Unit 3 Topic 1 Flashcards
(129 cards)
1
Q
What does sustainability mean?
A
Sustainability means achieving and maintaining a balance between personal income and expenditure for the short, medium and long term so that individuals can satisfy their needs and achieve as many of their wants and aspirations as they can afford within their budget.
2
Q
What is the main reason for the financial crisis of 2007 - 2008?
A
Bankers encouraged people to take on mortgage loans and other debts that they could not afford to repay.
Economists believe that the consumers who took advantage of the mortgages and loans to pay for unsustainable levels of spending must also share the blame.
3
Q
What did the financial crisis follow?
A
A period of unprecedented growth in personal debt. Total personal debt in the UK had doubled between 1994 and 2002, from £400 billion to £800 billion. It hit a peak of £1,400 billion in 2008.
4
Q
What is the credit crunch?
A
The credit crunch resulted from the financial crisis and is the tightening of the conditions required to obtain loans that were formerly freely available. This stopped the increasing of personal debt.
5
Q
When is personal debt manageable?
A
When the economy is growing and unemployment is relatively low.
6
Q
What did the recession following the financial crisis do to unemployment figures?
A
Unemployment figures rose on a steep upward path. In Jan 2008 there were 1.62m unemployed UK workers but this had increased to 2.12m just one year later. Unemployment continued to rise until Nov 2011 where is peaked at 2.7m.
7
Q
What are some of the consequences of growing debt without being able to keep up with payments?
A
Legal action from lenders seeking to recover bad debts, e.g. CCJs, bankruptcy and homes being repossessed.
The number of insolvent people grew from 35,604 in 2003 to 107,288 in 2006 and then to 135,045 in 2010. This is considered to be related to households taking on higher levels of debt from the early 2000s.
The number of repossessions rose from just over 8,000 in 2004 to nearly 49,000 in 2009.
Government agencies (Money Advice Service) and Non-government agencies (citizens advice, StepChange Debt Charity, national debt line service, etc) reported increased demand for help and advice.
Citizens Advice saw a 100% increase in the number of debt enquiries over the last 10 years.
8
Q
How have debt problems changed in the last few years?
A
Traditional credit problems have been overtaken by arrears on household bills (behind on household bills) and mainstream credit has fallen as a proportion of debt issues. There has also been a rise in the proportion of problems relating to high cost, short term payday loans.
9
Q
What has been added to the National Curriculum?
A
Financial capability, aiming to give students a basic level of financial literacy before they leave school.
10
Q
How do you achieve sustainable personal finance over the long term?
A
Through active management of all aspects of an individual’s financial plans.
This includes:
Being aware of how much money you are spending and what it is being spent on.
Using weekly or monthly budgets and cash flow forecasts to plan spending.
Knowing the financial implications of future events and aspirations.
Having a savings plan to build up the capital sums they expect to need in the future.
Carefully planning borrowing and only borrowing amounts you can pay back.
Having an adequate emergency fund to fall back on when there is an unexpected reduction in income.
Paying into a pension scheme to ensure income in retirement.
Looking for ways to increase income.
Making use of insurance products to protect income.
Regularly monitoring, reviewing and amending financial plans.
Having clear, realistic contingency plans to deal with unexpected events that can disrupt carefully made plans.
11
Q
What is a budget?
A
The short-term, medium-term and long-term plans detailing expected income and expenditure.
12
Q
What budget does the government publish?
A
An annual budget which is an estimate of the income from taxation expected in the coming year and what it expects to spend over the same time period.
13
Q
What do budgets and cash-flow forecasts, or financial plans allow?
A
They allow individuals to think about all the things they want and how much these will cost. They can estimate their income and work out whether that income is going to be enough to cover the expenditure.
14
Q
What is financial planning?
A
Planning for future expenditure and deciding how this will be financed. This depends on future income, their attitudes to saving, borrowing and other financial products like insurance.
15
Q
What can people use to check expenditure?
A
Monthly current account statements.
16
Q
Give examples of regular bills that don’t fall due every month that people should still plan for.
A
Motor vehicle road tax - can be paid either annually, six-monthly or monthly.
Council tax - can be paid either annually, quarterly or monthly (over ten months).
Should also plan for expected car servicing bills, costs of household maintenance, replacing broken or worn items and other occasional bills.
17
Q
Give examples of long term financial planning ?
A
Additional funds to do with raising a family, holidays and retirement (pensions and care home fees).
Calculations of these fees can work out the level of regular saving and investment likely to be required to make sure the funds are available when needed.
18
Q
What is the key principle to flexible financial planning?
A
Expect the unexpected.
Flexible financial planning means developing a mix of savings and insurance that allows an individual to cover the costs of unexpected events and changed circumstances. It also allows for future plans to be revised accordingly.
19
Q
What is a flexible financial plan sometimes also known as?
A
A dynamic financial plan
20
Q
List the features of a flexible financial plan.
A
Balanced between different time periods
Informed (based on accurate information)
Able to adapt to changing products and services
Fluid (must reflect any monthly, termly or seasonal variations in the personal circumstances of the person making it)
Realistic
21
Q
How do you draw up a financial plan?
A
Make a list of all the goods and services someone is likely to spend money on over a given period of time and record how much these cost. (For medium and long term plans this will be general headings and estimates).
The list can then be grouped into categories based on whether they are needs, wants or aspirations.
22
Q
What are the three categories of expenditure?
A
Mandatory expenditure
Essential expenditure
Discretionary expenditure
23
Q
What is mandatory expenditure?
A
Costs you have a legal obligation to pay.
E.g. income tax, National insurance contributions, council tax, Tv licence and third-party car insurance, road tax and MOT certifications.
24
Q
What is essential expenditure?
A
Costs that have to be paid to meet basic needs.
E.g. food and drink, rent or mortgage payments, bills, clothing, travel to and from work or school, mobile phone contracts, credit card payments, payments on a loan.
25
What is discretionary expenditure?
Spending on items that are not mandatory or essential but fulfil a want or aspiration.
E.g. snacks, clubs, cable TV, takeaway food, mobile phone contract payments, clothes for a special occasion, entertainment, restaurant food, holidays,
26
How should spending priorities be followed?
1. Pay all mandatory bills
2. Meet basic needs
3. Pay essential bills
4. Divide any surplus between spending and saving
27
What are the different types of savings?
Mandatory savings
| Discretionary (optional) spending
28
What is mandatory saving?
Under the pension auto-enrolment rules, employees are required to make regular pension contributions (unless they opt out). These are therefore mandatory.
29
What is discretionary saving?
People may choose to pay money into a savings account whenever there is some money left over at the end of the month. This is said to be discretionary saving.
30
What affects the amount of money people save?
| Give an example.
Income and attitudes to saving and borrowing.
Post-war economic growth in the 1950s and 1960s and easier access to borrowing led to a change in attitudes during the latter half of the 20th century. Previously people saved up to pay for items they wanted and avoided borrowing unless there was no other choice. People are now more willing to borrow to pay for their growing consumption of consumer goods.
31
How can cash-flow modelling help someone plan?
Cash-flow modelling software programs are available to allow individuals to predict the medium-term and long-term effects that different decisions and events may have on their income, expenditure and savings plans. They can then produce what if scenarios to judge the financial implications of a range of different decisions. By comparing these predictions of potential outcomes a person can change their spending, saving, investment and insurance plans to ensure they are financially stable.
32
What are the obstacles that prevent someone achieving sustainable personal finances over the long term?
Failing to:
Make short term, medium term or long term plans that are flexible.
Compare actual weekly or monthly income and expenditure with the amounts predicted in forecasts.
Amend plans when circumstances change or when monitoring reveals a difference between predicted and actual outcomes.
Take appropriate steps to avoid predicted cash shortfalls.
Make adequate contingency plans to deal with unexpected changes in income or expenditure.
33
Do sustainable personal financial plans need to evolve as circumstances change?
Yes, sustainable personal financial plans needs to evolve as individual's circumstances change.
34
What is contingency planning?
Contingency planning is attempting to plan for unexpected events, or at least take them into account when making financial plans. These can be planning for undesirable or unfortunate events or pleasant surprises too.
35
Give examples of favourable unexpected events.
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Getting a job
Salary increase or promotion at work
Winning money on the lottery
An increase in the value of an asset
Paying off a personal loan
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36
Give examples of unfavourable unexpected events.
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Losing a job
Receiving a pay cut
Increase in the rate of income tax
Becoming ill or having to stop work for a period of time
Major car repair costs
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37
How did the financial crisis cause contingencies in many financial plans?
The financial crisis and the economic recession that followed were major contingencies that results in financial plans going wrong.
People lost money when investments fell in value and others lost their jobs. People also were affected by prices rising faster than wages.
Investors and people paying into money-purchase pension schemes were affected by falling share prices. The FTSE 100 fell from 6730 in June 2007 to 3512 in March 2009 (nearly 50%).
In the 5 years following the crisis the real value of wages was squeezed by price inflation which rose to 5% in the second half of 2011, while the growth in wages was below 2% a year.
38
What is the FTSE 100?
An index of the share prices of the top 100 companies traded on the London Stock Exchange.
39
What is the credit crunch?
Banks tightening their lending policies.
40
What are austerity measures?
The government making large cuts in public spending to try cut government debt by reducing the deficit between government income and expenditure.
41
What are the financial products and services available from providers to help maintain sustainable personal finances?
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Current accounts
Savings accounts
Borrowing products
Insurance
Pensions
Investments
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42
What are current accounts?
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Banks and building societies are the main providers of current accounts. They allows for the safe storage of money and can be used to make payments to, and receive payments from other people. Current accounts can be used to:
Deposit money
Withdraw money
Current accounts can make payments using:
Cheques
Direct debits
Telephone banking
Mobile banking
Standing orders
Debit cards
Internet banking
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43
How do current accounts help sustainable personal finances?
The availability of online banking has made it easier for customers to monitor their accounts and access current account statements to show receipts, payments and balances. Customers can then compare their actual income and expenditure to what they predicted. They can also spot differences from their short term plans and if a problem arises can transfer money from another account, cancel a standing order or arrange a short term overdraft. This can all be done online.
44
What is a savings account and how are they used?
Customers deposit money into a savings account and are 'lending' this money to that provider to use to fund loans, overdrafts and credit cards to other customers. In return the provider pays the customer interest on their savings.
45
What type of savings products are available?
Savings accounts (variable rate interest)
Tax-free ISAs (individual savings accounts) (variable rate interest)
Regular (monthly) savings accounts
Notice savings accounts
Fixed term, fixed-interest savings bonds or deposit accounts
Credit union savings accounts
Christmas or other festival saving clubs
National Savings and Investments (NS&I) products
46
List the types of NS&I products available.
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Direct Saver account (variable interest online savings account)
Income bonds (variable interest paid monthly)
Investment account (variable interest paid annually)
Premium bonds (no interest but entered into a monthly prize draw)
Direct ISA (variable-interest, tax-free cash savings account)
Bonds (fixed interest rate for a fixed term of one or three years)
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47
What type of saving accounts help sustainable personal finances and can be used for emergency funds?
Instant or easy-access savings accounts as they are ideal to use for an emergency fund.
48
How long does a financial adviser recommend for an emergency or contingency fund?
Financial advisers usually recommend saving an emergency fund or contingency fund roughly equal to three months' net salary so that if someone is made redundant or has to stop working they will have enough money to continue paying their bills for three months.
A three month emergency fund also means that if someone takes out income protection insurance policies they can choose a three month waiting period before the policy starts to pay out benefits, this usually makes the policy's monthly premiums cheaper.
49
What type of saving accounts are NOT suitable for emergency funds and why?
Notice accounts or fixed term, fixed interest accounts and savings bonds are not suitable for emergency funds because the savers pay a penalty (or lose interest) if they withdraw money in an emergency without giving the required notice or before the 'maturity date' of the fixed term savings product.
50
When are notice accounts or fixed term, fixed interest accounts or savings bonds useful?
For medium-term or long-term saving if someone can afford to save more than they need to as an emergency. They are ideal when planning to save over a period of years.
51
How can borrowing lead to problems that might damage the sustainability if individual finances?
If the borrowing is unplanned and the borrower fails to consider whether they can afford to pay the regular monthly repayments, and there is no contingency plan in place then borrowing can lead to problems.
52
How can borrowing achieve and maintain sustainability?
Using the right borrowing product and the right time as part of a coherent financial plan can achieve and maintain sustainability.
53
What are the main products that allow people to borrow money?
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Overdrafts
Personal loans
Credit cards
Store cards
Hire purchases or retail credit
Mortgages
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54
Why are there different borrowing products?
Different borrowing products meet different needs.
55
Why are credit cards good?
They reduce the need to carry around large amounts of cash and, if the outstanding balance is repaid every month, can provide short-term borrowing, interest free.
For people without emergency funds, credit cards (and overdrafts) provide an alternative way of paying bills.
56
What should a person do if their credit card balance builds up?
If a person has allowed a credit card balance to build up to an amount that they cannot pay off in full at the end of the month, the cardholder should work out how much they can afford to pay off each month and incorporate these payments into their short-term and medium-term financial plans.
57
What would a customer use when buying a big purchase but not having enough credit on a credit card or overdraft?
Neither an overdraft nor a credit card will normally provide enough credit for a big purchase, and the interest rates on these are usually quite high.
If an individual is unable to save up the money they need to pay for this, they are likely to turn to a personal loan from a bank, building society, credit union or other lender. Or they can sign up to a high purchase or retail credit arrangement offered by the retailer.
58
What type of loan will someone use to buy a house or flat?
A mortgage loan from a bank or building society.
59
What are the features of mortgage loans?
Normally they have lower interest rates than other forms of borrowing.
They can be repaid over longer periods (25 years or more depending on the borrower's age).
These features make monthly repayments of large loans more affordable for people on relatively modest incomes.
60
Why can lenders take bigger risks with mortgage lending?
Lenders can afford to take more risks with mortgage (like the risk of defaulting on repayments) because the loan is secured on the property being purchased: the borrower signs a mortgage deed, which gives the lender the right to take possession of the property if the monthly payments are not maintained.
61
How can someone end up in a financial disaster?
Using the wrong borrowing product at the wrong time or in the wrong way.
62
What financial products will someone typically have during the adult stages of the personal financial life cycle in their borrowing portfolio?
Overdraft
One or more personal loans or hire purchase agreements
One or more credit cards
A mortgage
63
What does someone need to do to maintain sustainability?
To maintain sustainability, it is vital that borrowers regularly monitor and keep aware of both the total amount of all of their borrowing (their outstanding debt) and the total monthly repayments required to pay off these debts.
They can use this information to ensure that they are going to be able to afford to make these repayments each month and to work out if they can afford to take on any new debts to buy items that they want to buy now or in the future.
64
What is important for sustainability?
For sustainability, it is vitally important that people should use only borrowing products that are affordable and suited to their needs and financial circumstances.
65
How much has personal debt risen from 1994 to 2008?
Total personal debt in the UK more than trebled from £400bn in 1994 to £1,400bn in 2008.
66
How did unemployment affect ability to repay debt and sustainability?
When unemployment began to rise as a result of the recession, borrowers who had not set aside an adequate emergency cash fund or made other contingency plans were unable to meet the repayments on their mortgages and personal loans after being made redundant. Some then made the mistake of using other borrowing products to meet the monthly payments that they could no longer pay from their monthly income.
67
How can using a credit card to make monthly mortgage payments make a financial situation worse than better?
Using a credit card to make monthly mortgage payments can make a financial situation worse because it will not be long before the card balance hits the borrower's credit limit - at which point, the borrower will no longer be able either to make their monthly mortgage payments or to repay the balance owing on the card.
The borrower's total debt will now be significantly higher and, because the interest on credit cards is very high compared with that on mortgages, the debt will be growing rapidly each month, making it harder and harder to repay.
68
What are 'payday' loans?
Easily available, short-term loans at a very high interest rate.
69
How can payday loans make a financial situation worse than better?
A borrower might take out such a loan with every intention of repaying it within a matter of days, but then find themselves unable to do so. As the weeks or months roll by, and the sum borrowed and the unpaid interest accumulate, the borrower can find themselves with a debt that has rapidly grown.
70
When was FCA rules introduced?
FCA rules was introduced in 2015.
71
What did FCA rules introduce in 2015?
FCA rules introduced in 2015 addressed the issue of debt growing with payday loans and ensured that no payday borrower will pay back more than twice the amount they borrowed.
72
Even after the FCA introducing the payday loan rule, what did StepChange Debt Charity find?
Payday lenders still charge exorbitant interest rates after the FCA rule, StepChange Debt Charity found that in 2016, people with payday loans owed almost as much on average as before the FCA regulations came into force.
73
What happened to payday lender Wonga in 2018?
In 2018, payday lender Wonga went bust as a result of the FCA rule changes and a spate (large number of similar things coming in quick concession) of compensation claims.
74
What have people been trying to reduce since the financial crisis?
Since the financial crisis, many people have been trying to reduce the total amount that they owe.
75
What have existing mortgage holders benefited from?
Existing mortgage holders have benefited from a period of very low interest rates that have kept their monthly payments lower than they were expecting them to be.
76
What has low interest rates allowed mortgage holders to do?
Having lower mortgage payments than expected due to low interest rates has allowed mortgage holders to have 'spare' cash each month. Many people have used this cash to bring down overdrafts and credit card balances, and/or 'overpay' on their mortgage payments.
77
What is overpaying on mortgage payments and what does is allow?
Overpaying on mortgage payments is paying more to the mortgage lender than you are required to pay each month. It reduces the outstanding amount owing and can be used either to reduce monthly payments for the remaining period of the mortgage or to pay off the mortgage more quickly than originally agreed.
78
What happened to lending criteria after the financial crisis?
Lenders tightened up their lending criteria - meaning that it is less easy to borrow money from a financial institution than it was in the years leading up to 2007.
79
What did tighter restrictions on leading lead to?
The emergence of different types of lender who specialise in offering small, very short-term loans to people who are unable to borrow from a traditional lender because they do not have sufficient income or because they have a poor credit history.
E.g. payday loans or logbook loans
80
Define payday loans and describe them.
A payday loan is a type of loan that is instantly available online or from a high street loan shop.
When someone applies for one of these loans, the lender carries out a quick credit check (based on a trust rating) and, if the customer is accepted, the money can be transferred into their account within 30 minutes.
81
Who are payday loans aimed at?
They are aimed at employed people who experience a cash-flow problem at the end of the month, but do not have an emergency fund or overdraft arrangement.
82
How much is typically lent in a payday loan?
They are for quite small amounts, usually hundreds rather than thousands of pounds. The are also expected to be repaid as soon as the borrower's monthly salary is paid into their bank.
83
What are logbook loans?
Logbook loans are available to car owners, who pass over the ownership documents of their car (the logbook plus the MOT certificate) to the lender as security for an instant loan.
The borrower keeps the car in the meantime, but if they are unable to pay the loan back, the lender can take the car without a court order and will sell it so that it can recoup the sum loaned.
84
What bill allows property to be taken without a court order?
| E.g. A logbook loan
The ability to take away the property without a court order arises under the Bill of Sale Act 1878 and some people have argued that a new piece of legislation is necessary to protect people who take out these loans.
85
What is the problem of payday and logbook loans (short-term borrowing)?
The problem is that interest rates typically charged are extremely high.
86
Give an example of a payday loan.
Sunny - a payday loan company.
This online lender says it sends loans of up to £1000 within 15 minutes of approval. Sunny's online calculator allows potential customers to see how much they would pay for different loan amounts. Someone borrowing £100 for 6 months would repay £197.82 - that is, £97.82 in interest and fees. The representative annual percentage rate (APR) is given as 1,267%.
87
How can payday loans be good?
Borrowing in this way is a very expensive way of solving a short-term problem, but it is attractive to some because the loans are instant and because virtually any employed person over the age of 18 will be offered a loan regardless of their circumstances.
If the loan is taken out purely because someone has an unexpected bill that has to be paid now and they will definitely have enough spare cash to repay the loan when they get their wages in a week or two, then it can help them to resolve this kind of cash-flow problem.
88
How can payday loans be bad?
Payday loans are bad when the underlying problem is simply that their monthly income is less than their expenditure.
By using a payday loan to make up for this monthly deficit, they are only adding to the problem, because even when they have been paid, they will not have any spare money to repay the loan. They will then have to borrow even more money to cover the next month's deficit.
Payday lenders have been accused of encouraging people to take out more and more loans, or to simply 'roll over' the debt for another month, turning what are designed to be short-term loans into expensive long-term debt traps.
89
Can payday lenders be aggressive?
| Give an example.
Some payday lenders are even known for using aggressive tactics to get their money back. In February 2012, one payday lender, Minicredit, was compelled to apologise to customers after it sent them emails threatening to contact the customers' employers if they failed to pay their debts quickly.
90
What acts are payday loans covered by?
Payday loans are covered by the Consumer Credit Acts of 1974 and 2006.
91
What do payday lenders have to obtain before they can lend?
| What happened if they didn't obtain it?
Until April 2004 lenders had to obtain a licence from the Office of Fair Trading (OFT) before they could trade and could lose that licence if they were found to be lending irresponsibly.
From April 2014 the Financial Conduct Authority (FCA) took over responsibility for licensing and consumer credit legislation.
92
What did the OFT do in February 2012?
In February 2012, the OFT launched an extensive review of the payday lending sector and an investigation into whether the top 50 lenders were complying with consumer credit legislation.
93
What did the OFT conclude from their investigation into payday lending in Feb 2012?
What were the consequences of it?
In its final report, published in March 2013, the OFT was critical of payday lending and 'included an action plan to tackle deep-rooted problems in the market'.
The review identified a number of concerns regarding lending practices and aggressive debt collection. This resulted in more than 20 payday lenders having their licences taken away or volunteering to give them up and all 240 payday lenders were put on notice to improve their practices, or else face fines and closures.
94
What association took over from the OFT when looking at payday lending?
The Financial Conduct Authority (FCA) has continued the work of the OFT in relation to payday lenders.
95
What did the FCA announce in November 2014?
| In relation to payday lending
In November 2014, the FCA announced price caps for payday lenders: an initial cost cap of 0.8 per cent per day of the amount borrowed, a maximum default fee of £15 and a total cost cap of 100%.
The means borrowers will never have to pay back more than twice of what they borrowed.
The FCA also announced that it would do further work to find out if payday lenders were making adequate affordability checks on borrowers and the impact of repeat borrowing.
96
What price caps did the FCA introduce for payday lenders?
An initial cost cap of 0.8% per day of the amount borrowed.
A maximum default fee of £15.
A total cost cap of 100%, meaning borrowers will never have to pay back more than twice what they borrowed.
97
How can individuals engage in contingency planning?
Selecting and maintaining an appropriate portfolio of financial protection products is one of the most important ways in which individuals can engage in contingency planning.
98
What is contingency planning?
Making medium-term and long-term financial plans that can withstand expected and unexpected changes in income and expenditure.
99
What can not having insurance do?
Without insurance events such as a car crash, serious illness, redundancy or a house fire (unexpected events) could all have a damaging impact on an individual's finances and leave their plans in ruins.
100
What are the different types of insurance?
General insurance
Life insurance
Income protection insurance (IPI)
Critical illness cover (CIC)
101
Define general insurance.
General insurance is usually short term (12 months or less), this insurance is designed to protect:
- your home (buildings and contents insurance covering loss, damage or theft)
- your car (comprehensive or third-party loss, damage and theft cover)
- your income and health (accident, sickness and unemployment cover, private medical insurance)
- your holidays (travel insurance to cover cancellation, medical care, injury, cash)
102
Define life insurance.
Life insurance also called life assurance pays out a sum of money when someone dies, to protect their dependents from the financial consequences of their death.
It can be arranged to provide cover for a fixed term (e.g. the period of some ones mortgage term) or on a whole-of-life basis.
103
Define income protection insurance.
Income Protection Insurance also known as permanent health insurance (PHI) provides a monthly income to replace salary or wages if you are unable to work as a result of illness or disability.
104
Define critical illness cover.
Under a CIC policy, a lump sum is paid out to protect you from the financial consequences of suffering an illness such as cancer, stroke, heart attack or multiple sclerosis.
105
What does insurance depend on?
The type of insurance and amount of cover required under any of these policies depends on each individual's personal circumstances.
106
What is a pension?
A pension is a long-term form of investment that has tax benefits for investors.
People save in pension schemes throughout their working lives so that they will have an income in their retirement - that is, it is a way of achieving long-term personal financial sustainability.
107
What are the types on pension?
| Explain them.
- State pension (a government benefit based on the individual's National Insurance contributions)
- Occupational pensions (for those in employment)
- Personal pension plans (set up by an individual)
- Stakeholder pensions (a type of personal pension with low costs)
- The National Employment Savings Trust (NEST)
108
What does NEST stand for?
National Employment Savings Trust.
109
Describe NEST.
National Employment Savings Trust is a type of pension.
From 1 October 2012, all employers have been obliged to enrol their workers into a qualifying workplace pension scheme that meets or exceeds certain legal standards.
The NEST is a low-cost, trust-based, pension scheme designed to make it easier for all employers to meet their new duties and to help more people to save for their retirements.
It is also available to self-employed people.
110
What does state pension rely on?
| What eligibility
Eligibility for full state pension relies on a person's National Insurance contribution record. If someone has been out of the country for a number of years, or has not been in paid employment because they have been caring for children or a dependent relative, they may be entitled only to a reduced rate.
111
What should an individual have alongside state pension?
Even if someone is entitled to a full state pension, the amount paid is not generous and many pensioners presently struggle to meet ends meet. Because of this, a sustainable personal financial plan should include making regular monthly payments into an occupational pension or a private pension plan, in order to top up pension income to an amount that will allow you to enjoy a reasonably comfortable retirement.
112
What do employers have to enrol employees into?
Employers now have to enrol all their employees (whether they are employed full-time or part-time) aged 22 years or over into an occupational pension scheme.
The employer can either use the NEST scheme to meet its obligations, or can set up its own scheme through a pension provider as long as it meets certain minimum standards.
113
What are the requirements for occupational pension sheme?
Employers now have to enrol all their employees aged 22 years or over into an occupational pension scheme. There are minimum contribution levels that both the employer and the employee must pay into the scheme.
For those people who are self-employed or who are not working at all, insurance companies offer a range of private pension plans that are also designed to provide a source of income after retirement additional to the state pension.
114
How do pensions relate to personal finances and sustainability?
By incorporating adequate monthly pension contributions into short-term, medium-term and long term financial plans, individuals can ensure that their personal finances will remain in good health until long after they retire.
115
Why do people invest?
People put money into investment products because of their potential to achieve very high returns.
116
What do you have to be careful with when investing?
The promise of high returns is balanced by the increased risk of losing some or all of the money invested.
117
What does investing usually entail?
An investment usually entails buying an asset - shares in a company, or a house, or even art or antique furniture - which the investor expects to increase in value over time (capital growth) and / or to be a source of income (share dividends, rent from a house).
118
What are the main forms of investment for individuals?
Shares and bonds
Property
Non-financial investments
119
What is the most common form of financial investment?
Buying shares in companies, directly or indirectly, is the most common form of financial investment.
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What investment products do people use?
Wealthy investors use stockbrokers to buy and sell shares in particular companies, but most investors use collective investment products such as unit trusts, investment trusts and open-ended investment companies (OEICs), often within a tax-free ISA 'wrapper'.
These products can also be used to invest in government bonds (known as 'gilt-edged securities', or 'gilts') and corporate bonds.
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How can people invest in property?
Most people buy a house or flat as a home for themselves, but it can also be the biggest investment that they ever make, and if house prices steadily rise each year at a rate higher than that of inflation, the buyer can achieve high capital growth returns.
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What happened during the boom years before the credit crunch with 'buy-to-let mortgages'?
During the boom years before the credit crunch, the introduction of 'buy-to-let' mortgages also encouraged people to buy additional properties purely as investments. The rent received (after tax) was often sufficient to cover the monthly mortgage repayments, which meant that, while house prices were rising, this was a good investment.
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What happened to house investments after the financial crisis?
Following the financial crisis, house prices generally stagnated and even fell in many parts of the country, which made buying to let a less attractive investment option.
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What are non-financial investments?
Other ways of investing for capital growth are not strictly financial products (and are not regulated by the FCA). These include buying works or art, fine wine, antique furniture, classic cars, memorabilia, or stamp or coin collections - any physical asset that might be expected to increase in value over a period of years.
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How can investing maintain sustainable personal finances?
For those people who have a regular monthly surplus or a cash lump sum, carefully planned investment in shares, bonds or property can be an important way of maintaining sustainable personal finances.
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What can investment do for retirement?
Long-term investment is an effective way of building up a capital sum (whether in a pension plan and / or any of the investments listed) which can help to ensure a comfortable retirement.
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What are the risks to be careful with when investing?
Investors must make certain that they are fully aware of the risks involved with each investment.
Asset prices can rise and fall dramatically in a matter of days, which means that investors must be able to leave their money invested - ideally, for at least ten years - to benefit from any underlying long-term growth in the asset's value.
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What is the ideal time length to leave investments for?
At least 10 years.
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What should be done when investments are nearing the time that the money is going to be needed?
When it is closer to the time that the money is going to be needed - perhaps as the investor nears retirement - effective long-term planning would include moving money out of high-risk investment products and putting it into safer savings accounts or fixed-term savings bonds.
