R01 Chapter 2 Part 2

Question 1

What is regular saving

Answer 1

When a client puts small amounts of money aside on a regular basis that develops into a bigger lump sum

Question 2

Short term investment

Answer 2

Most adults want readily accessible savings.

Three to six months expenditure is a good goal for short term investing

Question 3

Medium term investing

Answer 3

Typically 5-15 years
It’s more important to maintain than short term savings

Question 4

Long term investment

Answer 4

Usually 15+ years
More important to maintain than medium term.
Wider range of investment choices

Question 5

Name some financial priorities?

Answer 5

Pay off expensive debts
Protect the family
Have an emergency fund

Question 6

Savings account

Answer 6

Pays higher interest than current accounts.
Instant or easy access.
get back at least what you put in

Question 7

Cash ISA

Answer 7

£20k limit per tax year.
Can pay higher interest than usual savings account.
Easy to access.
You usually get back at least your original investment, but it’s not guaranteed.

Question 8

Notice account

Answer 8

You have to give notice to take out money
30, 60 or 90 days
Involves a penalty if you withdraw too soon

Question 9

Fixed-rate bond
(Bank account)

Answer 9

Usually need to leave money in for at least a year (or the defined term).
A minimum deposit is usually required.
A penalty will be incurred if you withdraw before end of the term.

Question 10

High interest regular savings

Answer 10

Similar to a normal savings account, but with a higher interest.
Usually get access to these do you have savings and current accounts with the same provider.
Usually interest is paid yearly

Question 11

Help to buy ISA

Answer 11

Cash ISA for first time buyers.
Offers a government bonus.
30th November 2019 was the last date to open one.
Existing holders can save to 30th November 2029.
For every £200 deposit, a £50 bonus up to a maximum of £3000 on £12000 savings.

Question 12

Why is NS&I totally secure to invest in?

Answer 12

Because it is government backed

Question 13

What are the 4 main investment asset types?

Answer 13

Cash
Bonds
Shares
Property

Question 14

What are ‘alternative’ investments?

Answer 14

Hedge funds
Derivatives
Commodities
Other tangible items

Question 15

What’s a platform?

Answer 15

A proprietary system that provides access to a defined selection of investments

Question 16

Conventional investing

Answer 16

Focuses on generating returns through investing in companies that are expected to perform well.

Fund managers will focus on financial metrics , dividend yield, earnings per share and cash flow operations.

Question 17

Sustainable and responsible investing

Answer 17

Investment managers tend to avoid companies that are related to armaments, tobacco, gambling and adult entertainment.

Sometimes this also includes companies that produce fossil fuels.

Question 18

Sustainable funds

Answer 18

They pay significant attention to environmental/social/ethical issues.

Question 19

ESG funds (environmental, social, governance)

Answer 19

These focus on how businesses operate rather than problem solving.
If the company is run well, they may invest in controversial and somewhat unsustainable companies

Question 20

Positive selection

Answer 20

Managers invest in assets that meet specified policy requirements.

Question 21

Negative exclusions

Answer 21

Directs fund managers to avoid particular sectors and behaviours.

Question 22

Responsible ownership (stewardship) activity

Answer 22

Asset owners encouraging companies to have higher ESG standards.

Question 23

Investment advice process

Answer 23

• The strengths of clients beliefs
• Incorporate clients values and views
• Reccomending products and funds that are appropriate for the client

Question 24

Equity investment

Answer 24

Buying shares as a pooled investment or by directly through the stock market.

Shares also known as equities or stocks.

Question 25

Short term equity investment use

Answer 25

Pure speculation. Unless someone has insider information (which is illegal and called insider trading), you don’t know if it will go up or down, and thus an extremely risky short term investment

Question 26

Medium term equity investment use

Answer 26

Most companies wish to continue to grow their value and dividend, so although still risky, it’s safe to say that in medium term, if companies continue to make profit, there is a use for them.

Question 27

Real growth/capital preservation

Answer 27

Shares in companies that produce real good and services. Prices of these goods and services increase with inflation, often taking profits with them.

Question 28

Long term use of equities

Answer 28

Increasing income Capital preservation Asset allocation

Question 29

Other names for a bond

Answer 29

Loan stock Fixed interest Debt securities Gilts Corporate bonds

Question 30

What’s the benefit of bonds

Answer 30

They are government backed. Usually gets. Regular stable income.

Question 31

Building society Permanent interest bearing share (PIBS)

Answer 31

Undated Interest payments can be missed in exceptional circumstances Missed interest payments don’t need to be made up at a later stage.

Question 32

What happens to a Permanent interest bearing bare when a building society demutualises?

Answer 32

They become Perpetual subordinated bonds (PSBs) Perpetual - have no redemption date Subordinated - low ranking debt in event of insolvency Bonds - as its general name for fixed interest investment.

Question 33

What are some ways to access fixed interest investments

Answer 33

Unit trusts OEICs Life assurance or pension funds

Question 34

Strategic bond funds

Answer 34

Investment manager decides on the proportions of assets, which enables bond fund to adapt to changing market conditions.

Question 35

Property investment benefits

Answer 35

Rental income Capital growth

Question 36

Property investment risks

Answer 36

Money can be tied up Will need to sell to get any liquid capital Very illiquid

Question 37

Pooled investments

Answer 37

Investors money is ‘pooled’ into a fund which is then invested in one or more asset classes.

Question 38

Open ended investment funds

Answer 38

Usually structured as unit trusts or OEICs.

Question 39

Endowments

Answer 39

Regular premium policies which combine investment with life cover

Question 40

Mortgage endowment

Answer 40

Used to pay off mortgages.

Question 41

Savings endowment

Answer 41

Some of these plan premiums are limited to £3,600pa

Question 42

Investment trust

Answer 42

A listed company with a set number of shares. Closed ended.

Question 43

Derivatives

Answer 43

A right or obligation to buy or sell another asset type.

Question 44

Innovative finance ISA

Answer 44

Allows savers using a crowdfunding platform to receive their interest tax free.

Question 45

Lifetime ISA

Answer 45

Started 6th April 2017 Under the age of 40 £4k contribution limit 25% government bonus. If withdrawn before 60, there’s a 24% charge. (Unless used to buy first home or are terminally ill)

Question 46

Child trust fund

Answer 46

For investors to invest on behalf of a child for their future. Eligible for every child born after 1st September 2002

Question 47

Junior ISA

Answer 47

Replaces child trust funds on 1/11/2011 Cash or stocks Can’t withdraw before 18 £9000 limit

Question 48

Residence nil rate band

Answer 48

£175,000 (on top of £325,000) If downsized after 7th July 2015, RNRB is also available If estate = £2Million, RNRB withdrawn at £1 for every £2 over £2Million

Question 49

Two main ways to reduce IHT

Answer 49

Ensuring wills are in place, using lifetime gifts, using allowances, writing property in trust.

Question 50

IHT gifts

Answer 50

Gift must be irrevocable Must be part of a long term planning strategy, and not made shortly before death.

Question 51

Life policies on IHT

Answer 51

Can be used as a single premium investment to reduce the value of the estate m

Question 52

How can policies counter IHT

Answer 52

If there is IHT due, before death, the individual no old take out an own life policy that pays out the IHT amount on death

Question 53

4 main approaches to tax planning for investors

Answer 53

Make the maximum use of tax allowances. Choose investments that provide tax free returns. Choose investments that qualify for tax relief.