Chapter 1 - Savings and Investment

Question 1

Outline the Difference between Saving and Investments

Answer 1

Savings
• Savings is about depositing surplus cash into an
account that earns interest

• Interest can either be withdrawn or left to grow to
achieve compound growth (interest on interest).

• Inflation will erode return and has a negative
effect on the buying power of the amount saved

Investment
• Investment is normally about placing money into a
bond or share (or some other asset)

• The period concerned normally consists of years

• In some cases it can be difficult to sell the
investment, and it may lose rather than make
money

Question 2

Outline key differences between equities and fixed interest investments

Answer 2

Reward:

Equities - Investment and growth
Fixed Interest Securities - Interest and return of capital

Ownership:

Equities - Yes, part owner of company
Fixed Interest Securities - None

On Liquidation:

Equities - Paid Last
Fixed Interest Investments - Paid before shares

Question 3

List the different types of Whole of Life and Endowment assurance policies that are generally
available

Answer 3

Life assurance policies are an investment product that you buy from a life assurance company. They are set up as regular savings plans and at the end of a set period pay out a lump sum.

This product helps ensure that in the event of death any dependents of the deceased are financially secure.

Whole of life:
* Non-profit - fixed sum assured
* With profit - fixed sum assured plus bonus
* Unit linked - fixed or regular sums invested and used
to buy life cover and the balance invested in
units in a fund

Endowment policies:

• Non-profit - fixed sum paid on maturity or death
• With profit - fixed sum plus bonuses
• Low cost - variation of with profit

Question 4

Describe the basic features of the two different types of occupational pension scheme

Answer 4

Defined benefit (DB) pensions:
Amount retiree receives depends on number of years they have worked for the employer and final
salary level.

Defined contribution (DC) pensions:
Amount retiree receives depends on contributions made by employer and employee and how the
investment fund has performed.