Unit 2 : Financial Capability for the Medium and Long Term Flashcards

Question

Why should people be careful when choosing a financial product?

Answer 1

There is always a lot of 'small print' - that is terms and conditions. Sometimes a bonus or discount may be available only in certain circumstances and customers should be aware of this before choosing the product so they are not misled.

Answer 2

Public Relations - advertising that is not paid for directly but which keeps a business's product in the public eye

Answer 3

Promotion, where the entire message is implicit

Answer 4

These type of activities cost money buy they contribute to the general reputation of a business and are not directly related to the brands that the business sells

Answer 5

Our perception of what is the norm - the acceptable behaviour within our particular group, and often we want to fit in, to be one of the crowd

Answer 6

In financial services

Answer 7

- The way in which people pay for goods and services, i.e. card or cash - People's attitudes to savings - How people view using credit

Answer 8

People's attitude to borrowing money - many years ago it was deemed 'low class' to buy goods on credit because it showed that people could not afford to pay otherwise. The trend reversed after the invention of the credit card as it became desirable to fund a 'high class' lifestyle on credit.

Answer 9

Norms - about behaviour and attitudes across social groups, what society thinks is acceptable and unacceptable

Answer 10

Because it influences financial behaviour and indicates to them what financial products will be successful

Answer 11

Home ownership - providers make mortgage loans available to people so they can buy they homes and pay back over a long period (often 20-25 years)

Answer 12

People that work, and many people aspire to buy their own home one day - so people in the UK are likely to need to save for a deposit and then take out a mortgage

Answer 13

The risk that they may not be able to keep up with repayments and that their home may be repossessed

Answer 14

The property belongs to them and they do not have to make any more payments; thus nobody can ask them to leave their home, even in retirement

Answer 15

It has become a little harder to obtain a mortgage, but the culture of home ownership remains strong

Answer 16

Because of high deposits on houses

Answer 17

In Germany, for example, because the norm is to rent property - only 43% of Germans decide to buy their house. The other 57% do not need to save for a deposit, but to pay a few months' rent in advance.

Answer 18

Tenants could be asked to leave the property is they do not pay the rent or if the lease runs out and the landlord wants the property back

Answer 19

People's feelings affect how they behave. The links between thoughts, feelings and behaviour is clear, and can be traced back to attitudes and so our personal values.

Answer 20

Expectations - what people expect is going to happen

Answer 21

Self-fulfilling - in that people's attitudes mean that they affect the outcome of events

Answer 22

- If people expect a share price to fall, they will start to sell shares; if enough people see them the share price will fall - If interest rates are expected to rise, people will save more money and borrow less; this means providers will have to pay out more interest on savings and gain less from lending. They may choose to increase the interest rates on lending, to maintain their income. - If people expect increased unemployment, they may save more for the future or delay spending. Businesses will need to produce less goods and services, they then need fewer workers and so unemployment does rise.

Answer 23

- Ethical investing: involves someone choosing to save in a way that means money will be used for what the individual considers to be a good purpose. Ethics are a set of ideas about what people believe is right - the moral code that they aim to live by - so one person's opinion about what is ethical will differ from that of someone else. - Religious beliefs: Islamic Law (Sharia Law) prohibits the payment of interest on a debt and so Muslims are not allowed to borrow money. All major banks now provide Sharia-compliant financial products.

Answer 24

A relationship with the provider that has implications for a specified time period (short, medium or long-term) - so buying a financial services product is not the same as buying something that is quickly consumed

Answer 25

They bring with them responsibilities and the customer must be able to meet their obligations

Answer 26

In the case of short-term borrowing, a person can know with a good deal of certainty whether they can afford to pay the money back. In the case of a medium or long-term loan, they cannot be so certain as their circumstances may change (e.g. they may lose their job).

Answer 27

- Home and Travel insurance, are not very expensive. However, Motor insurance for young people can be very costly. Since motor insurance is compulsory, there is no point buying a car and then finding out you cannot afford to insure it. - Another issue is whether people are buying too much insurance. Policies such as payment protection insurance, pet insurance, mobile phone insurance are not essential and people have to decide if they can afford them or not.

Answer 28

People have to decide if they can afford to save and which account to use.

Answer 29

Since nobody can afford to buy everything they need, want aspire to have, they need to choose between alternatives. This means they must decide on their priorities = OPPORTUNITY COST.

Answer 30

Some people are risk averse and others risk tolerant, but the majority of people are somewhere in between. So, they will insure the most important items they possess but are not over-insured.

Answer 31

3 months to many decades

Answer 32

Because they make a decision now to save out of their current income to finance a future medium or long term need, want or aspiration. These future needs, wants and aspirations will require a significant amount of money and so people need to save for longer to achieve them.

Answer 33

People hope that their savings and investments will grow over a period to give them a good return. However, if the economy performs badly, they may not get as good a return as they had hoped, and with some types of investment they may get back less than they actually put in.

Answer 34

- They can hope for capital growth, i.e. the market value of the investment is greater when sold than the amount they paid for it. So, when they cash it in, they can use the lump sum to finance a planned project. - They can use their fund for income: the investment will pay out a regular amount that they can use as part of their monthly income, e.g. dividends.

Answer 35

A mixture of both growth and income

Answer 36

- Lower risk - Savings accounts are held at financial providers - Savers deposit money and earn interest - The capital sum the deposit is NOT at risk - The saver will get back the money that they put in - Deposits of up to £85,000 are protected by the FSCS, should a provider fail - Savings accounts do not pay very high interest - Medium-term savings accounts will pay less interest than long-term savings accounts, but savers will usually need to give the provider notice before they can withdraw money, from the long-term accounts - If notice is not given, interest is lost

Answer 37

Many investors use a variety of different long-term savings and investment products when saving for a large item or for retirement - this combination is known as their portfolio

Answer 38

- Banks, building societies, NS&I and post office (all offer long-term savings and investment products) - Friendly societies (mutual organisations that offer long-term savings and investments, life insurance, pensions and annuities) - Insurance companies (provide long-term savings and investments, including life insurance, investment products and pensions) - Investment companies (offer a wide range of product types. These products are divided into those that aim to grow money over time (capital growth), and those that provide regular income from the money invested).

Answer 39

An increase in the market value of an investment, over and above the amount the investor paid for it or paid into it.

Answer 40

People with small children may want a sum of money to be available in 15 years' time when their child goes to university, or someone else may want a sum of money for retirement. They do not want to take income from their investment now.

Answer 41

- They may be using a sum of money that they have accumulated to give them an annual return that could be regarded as part of their household income. - They may have inherited some money, so they place the money in a fund that will give them an income. They sacrifice growth in order to take the income out and spend it. - Another example is a retired person who wants to use their money to buy them an income in their old age. They buy an annuity, which means that they hand their sum of money over to an insurance company and, in return, they are paid an income for the rest of their lives.

Answer 42

A financial product that pays a regular guaranteed income, in return for a lump sum paid to the financial provider. It is used by people when they retire.

Answer 43

Invest their money, taking into account their attitude to risk, the amount to be invested and the length of time they can invest it

Answer 44

- Fund companies: offer packaged accounts that can be tailored for the private investor (unit trusts, OEIC's and investment trusts, which pool money for investors. - Portfolio managers: look after a portfolio of investment products such as shares and bonds on behalf of customers who have a sizeable sum to invest. They make decisions on behalf of the investor in order to meet an agreed investment objective. - Stockbrokers: carry out deals for people who want to buy and sell shares, bonds and other investments.

Answer 45

- Savings Bonds | - NS&I

Answer 46

The holder can only make a limited number of withdrawals or none at all, during the period without incurring a penalty

Answer 47

A savings product held for a fixed period, e.g. 2 years (maturity period)

Answer 48

Fixed rate e-bond, by Virgin Money - an online account paying AER of 3% gross per annum and matures in 3 years. Minimum investment is £1 and maximum £100,000, no withdrawals and you are unable to cancel or close the account once it has been opened.

Answer 49

People who need to accumulate a medium-sized lump sum but need the discipline of a product that does not allow them to spend the money in the meantime.

Answer 50

A Children's Bond. They can be bought for a child under 16, they pay a tax free interest, which is guaranteed for a fixed period.

Answer 51

Minimum £25, maximum £3000

Answer 52

Yes, but with a penalty equivalent to 90 days interest

Answer 53

A child if they don't need to access the money (so not suitable if the child might need it sooner)

Answer 54

As they are guaranteed by the government

Answer 55

- Stocks and shares - Stocks and shares ISA - Corporate and Government Bonds - Property

Answer 56

As they do not have enough money to allow them to spread their risk over a well-diversified range of assets. Also they are unlikely to have the knowledge or time to select suitable shares and track their progress.

Answer 57

- Known as equities - Each share represents the part ownership in a company - Someone who buys shares will pay the market value at the time, but this price will change subsequently and may rise/fall - It is possible for someone to sell their shares if they need the cash back, but they take they risk that they may be selling when the share value has fallen - In addition to capital growth, shareholders hope to receive a dividend, which is a share of the annual profits made by the company. - Quite high risk investment give capital growth and income, but if the company does badly, there will be no dividends and the share price may fall - The FTSE 100 (Financial Times Stock Exchange Index) shows the movements in the value of the shares in the hundred biggest companies listed on the stock exchange

Answer 58

Put money into different types of investment on a tax-efficient basis

Answer 59

£5,760 (half the allowance), and the rest in stocks and shares

Answer 60

Only if they are willing to tie their money up for at least 5 years, as the value of the ISA will fluctuate with changes in market values

Answer 61

Income tax and capital gains tax, but investors have to pay charges to their financial advisors and fund managers

Answer 62

The tax payable on profit (gain) made when you sell or give away an asset, like property or shares

Answer 63

18% up to £32,012

Answer 64

Companies and governments need to borrow money, so they issue bonds. Investors lend their money to the issuer by buying the bonds. They are lending money to the company or government and so are creditors and not part-owners - as shareholders are.

Answer 65

Their value can fluctuate as they are traded on the financial market

Answer 66

A specific period of time, and at the end of the period the bond matures and the issuing company repays the capital value

Answer 67

Income in the form of interest, usually at a fixed rate

Answer 68

There is a market for bonds and so holders can sell them

Answer 69

They are issued by the government and are regarded as very safe

Answer 70

As property prices tend to move upwards in the long-term

Answer 71

Because prices can fall in an economic downturn and it is not easy to sell an asset in such time

Answer 72

Part of their long-term investment portfolio

Answer 73

They can sell it and downsize and use the cash surplus to give them an income

Answer 74

People can rent out the properties to give them an income, which they hope will cover the mortgage repayment, and benefit from any increase in the capital value of the properties - this is seen as quite risky

Answer 75

Assets like gold and silver and works of art, antiques and fine wines. These can offer the potential for high rewards but are very risky and are only suitable for the very wealthy, who are experienced in these areas.

Answer 76

Using investment funds

Answer 77

Banks, building societies, friendly societies and insurance companies

Answer 78

Turn to the general financial providers and buy ready-made investment products

Answer 79

With a CRM, by telephone or by visiting the website

Answer 80

That investments are more risky than savings and that the value of the fund can fall as well as rise

Answer 81

- Barclays Funds (Foundation Funds and Investors' Choice Funds) - Nationwide Share dealing service

Answer 82

Money contributed by many people that is put into a common pool and investments are made out of that money

Answer 83

Many different investments such as a wide range of shares, bonds and other assets (like property, gold etc) - this means that each investor's risk is spread or diversified across many different holdings

Answer 84

Unit trusts, investment trusts and OEICs - they offer combinations of growth and income

Answer 85

Open Ended Investment Companies

Answer 86

They appeal to investors who want to buy shares buy who are too small or inexperienced to be able to invest on their own

Answer 87

- The risk is reduced because the fund invests in a large number of different types of company. The risk is spread; a small investor cannot take much advantage of as they do not have enough money to buy the minimum amount of stocks and shares. - The investor takes advantage of the expertise of the investment manager - The cost of hiring the services of a skilled fund manager is shared amongst investors - There is wide choice of investment funds and collectives which cater for all types of investors

Answer 88

- Term assurance: Life Cover - Endowment policy - Annuity

Answer 89

This is an insurance plan that runs for a fixed period of time and pays out a lump sum if the insured person dies within the term (not an investment policy)

Answer 90

A long term savings vehicle. They are often used to provide a lump sum to pay off a mortgage or other long-term debt, or fund an event in the future. They can be surrendered before maturity but the insured person is likely to lose quite a bit of money in doing so.

Answer 91

A product that provides an income for people when they retire. They take a lump sum they have already saved and buy an annuity. This gives them a guaranteed income for a fixed number of years or until the holder dies. Some annuities are index linked, which means they rise with inflation - but these cost more than the ones that are not.

Answer 92

A type of investment fund, a long-term savings plan that is tax-efficient and is purchased by an individual throughout their working life in order to save for their retirement

Answer 93

- Occupational pensions | - Personal pensions

Answer 94

Operated by employers, who may also pay contributions into them for their employees

Answer 95

- Final Salary Schemes | - Money Purchase Schemes

Answer 96

Employees pay throughout their working lives, the scheme is invested to make the best return and agrees to pay the employee a pension based on the amount of years they have worked and linked to the last salary they earned before retirement. They are risky for an employer and so many firms are closing them down. (More common is the Average Salary Schemes)

Answer 97

Employees pay into the pension plan over their working life - the scheme is invested and provides the employee with the resulting lump sum on retirement. The amount the employee receives depends on how the scheme performed. The employee can then take the lump sum and invest it in an annuity to provide income on their retirement.

Answer 98

Long term money-purchase products provided by banks, insurance companies and other providers to help customers to build up a pot for retirement

Answer 99

They are tax efficient because of the tax relief at the basic rate of income tax on the payments made into the plan

Answer 100

That everyone was automatically enrolled by their employer into a workplace pension scheme; then they have the option to leave if they wish

Answer 101

The National Employment Savings Trust (NEST) or equivalent

Answer 102

The minimum benefits required

Answer 103

Because they believe that people are not saving enough for their retirement - and so they do not have to rely solely on the state pension

Answer 104

A regular payment made by the government to people when they reach state pension age

Answer 105

A flat rate state pension for new pensioners from April 2016

Answer 106

- 65 for men born before Dec 1953 | - Between 60-65 for women born after April 1950 and before 1953

Answer 107

Life expectancy

Answer 108

- From 66 to 67 between 2026 and 2028 | - To 68 between 2044 and 2046

Answer 109

They need to fund a large expenditure

Answer 110

- A house - Study at university - A consumer durable - A car - An emergency life event

Answer 111

Because their monthly repayments need to be small enough to be affordable and fit into their personal budget

Answer 112

- Banks - Building societies - Friendly societies - Credit Unions - Finance companies - Insurance companies

Answer 113

A very long term loan to finance the purchase of property

Answer 114

A document that the person buying a property sings to agree that if they cannot continue to make repayments on the loan, the lender can take the property back and sell it to pay off the remaining debt

Answer 115

An individual or by 2 or more people buying together, but they must be over 18

Answer 116

Either the retirement or 70th birthday (whichever is sooner)

Answer 117

- First time buyers - Existing customers moving home - Existing customers switching their mortgage - Existing customers increasing their mortgage (usually to build an extension or pay for a life event)

Answer 118

If the borrower has sufficient equity in their property

Answer 119

When talking about property, it refers to the difference between the value of a property and the amount of money still outstanding on the mortgage

Answer 120

1) Buyer approaches lender 2) Lender works out how much it will lend 3) Buyer decides the period over which to repay 4) Legal processes to buy property are carried out 5) Buyer makes repayments every month a) At the end of the period the buyer owns the property b) If the buyer fails to keep up with the repayments the lender may repossess the property and sell it to recover the money lent to the buyer

Answer 121

- A survey of the property - Legal fees - Stamp duty - A mortgage application fee - Insurance - Cost of furnishing and fitting the property

Answer 122

How much they can afford to repay and this is connected to their income

Answer 123

- Loan to income (LTI) | - Loan to value (LTV)

Answer 124

- Basic annual salary + Any extra annual income (e.g. overtime, bonus, commission) - Monthly credit commitments (e.g. loans, credit cards, store cards). - i.e. Discretionary income is calculated. - This is multiplied by a figure (say 4 or 5) that reflects the customers' creditworthiness.

Answer 125

The ratio of the size of the loan to the value of the property: Value of property = Mortgage value + Equity

Answer 126

- A LTV of 60% would where you apply for a mortgage of £60,000 for a house priced £100,000, so the equity is £40,000. - A LTV of 90% would be where you apply for a mortgage of £90,000 for a house priced £100,000, so the equity is £10,000.

Answer 127

The longer the mortgage period, the lower the amount of the monthly repayment. The capital sum will always be the same, but the longer you take to pay the mortgage off, the higher the amount of interest paid.

Answer 128

- Capital: the amount they borrowed - Interest: the borrower must pay interest on the amount borrowed over the period of years of the mortgage So, the borrower must pay both capital and interest and there are 2 main schemes that work in different ways.

Answer 129

- Repayment mortgages | - Interest-only mortgages

Answer 130

With repayment you pay an amount each month that pays off the interest and the capital and at the end of the loan period you will have paid everything off

Answer 131

With interest-only the repayments are lower, but you are not paying off the capital (you will need another method to pay off the capital)

Answer 132

They have relied on the value of the house going up so much, that once they sell they have more than enough to pay off the capital (so nowadays borrowers should have a financial plan in place to afford the capital repayment)

Answer 133

Due to the problems with house prices falling and low returns on endowment policies

Answer 134

- SVR (Standard Variable Rate) - Tracker Rate - Discounted Interest Rate - Capped Interest Mortgage - Fixed Rate - Offset Mortgage - Loyalty mortgages - First-time buyers

Answer 135

This means you pay an interest rate that varies with the base rate. Any changes in the interest are at the provider's discretion. So, sometimes it can go down and sometimes up, meaning the amount you pay each month can change. This gives more uncertainty, but you can pay off the loan at any point and pay more each month if you choose.

Answer 136

The interest paid is equal to a set amount above the base rate. E.G. a tracker of 1% means the base rate is 2% and you pay 3%.

Answer 137

This suits people who want a cheap start to their mortgage. So for a period of time, you pay an interest rate below the base rate, and after that it reverts back to the variable rate. So, if you think your income will improve in the future, this maybe an option.

Answer 138

This is where a ceiling is put on the rate you can pay for a short period of time. So you pay the SVR and have the security of knowing it won't go above a certain level.

Answer 139

This means that the borrower has the security of knowing what the repayments will be for a set period of time. Also, if interest rates go up, your repayments stay the same. However, if the interest rates go down, you will not benefit. There are also substantial penalties if you pay the mortgage off early.

Answer 140

Combines the current account, Savings and Mortgage, so that mortgage can be paid off quicker

Answer 141

A discount is offered, typically around 0.5%, for a specified number of years, e.g. 2. But, the borrower must have their current account with the provider and regularly pay in at least £800 per month.

Answer 142

Make money from money; it is therefore not permitted to borrow or lend money for interest

Answer 143

- Ijara Mortgages | - Murababaha Mortgages

Answer 144

This involves the provider buying the property and selling to the borrower at a higher price, effectively hiding the interest component

Answer 145

When a lender does not seek to repossess the property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period

Answer 146

- Provides support to customers and helps maintain good relations between customer and provider - It prevents people from becoming homeless - Enhances the providers' reputation - It may mean the provider does not have to write off the loan and absorb the loss in its accounts

Answer 147

- Once the customers temporary financial difficulties have been resolved, they will face higher repayments to make up for the shortfall - The lender may eventually have to write off the loan

Answer 148

- Help to Buy equity loans - Shared ownership schemes - NewBuy schemes - Help to Buy Mortgage Guarantees

Answer 149

These are open to first time buyers and home-movers on new build homes worth up to £600,000. The purchaser provides a deposit of 5% of the purchase price, the lender provides a mortgage of 75% and the Government pays the remaining 20% via an equity loan.

Answer 150

These are provided through housing associations. The borrower buys a share of their home (between 25% and 75%) for which they take out a mortgage and they pay rent on the remaining share. These are only available to people who earn less than £60,000, a FTB and be renting a council or housing association property.

Answer 151

This allows a person to buy a newly-built home with a deposit of 5%. The house builder and mortgage lender get together to provide 95% of the value. The government guarantees the mortgage.

Answer 152

This is available from Jan 14. The government will guarantee the mortgage of a FTB or home-mover who buys a newly built home or an existing property with a 5% deposit.

Answer 153

A long term secured leans taken out by a person who is buying a property with the intention of letting it to tenants. The owner becomes the landlord. The aim is that the rent will cover the mortgage repayments.

Answer 154

- Value of the property might fall - Tenants may fail to pay the rent - The owner may have difficulty renting the property out, or getting enough rent - There are additional costs such as legal expenses, stamp duty, insurance etc. - The owner will have to pay income tax on the rent received and capital gains tax when they sell the property - They need a valid tenancy agreement and the landlord as a 'Duty of Care' to make sure the property is safe

Answer 155

A type of secured consumer credit to finance items such as cars and furniture, which involves the borrower repaying over a number of years. The borrower does not become the legal owner until all the repayments have been made.

Answer 156

They can terminate the agreement in writing, and will have to pay instalments up to that date. If they have paid more than 1/3 the company must obtain a court order to repossess the goods. They will then sell the goods at auction and if there is a shortfall the purchaser is liable for the difference. Most HP agreements are not with the trader or retailer, but with a finance company (e.g. buy now, pay later, say 6 months).

Answer 157

A non-profit government-owned organisation set up to provide loans and grants to students in universities and colleges in the UK. It pays loans and non-repayable grants to cover living costs and studying expenses and the cost of tuition fees - this is paid directly to the student.

Answer 158

- Tuition fee loans | - Maintenance loans

Answer 159

25% at the beginning of Term 1 and 2 and 50% at the beginning of Term 3 (plus interest is charged on this loan)

Answer 160

This is paid for living expenses and is usually paid in 3 instalments. If your parents earn below a certain amount e.g. £40,000, you will get a grant for a percentage which you do not have to pay back.

Answer 161

For course that begin after September 2012

Answer 162

£21,000 and will rise with inflation

Answer 163

- The borrower cannot keep up the repayments, maybe through the loss of a job or an illness - The property may lose value (negative equity)

Answer 164

- Life Insurance: if the insured person dies during the mortgage term, the life policy pays out a lump sum that covers the outstanding debt. The family of the decreased are then free of the debt and own the property outright. - Payment Protection Insurance: PPI can apply to a mortgage, personal loan or Hire Purchase. It covers loss of earnings due to accident, sickness or involuntary unemployment. These policies are not cheap and the borrower must weigh up the advantages/disadvantages.

Answer 165

Because they believe it will bring some type of reward, but with some risk

Answer 166

Uncertainty because the future cannot be predicted

Answer 167

Between risk and reward

Answer 168

- Someone who wants a high rewards must accept a higher risk of loss - Someone who is keen to avoid risk must accept that they will earn a lower return - The saver or investor pays for accepting less risk by agreeing to receive a lower reward

Answer 169

- Shares in newly quoted firm - Shares in established firm - Unit trusts - Bank Savings Account - Premium Bonds

Answer 170

Savers earn very little interest on their savings and this is an incentive for some savers to choose a riskier product in order to earn a higher return

Answer 171

To transfer it, although this does have a cost

Answer 172

Insurance - the person facing the risk decides to spend money on passing the risk to someone else, who will accept financial responsibility. People pay a premium and pass the risk of loss or damage on to the insurance company.

Answer 173

So they they are high enough to cover the losses that do happen and to make a profit on top of this

Answer 174

Car insurance

Answer 175

Travel insurance, pet insurance

Answer 176

- Impact of the risk: the effect on their life, of the loss or damage. Need to consider the amount of money involved, effect on their lifestyle, the timing of the event and the frequency of the event. - Probability of the risk occurring: how likely it is that it will happen. This is difficult for an insurance company to calculate.

Answer 177

Probability x Impact = Degree of Risk | High number = high risk

Answer 178

- Whole of life assurance: the sum assured is payable on the death of the life assured, whenever the death occurs. There is no fixed time limit and remains in force until the policyholder dies or surrenders it. - Term assurance: the sum assured is only paid out if the person dies before the end of the specified period.

Answer 179

It is guaranteed that the sum will be paid out

Answer 180

The cover ceases and no payment or refund of premiums is made

Answer 181

Mortgage protection

Answer 182

This cover pays out a guaranteed cash lump sum if the insured person dies or is diagnosed with a critical illness - it usually covers illnesses like cancer, heart attack and stroke

Answer 183

Inability to work and the subsequent loss of income is a long term risk that everyone faces. Income protection pays out a monthly income to insured people who have suffered an accidental injury or a long term illness and who are unable to work.

Answer 184

This is usually paid out when someone becomes involuntarily unemployed

Answer 185

- Deposits in banks: covers the first £85,000 - Long-term insurance (pensions and life assurance): covers 90% of the claim - Compulsory insurance, e.g. 3rd party motor insurance - Non-compulsory insurance, e.g Home and general: 90% claim

Answer 186

- Making a will - Providing for inheritance tax - Trusts

Answer 187

- The person who will get their money, property and possessions - They can provide for a partner where there is no marriage or civil partnership (without a will, such a partner cannot inherit) - They can make arrangements for their children - They can minimise the amount of inheritance tax they pay

Answer 188

A solicitor

Answer 189

- It must be made by a person who is 18 years of age or over, who is of sound mind and aware of what it contains and who is making it voluntarily - without the pressure from anyone else. - It must be in writing and signed by the person making the will in the presence of 2 witnesses (who sign it also), who cannot benefit from the will.

Answer 190

On the death of the second partner in marriage or civil partnership

Answer 191

Some people like to make provision for this inheritance tax, so the beneficiaries can inherit the full estate without having its value reduced by tax (especially if the spouse or partner wants to live in the property). This is because the beneficiary may have to hell the house in order to pay the inheritance tax.

Answer 192

A financial relationship whereby property is held by 1 property (the trustee) for the benefit of another (the beneficiary). The trustee has the legal title to the property held by the trust and has the power to buy and sell assets on behalf of the beneficiary, but the trustee has the duty of care to the beneficiary and must act in their interests.

Answer 193

That money is safe and cannot be accessed by anyone except for the children when they reach a certain age

Answer 194

What happens in the short term

Answer 195

Because people want to achieve their aspirations and to finance life events

Answer 196

- Life events (e.g. going to university, buying car or house, going on a world cruise, having a big wedding, starting family) - Retirement: People will need to save in a pension fund or have long term investments over a period of years, in order to generate sufficient income when they stop work - Death: Someone who has a partner, children or other dependents need to consider how death might affect others financially and they should make plans accordingly

Answer 197

- Their family situation - Their financial situation - Their lifestyle and how this may change - Their personality - Their attitude to risk

Answer 198

As they are connected with people's aspirations

Answer 199

- Positive unplanned events (e.g. a wedding or having children), these still have an impact on a budget - Negative unplanned events (e.g. a car breakdown, redundancy, divorce, illness), these can drain finances

Answer 200

Because not all events are predictable

Answer 201

The skill of risk assessment

Answer 202

- Realistic: within the context of their income and expenditure - Clear: be clear as to how much something will cost - Timely: timescales need to be applied, the longer the timescale the more planning is needed - Flexible: a personal should be able to make changes to the plan if necessary - Documented: a written plan is more likely to be kept to

Answer 203

- Budgets | - Cash flow forecasts

Answer 204

A personal financial plan that someone draws up every month to show their expected income, expenditure and end of month balance

Answer 205

A medium and long term financial plan, known as a cash flow forecast

Answer 206

By monitoring the amounts going in and out of a bank account - this way you will know when your are spending more than you anticipated, earning less and then you can find out why this is happening

Answer 207

Either increasing income or decreasing expenditure over a few months in order to restore the savings balance or to make up the debt arrears

Answer 208

1) Decide on realistic aspirations 2) Establish a timescale (e.g. 5 years to sabe for a house deposit, 40 years to retire to a warm climate) 3) Establish a starting position: the person needs to audit their current resources, like the balance on their current account, current income and expenditure, the assets they own, the liabilities they owe like overdraft or outstanding balance on their credit card, and any current provision for the future like pension 4) Establish priorities: one has to make choices between various options. Loan payments have to be made. 5) Document the plan 6) Implement the plan: keep an eye on when desired savings are proving unachievable, or loan payments. Missing payments means that the following payments will be double, interest owing will accumulate, and the lender may add penalty charges so the borrower may get an adverse credit rating. 7) Review the plan: financial planning is an ongoing process rather than a single activity. A person needs to review their financial plan regularly, as their wants and aspirations may change and their priorities will change to reflect this.

Answer 209

- Savings: it may take longer than anticipated to save up, and depending on what product you choose a balance between risk and reward needs to be considered - Borrowing: this involves getting into debt to achieve the aspiration now but a certain amount of future income has been earmarked to make the repayments, which might mean giving up other expenditure. The total amount repaid will be greater than the cost of the item, since interest and perhaps fees may have to be paid. - Insurance: life assurance and pension funds are ways that many people save to achieve their long term aspirations

Answer 210

Because of the financial footprint, which is a person's financial reputation and creditworthiness

Answer 211

They could be refused credit in the future, when they desperately need it. Their behaviour at an earlier stage of their life can have a negative impact on later stages or on life events.

Answer 212

- Failing to provide for a pension, they will be dependent on the state pension and on any other benefits they may be entitled to - Their standard of living will probably not be very high - They might be forced to continue working for longer but this will depend on their being fit enough and on their finding a job

Answer 213

1) Look carefully at your wants and aspirations 2) Look carefully at your position on the risk/reward spectrum 3) Look carefully at the risk/reward spectrum of the product: a. Saving and Investment b. Borrowing c. Insurance 4) If necessary, you should take professional financial advice before proceeding

Answer 214

Their personality, the amount of money they have at their disposal and the stage of the life cycle they are in

Answer 215

Some people do not ignore the risk completely, nor do they pay for insurance. Instead they save some money to fall back on in case the risk event does arise.

Answer 216

- Whether there is any legal obligation - The cost of the insurance - The perception of the degree of risk - The ability to access insurance

Answer 217

As it helps someone to reduce their future risk by ensuring that they have a lump sum to use in an emergency

Answer 218

That a saver has to hand their money over to a provider. If the provider fails, they may lose uninsured deposits (FSCS only covers the first £85,000)

Answer 219

The rate of inflation, otherwise the value of saved/invested money will fall

Answer 220

As the borrower has to commit to repaying out their future income, but they cannot be sure that they will have enough income over the repayment term to be able to settle the debt in full

Answer 221

A higher risk

Answer 222

The insurance company may fail and not be able to pay compensation (but the FSCS covers 90% of a failed insurer)

Answer 223

1) Consider the strength of your wants and aspirations, and the benefit you will derive from fulfilling it 2) Look at your own risk profile according to your financial circumstances 3) Find out the charges and any penalties, how flexible it is and the terms and conditions 4) Consider the extent to which it fits in with your own values

Answer 224

To match the product to its intended purpose and to the characteristics of the person buying it - this means that the product should fit well into the person's financial plan and is suitable

Answer 225

- The intended purpose, e.g. achieving an aspiration or paying for a life event - The timescale: medium or long term - Affordability: taking into account the person's income and other expenses - Attitude to risk and the risk profile of the product/brand - How the product fits into the overall product mix

Answer 226

- Joint Demand | - Competitive Demand

Answer 227

Means that 2 products are bought together because they are complementary, i.e. the purchase of one product necessitates the purchase of another

Answer 228

- Personal loan to buy a car and motor insurance - A long term savings bond and an instant access savings account. These 2 products fulfil different wants and needs and cover different time periods. - An interest only mortgage and an investment product to cover the payment of the capital - A mortgage to buy a home and a personal loan to buy furniture to put in the home

Answer 229

A situation in which 2 or more products fulfil the same need or want and therefore are in competition with each other for the customer's money

Answer 230

- Different savings products - Different insurance providers - Different credit card providers - Different loan providers - Different mortgage providers

Answer 231

People's wants and aspirations, their plans and ability to succeed in those plans. They make a difference to financial planning but people do not have control over them.

Answer 232

- Inflation - Interest Rates - Unemployment - House Prices - Changes in stock market

Answer 233

- Inflation affects savers and borrowers differently, depending on the difference between the inflation rate and the interest rate being received or paid - Savers often lose out as their purchasing power falls. - Borrowers often benefit as money borrowed also loses value. This is corrected by paying interest, that is almost certainly higher than the inflation rate. - Inflation may affect a decision on whether to finance a purchase by saving up the item or borrowing the money. Someone who decides to save for it faces the risk that the price of the item will increase by the time they are able to afford it, even taking interest into account. It may be better to borrow the money and to buy it at today's price. The final decision will spend on the interest rate of each product.

Answer 234

- Inflation affects savers and borrowers differently, depending on the difference between the inflation rate and the interest rate being received or paid - Savers often lose out as their purchasing power falls. - Borrowers often benefit as money borrowed also loses value. This is corrected by paying interest, that is almost certainly higher than the inflation rate. - Inflation may affect a decision on whether to finance a purchase by saving up the item or borrowing the money. Someone who decides to save for it faces the risk that the price of the item will increase by the time they are able to afford it, even taking interest into account. It may be better to borrow the money and to buy it at today's price. The final decision will spend on the interest rate of each product.

Answer 235

- The Bank of England makes changes to the Bank Rate, according to whether they want to slow down or speed up the economy - so whether they want to encourage saving or borrowing. - The Bank Rate affects other interest rates, the rates that providers pay on savings and charge on loans and also how people expect interest rates to change in the future.

Answer 236

- Individuals who have lost their job will now have to rely on benefits, which would be significantly less than the income they would have been earning. - Unemployment is a particular problem for anyone who already owes money because they will have no income from which to meet loan repayments. - People who have purchased PPI will be in a better position as their loan payments will be covered at least. - Unemployed people may have to use their savings to pay for current expenses and their debts and they will have to postpone any life events they were planning. - There is also an impact on long term plans such as pensions and especially if they are paying into an occupational scheme with their employer. Anyone who pays into a flexible personal pension is in a better position as they can put the scheme on hold until they find another job.

Answer 237

- House prices are a key indicator of the state of the economy. In a growing economy, there is a lot of demand and house prices will be buoyant but if the economy slows down and there is more economic uncertainty about the future, house prices may fall. - If house prices fall this is good for first time buyers, as it makes it easier to get on the property ladder. On the other hand there is a greater risk of them losing their jobs and mortgages may become harder to obtain. - Falling house prices are certainly not good for people who have already bought their own home as its value will fall and may even become less than the amount they owe on their mortgage. - This negative equity is a problem for someone who wants to move but knows that the proceeds of the sale of the house will not cover the debt outstanding. They will either have to buy a cheaper property or ask the bank to finance any difference or they will have to wait until the market improves. - A fall in property prices also affects people who look on their property as an asset in their pension portfolio and it reduces their retirement savings.

Answer 238

A fall in the stock market mean that people sell shares, they will get for their shares than they paid for them. If companies are not doing very well, they will earn fewer profits and shareholders will receive fewer dividends. If someone is relying on their shareholdings to finance a future expenditure, they will have to adjust their plan.

Answer 239

Flexibility

Answer 240

Being willing and able to change priorities

Answer 241

- Savings: Reducing the stress of worrying about how to manage an unfavourable unexpected event, and if it doesn't happen, they will still have the money - Anticipate events: this is part of risk assessment

Answer 242

A function of a spreadsheet whereby the user can set out a table of calculations and then change one of the variables to see 'what' the effect will be on the final results 'if' certain changes happen. Changes in interest rates and other economic variables impact on borrowing repayments and savings goals.

Answer 243

If someone has taken out a mortgage when interest rates were very low, which they are currently

Answer 244

For people on fixed incomes, such as retired people living off an annuity that pays them the same nominal amount of money each month. Some annuities are inflation-linked and people with this type of annuity are less badly affected.

Answer 245

They should assume an average rate of inflation (say 2/3%) and increase their income and expenditure by this amount each year

Answer 246

- Jobseekers Allowance (JSA) - Universal Credit - Personal Independence Payments (POP); previously called Disability Living Allowance

Answer 247

Changes in people's social security policy. When changes happen, they create great uncertainty for people who are in receipt of benefits or who think they may have to claim them in the future. It is difficult for them to factor these changes into their financial plans

Answer 248

- Equity withdrawal: this is additional borrowing based on the difference between the value of a house and the outstanding mortgage. This additional borrowing was very common prior to the FC, and was often used to finance holidays, new cars and extensions, pay off credit cards. When house prices were rising, people relied on an increase in the value of their house to pay for the extra mortgage. - Other types of debt (Hire Purchase, unsecured loans, credit cards and overdrafts). - Student debt: the amount an average student will owe when they graduate is set to rise.

Answer 249

When their income reaches £21,000

Answer 250

People owe more than they can afford to repay and may never pay it back

Answer 251

Organisations such as MAS, CA and StepChange

Answer 252

- How much the person has borrowed in the past, when and how often - Whether their borrowing has increased overtime and by how much - How many loan applications they have made and what the results of these were - How, to what extent and when they have been paid off their debts - Whether they have missed payments - Whether they have ever defaulted on a debt

Answer 253

- Not being able to gain a mortgage to buy a house - Not being able to access hire purchase - Not being able to set up a mobile phone contract

Answer 254

- The only option is to save up, which is not feasible in the case of buying a house - Being refused credit also means that it will not be possible to borrow money in an emergency - If they are desperate to borrow, they may be forced to go to a moneylender or payday loan company that will charge extremely high interest rates and may use aggressive money recovery techniques

Answer 255

- Sell assets, e.g. downsize property to receive a lump sum and so reduce mortgage - Cut down discretionary expenditure - Contact lender to secure a payment holiday for a few months, or extend mortgage - If you have PPI you will be able to get some income for a period of time, 6 months to a year

Answer 256

- Accurate: the description must be correct (e.g. the cost of an insurance policy and the level of cover in the event of a claim) - Up to date: (e.g. correct interest rates) - Transparent: must be clear and not hide anything from customers (e.g. any penalties for early repayment or withdrawal) - Timely: info must be available when customer needs it - Sufficient: so the customer has a clear idea of what a product will do for them, but not too technical

Answer 257

- The original want or aspiration (e.g. strong desire for house = strong desire for mortgage) - Feasibility of access - Information sources - Personality - Price and product features - Reputation of provider

Answer 258

The moral principles that govern a person's behaviour

Answer 259

A degree of moral behaviour

Answer 260

A provider must go beyond simple compliance and have an ethical culture

Answer 261

Shared values - the beliefs and norms that determine how people are expected to behave

Answer 262

'Treating customers fairly (TCF)' under which providers are expected to put the well-being of customers at the heart of their business

Answer 263

- An advisor sells a product that is clearly unsuited to their circumstances, e.g. mis-selling PPI; either because they could not afford them or they would not qualify to benefit from them - A bank makes charges that are out of proportion to the cost of providing a product - A bank makes exaggerated and unrealistic claims for its products when compared with products of its competitors (E.G. the unrealistic claims about endowment policies, which people bought as repayment vehicles for interest-only mortgages in the 80s and 90s). Customers were told that the endowment polcicies would grow fast and by the end of the mortgage period, would be worth enough to pay off the mortgage and have a surplus left over. The mis-selling lay in the fact that the advisors made false assurances and promised customers something they could not deliver).

Answer 264

- An advisor sells a product that is clearly unsuited to their circumstances, e.g. mis-selling PPI; either because they could not afford them or they would not qualify to benefit from them - A bank makes charges that are out of proportion to the cost of providing a product - A bank makes exaggerated and unrealistic claims for its products when compared with products of its competitors (E.G. the unrealistic claims about endowment policies, which people bought as repayment vehicles for interest-only mortgages in the 80s and 90s). Customers were told that the endowment policies would grow fast and by the end of the mortgage period, would be worth enough to pay off the mortgage and have a surplus left over. The mis-selling lay in the fact that the advisors made false assurances and promised customers something they could not deliver).

Answer 265

An ethical response to the issue would be for a provider to limit the salaries and bonuses it pays to its top staff, while maintaining a reasonable difference for the pay of people at lower levels in the business

Answer 266

To take more general responsibility for their actions in the world in which they operate. Therefore, they need to consider the effects of their business and of their decisions on stakeholder groups other than shareholders and top directors.

Answer 267

- Customers - Employees - Communities - Disadvantaged groups in other countries - The environment

Answer 268

Any action or project in which a company goes beyond the interests of shareholders and top management in order to benefit other stakeholder groups, a self-imposed ethical policy

Answer 269

That it is simply window dressing an overall market campaign and aims to create a good image in order to cover up less ethical policies

Answer 270

- That it is simply window dressing an overall market campaign and aims to create a good image in order to cover up less ethical policies - Others comment that financial providers should concentrate on its main services, and maybe it could lower interest rates if it didn't have to pay money on CSR projects

Answer 271

- Barclays 2015 Citizenship Plan - HSBC environmental work in China - Coop; a social banking unit, socially finance

Answer 272

When someone chooses to save in a way that means the money will be used for what that individual considers to be good purposes. Also, the company they invest in takes into account the wider impacts of its activities on society and the environment.

Answer 273

Whether you save money with a financial provider and they lend to a cosmetics company that tests its products on animals

Answer 274

An organisation that brings together and offers support to financial advisors who want to promote green and ethical investment

Answer 275

Offering investment into hydrogen-powered cars, which are more energy efficient compared with diesel or petrol engines

Answer 276

An initiative set up by the United Nations Environmental Programme, a set of voluntary guidelines for investment firms that want to address social and environmental issues (e.g. human rights, climate change)

Answer 277

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Answer 278

- Sustainability of an individual financial services provider, in other words they will not fail. Can they maintain their level of service, meet its obligations, are its products sustainable; do they meet the long term needs of its customers? - Sustainability of the customers of financial service provider; are they managing their finances so they can afford to live well and not become indebted/face bankruptcy, can they achieve a good balance between consumption and saving during their working lives for themselves and their children and secure a comfortable old age? - Sustainability of the overall financial markets

Answer 279

- Refer to the EIA (Ethical Investment Association). EIA members can search the website for a financial advisor who is also a member and who will give them advice to suit them. - Search for an affinity savings account, these are linked to a particular charity or good cause. The provider makes a cash payment from its own funds to this charity based on the average balances held in the affinity group accounts - People who are very keen on buying ethical and green products might consider becoming customers of a building society or mutual

Answer 280

Only financial products that comply with Sharia Law

Answer 281

That a person or an institution must place their money only in investments that are ethical, must be permissible or halal

Answer 282

- Free of interest, speculation and gambling as these are considered to be forms of exploitation - Made in permissible activities. (E.G. not industries such as alcohol, tobacco, gaming, adult entertainment and weapons). The permissible financial products are ones offered at an Islamic banks or a conventional bank, which offers Sharia-compliant products. - Separately approved by an Independent Sharia supervisory board to ensure that the principles have been adhered to. Anyone who does not comply with this rule must pay money t charity.

Answer 283

- Free of interest, speculation and gambling as these are considered to be forms of exploitation - Made in permissible activities. (E.G. not industries such as alcohol, tobacco, gaming, adult entertainment and weapons). The permissible financial products are ones offered at an Islamic banks or a conventional bank, which offers Sharia-compliant products. - Separately approved by an Independent Sharia supervisory board to ensure that the principles have been adhered to. Anyone who does not comply with this rule must pay money to charity.

Answer 284

- When buying a financial product, to help them make an informed choice - Also during the period they are using the product

Answer 285

Interest rates may change, personal circumstances or the economic conditions within the country may change. So, people should seek updated advice every year to make sure their financial plan is on track and that their needs have not changed without them realising it.

Answer 286

- With short term products (e.g. current accounts/savings accounts) it is easier to switch to a different one. - However with long term products (e.g. mortgages) they are more inflexible and people need to know the facts before committing themselves. They can experience financial problems if they do not understand the agreement they are making.

Answer 287

- Information from providers - Marketing brochures and leaflets - Provider websites - TV and Radio Adverts - Provider staff - Information from the media - Public sources of information - Information from charities - Financial advisors - Family and peers

Answer 288

- They will only provide information on their products, not any other providers. - Much of the information is quite general and aimed at a large audience. - The T&Cs can be hard for people to understand and they may need help interpreting them. - FCA requires information given by financial providers to be fair and most misleading, and in plain English. - The provider should point out the cost, penalties and other obligations (E.G. someone should be aware of the consequences of becoming overdrawn).

Answer 289

Consumers can 'shop around' and collect leaflets, the marketing material will give some detail. These leaflets can be collected in branch or received through the post, or through cold calling.

Answer 290

They do not give a lot of information and are intended to publicise the provider's name as widely as possible. They seek to build brand awareness.

Answer 291

Money Box on Radio 4, that gives the latest news on personal finance plus advice to those trying to make the most of their money. It gives information but does not aim to market products. They identify problems that consumers are having and try to identify scams. There is also a weekly interactive programme that answers listeners' questions on financial issues. Plus there is a website.

Answer 292

- TV and Radio - Newspapers - Price comparison websites

Answer 293

- Consumers can access at a glance a list of products from different providers, which helps them make a choice. - Consumers can get information on a number of providers without contacting them separately, which saves time. - Consumers can find the 'best buy' tables. - Consumers can enter their own specifications and find products to suit their needs.

Answer 294

- Not everyone has access to a computer and some are not computer literate - Not all price comparison sites are reliable - The price comparison websites gives the headline details, consumers should always read the small print and T&Cs - Some price comparison websites are sponsored by specific providers who may push their own products and not give impartial advice

Answer 295

- Money Advice Service - Financial Conduct Authority (FCA) - Office of Fair Trading

Answer 296

It gives free and unbiased money advice to everyone in the UK via its website, over the phone and face to face. It provides a number of services.

Answer 297

- Money Health Check: This looks at a person's overall financial position in relation to their circumstances and aims to anticipate future events. The MAS offers an online money health check. When they have answered the questions, a person gets feedback in the form of an action plan. Although the MAS does not recommend a particular brand. - Financial education and information: the website gives information on life events, managing your money, money topics and tools/resources - Debt advice

Answer 298

It has a website which contains a lot of information on the main groups of financial products and how consumers can protect themselves against bad products, mis-selling any scams, making complaints and receiving compensation

Answer 299

Its website contains advice about consumer alerts, problems with customer service

Answer 300

- Citizens Advice - StepChange Debt Charity - National Debtline

Answer 301

It is a free service and its debt advice includes a self-help pack, fact sheets, guides and review packs, personal budget sheets, debt options and sample letters

Answer 302

- Independent financial advisors (IFA) | - Restricted advisors

Answer 303

They offer independent advice and are able to consider all types of retail investment product that might meet a client's needs and objectives. It must be unbiased and unrestricted advice based on the comprehensive and fair analysis of the relevant market. They must tell consumers that they are independent.

Answer 304

These can only recommend certain products from one or a limited number of providers. (E.G. they offer advice on Pensions or ethical investment). They are not allowed to use the word 'independent' to describe their advice.

Answer 305

It prevents financial advisors and sales staff from being paid commissions by the firms whose products they are selling. It applies to pension annuities and unit trusts but not to some mortgages and insurance policies.

Answer 306

To stop sales people from pushing the sale of products that pay them the biggest commission

Answer 307

Professional advisors charge their clients for their services and so the client needs to ask beforehand how much they are going to be asked to pay

Answer 308

- That they will be charged a fee for the advice they are given and provide details of the charges - Make it clear whether they are independent or restricted, so that the customers are given advice that is specific to their needs

Answer 309

- That they will be charged a fee for the advice they are given and provide details of the charges - Make it clear whether they are independent or restricted, so that the customers are given advice that is specific to their needs

Answer 310

- Made things transparent, as before customers often did not know the advisor received a commission from the provider when the customer bought a product or indeed how much the commission was - Also it is hoped that the approach will restore consumer trust and avoid mis-selling scandals in the future

Answer 311

That it makes getting financial advice expensive and many people may not be prepared to pay for the consultation

Answer 312

That someone who is close to you has your interests at heart and would have a good knowledge of their personal circumstances, their personality and their wants and aspirations (however their knowledge of financial products will most likely be poor)

Answer 313

The relative or friend does not necessarily have a good (or any) knowledge of financial products. Even if they have used the product before, they do not know whether it suits the person they are advising and key aspects of the product might have changed since they bought it.

Answer 314

If they are buying a financial product jointly. Each would listen to each other's point of view, take a joint decision that suits them both and be fully aware of the responsibility that each has to the other.