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CeFS Unit 2 > Topic 2 - Savings and Investment Products > Flashcards

Topic 2 - Savings and Investment Products Flashcards

1
Q

Why people save in medium and long term

A

To save current income
To finance medium term or long term need, want or aspiration
Hoping investments will grow and give higher return

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2
Q

Two ways in which people can use savings or investment fund when it matures

A

Capital growth i.e. market value of investment is greater when sold than amount paid for it
Income - investment will pay out a regular amount

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3
Q

Friendly societies definition

A

Mutual organisations that offer members a wide range of financial products

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4
Q

Providers or long-term savings and investment products

A

Friendly societies
Insurance companies
Investment companies

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5
Q

Investment product examples

A

Stocks and shares NISA (new individual savings account)
Corporate and government bond
Property
Stocks and shares

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6
Q

Shares are also known as…

A

Equities

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7
Q

What do shareholders hope to receive?

A

Capital growth and a dividend

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8
Q

What do stock and shares NISA allow?

A

A person to put money into different types of investment on a tax-efficient basis

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9
Q

NISA allowance in 2015/16

A

£15,240

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10
Q

People are advised that they should use a stocks and shares NISA only if they will tie up their money for at least how many years?

A

5 years

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11
Q

Investment options for an investor

A

Buy a ready-made product and let the provider manage the investment
Choose and buy their own shares and put them into an NISA ‘wrapper’

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12
Q

Why are stocks and shares NISA tax-efficient?

A

They are free of UK income tax and capital gains tax

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13
Q

How do bonds work?

A

Investors lend their money to the issuer by purchasing bonds - they receive income from interest,

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14
Q

Are bond-holders creditors or part-owners?

A

Creditors because they are lending money to the company

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15
Q

What are ‘gilt-edged bonds’ or ‘gilts’?

A

Bonds issued by the UK government

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16
Q

Why are gilts considered safe?

A

It is extremely unlikely that UK government will be unable to pay back

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17
Q

Why do people see their own house as part of their long-term investment portfolio?

A

On retirement they can sell it, downsize to a smaller property and invest the cash difference to give them an income

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18
Q

How does a buy-to-let mortgage work?

A

Borrower rents out the property to give an income, which they hope will cover mortgage repayments, and benefit from any increase in capital value

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19
Q

Collective investment funds are also known as…

A

Fund management firms

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20
Q

Collective investment funds definition

A

Specialist organisations that carry out investment on behalf of their clients.

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21
Q

Why are collective investment funds known as pooled investments?

A

Money contributed by many people is put into a common pool

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22
Q

Advantages of collective investment funds

A

Risk is reduced - diversification
Cost of hiring a fund manager is shared
Can use expertise of investment manager

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23
Q

Unit trusts appeal to who?

A

Investors who want to buy shares but who are too small or inexperienced to invest on their own.

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24
Q

Unit trust definition

A

Trust that manages stock exchange in which small investors can buy units

25
Q

A unit trust is established under what?

A

A trust deed

26
Q

What are managers in unit trusts responsible for?

A 
Investing the funds
Valuing the assets
Fixing the prices of units
Offering the units for sales
Buying units back from unit holders
27
Q

What are trustees in unit trusts responsible for?

A

Ensuring managers comply with terms of trust deed.

28
Q

Unitised funds definition

A

Each unit represents a proportion of the fund’s total asset value.

29
Q

Open-ended definition

A

More units can be created when more money is invested

30
Q

Can unit trusts borrow money?

A

No

31
Q

What are investment trusts?

A

Common collective investments in the UK

32
Q

Are unit trusts unitised funds?

A

Yes

33
Q

Are unit trusts open-ended or closed-ended?

A

Open-ended

34
Q

Are investment trusts unitised funds?

A

No

35
Q

How do investment trusts work?

A

They issue shares, which are purchased by investors and which are traded on the stock market

36
Q

Are investment trusts open-ended or closed-ended?

A

Closed-ended - the number of shares they issue is limited by the investment trust’s constitution

37
Q

What are open-ended investment company funds?

A

Pooled collective investments - they are a cross between unit trusts and investment trusts

38
Q

How do open-ended investment company funds work?

A

They issue shares but the number of shares can vary and can be created or liquidated according to demand.

39
Q

Who manages an open ended investment company?

A

Corporate director

40
Q

What is a depository in an open-ended investment company?

A

An authorised person who is responsible for overseeing the operation of the company

41
Q

Pension definition

A

A long-term savings product purchased by an individual throughout their working life in order to save for retirement.

42
Q

Two types of pensions

A

Occupational pension

Individual pension

43
Q

Who operates occupational pensions?

A

The employer

44
Q

Two types of occupational pension

A

Final salary scheme

Money purchase scheme

45
Q

Final salary scheme features

A

Based on number of years worked for employer
Linked to salary at time of retirement
Employees make regular contributions from salary
Employers can make contributions

46
Q

Money purchase scheme features

A

Employee pays into pension plan whilst working
Received lump sum on retirement
Can only take out of pension pot once

47
Q

Personal pension plan definition

A

Long-term products to help customer to build up money to use when they retire.

48
Q

Why are personal pension plans tax-efficient?

A

There is tax relief at the basic rate of income tax on the payments made into the plan

49
Q

What is the maximum annual amount someone can pay and receive the tax relief?

A

The greater of all their UK taxable earnings of £2,880 including tax relief.

50
Q

What does auto-enrolment mean?

A

Workers must be automatically enrolled by their employer into a workplace pension scheme - they then have the option to leave

51
Q

What is the National Employment Savings Trust (NEST)?

A

Trust-based pension scheme which aims to ensure that the majority of workers are enrolled in an occupational pension.

52
Q

Who is NEST open to?

A

Employers of any size and to self-employed people.

53
Q

Dividend definition

A

Share of profits made by a company to its ordinary shareholders

54
Q

Two half-yearly dividend payments

A

Interim dividend and final dividend

55
Q

Capital gains tax definition

A

Tax on any profit made when someone disposes of an asset

56
Q

What is tax levied on in capital gains tax?

A

The gain and not the amount of money received for asset

57
Q

Annual exempt amount definition

A

The annual tax-free allowance for capital gains tax

58
Q

Annual exempt amount for 2014-15

A

£11,000 for individuals and £5,500 for trusts

CeFS Unit 2 (10 decks)

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