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R02 Investment Principles & Risk > 8 Other indirect investments > Flashcards

8 Other indirect investments Flashcards

1
Q

The two types of life assurance contract are __ only and __ + __

A
  1. Protection only (e.g. term assurance)
  2. Protection + investment (e.g. whole of life, endowment)
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2
Q

What does MVR stand for?

A

Market value reduction

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3
Q

What is the aim of an MVR?

A

Prevent the value leaving the fund from exceeding underlying assets

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4
Q

When is an MVR applied?

A

Surrenders or switches out during adverse conditions e.g. stock market crash

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5
Q

What are the FCA’s requirements for selling with-profits policies?

A

Explain the bonus system & MVR

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6
Q

What are the two main types of with-profit policies?

A
  1. Unitised
  2. Conventional
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7
Q

What are the different pricing systems for unitised with-profit policies?

A
  1. Fixed price
  2. Variable price
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8
Q

How does a fixed-price unitised with-profit policy work?

A

Bonuses are added as extra units at the same price

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9
Q

How does a variable-price unitised with-profits policy work?

A

Bonuses are added as gradual increases in the unit price

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10
Q

True or false: in a variable-price unitised with-profits policy, the unit price may fall as well as rise

A

False. The unit price can only rise

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11
Q

What are the benefits of unitised with-profits policies for the investor?

A
  1. Bonus rate declared annually in advance
  2. Easier to see current value
  3. Can switch to other unitised funds
  4. May pay final bonus on death or maturity
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12
Q

Which are more popular, conventional or unitised with-profit policies?

A

Unitised

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13
Q

What is one advantage of conventional with-profit policies?

A

Bonuses are not directly linked to investment performance, as companies can use their reserves

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14
Q

What does ABI stand for?

A

Association of British Insurers

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15
Q

What are the ABI classifications for managed funds?

A
  • Mixed Investment 0-35% Shares
  • Mixed Investment 20-60% Shares
  • Mixed Investment 40-85% Shares
  • Flexible Investment
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16
Q

If the ABI classification of a managed fund is Flexible Investment, how much can it hold in equities?

A

100%

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17
Q

True or false: some evidence suggests new funds perform better in early years

A

True, possibly because small size makes dealing easier

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18
Q

How might fluctuating unit prices benefit an investor?

A

Pound cost averaging: if you pay regular premiums, they’ll buy more units when the price is low

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19
Q

Aside from MVA, do life offices charge for switching between funds?

A

Typically your first two switches are free, but any further switches are chargeable

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20
Q

What tax do policyholders pay for switching between funds?

A

None

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21
Q

What is the most basic type of life assurance savings plan?

A

Conventional with-profit endowment

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22
Q

What is the typical term of a conventional with-profit endowment?

A

Ten years (which is the minimum for qualifying status)

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23
Q

What type of premiums are paid on a conventional with-profit endowment?

A

Level premiums, usually monthly or annually

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24
Q

In a conventional with-profit endowment, what do premiums purchase?

A

A guaranteed sum on maturity or death, with bonuses added yearly + final bonus

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25
Q

True or false: there are virtually no new conventional with-profit endowments

A

True. They can more easily be bought second-hand

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26
Q

What is a low-cost endowment savings plan?

A

The basic/maturity sum (on which bonuses are calculated) is lower than the death sum

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27
Q

What is a low-start low-cost endowment savings plan?

A

Like a regular low-cost endowment savings plan, but the premiums increase over the term

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28
Q

In a low-start low-cost endowment savings plan, what is the maximum final premium?

A

Double the initial premium

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29
Q

True or false: unlike standard with-profit endowments, low-cost with-profit endowments are growing in popularity

A

False. Low-cost endowments are also going extinct

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30
Q

What does MIP stand for?

A

Maximum investment plan

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31
Q

What is a maximum investment plan?

A

A type of unit-linked savings plan for people who’ve maximised their ISA & pension contributions

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32
Q

__ can be written as endowment or whole-life policies

A

Unit-linked savings plans

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33
Q

The best return on a fixed-term savings plan is usually achieved by…

A

Letting the contract run until maturity

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34
Q

What is segmentation?

A

Writing a savings plan as a cluster of identical policies (e.g. twenty £5/mo plans instead of one £100/mo plan)

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35
Q

What is an investment bond?

A

A single premium life assurance policy, typically whole-life with no maturity date

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36
Q

What kind of life cover do investment bonds provide?

A

Nominal (e.g. 101% of the value of units)

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37
Q

Why are unit-linked investment bonds attractive to higher-rate taxpayers?

A

Liability to basic rate rate income tax is covered by tax paid within the fund

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38
Q

True or false: ‘income’ from investment bonds is not actually income

A

True. It is technically a return of capital

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39
Q

What is one advantage of unit-linked bonds over guaranteed bonds?

A

Flexibility – cash can be withdrawn as required

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40
Q

What characterises a distribution bond?

A

The income paid reflects the income generated, leaving the capital intact

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41
Q

What are the ABI requirements for a distribution fund?

A
  1. Assets: 20-60% equity
  2. Assets: at least 50% sterling
  3. Yield: at least 110% of FTSE All-Share
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42
Q

What could be a good investment for a cautious investor requiring income?

A

A distribution bond

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43
Q

What sort of fund might have a lock-in?

A

Guaranteed equity bond

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44
Q

What do guaranteed equity bonds typically guarantee on maturity?

A

Initial investment + a % of relevant index growth

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45
Q

Why are bonds suitable for trusts?

A
  1. Variety of bonds for different risk requirements
  2. No taxable income = less admin
  3. Lower rate of corporation tax for underlying life fund
  4. Up to 5% of original investment can be paid to beneficiaries annually w/ no additional tax
  5. Policies can be assigned to/encashed by beneficiaries
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46
Q

How do you calculate chargeable gain on an offshore bond?

A

Total gain x (days resident in UK / days policy has run)

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47
Q

What is an exchange-traded fund (ETF)?

A

Index-tracking fund listed on major stock market

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48
Q

What distinguishes an ETF from a pooled tracker fund?

A
  1. Traded like single shares through stockbrokers
  2. Prices updated throughout the day
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49
Q

How much stamp duty applies to ETFs?

A

None

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50
Q

What is a typical ETF management fee?

A

Low, less than 0.5%

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51
Q

What are the terms for investing in a subset of an index?

A

Sampling / optimisation

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52
Q

What does ETC stand for?

A

Exchange-traded commodity

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53
Q

What is an ETC?

A

Tracks underlying commodity, either directly or an appropriate index

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54
Q

What does ETN stand for?

A

Exchange-traded note

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55
Q

How does an ETN work?

A

Like ETF, but a bond (debt) issued by a bank – no interest, but pays index-linked returns

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56
Q

What is a property authorised investment fund (PAIF)?

A

An OEIC that mainly invests in property & pays no tax on property/rental income

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57
Q

What are the requirements for PAIFs?

A
  1. 60% of annual income must be property
  2. 60% of assets must be property
  3. No investor may hold more than 9% of NAV
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58
Q

What does REIT stand for?

A

Real estate investment trust

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59
Q

What are the basic requirements for REITs?

A
  1. Resident in UK
  2. Listed on a recognised stock exchange
  3. Closed-ended companies
  4. One class of ordinary shares
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60
Q

What are the two elements of a REIT?

A
  1. Ring-fenced letting business
  2. Other business, e.g. property management, subject to corporation tax
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61
Q

What are the profit/asset requirements for a REIT?

A
  1. 75% profits from tax-exempt rental business
  2. 75% tax-exempt assets, ignoring secured loans
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62
Q

What are three ways to invest in private equity?

A
  1. Enterprise investment scheme (EIS)
  2. Seed enterprise investment scheme (SEIS)
  3. Venture capital trust (VCT)
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63
Q

What is the tax relief for an EIS?

A

Income tax relief at 30% on investments up to £2m, provided shares are held for 3+ years

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64
Q

What is the upper limit when using an EIS for CGT deferral relief?

A

None

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65
Q

What is the maximum number of employees for a company to qualify for EIS?

A

250 employees, or 500 for KI companies

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66
Q

What is the main difference between EIS and SEIS?

A

SEIS = more tax relief for investing in younger (riskier) companies

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67
Q

What are the requirements for a company to qualify for SEIS?

A
  1. Unquoted
  2. > 25 employees
  3. > 2 years old
  4. > £200k gross assets
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68
Q

What are the similarities between a VCT and an investment trust?

A

Listed companies run by fund managers, shares traded freely

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69
Q

What is the CGT treatment of VCT shares?

A

Gains are not taxable, losses are not deductable

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70
Q

What are some requirements for a VCT?

A
  1. All money raised must be used in 2 years
  2. Must not retain more than 15% income
  3. 80% holdings are new shares from unlisted companies
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71
Q

Why might it be difficult to resell VCT shares?

A

Income tax relief is only available on subscriptions of new shares

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72
Q

What happens if an ISA holder ceases to be a UK resident?

A

They retain the ISA & tax benefits but cannot pay in any further money

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73
Q

What is the ISA subscription limit?

A

£20k p.a. across all ISAs (£4k for Lifetime)

74
Q

What are stakeholder products?

A

Straightforward + good value products that can be sold through ‘basic advice’

75
Q

What are the three stakeholder products that can be held in ISAs?

A
  1. Stakeholder deposit account
  2. Stakeholder MTIP (medium-term inv. product)
  3. Smoothed MTIP
76
Q

What are innovative finance ISAs for?

A

Peer-to-peer lending

77
Q

What is the difference between an exchange-traded vs OTC derivative?

A

OTC = tailored to client = more expensive & harder to trade

78
Q

What does NYSE Liffe stand for?

A

New York Stock Exchange – London International Financial Futures & options Exchange

79
Q

Are futures buyers short or long?

A

Long, as they hope prices will rise above their set price

80
Q

What is variation margin?

A

Profits & losses paid daily to/from the clearing house and both sides of a futures contract

81
Q

What is a strike price?

A

Fixed “exercise” price of an options contract

82
Q

What is a call option?

A

Gives buyer the right to buy

83
Q

What is a put option?

A

Gives buyer the right to sell

84
Q

What is a European-style option?

A

Can only be exercised at expiry

85
Q

What is an American-style option?

A

Can be exercised at any time before expiry (includes most UK options)

86
Q

What do in-, out-of-, and at-the-money refer to?

A

The intrinsic value of an options contract

87
Q

What is the time value of an options contract?

A

Value above the intrinsic value – represents hope for an increase in intrinsic value

88
Q

What are the advantages of derivatives?

A

Quicker, lower dealing costs, and more liquid than underlying assets

89
Q

What is “writing uncovered calls”?

A

Selling call options for assets you don’t own

90
Q

What tax applies to derivatives?

A

CGT, or income if you’re classed as a trader

91
Q

What derivatives are exempt from CGT for individuals?

A

Underlying asset = gilt or qualifying corporate bond

92
Q

For CGT purposes, what happens when a call option is exercised?

A

The cost of the option is treated as part of the cost of purchase

93
Q

For CGT purposes, what happens when a put option is exercised?

A

The cost of the option is treated as an allowable deduction from the sale proceeds

94
Q

For CGT purposes, what happens when an option is allowed to expire?

A

This counts as a disposal, resulting in a capital loss

95
Q

What are the two main uses of futures and options?

A

Hedging and speculation

96
Q

True or false: hedge funds aim for performance relative to a benchmark

A

False, they aim for absolute returns

97
Q

True or false: hedge funds have limited or even negative correlation with equity and bond markets

A

True

98
Q

What are typical structures for hedge funds?

A

Offshore collective investment schemes or US limited partnerships

99
Q

What are the main categories of hedge fund strategy?

A
  1. Long/short funds
  2. Relative value funds
  3. Event-driven funds
  4. Tactical trading funds
100
Q

How do relative value funds work?

A

Arbitrage i.e. exploiting pricing anomalies between similar investments

101
Q

Hedge funds may be appropriate for…

A

High-net-worth individuals with adventurous risk profiles

102
Q

What are structured products?

A

Umbrella term for investment wrappers designed to offer tailored combinations of risk & return

103
Q

What are the typical components of a structured product?

A

Capital protection + participation in return from riskier product

104
Q

What are the three main types of structured products?

A
  1. 100% capital protection
  2. Partial / soft / contingent protection
  3. No protection
105
Q

What are SCARPs?

A

Structured capital-at-risk products i.e. partial or no protection

106
Q

What is an investment note?

A

A type of structured product that is listed on the stock exchange

107
Q

What are the three main types of Shariah-compliant funds?

A
  1. Equity funds
  2. Commodity funds
  3. Ijarah funds
108
Q

What are the maximum gross assets for a company to qualify for EIS?

A
  1. £15m gross assets before EIS
  2. £16m after EIS
109
Q

What is the maximum 12-month VC for a company to qualify for EIS?

A

£5m, or £10m for KI companies

110
Q

What is the maximum all-time VC for a company to qualify for EIS?

A

£12m, or £20m for KI companies

111
Q

True or false: a loss on the termination of an ISA is deductible for CGT purposes

A

False, as ISAs are exempt from CGT

112
Q

If investments are withdrawn from an ISA, what is their base cost for CGT purposes?

A

Their market value on date of withdrawal

113
Q

Income & gains in a ‘continuing ISA’ are tax free until the earliest of…

A
  1. Distribution of the estate
  2. Closure of the ISA
  3. 3 years + 1 day from death
114
Q

How much can be added to a ‘continuing ISA’?

A

Nothing

115
Q

If your spouse dies, you inherit their ISA allowance…

A

On the date of death OR date when ISA investments are passed on, whichever is higher

116
Q

What are the three basic types of CTF?

A
  1. Savings account
  2. Share account
  3. Stakeholder account
117
Q

What is the annual subscription limit for a CTF?

A

£9,000

118
Q

True or false: a child gains management responsibility for a JISA/CTF at 16

A

True, but withdrawals are not allowed until 18

119
Q

What happens if a CTF is rolled over into an ISA?

A

It doesn’t count towards overall ISA subscription limit (but it is subject to LISA limit)

120
Q

Who is eligible for a JISA?

A

Any UK resident under 18 who doesn’t have a CTF

121
Q

What types of investments can be held in JISAs?

A
  1. Cash
  2. Stocks & shares
122
Q

True or false: the qualifying investments for JISAs are more limited than adult ISAs

A

False, they are the same

123
Q

True or false: a child can hold a cash JISA and a shares JISA at the same time

A

True

124
Q

Who is allowed to pay into a JISA?

A

Anyone

125
Q

What is the annual subscription limit for a JISA?

A

£9,000

126
Q

Who can open a JISA for a child?

A

Those with parental responsibility, or children themselves at 16

127
Q

True or false: a CTF can be transferred to a JISA

A

True

128
Q

What are the age limits for ISAs?

A
  1. Stocks & shares: 18+
  2. Innovative finance: 18+
  3. Lifetime: 18-40
  4. Cash: 16+
  5. Junior: 0-18
129
Q

If a child’s cash ISA returns __ p.a. on capital derived from parents, it’s taxable income for the parent

A

> £100

130
Q

What is one way to invest in a stocks & shares ISA?

A

Transferring, within 90 days, from an approved share-incentive plan or savings-related share option scheme

131
Q

If shares are transferred to a stocks & shares ISA, how does this affect the subscription limit?

A

The value of shares on the date of transfer counts towards the limit

132
Q

When would an ISA manager receive distributions gross of tax?

A
  1. When 60%+ of the fund is bonds
  2. Property income distributions from REITs
133
Q

If an ISA holds life assurance, what happens if the subscription is exceeded?

A

The policy must end, causing a taxable gain if the proceeds exceed the premiums

134
Q

True or false: AIM shares qualify for ISAs

A

True

135
Q

True or false: unlisted shares qualify for ISAs

A

False, unless acquired from share incentive plan or savings-related share option scheme

136
Q

True or false: EEA securities & strips qualify for ISAs

A

True

137
Q

True or false: non-UCITS retail schemes are eligible for ISAs

A

True, provided the funds can be accessed within 2 weeks

138
Q

True or false: life assurance policies qualify for ISAs

A

True, provided they cover the investor’s life/health only

139
Q

True or false: annuities & pensions qualify for ISAs

A

False

140
Q

What are some requirements for a stakeholder cash ISA?

A
  1. No charges
  2. Max min deposit of £10
  3. Unlimited withdrawals within 7 days
  4. Interest rate no more than 1% below base rate
141
Q

What are some requirements for a stakeholder MTIP ISA?

A
  1. Max annual charge of 1.5% (1% after 10 years)
  2. Max min investment of £20
  3. Max 60% in risky assets like equity & property
  4. Bid & offer prices must be the same & published daily
142
Q

What happens if a stakeholder smoothed MTIP needs extra capital in its smoothing account?

A

Policyholders can be charged extra

143
Q

How long do VCT shares need to be held to retain income tax relief?

A

5 years

144
Q

How long do VCT shares need to be held to retain CGT relief?

A

No minimum

145
Q

What is the income tax relief on VCT shares?

A

30% on investments up to £200k

146
Q

How much can a VCT invest in a single company or group?

A

15%

147
Q

Why might a friendly society policy have a higher return than an ordinary life office?

A

The friendly society fund does not pay tax on income or internal gains

148
Q

How much can friendly society funds invest in equities?

A

Any amount

149
Q

What are the age limits for friendly society policies?

A

None

150
Q

What is the annual premium limit for friendly society policies?

A

£270, or £300 (£25/mo) if premiums are paid monthly/quarterly

151
Q

What is a friendly society lump sum investment?

A

Lump sum buys a capital protected annuity which feeds annual premiums

152
Q

When are returns on friendly society policies tax-free?

A

When taken after 7.5 years

153
Q

What tax do life assurance funds pay on dividends from UK/overseas companies?

A

None

154
Q

What tax do life assurance funds pay on non-dividend income e.g. interest, rental?

A

20%

155
Q

What tax do life assurance funds pay on gains from gilts and corporate bonds?

A

None

156
Q

What tax do life assurance funds pay on gains NOT from gilts/corporate bonds?

A

20% after indexation allowance

157
Q

How can an insurance company offset its expenses?

A

Against its unfranked investment income

158
Q

How much tax is paid when an offshore bond is encashed?

A

Starting: nil
Basic: 20%
Higher: 40%
Additional: 45%

159
Q

When does the starting rate for savings income apply?

A

Any savings income in your first £5k – earnings are counted first

160
Q

What is a typical term for a guaranteed income bond?

A

Up to 5 years

161
Q

What do investors get from a guaranteed income bond?

A

Annual income + capital returned on maturity

162
Q

What is a guaranteed growth bond?

A

Like a guaranteed income bond, but pays no income

163
Q

True or false: guaranteed growth bonds are exempt from CGT on encashment

A

True

164
Q

What kind of product allows investors to select a quarterly guaranteed level of protection between 95-100%?

A

Protected equity bond

165
Q

Most regular premium life assurance policies taken out for investment purposes are…

A

Endowments

166
Q

For a policy to be qualifying, no single premium may exceed…

A

1/8 the value of total premiums

167
Q

What is the minimum term for a qualifying policy?

A

10 years

168
Q

For a policy to be qualifying, premiums must be paid at least…

A

Annually for 10 years, or until claim

169
Q

What is the minimum life assurance cover for a qualifying policy?

A

75% of total premiums

170
Q

For a policy to be qualifying, premiums paid in any one year must not exceed…

A
  1. £3,600
  2. Twice the premiums paid in any other year
171
Q

What is the key difference between a REIT and a PAIF?

A

A REIT is closed-ended whereas a PAIF is a type of OEIC

172
Q

How long do EIS shares need to be held to be free of IHT?

A

2 years

173
Q

When does EIS investment need to happen to qualify for CGT deferral?

A

One year before to three years after the gain

174
Q

True or false: gains on REIT investments are exempt from CGT

A

False

175
Q

What are the distributions from REITs?

A
  1. Ringfenced element, paid net of 20% tax
  2. Non-ringfenced element, paid gross, subject to usual dividend tax
176
Q

What are the rules for the ringfenced element of REIT distributions?

A
  1. Non-taxpayers can reclaim the 20%
  2. Higher- and additional-rate taxpayers must pay extra
177
Q

What are the exceptions to the three-year holding period for EIS income tax relief?

A
  1. Disposal to a spouse
  2. Death of the investor
178
Q

What type of tax relief may be carried back to the previous tax year?

A

EIS income tax relief

179
Q

What is the condition on unlimited EIS CGT relief?

A

It must be the only tax relief claimed on the investment

180
Q

What are chargeable events for a non-qualifying policy?

A
  1. Death
  2. Maturity
  3. Full surrender, some part surrenders
  4. Assignment, except as a gift
181
Q

ETFs are exempt from what type of tax?

A

Stamp duty

182
Q

What are the requirements for an endowment policy to be qualifying?

A
  1. Term: 10+ years
  2. Premiums paid at least annually for 10+ years (or until claim)
  3. Cover: 75%+ of total premiums
  4. Premiums in any year must not be more than 2x any other year
  5. No premium is more than 1/8 total premiums
  6. Maximum annual premiums: £3,600

R02 Investment Principles & Risk (11 decks)

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