fund

Cash reserve of three to six months of essential expenditure held in instant-access accounts, designed to cover unexpected costs without forced borrowing or selling investments.

Real return formula

Real return equals (1 plus nominal return) divided by (1 plus inflation) minus one; it expresses return after inflation and is lower than nominal return.

Personal allowance taper

The personal allowance reduces by one pound for every two pounds of adjusted net income above 100,000 pounds, disappearing entirely at 125,140 pounds.

UK tax year dates

The UK tax year runs from 6 April to the following 5 April; allowances such as the ISA limit and pension annual allowance reset on 6 April.

Attitude to risk

A client's willingness to accept investment volatility, assessed separately from capacity for loss, which is the ability to withstand a fall in value.

Rule of 72

A shortcut estimating how many years an investment takes to double: divide 72 by the annual percentage return, ignoring compounding precision.

Modified duration

A measure of a bond's price sensitivity to interest rate changes; approximate percentage price change equals minus modified duration times the yield change.

Systematic risk

Market-wide risk affecting all securities, such as interest rate or recession risk; it cannot be eliminated through diversification and is compensated by expected return.

Unsystematic risk

Company- or sector-specific risk that can be reduced by holding a diversified portfolio; it is not compensated by higher expected return in an efficient market.

Sharpe ratio

Portfolio return minus the risk-free rate, divided by the portfolio's standard deviation; it measures excess return earned per unit of total risk taken.

Correlation coefficient

A number between minus one and plus one showing how two assets' returns move together; low or negative correlation reduces portfolio volatility.

OEIC pricing

Open-ended investment companies are single-priced: investors buy and sell at one price based on net asset value, unlike dual-priced unit trusts with bid-offer spread.

Total return

The combined return from income received plus capital growth over a period, expressed as a percentage of the initial investment value.

Money purchase annual allowance

Set at 10,000 pounds; it replaces the standard annual allowance for future pension contributions once flexible income has been taken from a money purchase scheme.

Annual allowance taper

For adjusted income above 260,000 pounds, the annual allowance falls by one pound for every two pounds of income, down to a 10,000 pound minimum.

Carry forward

Use of unused annual allowance from the previous three tax years, available only where the individual was a member of a registered pension scheme in that year.

Pension commencement lump sum

Normally 25 percent of the fund, paid tax-free at retirement, subject to the lump sum and death benefit allowance of 1,073,100 pounds.

Lump sum and death benefit allowance

The 1,073,100 pound cap introduced when the lifetime allowance was abolished in April 2024, limiting tax-free lump sums paid from pension schemes.

Normal minimum pension age

The earliest age at which most members can access pension benefits, currently 55 and legislated to rise to 57 in 2028.

Enhanced annuity

An annuity paying a higher income because the applicant's health or lifestyle suggests a shorter life expectancy, such as smoking or a serious medical condition.

State Pension qualifying years

Thirty-five qualifying years give the full new State Pension; at least ten are needed to receive any payment, and voluntary NI can fill gaps.

Annuity rate drivers

Income depends mainly on age at purchase, prevailing gilt yields and interest rates, the amount of capital, and the applicant's health and lifestyle.

Term assurance

Life cover paying a lump sum only if death occurs within a fixed term; it has no investment element and no payout if the policyholder survives.

Decreasing term assurance

Cover where the sum assured falls over time, typically aligned to a repayment mortgage; premiums are lower than level term for the same starting cover.

Critical illness cover

Pays a tax-free lump sum on diagnosis of a specified condition listed in the policy; it is separate from income protection and life cover.

Income protection

Pays a regular benefit, usually up to 50 to 70 percent of pre-tax income, after a deferred period, continuing until recovery, retirement, or policy end.

Deferred period

The waiting time after incapacity before income protection benefits begin; it should match employer sick pay, and a longer period lowers the premium.

Own occupation definition

A claim is paid if the policyholder cannot perform their own specific job; the most favourable and most expensive income protection definition available.

Split trust

A trust arrangement for protection policies that can hold the death benefit outside the estate while retaining critical illness benefits for the policyholder.

Level term assurance

Cover paying a fixed sum assured throughout the policy term, commonly used for interest-only mortgages or family protection; premiums remain constant.