Topic 2 - Savings + Investment Products Flashcards
Why do ppl save for long periods of time?
- make a decision now to save out of current income to finance a M/LT need, want or aspiration
What are the 2 main ways ppl can use their savings or investment fund when it matures in the future?
- can hope for capital growth + cash in the investment to receive a lump sum: can use to finance their planned project
- can use their fund for income: investment will pay out regular amount that can be used as part of monthly income
What are the 2 ways ppl can put away their surplus money + earn a return on it?
- savings products
- investment products
What is the risk relationship of using savings + investment products?
- saver may lose money, but may earn a higher return
- saving products < risky than investment products
Where are savings accounts held?
- financial services providers:
- banks
- building societies
- credit unions
Why is the capital sum a saver deposits into a savings account not at risk?
- savers won’t get back less money than they paid in
- if provider fails: deposits up to £85,000 protected by FSCS
Who are investments suitable for?
- ppl prepared to invest for the M-LT
- hope capital value grows + income higher than using a savings product
Why are investment products a higher risk?
- value at any time depends on performance of assets the money has been placed + on general movements in financial markets
What is a portfolio?
- the diff. LT savings + investment products an investor chooses
What does the FTSE 100 index do?
- lists the 100 biggest companies on London Stock Exchange
What is a volatile investment?
- an investment where the value varies often + widely
What financial services providers have LT savings + investment products?
- banks
- building societies
- NS&I
- post office
What are friendly societies?
- mutual organisations offering their members a wide range of financial products
- e.g. ST savings accounts (some provide LT savings, investments, life insurance, pensions + annuities)
What do insurance companies provide?
- range or LT investment products: incorporate life assurance + pensions
What do pension funds do?
- accept ppl’s savings throughout working lives + invest the money so savers will eventually have a pension to finance their retirement
What are investment products divided into?
- those aiming to grow the money over time
- those that provide a regular income from the money invested
What do investment companies take into account when helping a person?
- their attitude to risk
- the amount to be invested
- the length of time they can invest it
What are types of investment providers offering packaged products that can be tailored for the private investor?
- unit trusts
- open-ended investment companies (OEICs)
- investment trusts
What do portfolio managers do?
- look after a portfolio (e.g. shares + bonds) for customers w a big sum to invest
- make investment decisions for investor to try to meet an agreed investment objective
What do stockbrokers do?
- carry out deals for ppl who want to buy + sell shares, bonds + other products
What does a fixed-term saving account do?
- allows ppl to put money aside for a fixed period, that earns a higher rate of interest w/o taking lots of risk
What are bonds?
- fixed-term savings accounts
How long are the maturity periods available for fixed term savings accounts?
- usually 6 months - 5 yrs
What are fixed-term savings accounts useful for?
- saving money in the medium term for ppl needing to save a medium-sized lump sum
- need discipline of a product that doesn’t allow them to spend the money
What do NS&I offer?
- small range of savings accounts (more ST)
What did NS&I offer in the past?
- a number of bonds + other LT savings products
What type of bonds did NS&I use to offer?
- Children’s bonds
- an income bonds account
What are NS&I Children’s Bonds?
- can be bought for a child <16 by a parents, legal guardian, grandparent, great-grandparent
- bonds pay fixed interest rate for a set term
- min. investment = £25, max. = £3000 per child per issue
- can be cashed early: penalty = 90 days interest
- withdrawn from general sale, existing bonds still earn interest
What is an Income Bonds account?
- designed for >16s
- calculates interest daily
- min. deposit = £500
- holds up to £1M
- can manage account online, by phone or by post
Why are NS&I seen as being less risky than those offered by other providers?
- 100% backed by UK gov.
- returns not high + don’t offer potential for big rewards that some investors seek
What is an investment?
- a process where ppl w surplus funds lends their money to companies + govs. that want to borrow it over a long period
What are the main categories of investment product?
- stocks + shares
- stocks + shares ISA
- corporate + gov. bonds
- property
How can ppl invest their money themselves?
- by choosing + buying specific assets (e.g. shares or property)
- not good for small investors: don’t have enough money to spread risk over range of assets
What can funds be?
- specialist companies or can be provided by banks
What is a share (equity)?
- a part-ownership in a company
Where do most ppl buy shares?
- in a company listed on the stock market
Where can shares be bought?
- directly from company (if a new issue of shares)
- on stock market from previous owner
What is the risk taken when someone sells their shares?
- may be selling when share values have fallen (values rise + fall)
What do shareholders hope to receive?
- capital growth
- dividends
What are dividends?
- a share of the annual profits made by the company
- paid on regular basis, usually 1/2 yr or yearly
Why are shares quite a high-risk investment?
- offer potential of both capital growth + income (high reward)
- also my be no dividends + share price may fall (if company does badly): no return + suffers capital loss
What is the FTSE 100 known as?
- the ‘footsie’
What is the FTSE 100?
- a series of figures showing movements in the value of shares of the 100 biggest companies listen on the London Stock Exchange
What do stocks + shares ISAs allow ppl to do?
- put money into diff. types of investment on a tax-efficient basis
What are ppl advised about stocks + shares ISAs?
- to only use them if they’re willing to tie their money up for at least 5 yrs
Why should ppl only use a stocks + shares ISA if they’re willing to tie their money for at least 5 yrs?
- as value of the ISA fluctuates w changes in market values + investor needs time to take advantage of periods when values rise
What are the 2 things an investor can do when buying a stocks + shares ISA?
- buy a readymade product from a provider + let provider manage the investment for them
- choose + buy their own shares + put them into an ISA ‘wrapper’
What does using an ISA ‘wrapper’ mean?
- can set aside shares up to permitted limit for ISAs
- receive a tax-free return on these shares regardless of other investments they have
What are stocks + shares ISAs tax-efficient?
- free of UK income tax + capital gains tax that would have been paid on an investment outside an ISA
Who do investors have to pay charges to?
- their financial advisers
- the fund managers in the investment company they use
What are tax-free savings plans also sometimes called?
- tax exempt savings plans
What do companies, govs. + other bodies do when they need to borrow money?
- issue bonds
How do companies, govs. + other bodies borrow money?
- investors lend money to issuer by purchasing bonds (so are creditors)
What are all corporate + gov. bonds?
- a way where the issuing bank or company can borrow money from purchasers of bonds
What is the difference between fixed-term savings bonds + corporate + gov. bonds?
- FTSB: type of LT savings account where capital sum is safe
- C+GB: traded on a financial market + so values fluctuate
How long are bonds normally issued for?
- specific period of time
What happens at the end of a period when a bond is issued?
- bond matures + issuing company or other body repays capital value of bond
How do bondholders receive income?
- in form of interest on their bond
- usually at a fixed rate + twice a yr
What does the market in bonds allow holders to do?
- sell bonds before maturity if they want their money back
What are the best-known bonds?
- ‘gilt-edged bonds’ or ‘gilts’
Who issues ‘gilt-edged bonds’ or ‘gilts’?
- UK gov.
Why are ‘gilt-edged bonds’ or ‘gilts’ regarded as v. safe?
- it’s extremely unlikely UK gov. will be unable to repay its capital or to keep up interest payments
What does property mainly refer to?
- land + buildings: normally means residential property (houses + flats) or commercial property (office blocks)
Who can include property in their investment portfolio?
- both individuals + companies
Why is property seen as a good investment proposition?
- property prices tend to move up in the LT
Why is property a risky investment?
- prices can fall in an eco. downturn + it’s not easy to sell the asset at this time
Why do many ppl see their own house or flat as part of their LT investment portfolio?
- on retirement they can sell it, downsize to a smaller property + invest cash difference to give an income
How do some ppl buy additional properties?
- by taking out a buy-to-let mortgage
How do ppl benefit from buying additional properties?
- can rent them out to give an income, which they hope covers mortgage repayments
- can benefit from any inc. in the capital value of the properties
How is buying additional properties seen as in the current eco. circumstances?
- quite risky + buy-to-let mortgages are more difficult to access since financial crisis
What commodities can ppl also invest in?
- gold + silver
- works of art
- antiques
- fine wines
What may investing in other assets inc. commodities offer?
- v. high capital gains but are risky
Who is suitable for investing in other assets inc. commodities?
- v. wealthy ppl
- ppl experienced in these areas + know what they’re buying
What is seen as the safest asset and why?
- gold as its relatively scarce, durable + tends to keep its value
Why have gold prices been high since the beginning of the financial crisis?
- uncertainties ab. the eco. + poli. situation
What affects the price of gold?
- the view on prices taken by those who trade in existing gold
- it’s overall supply
What technical study carried out by the United Nations’ International Seabed Authority has been reported?
- new tech. has been dev. to make it possible to extract nodules of gold + other metals from seabed
What do many ppl who want to invest over the LT, have no knowledge of?
- how to go ab. purchasing shares, bonds, property or commodities
How can ppl discuss their needs + receive advice from a financial services provider?
- meet w a customer relationship manager at their branch
- telephone a call centre
- browse providers website
Who offers investment fund products?
- all major banks + insurance companies
- some building societies + friendly societies
What do providers use to combine various assets into funds?
- their extensive networks
- their specialist investment managers
What do providers set certain limits on?
- amount of the investment
- time period of maturity
- sometimes age of the investor
What do providers make clear ab. investments?
- they’re more risky than savings + the value of a fund can fall as well as rise
What are collective firms also known as?
- fund management firms
What are collective investment firms?
- specialist organisations carrying out investment for clients, who are individuals w money to invest
Why are collective investment funds sometimes called ‘pooled investments’?
- as money contributed by many ppl is put into a common pool + investments are made out of that money’s
How might an individual investor contribute to a collective investment fund?
- by paying in a lump sum
- by making regular payments into fund
What is the pool of money, from a collective investment fund, used for?
- to invest in many diff. investments, including a wide range of shares, bonds + other assets
What does contributing to collective investment funds mean ab. an investors risk?
- it’s spread or diversified across many diff. holdings
What do collective investments inc.?
- unit trusts
- investment trusts
- OEICs
What do collective investments offer?
- various combinations of growth + income
What do some funds allow the individual investor to choose?
- types of company they want to put their money into
What are advantages to an individual investor from using collective investments?
- risk is reduced
- can take advantage of expertise of investment manager
- cost of hiring services of a skilled fund manager is shared w all investors
- fund managers deal w £M’s worth of investments + can negotiate: dec. dealing costs for their investors
- wide choice of investment funds + collectives
Why is an advantage of using collective investments, dec. risk?
- as the fund invests in a large number of diff. types of company
- so impact of 1 investment falling in value is less severe
- if 1 company does badly, others may do better
Why can a small investor not take much advantage of ‘diversification’?
- as they don’t have enough money to buy a min. amount of many individual stocks + shares
How does the investor taking advantage of expertise of the investment manger, an advantage of using collective investment?
- it means the individual doesn’t have to research particular companies or understand financial info to find out which companies to choose
What is the most common form of collective investment in the UK?
- unit trusts
What type of investors do unit trusts appeal to?
- those wanting to buy shares but are too small/inexperienced to invest on their own
What is a unit trust established under?
- a trust deed
How is a trust deed entered into?
- by managers of the unit trust + the trustees
What are the managers of the unit trust responsible for?
- investing the funds
- valuing the assets
- fixing the price of units
- offering the units for sale + buying units back from unit holders
What are the trustees of the unit trust responsible for?
- ensuring managers comply w terms of trust deed
- hold + control trust’s assets on behalf of unit holders
- collect income from assets + distribute income to unit holders
What are unit trusts?
- unitised funds, w each unit representing a proportion of the fund’s total asset value
- open ended: more units can be created when more money is invested
- not allowed to borrow money
What are investment trusts?
- public limited companies
- not unitised funds
What do investment trusts do?
- issue shares which are purchased by investors + traded on the stock market
What is the money they receive from the share issues used for?
- to trade in stocks + shares of other companies + in certain other investments (e.g. commodities)
What is the number of shares investment trusts issue, limited by?
- the investment trust’s rules + can’t easily be inc. so are described as ‘closed-ended’
How is an investment trust diff. to a unit trust?
- not unitised funds
- allowed to borrow money
What must a person do to invest in an investment trust?
- buy its shares, + to cash in the investment, they must sell the shares
What are the 2 levels of risk an investor takes when investing in an investment trust?
- the shares the investment trust company has invested in might fall in value
- the shares of the investment trust company itself might fall in value
What does OEICs stand for? 
- Open-ended investment company funds
What are OEICs?
- a pooled collective investment vehicle
- they’re a cross between unit trusts + investment trusts
What do OEICs do?
- issue shares (number can vary + can be created or liquidated)
What does the number of shares an OEIC issues vary according to?
- the number of buyers + sellers in the market
- expands as people invest + shrinks as they withdraw their money
Who are OEICs managed by?
- an authorised corporate director (role similar to a manager of a unit trust)
What is the depository responsible for?
- overseeing the operation of the company + for making sure that it complies w the requirements for investor protection
What is the role of a depository equivalent to?
- that of a trustee of a unit trust
What do insurance companies offer?
- various types of life cover
What is term assurance?
- an insurance plan that runs for a fixed period of time + pays out a lump sum if insured person dies during term
- not an investment policy
What is an endowment policy?
- a life insurance contract that pays a lump sum after a specified term or if the insured person dies before this date
- a type of LT savings vehicle
What are endowments used for?
- to provide a lump sum to pay of a mortgage/other LT debt
- can also be used to fund a specific event in the future
What happens if an endowment policy is surrendered before maturity?
- insured person is likely to lose quite a lot of money
What is an annuity?
- a product that provides an income for ppl when they retire
How does a person buy an annuity?
- by using a lump sum which they have alr saved, usually via a pension plan or some other investment vehicle
What does an annuity provide a person with?
- a guaranteed income for a fixed number of yrs or until the holder dies
What are annuities that are index-linked?
- they rise w inflation
- cost more
What security does an annuity give the holder?
- security of knowing what their annual income will be until they die
What is a personal pension?
- a type of investment fund
- a LT savings plan that is tax-efficient + is purchased by an individual throughout their working life to save for their retirement
What can pensions be subdivided into?
- occupational + individual pension plans
What similar principle do both types of pensions operate on?
- ppl pay money into a fund, which uses money to invest in assets + to provide them w a retirement income
Who operates occupational pensions?
- employers: who may pay contributions into them for their employees
What are the 2 main types of occupational pension?
- final salary schemes
- money purchase schemes 
What do final salary schemes do?
- pay an employee a pension based on number of yrs they’ve worked for employer + linked to amount of salary at the time they retire.
What do most financial salary schemes require?
- employee to make regular contributions from their salary + employer has to make payment to ensure agreed benefits can be paid at retirement
Why are many financial salary schemes being closed down?
- pose a greater risk to employer
What are money purchase schemes?
- where employee pays into pension plan over the working life
- scheme is invested + provides employee w resulting lump sum on retirement 
What does the amount of money an employee received form a money purchase scheme depend on?
- how well scheme has performed
- employee can then take pension pot + use it to purchase an annuity to provide an income in retirement
What’s re money purchasing schemes also known as?
- defined-contribution
Who do money purchasing schemes pose a greater risk to?
- employee, as doesn’t know size of final pension pot
What are personal pension plans?
- long-term money-purchase products
- helps customers build up a pot of money: can use to buy income on retiring
- tax efficient: tax relief at basic rate of income tax on payments made into plan
What is the max. annual amount a non-taxpayer can pay + receive the tax relief?
- £2880
What is the max. pension contributions a taxpayer will get a tax relief on?
- £40,000 (annual allowance)
What is auto-enrolment in workplace pensions?
- when workers must be automatically enrolled by employer into a workplace pension scheme (have option to leave)
What pension schemes must the employer choose out of?
- National Employment Savings Trust (NEST)
- qualifying Workplace pension scheme w benefits broadly = to or better than those of NEST
What is NEST?
- large trust-based, defined-contribution, multi-employer pension scheme: aim to ensure majority of workers are involved in an occupational pension
What is NEST open to + why?
- employed ppl
- makes it easy for working ppl to save: single retirement pot that they can continue to contribute to (even if they move jobs)
What is the state pension?
- regular payment made by gov. to ppl when they reach state pension age
- must have paid/or been credited w sufficient NI contributions
What is the current state pension age?
- 66
Why does the state pension age continue to inc.?
- to keep pace w inc. life expectancy
- to compensate for inflation
When are ppl eligible for the full state pension under the new rules?
- if they have 35 qualifying yrs of NI contributions
- (old rule = 30yrs)
What is the general rule w risk + reward?
- the higher the risk in a product the higher the rate of return (motivates ppl to put money into it)
What are dividends?
- a share of profits paid by company to its ordinary shareholders
What are the 2 half-yr payments of a dividend called?
- interim dividend
- final dividend
What doesn’t have a fixed rate of dividends?
- ordinary shares
- company decides % each yr based on profit made
Why are dividends risky?
- company may not make enough profit (no dividend)
- may receive high % in good yr
What are preference shares?
- carry fixed % rate of dividend
What is capital gains tax?
- a tax on any profit made when someone disposes of an asset 
- tax levied on gains (not money received for assets)
What are capital gains tax not applied to?
- someone’s main home, car or personal possessions disposed of for max. £6000
What is the annual exempt amount?
- annual tax-free allowance for capital gains tax
What are the capital gains tax bands?
- basic rate: 10%
- higher rate: 20%
