Topic 4

• Risk


  The possibility that something harmful or damaging could occur if things go wrong
• Risk


  • Associated with uncertainty
  • Associated with probability
  • Associated with taking a chance
• Greater the possible reward


  Greater the risk
• Speculative risk


  The outcome could be either favourable or adverse
• Actual outcome of an event or situation


  Differs from what someone expected or planned for
• Risk/reward relationship


  To be willing to take a greater risk, a higher reward must be offered
• Trade-off between risk and reward


  Saver/investor pays for the chance of earning a higher reward by accepting more risk
• Examples of savings/investment products with different risk levels

  • Premium Bonds
  • Bank savings account
  • Unit trusts
  • Shares in established company
  • Shares in newly quoted company
• Interest rates in the UK have been very low in recent years, incentivising some savers to choose riskier products
• When people borrow money, the interest rate they pay reflects the risk to the lender
• Risk acceptance/tolerance


  The degree to which someone is willing to accept risk
• Risk averse


  Very cautious, always try to avoid risk
• Risk transfer


  Passing the risk to someone else, usually via insurance
• Measuring risk


  • Linked to each person's situation and attitude to risk
  • Two main dimensions: impact of risk and probability of risk occurring
• Impact of risk


  The effect it has on someone's life, related to the severity of the event
• Probability of risk


  The likelihood of the risk occurring
• sk-tolerant person


  Content to take the risk
• Probability of risk


  How likely it is that the event will happen
• Measuring risk is not an exact science and people's perceptions are subjective
• Aspects of the impact of a risk

  • Amount of money involved
  • Effect on lifestyle
  • Timing of the event
  • Frequency of the event
• To calculate the significance of a risk

  Probability of it happening is multiplied by the impact it would have if it did happen
• The greater the resulting number, the higher the risk
• Life assurance


  Insurance products designed to pay out when someone dies
• Types of life assurance


  • Whole-of-life assurance
  • Term assurance
• Reasons for buying life assurance

  • Family protection
  • Debt protection
  • Managing a tax liability
  • Cover for older people
• Critical illness insurance


  Pays out a lump sum if the insured person is diagnosed with a critical illness
• Income protection insurance


  Pays out a monthly income to insured people who have suffered an accidental injury or a long-term illness and are unable to work
• Accident, sickness and unemployment (ASU) insurance


  Provides cover in the event of an accident, sickness or involuntary unemployment
• Savings can be a form of risk management against unexpected negative events
• Savings and investments can also be used to manage the risk of positive future events
• The Financial Services Compensation Scheme (FSCS) protects people's savings up to a certain limit
• The FSCS promotes confidence in financial institutions as people know they will not lose all their money in the worst case
• If both parents die while the children are under 18, Mark's sister will become their guardian
• Financial Services Compensation Scheme (FSCS)


  A type of insurance that helps people to manage their long-term risks
• There is no form of saving or investment that does not carry some risk
• The FSCS was set up to protect people's savings up to a certain limit
• FSCS maximum protection for firms declared in default on or after 1 January 2010


  • Deposits in banks, building societies and credit unions - 100% of the first £85,000 per person per authorised provider
  • Investments - 100% of the first £85,000 per person per firm
  • Home finance - 100% of the first £85,000 per person per firm
  • Long-term insurance - 100% of the claim with no upper limit
  • Compulsory insurance - claims are protected in full
  • Non-compulsory insurance - 90% of the claim with no upper limit
  • General insurance advice and arranging - 90% of the claim with no upper limit
• Making a will allows someone to make provision for their property after their death
• Intestate


  Dying without making a will
• Advantages of making a will

  • Decide what will happen to money, property and possessions after death
  • Provide for a partner where there is no marriage or civil partnership
  • Make arrangements for children in the event of the death of one or both parents
  • Minimise the amount of inheritance tax paid