7 - Meeting Customers Needs: Saving & Investment Flashcards
What three categories can investment savings be divided into?
Deposit Based investment and savings
Fixed interest investments
Asset back investments
How does inflation impact on savings?
Savings are affected by inflation, which can reduce the amount your savings are worth over a period of time. For example, if there was inflation of 3 percent over 10 years, a £1000 saving, will be only worth £750 at the end of 10 years. Long term investments in equity-linked investments have proven most likely to give growth rates above that of inflation.
What can we do to limit the impact on TAX on investments?
Tax planning is not what a financial advisor would provide, but it is prudent to make sure that the client is taking advantage of products that do not or have a limited impact on the clients’ tax obligation. To that end, clients should consider pensions, ISA’s and if they expect to exceed their capital gains allowance, could consider gilt-edged stocks, which are CGT free.
What are deposit-based savings?
The simplest method of saving and the lowest risk, but also with the least potential growth. These are good for shorter-term savings where the need for an income from the amount is not a requirement.
What are is the taxation on interest accrued from savings?
Interest on savings is paid in gross. The starting rate for paying interest is based on the PAYE initial allowance plus £5000 starting rate for interest. Therefore, providing the income is below £17500 including income and interest payments, then there would be no TAX to pay. Anything above this figure, either from income or interest received, would be liable to TAX.
There is also a Personal Savings Allowance (PSA) as follows; £1000 for those on the basic rate of TAX and £500 for those based on the higher rate of TAX. Those outside these bands do not receive any allowance and tax is paid.
Therefore, those that start on the basic rate, plus the standard savings rate of £5000, also receive an additional £1000 PSA.
What are fixed interest investments?
Fixed interest investments tend to refer to fixed interest securities such as bonds, corporate and government bonds - collecting just known as bonds. Essentially, you are loaning the money over a period of time, based on the interest return on the bond.
What are gilts?
Gilts, are what are known as ‘Gilt Edged Securities’, gilts are a form of Bond issued by the Debt Management Office part of the executive of the HM Treasury. Designed for the UK Govt to borrow money to finance budget deficits.
Gilts have a par value, or otherwise known as a face value - the amount payable on redemption, which is usually the same as the initial purchase price. Gilts bought via tender or auction could cost more or less than their face value.
Gilts have a redemption date which can be between 5 and 30 years. With a guaranteed interest return paid out each year, during the life time of the guilt. This is known as the coupon.
Some are index-linked and the payments rise in value based on the RPI.
Gilts can be sold during the term and if the investor makes a profit on the sale of the gilts, they are exempt from CGT.
What are corporate bonds?
Corporate bonds enable a large corporate to raise money through the bond market. Coupon (interest return) rates tend to be higher than govt backed gilts. Due to the risk of a possible default. The higher the company credit rating, usually the lower the coupon return rate.
How can you profit from gilts and bonds?
Aside from the expected yearly coupon return rate, the gilt or bond can also be traded for a profit on the secondary market. If the current interest rate is below that of the current coupon rate on a gilt, then this would be an attractive sale at a profit. If the interest rate is above that of the gilt, then the sale will unlikely be at a profit.
What are Permanent interest-bearing shares (PIBS)?
These are corporate bonds issued by building societies.
They cannot be redeemed and are therefore considered to be more risky. Although, some PIBS may have a redemption clause to allow it.
Interest rates (coupon) tends to be much higher on PIBS,.
They can be sold, much like bonds and gilts in the secondary market. But it is important to note that the secondary market for PIBS is much smaller or less liquid.
Income from PIBS is paid gross and the income is taxable. Gains made from sales on the secondary market are not subject to CGT.
What are asset backed investments?
Shares
Property - Residential / Commercial
Real Estate Investment Trusts (REITSs)
- Enabling investors to invest in a wider range of diversified property portfolio.
What are collective investment products?
Collectively your investment is added to a pool and managed by a fund manager - who will then use their knowledge and skill and invest in the following products for a return.
Cash,
Equities,
Gilts & Bonds
Commercial Property
Risk is spread amongst all investors, there is economies of scale and the schemes are highly regulated and run by professionals, meaning the investor doesn’t have to make the investment decisions.
What are Unit Trusts and what are their main types?
A pooled collective of funds which are created under a trust deed. They can be invested as a lump sum, regular contributions or both. The fund is divided into units, which you can buy, either monthly or as a lump sum. The number of units is open-ended, so the manager can create more units, to create more funds, to create more to invest. They are also required to buy back units, should the investor wish to sell.
The unit trustee is to oversee that the fund is managed in line with the accordance with the deed and the law.
Unit Trust Manager is to manage the investments, value units and buy and sell units on demand - most are actively managed, whereby the manager will research and decide where to direct funds accordingly.
Income funds - designed to draw a regular income and to provide some capital growth.
Growth funds - to provide growth.
Specialist funds - that do not fit into the above, due to the nature of the investments.
What are open-ended investment companies?
Similar in function to how Unit Trusts work with regards to being a pooled investment, but instead of taking a share based on units of a fund, the investor is actually taking a share in an OEIC company that holds the fund assets / by the shares, therefore taking a direct share in the company and its results.
What are the benefits of an OEIC?
Flexible in nature, no contractual term.
A wide choice to choose from.
As a pooled investment they provide less risk than other pooled investments, as you’re not investing in the underlying (the financial vehicles) but the company.
Charges are generally lower.
