A.4 (part b) Savings and Investments

Question 1

What is the difference between saving and investment?

Answer 1

Saving is putting money aside, bit by bit. Investing is taking some of your money and trying to make it grow by buying things you think will increase in value.

Question 2

What are the six savings and investment products?

Answer 2

1. ISA
2. Deposit and savings accounts
3. Premium bonds
4. Bonds and gilts
5. Shares
6. Pensions

Question 3

What is an ISA?

Answer 3

A savings or investment account you never pay tax on. You can save up to a minimum of £20000 per year.

Question 4

What are the three main types of ISA accounts?

Answer 4

1. Cash
2. Lifetime
3. Stocks and shares

Question 5

What are the features of a cash ISA?

Answer 5

They are like a savings account, with tax free interest payments. You can only open one cash ISA every tax year, and they can be instant access or fixed term.

Question 6

What are the features of a lifetime ISA?

Answer 6

You have to be between 18 and 39 years old to open one. You can’t put more than £4000 in a year. It only allows you to use the money to buy a house or a pension. You can’t use it for a minimum of a year. You will get 25% bonus on the amount deposited.

Question 7

What are the features of a stocks and shares ISA?

Answer 7

You can invest in a wider range of stocks, shares and funds. There is tax free interest on capital and income. You can only open one every tax year.

Question 8

Give two advantages of an ISA

Answer 8

1. Tax free withdrawals
2. They offer wide investment choices
3. They are transferrable (transfer your money from a cash ISA to a lifetime ISA)
4. No age limits (junior ISA’s for under 16s)
5. They are easy to pass on to someone if you were to pass away

Question 9

Give two disadvantages of an ISA

Answer 9

1. Cash and investment ISA’s both have a contribution cap of £20000 for the current tax year
2. Although your returns will be interest free, there is no tax relief
3. Withdrawn money cannot be replenished
4. You can’t carry over what’s left in an ISA over to the next one
5. You can’t have an ISA in joint names

Question 10

What is a deposit and savings account?

Answer 10

An account for saving a monthly chunk of your income. There are rules about how much you can put in and take out, but you get a slightly higher interest rate.

Question 11

Give two advantages of a deposit and savings account

Answer 11

1. Up to £85000 per person is protected in the UK-regulated financial institutions
2. Interest from savings is tax free for most
3. You can split money across different accounts to get a mix of benefits

Question 12

Give two disadvantages of a deposit and savings account

Answer 12

1. Minimum balance requirements

2. Lower interest rates than other accounts/investments

Question 13

What are premium bonds?

Answer 13

Premium bonds are a savings account you can put money into (and take out when you want), where the interest paid is decided by a monthly prize draw.

Question 14

What are bonds?

Answer 14

Debt obligations. A company or government can issue bonds in order to raise capital for a particular venture. The company has therefore borrowed money and pays an agreed interest amount over time as a payment.

Question 15

What are gilts?

Answer 15

You invest money into the government and they keep it for a period of time. Every year, they will pay you back a certain amount of interest back and on the final date you will receive all of the money back that you invested in the first place, along with interest.

Question 16

Give two advantages of bonds and gilts

Answer 16

1. As the security is issued by the GOI, it has a minimal default risk
2. Investors have the opportunity to invest in very long term debt
3. Almost all issues by the government have adequate liquidity except for a few.
4. There are many types of corporate bonds

Question 17

Give two disadvantages of bonds and gilts

Answer 17

1. The inflation will decrease the real return on the security and the possibilities of higher interest rates erode the value of the bond
2. Bonds are subject to risks such as the interest rate risk, repayment risk, credit risk, reinvestment risk and liquidity risk
3. One major risk of corporate bonds is a credit risk. If the issuer goes out of business, the investor may not receive interest payments or get their principal back

Question 18

What are shares?

Answer 18

A share is a divided-up unit of the value of a company. If you own one, you own a little bit of the company and a proportion of the company’s value.

Question 19

Give two advantages of shares

Answer 19

1. It’s a good way to stay ahead of inflation
2. They are easy to buy
3. They are easy to sell
4. You receive dividends either as income or reinvest to buy more shares
5. You get voter rights, a say in what the company does
6. You can trade in companies you believe in (ethical rights)

Question 20

Give two disadvantages of shares

Answer 20

1. If businesses perform badly, you could lose your money
2. Share price could drop and you would lose money
3. Long term investments, you can’t dip into the money
4. Very risky investment compared to other investment options
5. It is hardly possible to impact the decision of the company using the voting rights

Question 21

What is a pension?

Answer 21

It is a type of income you get when you retire. The amount you get depends on how much you contributed to your pension fund during your working life. You either get a state pension or an employers pension.

Question 22

Give two advantages of a pension

Answer 22

1. Tax relief