Topic 7 Meeting customers’ needs: savings and investment

Question 1

1. In order to achieve a real return, an investment must grow by more than what factor?

Answer 1

In order to achieve a real return, an investment must grow by more thaninflation.

Question 2

1. What are the two main risks facing someone who places money on deposit?

Answer 2

The following are two main risks facing someone who saves ondeposit:

• Interest rate risk – if the interest rate is below the rate of inflation, the value of the deposit will be reduced in real terms, even if it is accumulated. If the interest is withdrawn, then, regardless of the rate paid, the value of the deposit will reduce in real terms each year.
• Provider risk – the deposit is at risk if the provider becomes insolvent, although the Financial Services Compensation Scheme will provide compensation up to £85,000.

Question 3

3. List three benefits of collective investments.

Answer 3

• Spread of risk.
• Economy of scale re: charges, dealing and the range of investments.
• Professional investment management.

Question 4

1. Naveen is a higher‑rate taxpayer and received a dividend cheque for £6,000 in July 2018 from his only investment, an equity income unit trust holding. How much more tax will Naveen have to pay, if any?

Answer 4

Naveen would have to pay £1,300 tax. The first £2,000 would be covered by his dividend allowance, and he would have to pay 32.5 per cent on the balance of £4,000

Question 5

1. List the requirements for a life assurance policy to be ‘qualifying’.

Answer 5

The qualifying rules are asfollows.

• The policy must have a term of at least ten years.
• Premiums must be payable on a regular basis, at least annually.
• The plan sum assured must be at least 75 per cent of the premiums payable over the term of the policy.
• Premiums in any one year cannot be more than twice the premiums in any other year.
• Premiums in any one year cannot be more than 1/8th of the premiums payable over the term of the policy.

Question 6

1. Ling invested £30,000 in an investment bond six years and three months ago; it is now valued at £50,000. Assuming she has not taken any money out of the bond, how much could she withdraw today without incurring a tax charge?

Answer 6

Ling could have taken 5 per cent of the original capital (£1,500) each year (or part year) that the bond has been in existence. As the bond is in its seventh year, she could withdraw £10,500 without a taxcharge.

Question 7

1. Explain the difference in the way investment returns are structured on with‑profits and unit‑linked endowments.

Answer 7

• With-profits endowments provide a guaranteed sum assured (GSA) that is guaranteed to be paid on maturity. Each year the company may add a reversionary bonus to the GSA from the fund’s profits, further increasing the maturity value, and may add a terminal bonus at maturity.
• To achieve this, the company does not pay out all the fund’s gains to investors each year, keeping some back in reserve to be able to pay bonuses in poor years.
• Unit-linked endowments offer the investor a choice of funds to invest in, each one with a particular style and objective. Once the manager has taken out management charges, the investor participates in all the growth (or losses) made by the fund. This means the investor will benefit more directly from good fund growth than will a with‑profits investor, but has no guaranteed maturity amount and no protection against poor market performance.

Question 8

1. What are the ISA investment limits for the 2019/20 tax year and what tax advantages do ISAs offer?

Answer 8

• The investment limit is £20,000 overall, and investors can invest any of the money in a cash ISA, a stocks and shares ISA, an innovative finance ISA or a combination thereof, without any limit on each one within the £20,000 limit. Investment in Help to Buy and Lifetime ISAs also forms part of the annual limit.
• The tax advantages are that ISAs are free from income and capital-gains taxes.

Question 9

1. List the tax‑free National Savings and Investments products.

Answer 9

The following are tax-free National Savingsproducts:

• savings certificates;
• Children’s Bonds;
• Premium Bonds;
• cash ISA.