8 - Other indirect investments Flashcards
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What type of basis are with-profit policies written in
Unitised basis
How often are bonuses added to policy
Annually
What are bonuses based on?
Company’s profit
Can bonuses be taken away?
Not once they are added
During uncertain times what happens to surrender value of policy?
Market value reduction is applied to unities with profit funds - otherwise a reduction in value of surrender
What is market value reduction
To reduce amount payable on surrender during adverse market conditions.
Does not apply on death or maturity - usually
What are the two with profit policies available
Unitised with profit
Conventional with profit
What are unitised with profit policies?
With profit investments linked as unit-linked policies.
Premiums buy units in unitised with-profit funds. Difference is unit price is guaranteed not to fall
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Conventional with profit policies
Has initial sum assured that is increased by addition of bonuses.
Thus bonuses are declared as a percentage of sum assured
What are the factors of with profit performance
Underlying performance of investements
Profitability of other companies
What are some advantages of with profit policies
Outstrip inflation
Can get ownerships rights of life office - dividends
Bonusues not directly linked to investment performance as unit-linked policies
What should policyholders consider before choosing policy
Financial strength
Asset allocation
bonus rate
long term perofrmance
surrender value
mvr
Unit linked funds
Linked to performance of units in company
What are some investment funds
13
Cash
Building society
Gilt
Index-linked
Equity
International
Property
North American
Fair easterns
Managed funds
Ethical
External manager
Manager of Manager fudns
What does ABI stand for?
Association of British Insurers
What are the ABI classifications for managed funds?
Mixed Investment 0-35% Shares
Mixed Investment 20-60% Shares
Mixed Investment 40-85% Shares
Flexible Investment
If the ABI classification of a managed fund is Flexible Investment, how much can it hold in equities?
100%
How might fluctuating unit prices benefit an investor?
Pound cost averaging: if you pay regular premiums, they’ll buy more units when the price is low
What tax do policyholders pay for switching between funds?
None
What is the typical term of a conventional with-profit endowment?
How are premiums paid
Ten years (which is the minimum for qualifying status)
Level premiums, usually monthly or annually
True or false: there are virtually no new conventional with-profit endowments
True. They can more easily be bought second-hand
Q
What is a low-cost endowment savings plan?
The basic/maturity sum (on which bonuses are calculated) is lower than the death sum
In a low-start low-cost endowment savings plan, what is the maximum final premium?
Double the initial premium
What does MIP stand for?
Maximum investment plan
What is a maximum investment plan?
A type of unit-linked savings plan for people who’ve maximised their ISA & pension contributions
What is the cap on contributions into qualifying policies MIP?
£3,600
__ can be written as endowment or whole-life policies
Unit-linked savings plans
What are the options after 10 years for unit-linked saving plans?
Bid value of units taken up
Premiums continued for 10 years
units can be withdrawn whenever
What is segmentation?
Writing a savings plan as a cluster of identical policies (e.g. twenty £5/mo plans instead of one £100/mo plan)
What is an investment bond?
A single premium life assurance policy, typically whole-life with no maturity date
When is there an exit charge for investment bonds
first 5 years
What is AMC charged at
1% of value of units (investment bonds)
What is one advantage of unit-linked bonds over guaranteed bonds?
Flexibility – cash can be withdrawn as required
What are guaranteed income bonds?
in return for single preimum, bond provides guaranteed income each year for specified period.
What are high income bonds?
Based on packages of deriviatives - does not guarantee capital back
Guarantee growth bonds
Similar to guarantee income bonds - no income paid
but capital sum in three, four, five years
How much investment can investor take from investment without tax
5% of original investment as long as yields are growing
What are the ABI requirements for a distribution fund?
Assets: 20-60% equity
Assets: at least 50% sterling
Yield: at least 110% of FTSE All-Share
What characterises a distribution bond?
The income paid reflects the income generated, leaving the capital intact
What sort of fund might have a lock-in?
Guaranteed equity bond
What is protected equity bonds
Allows investors to select a quarterly guaranteed level of protection
Why are bonds suitable for trusts?
Variety of bonds for different risk requirements
No taxable income = less admin
Lower rate of corporation tax for underlying life fund
Up to 5% of original investment can be paid to beneficiaries annually w/ no additional tax
Policies can be assigned to/encashed by beneficiaries
How do you calculate chargeable gain on an offshore bond?
Total gain x (days resident in UK / days policy has run)
Friendly society policies funds
Advantage
Do not make tax on funds or dispose
Return is tax free if taken after at least 7.5 years
What is independent taxation
Reduce tax liability by assigning ownership of bond to a lesser taxed spouse before surrender
How long does a qualifying policy have to be held on to be sold to not be a chargeable event and no income tax
10 years
What is an exchange-traded fund (ETF)?
Index-tracking fund listed on major stock market
What distinguishes an ETF from a pooled tracker fund?
Traded like single shares through stockbrokers
Prices updated throughout the day
How much stamp duty applies to ETFs?
None
What is a typical ETF management fee?
Low, less than 0.5%
What are the terms for investing in a subset of an index?
Sampling / optimisation
What does ETC stand for?
Exchange-traded commodity
What is an ETC?
Tracks underlying commodity, either directly or an appropriate index
What does ETN stand for?
Exchange-traded note
How does an ETN work?
Like ETF, but a bond (debt) issued by a bank – no interest, but pays index-linked returns
What is the maxium period permitted between redemption of funds in property
6 months
What is a property authorised investment fund (PAIF)?
An OEIC that mainly invests in property & pays no tax on property/rental income
What is the distribution split for PAIFS
Property Income - net of 20% income tax
Interest income: Paid gross
Dividend - paid without tax
What are the requirements for PAIFs?
60% of annual income must be property
60% of assets must be property
No investor may hold more than 10% of NAV
Insurance company property funds - how much tax
20% on income and capital games
What does REIT stand for?
Real estate investment trust
What are the profit/asset requirements for a REIT?
75% profits from tax-exempt rental business
75% tax-exempt assets, ignoring secured loans
What are the two elements of a REIT?
Ring-fenced letting business
Other business, e.g. property management, subject to corporation tax
What are the basic requirements for REITs?
Resident in UK
Listed on a recognised stock exchange
Closed-ended companies
One class of ordinary shares
What are three ways to invest in private equity?
Enterprise investment scheme (EIS)
Seed enterprise investment scheme (SEIS)
Venture capital trust (VCT)
What is the tax relief for an EIS?
Income tax relief at 30% on investments up to £2m, provided shares are held for 3+ years
What is the upper limit when using an EIS for CGT deferral relief?
None
What is the maximum number of employees for a company to qualify for EIS?
250 employees, or 500 for KI companies
What is the maxium amount of gross assets of company before issue of shares EIS
£15 millium before issue of shares, £16mill after
What are the conditions to qualify for relif for EIS
<£5 m VCT - 12 months
£10m for knowledge intensive comapnies
£12m company lifetime - £20 m for knowledge intensive companies
What is the main difference between EIS and SEIS?
SEIS = more tax relief for investing in younger (riskier) companies
What are the requirements for a company to qualify for SEIS?
Unquoted
< 25 employees
< 3 years old
> £350k gross assets
What is the income relief given to SEIS
50% of shares - maxium investment of £200,000
When is business relief of IHT given for SEIS
after 2 years
What are the similarities between a VCT and an investment trust?
A
Listed companies run by fund managers, shares traded freely
Tax relief VCT
30% income tax - £200,000
NO CGT
What are some requirements for a VCT?
All money raised must be used in 2 years
Must not retain more than 15% income
80% holdings are new shares from unlisted companies
How long is holding period for VCT tax relief
5 years
What happens if an ISA holder ceases to be a UK resident?
They retain the ISA & tax benefits but cannot pay in any further money
Who is proeprty income distributions from REITs paid to?
ISA managers
What are stakeholder products?
Straightforward + good value products that can be sold through ‘basic advice’
What are the three stakeholder products that can be held in ISAs?
Stakeholder deposit account
Stakeholder MTIP (medium-term inv. product)
Smoothed MTIP
What is the date of withdrawls for stakeholdr deposit account
7 days
What is annual charge for stocks and shares isa stakeholder
1.5% for 10 years - 1% after
What are innovative finance ISAs for?
Peer-to-peer lending
What are initial charge range from Unit trusts isas
0.5% - 5%
What are some charges that isa managers can receive
Initial charge
Annual charge
Early encashment penalties
Commission
Dividend collection fee
Report charges
When someone dies with an ISA what happens
Tax free gains and income until
Estate being administered
ISA being closed
three years and 1 day from date of death
What is APS
Additional permitted subscription - set at higher of value of deceased continuing ISA. (Additional isa allowance)
What can spouse do with APS
enchash investment
reinvest into inherited isa allowance
invest money from another source to inherited isa allowance
What is a derivative
Financial contract that derives its value from the value of an underlying investment
Are futures buyers short or long?
Long, as they hope prices will rise above their set price
What is a future
Exchange traded forward contract - agreement to buy or sell an asset at a specified future date, at a price when contract is made
Who does NYSE liffe use services of for future agreement
London clearing house
What is the process which open positions are revalued
market to market
What is variation margin?
Profits & losses paid daily to/from the clearing house and both sides of a futures contract
What is EDSP
Exchange delivery settlment price
What is options
gives buyer right but not obilgation to buy or sell specifeied asset at fixed price before or certain date in future
What type of contracts are settled in cash of future contracts
Interest rate
Index contracts
What is a strike price?
Fixed “exercise” price of an options contract
What is a call option?
Gives buyer the right to buy
What is a put option?
Gives buyer the right to sell
What is a European-style option?
Can only be exercised at expiry
What are the choices given to holder of options
Excercise option
Sell option before expiry
Let option expire worthless
What is an American-style option
Can be exercised at any time before expiry (includes most UK options)
What do in-, out-of-, and at-the-money refer to?
The intrinsic value of an options contract
When does a call option have intrinsic value
if the current price of the underlying asset is above the option’s strike price.
When does a put option have intrinsic value
A put option will have intrinsic value if the current price of the underlying asset is below the option’s strike price.
What is the time value of an options contract?
Value above the intrinsic value – represents hope for an increase in intrinsic value
What are futures and options used for
Hedging
Speculation
What are sellers of options
Writers
What is “writing uncovered calls”?
Selling call options for assets you don’t own
What tax applies to derivatives?
CGT, or income if you’re classed as a trader
What derivatives are exempt from CGT for individuals?
Underlying asset = gilt or qualifying corporate bond
What do hedge funds aim to make
Absolute returns
True or false: hedge funds have limited or even negative correlation with equity and bond markets
True
What are typical structures for hedge funds?
Offshore collective investment schemes or US limited partnerships
What are the main categories of hedge fund strategy?
Long/short funds
Relative value funds
Event-driven funds
Tactical trading funds
How do relative value funds work?
Arbitrage i.e. exploiting pricing anomalies between similar investments
Hedge funds may be appropriate for…
High-net-worth individuals with adventurous risk profiles
What are absolute return funds?
Absolute return funds aim to achieve a positive absolute return for investors in all market conditions. They focus on the value created purely by the fund manager and measure their return against an absolute return objective such as cash, rather than relative to a market benchmark.
What are structured products?
Umbrella term for investment wrappers designed to offer tailored combinations of risk & return
What are the typical components of a structured product?
Capital protection + participation in return from riskier product
What is the common term for a structured product
5-6 years
What are the three main types of structured products?
100% capital protection
Partial / soft / contingent protection
No protection
What are SCARPs?
Structured capital-at-risk products i.e. partial or no protection
What are the three main types of Shariah-compliant funds?
Equity funds
Commodity funds
Ijarah funds
What is the optimal portofolio diversification
After 20th stock
