Risk

Question 1

Inflation risk

Answer 1

Meaning:

Spending power of an asset/fixed income is eroded

Impact:

This will have an impact on the purchasing power of fixed income & pension benefits and the value of investments

Question 2

Taxation risk

Answer 2

Meaning:

Tax legislation can change

Impact:

Changes in the future may make the tax treatment of investments & pensions less advantageous

Question 3

Interest rate risk

Answer 3

Meaning:

Rates can vary/fluctuate

Impact:

Falls in interest rates could reduce the interest on savings, reducing essential income.

An interest rate rise will reduce the value of a fixed interest asset

Question 4

Liquidity risk

Answer 4

Meaning:

Asset may be illiquid when cash is needed/cannot partially encash

Impact:

Often main asset is the home
which is illiquid. Also applies to any commercial property held within a SIPP

Question 5

Currency risk

Answer 5

Meaning:
Exchange rates can vary and be volatile

Impact:
Changes in exchange rate will effect the value of non sterling assets

Question 6

Concentration / diversification risk

Answer 6

Meaning:

Too many eggs in one basket/geographical area

Impact:

Without diversification higher chance of making a loss if the investments held fail. Also includes geographical diversification. Portfolios need to be rebalanced and monitored to maintain their desired asset allocations

Question 7

Non-systematic risk

Answer 7

Meaning:

Risk of company failure

Impact:

Any equity is subject to risk of individual holdings failing

Question 8

Market/Systemic risk

Answer 8

Meaning:

Value of stock markets can fall

Impact:

Equity asset classes held which are exposed to market volatility

Question 9

Default/provider risk

Answer 9

Meaning:

Investment provider may not be able to pay monies invested

Impact:

Assets held may be in excess of the FSCS compensation limits, or may not be protected at all, for example directly held shares, commercial property