Topic 2 - Savings and Investment Products

Question 1

Why people save in medium and long term

Answer 1

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

Question 2

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

Answer 2

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

Question 3

Friendly societies definition

Answer 3

Mutual organisations that offer members a wide range of financial products

Question 4

Providers or long-term savings and investment products

Answer 4

Friendly societies
Insurance companies
Investment companies

Question 5

Investment product examples

Answer 5

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

Question 6

Shares are also known as…

Answer 6

Equities

Question 7

What do shareholders hope to receive?

Answer 7

Capital growth and a dividend

Question 8

What do stock and shares NISA allow?

Answer 8

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

Question 9

NISA allowance in 2015/16

Answer 9

£15,240

Question 10

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?

Answer 10

5 years

Question 11

Investment options for an investor

Answer 11

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’

Question 12

Why are stocks and shares NISA tax-efficient?

Answer 12

They are free of UK income tax and capital gains tax

Question 13

How do bonds work?

Answer 13

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

Question 14

Are bond-holders creditors or part-owners?

Answer 14

Creditors because they are lending money to the company

Question 15

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

Answer 15

Bonds issued by the UK government

Question 16

Why are gilts considered safe?

Answer 16

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

Question 17

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

Answer 17

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

Question 18

How does a buy-to-let mortgage work?

Answer 18

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

Question 19

Collective investment funds are also known as…

Answer 19

Fund management firms

Question 20

Collective investment funds definition

Answer 20

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

Question 21

Why are collective investment funds known as pooled investments?

Answer 21

Money contributed by many people is put into a common pool

Question 22

Advantages of collective investment funds

Answer 22

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

Question 23

Unit trusts appeal to who?

Answer 23

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

Question 24

Unit trust definition

Answer 24

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

Question 25

A unit trust is established under what?

Answer 25

A trust deed

Question 26

What are managers in unit trusts responsible for?

Answer 26

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

Question 27

What are trustees in unit trusts responsible for?

Answer 27

Ensuring managers comply with terms of trust deed.

Question 28

Unitised funds definition

Answer 28

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

Question 29

Open-ended definition

Answer 29

More units can be created when more money is invested

Question 30

Can unit trusts borrow money?

Answer 30

No

Question 31

What are investment trusts?

Answer 31

Common collective investments in the UK

Question 32

Are unit trusts unitised funds?

Answer 32

Yes

Question 33

Are unit trusts open-ended or closed-ended?

Answer 33

Open-ended

Question 34

Are investment trusts unitised funds?

Answer 34

No

Question 35

How do investment trusts work?

Answer 35

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

Question 36

Are investment trusts open-ended or closed-ended?

Answer 36

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

Question 37

What are open-ended investment company funds?

Answer 37

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

Question 38

How do open-ended investment company funds work?

Answer 38

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

Question 39

Who manages an open ended investment company?

Answer 39

Corporate director

Question 40

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

Answer 40

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

Question 41

Pension definition

Answer 41

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

Question 42

Two types of pensions

Answer 42

Occupational pension | Individual pension

Question 43

Who operates occupational pensions?

Answer 43

The employer

Question 44

Two types of occupational pension

Answer 44

Final salary scheme | Money purchase scheme

Question 45

Final salary scheme features

Answer 45

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

Question 46

Money purchase scheme features

Answer 46

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

Question 47

Personal pension plan definition

Answer 47

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

Question 48

Why are personal pension plans tax-efficient?

Answer 48

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

Question 49

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

Answer 49

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

Question 50

What does auto-enrolment mean?

Answer 50

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

Question 51

What is the National Employment Savings Trust (NEST)?

Answer 51

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

Question 52

Who is NEST open to?

Answer 52

Employers of any size and to self-employed people.

Question 53

Dividend definition

Answer 53

Share of profits made by a company to its ordinary shareholders

Question 54

Two half-yearly dividend payments

Answer 54

Interim dividend and final dividend

Question 55

Capital gains tax definition

Answer 55

Tax on any profit made when someone disposes of an asset

Question 56

What is tax levied on in capital gains tax?

Answer 56

The gain and not the amount of money received for asset

Question 57

Annual exempt amount definition

Answer 57

The annual tax-free allowance for capital gains tax

Question 58

Annual exempt amount for 2014-15

Answer 58

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