A4- Saving And Investment Flashcards
INDIVIDUAL SAVINGS ACCOUNT ( ISAs)
Adv & Disadv
Bank will pay interest on the balance. This interest is a form of income. In an ISA the income earned is exempt from income tax. The interest encourages saving.
Advantages:
Tax isn’t charged on interest earned allowing the saver to keep all the rewards of saving. Interest rates are sometime slightly higher than in alternative saving accounts.
Disadvantages:
Notice is often required when to make withdrawals. There may be a limit set on the number of withdrawals made. If saver makes more withdrawals than agreed then the penalty may cancel out the tax savings. There is a limit for how much money you can place in an ISA
DEPOSIT AND SAVINGS ACCOUNT
Adv & Disadv
Account held with banks or building societies where interest is paid on positive balances. Funds cannot be withdrawn immediately, notice required. Interest rate is subject to income tax, but only if above certain level. E.g. an individual who pays the basic rate if 20% income tax can earn up to £1000 a year in interest, tax free.
Advantages:
Interest rate is received on positive balances. Accounts sometimes require regular deposits forcing the saver to follow a savings plan.
Disadvantages:
Interest earned us taxed. The interest rate is likely to be lower than the interest paid on borrowing, therefore the benefits are lost if the customer is borrowing at the same time.
PREMIUM BONDS
Adv & Disadv
A government incentive for individuals to save. Bonds are sold by the National Savings and Investments Bank. Each month bonds are entered into a prize draw with the opportunity to win up to £1 million. Each person is limited to holding up to £50 000 in bonds. Interest is not paid on savings.
Advantages:
Chance to win more than what can be earned in interest. Can easily be withdrawn with no loss or penalty.
Disadvantages:
No guaranteed return on investment. Maximum amount reviewed annually by government. The amount invested lose value due to inflation.
BONDS AND GILTS
Adv & Disadv
Individuals or companies lend money to the company in return for an IOU. A fixed rate of interest is paid on the loan and the initial sum repaid in full at a set point in the future.
Advantages:
Regular fixed returns. Spreads risk across a range of markets.
Disadvantages:
Risk of losing some/all of the value of the investment if the bond or guilt value falls. Interest payments may not be received if the issuer is unable to make payments.
SHARES
Adv & Disadv
Investment made when individuals or organisations become part owners of a business i.e. they invest finance in return for equity
Shareholders’ objectives are to receive income in the firm if dividends paid from the companies profits as well as to gain wealth as share prices increase.
Advantages:
Share prices offer high reward. As per owners in a business, there may be additional benefits like discounts and special offers. For some, this is a way creating interest.
Disadvantages:
Share prices fluctuate offering potential high risk. There is no guarantee of any reward or return, investment can be lost.
PENSIONS
Adv & Disadv
Saving plans whereby the individual make regular contributions to a pension policy. The objective is to plan for the future so that the income is available upon retirement. Can give lump sum payment or regular payments or combo of both. Private pensions where only individual contributes OR company pensions where employer also makes a contribution.
Advantages:
Encourages individuals to save throughout their working life for retirement. Depending upon the policy, employer can boost an individuals savings increasing the final value. Regular payments.
Disadvantages:
Movement between jobs may mean that one policy stops and another starts, which can reduce the overall value of savings. Final outcome is difficult to predict. If compulsory payments are deducted it might affect short term living standards.
DEFINE INVESTMENT
The action/ process of investing money for profit
DEFINE SAVING
The money you have saved, through bank/official scheme
