Quick comparison Flashcards

Question

contribution limits ISAS PERSONAL PENSIONS INVESTMENT BONDS

Answer 1

ISAS PERSONAL PENSIONS INVESTMENT BONDS

Answer 2

ISAS PERSONAL PENSIONS INVESTMENT BONDS

Answer 3

ISAS PERSONAL PENSIONS INVESTMENT BONDS

Answer 4

Yes to all

Answer 5

Cash & Fixed Interest

Answer 6

Yes to all

Answer 7

Yes to all

Answer 8

Yes to all

Answer 9

Equities only

Answer 10

Equities only

Answer 11

Equities only

Answer 12

Property only

Answer 13

Property only

Answer 14

Property only

Answer 15

2, 3 or 5 years

Answer 16

Fixed + CPI uplift

Answer 17

Paid with capital on maturity

Answer 18

Savers can win a prize of up to £1m, so this product is not about saving in the conventional way, but instead holding cash in a secure manner whilst having a 22,000/1 chance of winning a tax-free cash prize.

Answer 19

Suitable for savers who are looking to lock their savings away for several years on the promise of receiving their deposit but interest at maturity. On maturity, certificates can be rolled over into a new issue (if available). Can be held in trust.

Answer 20

£1/£2m per person (can be held jointly)

Answer 21

£500/£1m per person (can be held jointly)

Answer 22

£100/£100,000 per person (can be held jointly)

Answer 23

Easy access without penalty

Answer 24

Cannot access capital until end of the term.

Answer 25

Annually, as a top-up

Answer 26

Monthly, as an income

Answer 27

Income Bond – monthly. Growth Bond – paid with capital at maturity

Answer 28

Paid with capital at maturity.

Answer 29

Suitable for individuals who wish to make sizeable cash deposits beyond the FSCS compensation limits.

Answer 30

Suitable for individuals who wish to generate income from their savings whilst having access to capital. Can be held in trust.

Answer 31

Suitable for individuals who wish to benefit from fixed interest savings terms for a short period, but do not require access until the end of that term. Can be held in trust.

Answer 32

Suitable for individuals who want a guaranteed return on a more ethically focused product over a 3-year term, but do not require access over the term. Can be held in trust.

Answer 33

Lack of asset class diversification – the entire ISA is equity focused. Lack of geographical/sector diversification – all three holdings are FTSE 250 listed. Market risk – the risk of fluctuations in value No FCSC compensation available – if the companies issuing the shares were to fail, there would be no regulatory protection and Abraham would lose his entire investment.

Answer 34

Attitude to risk and alignment to ETF or multi-asset fund Capacity for loss Costs/Charges The benchmark used to measure/track performance. Dealing frequency/liquidity Performance and reputation Concentration/diversification of holdings Yield/income Mandate/style of the fund

Answer 35

As the fund is an equity fund, it will pay dividends as opposed to interest. Dividend received = 6.5% x £165,000 = £10,725 Dividend allowance = £1,000 Taxable dividend = £10,725 – £1,000 = £9,725 Tax liability (higher rate) = £9,725 x 33.75% = £3,282 Mitigation Transfer part/all of the investment to Kim as she is a basic rate taxpayer and will pay a lower tax liability (such a transfer will be exempt from CGT and IHT). Consider using Abraham’s annual CGT exemption to move funds from the GIA into the ISA each year, thus reducing the overall income tax liability on his investment income as ISAs are free of income tax.

Answer 36

Annual management charges Admin charges Marketing costs Audit/compliance fees Regulatory costs/fees Custody/depositary costs

Answer 37

Lifetime Annuity/Scheme Pension – this involves the pension fund being used to purchase a secure income from an insurer which is guaranteed for the rest of Kim’s life. Flexi-Access Drawdown – this involves Kim’s pension fund remaining invested for further growth and the flexibility to withdraw a taxable income as and when required. Uncrystallised Fund Pension Lump Sum (UFPLS) – this involves Kim taking her pension income as a series of lump sums direct from the uncrystallised funds, with residual funds remaining invested for growth. Phased retirement – may involve a combination of the above.

Answer 38

Sequencing risk is the risk of withdrawing too much from an investment during or immediately after a market downturn, which then creates a significant drag on investment growth. In turn, this can have an impact on Abraham and Kim’s ability to maintain the long-term value of their investments and meet their retirement income needs. Sequencing risk is high based on Abraham and Kim’s current position as they are predominantly invested in equities, which can fluctuate considerably in value in the short term. Mitigation Keep withdrawals to a minimum and access other income sources to provide retirement income in the early years (i.e., cash deposits). Change the timing/frequency of withdrawals. Alter the asset allocation of their portfolio to provide greater diversification away from equity concentration. Increase liquidity/cash holdings. Take natural income/dividends from investments to support retirement needs (leave capital invested). Consider securing an income from Kim’s pension through a scheme pension or lifetime annuity.

Answer 39

Minimum of 16 holdings A maximum of 10% of the fund value invested in up to four of those holdings/companies (40% in total). Maximum of 5% of the fund value invested in the rest of the remaining holdings (60% in total). The maximum exposure for unlisted securities is 10% of the fund value.

Answer 40

On Abraham’s death, the value of his ISA will form part of his estate for IHT purposes. As Abraham will have died after 6 April 2018, his ISA will become a ‘continuing ISA’ and will therefore continue to offer ISA tax advantages until the earliest of the completion of the administration of his estate, the 3rd anniversary of his death or the closure of the ISA. The APS is the higher of the value of the ISA on Abraham’s death or the value when the ISA ceases to be a ‘continuing ISA’. The APS is an additional ISA allowance that will be available to Kim in addition to her own personal ISA allowance of £20,000. This would allow Kim herself to make additional ISA investments and achieve greater levels of tax efficiency with her investments. The APS can be used to make a deposit into a cash ISA. The APS can be used to fund a stocks and shares ISA, or transfer Abraham’s ISA holdings across into Kim’s ISA without needing to sell and repurchase holdings.

Answer 41

Market risk – the risk of Tania’s investments fluctuating in value due to being over-exposed to the stock market. Diversification risk – Tania’s portfolio is heavily concentrated on equities and lacks exposure to other asset classes such as property, fixed interest, and cash, which can help to manage risk and provide steady returns. Liquidity risk – this is particularly focused on Tania’s investment trust investment which is closed-ended and therefore may be more illiquid than the unit trust and OEICs. It may be difficult for Tania to sell her investment trust shares as there may not be sufficient demand to enable her to sell the shares at the price she wants and at the time she wants to sell. Default/credit risk – in the event of any of her providers defaulting/becoming insolvent, Tania’s protection/compensation will be limited to FSCS prescribed levels. Given the level of investment she has with each provider, there is a strong likelihood that she won’t be able to claim the full value of her investments back and could therefore suffer financial loss as a result. Currency risk – this specifically applies to the emerging markets and US investments which will be denominated in a different currency and any income or gains will have to be converted into GBP in Tania’s hands. This could be problematic for her if foreign exchange rates fluctuate to her disadvantage. Political risk – Tania’s emerging markets investments will be most exposed to this, as emerging market investments tend to be at risk of political influence or manipulation. This could make it more difficult for Tania to access such investments and could also lead to wild fluctuations in value. Shortfall risk – This is the risk that Tania’s target growth or income from this portfolio is not achieved over the term and is heightened here due to Tania’s high exposure to the stock market through her equity holdings.

Answer 42

An OEIC is a limited liability company governed by an instrument of incorporation. An Investment Trust is a listed public company governed by a memorandum and articles of association. An OEIC is open-ended. An Investment Trust is closed-ended. An OEIC is regulated by the FCA. An Investment Trust is regulated by the Companies Act. An OEIC is managed by an Authorised Corporate Director (ACD), with investments held by the Depositary. An Investment Trust is managed by a fund manager/board of directors.

Answer 43

An OEIC’s method of valuation is defined in regulation. An Investment Trust’s method of valuation is based on market price. An OEIC is usually valued at least daily. An Investment Trust is usually valued at least monthly. Most OEICs are priced on a single price basis reflecting the net asset value (NAV) of the underlying assets. An Investment Trust is priced based on supply and demand, and therefore the share price may be trading at a discount or premium to NAV. OEIC shares are mostly purchased and sold through the OEIC manager. Investment Trust shares are mostly purchased and sold through a stockbroker.

Answer 44

Attitude to risk Capacity for loss Objectives and time horizons Specific income requirements at each stage of Tania’s life Tania’s views on inflation Tania’s views on interest rates Tania’s specific investment preferences (ethical, ESG etc.) Tania’s current and projected future tax status Emergency fund/liquidity requirements Tania’s views on costs and charges

Answer 45

Tania would receive no compensation/protection from the FSCS should her Brazilian corporate bond provider default or become insolvent. As Investment Trusts are structured as listed companies, the FSCS would not provide protection against the failure of Tania’s investment trust. Tania’s OEICs and Unit Trust will be protected up to a maximum of £85,000 per firm/provider. Based on the current value of Tania’s OEIC and Unit Trust holdings (£475,000), the maximum FSCS compensation available would be £170,000 (£85,000 x 2 providers), therefore Tania would stand to lose up to £305,000.

Answer 46

30% income tax reducer , but shares must be held for 3 years.

Answer 47

50% income tax reducer , but shares must be held for 3 years.

Answer 48

30% income tax reducer , but shares must be held for 5 years.

Answer 49

£2m (excess over £1m must be in knowledge- intensive companies)

Answer 50

Dividends subject to income tax (after use of £1 ,000 dividend allowance) (0%, 8.75%, 33.75%, 39.35%)

Answer 51

Gains are liable to Capital Gains Tax if disposed of within three years and income tax relief has not been taken (£6,000 annual exempt ion, then gains charged at 10% or 20%)

Answer 52

Exempt f rom CGT

Answer 53

Gains made on other assets can be defer red by reinvesting in an EIS (must be done within one year prior or three years after the gain is made) .

Answer 54

CGT deferral not available (However , reinvestment relief applies – which allows the individual to treat a maximum of 50% of the gain from any asset as exempt from CGT if proceeds are reinvested into a SEIS)

Answer 55

Qualify for Business Relief, meaning that the investment can pass on death free of IHT, as long as the shares are held for at least two years.

Answer 56

Business Relief not available, so on death the VCT shares will form part of the investor ’s estate and be potentially liable to IHT.

Answer 57

An FCA authorised OEIC that invests predominantly in proper ty (can include REITs)

Answer 58

Price volatility Pricing is largely driven by availability of information which may not be as accessible to private investors as it is for larger companies with dedicated research Highly illiquid, especially in relation to physical commodities High level of costs involved

Answer 59

Similar to an ETF, t racking the performance of under lying commodities Investor is not exposed directly to the under lying physical commodity

Answer 60

Risks/Drawbacks Investment risk Gearing Expensive Regulation (lack of) Access

Answer 61

Factors to consider Type of product Details of sums payable and guarantees Payment conditions Term and repayment dates Early encashment penalties

Answer 62

Advantages ► Ability to select property ► Can be ‘hands-on’ in management of property ► An asset class with which investor is likely to be familiar from their own home ► Availability of cheap borrowing allowing for gearing ► Returns have traditionally been very strong Disadvantages ► Too great an exposure to single investment – ‘all eggs in one basket’ ► Could have periods without a tenant ► Will have costs attached to management of the property unless selfmanaged ► Self-management will involve time and effort ► Costs associated with direct investment are now high – stamp duty, 8% loading on capital gains tax and ongoing changes to the way interest is allowed against tax on rent ► REIT will give exposure to commercial property which tends to be a stable asset class ► May be illiquid

Answer 63

► End of 2022 Price £1.10, NAV 95p ► 1.10 / 0.95 = 1.158 ► Trading at a premium of 15.8% ► End of 2023 Price £1.06, NAV £1.02 ► 1.06 / 1.02 = 1.039 ► Trading at a premium of 3.9%

Answer 64

PCLS = 25% x £300,000 = £75,000 Property gain = £120,000 Total = £195,000

Answer 65

Options Harrison (or his fund manager) could buy a FTSE 100 call option. This will give Harrison the right, but not the obligation, to purchase FTSE 100 shares at some point in the future at the agreed exercise price. If the FTSE 100 rises above the exercise price, Harrison can exercise the option and make a profit (as he’ll be able to buy the index for a lower price than its’ current value). If the market falls, Harrison can just walk away and let the option lapse. All Harrison will lose is the premium he paid up front.

Answer 66

Works on the principle that investment performance is driven not only by risk and return but also the relationships between the investments in terms of price changes.

Answer 67

Theory that market prices are always correct and provide an indication of the true value of a security. Security prices reflect all available information, so any new information will impact the price. Assumes no undervalued or overvalued securities exist

Answer 68

Dandymoney = 2% + (1.2 x (8.5% - 2%)) = 2% + 7.8% = 9.8%

Answer 69

Beanoinvest = 2% + (0.5 x (8.5% - 2%)) = 2% + 3.25% = 5.25%

Answer 70

BeezerGlobal = 2% + (0.8 x (8.5% - 2%)) = 2% + 5.2% = 7.2%

Answer 71

Dandymoney = 10% - 9.8% = 0.2%

Answer 72

Beanoinvest = 7.5% - 5.25% = 2.25%

Answer 73

BeezerGlobal = 12% - 7.2% = 4.8%

Answer 74

Dandymoney = 60 = 7.75%

Answer 75

Beanoinvest = 89 = 9.43%

Answer 76

BeezerGlobal = 75 = 8.66%

Answer 77

Dandymoney = (10% - 2%)/7.75% = 1.03

Answer 78

Beanoinvest = (7.5% - 2%)/9.43% = 0.58

Answer 79

BeezerGlobal = (12% - 2%)/8.66% = 1.15

Answer 80

Dandymoney = (10% - 8.5%)/4% = 0.375

Answer 81

Beanoinvest = (7.5% - 8.5%)/5% = -0.2

Answer 82

BeezerGlobal = (12% - 8.5%)/4% = 0.875

Answer 83

Mean = Average return = sum of returns/number of years Median = Middle data point (in this case, the third data point in the series when ordered by value) Returns on investment A (in order) = -2%, 2%, 4%, 5%, 9% Mean Investment A = (5% + 4% - 2% + 2% + 9%)/5 = 3.6% Median Investment A = 4%

Answer 84

Returns on investment B (in order) = -4%, -1%, 6%, 10%, 12% Mean Investment B = (6% + 10% - 4% - 1% + 12%)/5 = 4.6% Median Investment B = 6%

Answer 85

Investment X B = (3.93% - 3%)/(5.5% - 3%) = 0.93%/2.5% = 0.37 (low sensitivity to market volatility, 63% less volatile than the market)

Answer 86

Investment Y B = (5.72% - 3%)/(5.5% - 3%) = 2.72%/2.5% = 1.09 (will slightly exaggerate market fluctuations/9% more volatile than the market)

Answer 87

Alpha = Actual return – Expected return Investment X Alpha = 5% - 3.93% = 1.07%

Answer 88

Investment Y Alpha = 5.5% - 5.72% = -0.22%

Answer 89

Flat yield = (Coupon/Price) x 100% UK Treasury Gilt = (3/97) x 100% = 3.09% Infinity PLC = (6/102) x 100% = 5.88%

Answer 90

UK Treasury Gilt = (((£100 - £97)/£97) x 100%)/3 = 3.09%/3 = 1.03% per year GRY of Treasury Gilt = 3.09% + 1.03% = 4.12% Infinity PLC = (((£100 - £102)/£102) x 100%)/8 = -1.96%/8 = -0.24% per year GRY of Treasury Gilt = 5.88% - 0.24% = 5.64%

Answer 91

Modified duration = Macaulay Duration/(1 + GRY) UK Treasury Gilt = 2.91/(1.0412) = 2.79% (this means that a 1% interest rate increase would have the effect of reducing the gilt price by £2.79, therefore a 2% increase in interest rates would see this gilt price fall by £5.60). Infinity PLC = 6.58/(1.0564) = 6.23% (this means that a 1% interest rate increase would have the effect of reducing the infinity PLC bond price by £6.23, therefore a 2% increase in interest rates would see this bond price fall by £12.46)

Answer 92

Asset allocation Fund opt ions Frequency of rebalance Timing of rebalance Manual or automated rebalancing? Are investments held on a plat form? Rebalancing thresholds Strategic or tactical approach? Costs/charges associated ( inc. dealing/transaction costs) Tax implications ( income tax and CGT) Knowledge and experience Attitude to risk/capacity for loss Benchmark used

Answer 93

► ER = Rf + (B x (Rm - Rf)) ► ER = 0.5 + (1.2 x (4 – 0.5)) ► ER = 0.5 + (1.2 x 3.5) ► ER = 0.5 + 4.2 ► ER = 4.7

Answer 94

► All investments have the same term ► Risk is the only factor in the investor making investment decisions ► There are no liquidity problems, there are many buyers and sellers in the market and so it will always be possible to find a willing buyer without delay. ► Nothing is hidden from the investor, the market is open and transparent and all investors have the same level of information at their fingertips ► The risk-free return is freely available to investors ► There are no costs involved in buying or selling, nor will taxes apply

Answer 95

► In reality the risk-free return is NOT always available. ► To counter this, the return on government treasury bills can be used used ► It is hard to accurately determine the best market portfolio to produce the representative market return ► Betas are based on past performance which is not a perfect measure.

Answer 96

► Weak: ► Assumes that all past price and trading information is available to everyone ► Given that it is available, it is already taken account of in the price ► No outperformance will be possible by using this information ► This level seems to be supported by empirical evidence ► Semi-strong: ► Goes further than the weak version ► Argues that all information which is in the public domain is already taken into account in the price and that this happens soon after the information becomes available ► Available information would include any financial information published by a company such as annual report and accounts, profit statements etc. ► No outperformance should be possible from the use of this information. ► The research evidence is less conclusive here, though it would seem that this holds true for most markets. ► Strong: ► Takes the theory to the end conclusion ► Argues that price includes all information that could be obtained – not just the financial and trading information but also private information such as that which can be obtained from interviewing company directors or their advisers. ► This level is less supported by research. ► Much information might be available to the largest institutional investment but is not available to most investors and so will not necessarily be taken into account

Answer 97

► Full replication – all the components of the index being tracked are held in the same proportionate weight as the index itself Has a low ‘tracking error’ But will involve transaction costs, custodian costs etc ► Optimisation – not all the holdings are purchased, but enough to give a good track with minimised tracking error Better for smaller funds, lower costs Higher tracking error, risk of more volatility ► Synthetic – using only derivatives and not holding any actual physical stock Low costs No income stream ► Blended – a mix of the above designed to achieve the best overall return – so perhaps an optimised approach, combined with synthetic coverage of the reset of the market Controlled costs / best of both worlds More complicated for customers to understand.

Answer 98

► Dealing commission / bid-offer spread on funds ► Fund ongoing charges ► PTM levy ► Stamp duty / Stamp duty reserve tax ► Custodian / platform and wrapper fees ► DFM own annual management charge ► Initial set-up fees ► Possible charges attached to ad hoc valuations and other services requested by the client.

Answer 99

► Cheaper than active management ► Most fund managers don’t outperform the index so return should be as good if not better than under alternative arrangements ► Weighted trackers can be used to take out bias toward largest market capitalisation ► Diversification can be achieved through the use of multiple tracker funds tracking different indices Advantages of DFM ► Access to a specialist fund manager with expertise in given area ► Ability to respond quickly to changes by buying and selling without shares ► Can outperform the index ► Can take account of any special requirements of the investor – such as ethical concerns ► Allows for bespoke asset allocation

Answer 100

Investment objectives/timescales Attitude to risk Capacity for loss Investment experience (especially in this specific area) Amount available for investment (could be higher minimum investment levels on specialist funds) Investment preferences/ethical views and beliefs – and the conviction behind these Other investments/level of diversification Views on costs and charges

Quick comparison Flashcards

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