R01 Chapter 2 Part 2 Flashcards
What is regular saving
When a client puts small amounts of money aside on a regular basis that develops into a bigger lump sum
Short term investment
Most adults want readily accessible savings.
Three to six months expenditure is a good goal for short term investing
Medium term investing
Typically 5-15 years
It’s more important to maintain than short term savings
Long term investment
Usually 15+ years
More important to maintain than medium term.
Wider range of investment choices
Name some financial priorities?
Pay off expensive debts
Protect the family
Have an emergency fund
Savings account
Pays higher interest than current accounts.
Instant or easy access.
get back at least what you put in
Cash ISA
£20k limit per tax year.
Can pay higher interest than usual savings account.
Easy to access.
You usually get back at least your original investment, but it’s not guaranteed.
Notice account
You have to give notice to take out money
30, 60 or 90 days
Involves a penalty if you withdraw too soon
Fixed-rate bond
(Bank account)
Usually need to leave money in for at least a year (or the defined term).
A minimum deposit is usually required.
A penalty will be incurred if you withdraw before end of the term.
High interest regular savings
Similar to a normal savings account, but with a higher interest.
Usually get access to these do you have savings and current accounts with the same provider.
Usually interest is paid yearly
Help to buy ISA
Cash ISA for first time buyers.
Offers a government bonus.
30th November 2019 was the last date to open one.
Existing holders can save to 30th November 2029.
For every £200 deposit, a £50 bonus up to a maximum of £3000 on £12000 savings.
Why is NS&I totally secure to invest in?
Because it is government backed
What are the 4 main investment asset types?
Cash
Bonds
Shares
Property
What are ‘alternative’ investments?
Hedge funds
Derivatives
Commodities
Other tangible items
What’s a platform?
A proprietary system that provides access to a defined selection of investments
Conventional investing
Focuses on generating returns through investing in companies that are expected to perform well.
Fund managers will focus on financial metrics , dividend yield, earnings per share and cash flow operations.
Sustainable and responsible investing
Investment managers tend to avoid companies that are related to armaments, tobacco, gambling and adult entertainment.
Sometimes this also includes companies that produce fossil fuels.
Sustainable funds
They pay significant attention to environmental/social/ethical issues.
ESG funds (environmental, social, governance)
These focus on how businesses operate rather than problem solving.
If the company is run well, they may invest in controversial and somewhat unsustainable companies
Positive selection
Managers invest in assets that meet specified policy requirements.
Negative exclusions
Directs fund managers to avoid particular sectors and behaviours.
Responsible ownership (stewardship) activity
Asset owners encouraging companies to have higher ESG standards.
Investment advice process
- The strengths of clients beliefs
- Incorporate clients values and views
- Reccomending products and funds that are appropriate for the client
Equity investment
Buying shares as a pooled investment or by directly through the stock market.
Shares also known as equities or stocks.
Short term equity investment use
Pure speculation. Unless someone has insider information (which is illegal and called insider trading), you don’t know if it will go up or down, and thus an extremely risky short term investment
Medium term equity investment use
Most companies wish to continue to grow their value and dividend, so although still risky, it’s safe to say that in medium term, if companies continue to make profit, there is a use for them.
Real growth/capital preservation
Shares in companies that produce real good and services.
Prices of these goods and services increase with inflation, often taking profits with them.
Long term use of equities
Increasing income
Capital preservation
Asset allocation
Other names for a bond
Loan stock
Fixed interest
Debt securities
Gilts
Corporate bonds
What’s the benefit of bonds
They are government backed.
Usually gets. Regular stable income.
Building society Permanent interest bearing share (PIBS)
Undated
Interest payments can be missed in exceptional circumstances
Missed interest payments don’t need to be made up at a later stage.
What happens to a Permanent interest bearing bare when a building society demutualises?
They become Perpetual subordinated bonds (PSBs)
Perpetual - have no redemption date
Subordinated - low ranking debt in event of insolvency
Bonds - as its general name for fixed interest investment.
What are some ways to access fixed interest investments
Unit trusts
OEICs
Life assurance or pension funds
Strategic bond funds
Investment manager decides on the proportions of assets, which enables bond fund to adapt to changing market conditions.
Property investment benefits
Rental income
Capital growth
Property investment risks
Money can be tied up
Will need to sell to get any liquid capital
Very illiquid
Pooled investments
Investors money is ‘pooled’ into a fund which is then invested in one or more asset classes.
Open ended investment funds
Usually structured as unit trusts or OEICs.
Endowments
Regular premium policies which combine investment with life cover
Mortgage endowment
Used to pay off mortgages.
Savings endowment
Some of these plan premiums are limited to £3,600pa
Investment trust
A listed company with a set number of shares.
Closed ended.
Derivatives
A right or obligation to buy or sell another asset type.
Innovative finance ISA
Allows savers using a crowdfunding platform to receive their interest tax free.
Lifetime ISA
Started 6th April 2017
Under the age of 40
£4k contribution limit
25% government bonus.
If withdrawn before 60, there’s a 24% charge. (Unless used to buy first home or are terminally ill)
Child trust fund
For investors to invest on behalf of a child for their future.
Eligible for every child born after 1st September 2002
Junior ISA
Replaces child trust funds on 1/11/2011
Cash or stocks
Can’t withdraw before 18
£9000 limit
Residence nil rate band
£175,000 (on top of £325,000)
If downsized after 7th July 2015, RNRB is also available
If estate = £2Million, RNRB withdrawn at £1 for every £2 over £2Million
Two main ways to reduce IHT
Ensuring wills are in place, using lifetime gifts, using allowances, writing property in trust.
IHT gifts
Gift must be irrevocable
Must be part of a long term planning strategy, and not made shortly before death.
Life policies on IHT
Can be used as a single premium investment to reduce the value of the estate m
How can policies counter IHT
If there is IHT due, before death, the individual no old take out an own life policy that pays out the IHT amount on death
4 main approaches to tax planning for investors
Make the maximum use of tax allowances.
Choose investments that provide tax free returns.
Choose investments that qualify for tax relief.
