Workshop 10

• Pension plan

  An asset pool that accumulates over an individual's working years and is paid out during the nonworking years
• Pensions developed as Americans began relying less on children for care during their later years
• Pensions also became popular as life expectancy increased
• Retirement planning


  The "putting away of money" to use up in retirement
• Retirement


  When an individual is no longer required by law to continue working
• The retirement age across many countries has increased over time due to improvement in healthcare and medical advances
• Retirement age in different countries for men and women

  • USA: Men 66.5, Women 66.5
  • UK: Men 66, Women 66
  • China: Men 60, Women 55
  • India: Men 60, Women 60
  • France: Men 62, Women 62
  • Australia: Men 67, Women 67
• Pension sources


  • Personal pension
  • Employer-sponsored pension
  • State pension
• Personal pension scheme


  Typically made available by banks, insurance companies and fund managers. The individual sets aside a proportion of their monthly salary into a pension scheme, which the pension scheme then invests into shares, bonds and other financial assets.
• Employer-sponsored pension

  Provided by the individual's employer. Can be fully funded by the firm or a contributory scheme with both employer and individual contributions.
• State pension scheme


  A number of countries around the world provide pensions to their citizens, but these schemes tend to pay a very small amount. A state scheme must be supplemented by an additional source of income or additional pension plan if a more comfortable retirement is desired.
• The UK state pension is made up of basic state pension and additional state pension. The full amount of the new state pension is £155.65 a week, but the actual amount depends on the individual's National Insurance record.
• Demographic time bomb is most marked in Japan
• Overdraft


  A line of credit that allows an individual to withdraw more money from their bank account than they have deposited. Can be authorised (agreed in advance with the bank) or unauthorised (not agreed in advance).
• Loan


  Can be secured (linked to an asset like a house) or unsecured (not linked to a specific asset).
• Payday loan


  A short-term unsecured loan, typically for small amounts between £100-£500, that is meant to be paid back by the individual's next payday or within 31 days.
• New rules on payday loans include a price cap on the rate of interest at 0.8% per day and a cap on default charges at £15 and the maximum cost at 100% of the original sum.
• Credit cards are much more widely used in the UK than in other European countries. Most people cannot live without them.
• How credit cards work


  The retailer is paid by the credit card company for the goods sold, and the credit card company charges the retailer a small fee. Customers are sent a monthly statement and can choose to pay the full balance or just a percentage.
• Credit card interest


  Interest is charged on the balance owed by the customer. The interest rate is relatively high compared to other forms of borrowing. If the full balance is paid each month, it is interest-free.
• Effective Annual Rate (EAR)


  The annual rate of interest assuming the addition of interest charges to the principal sum (i.e. outstanding balance)
• Annual Percentage Rate (APR)


  The annual percentage rate of interest you must pay, which helps understand how much it will cost to borrow money over a year, including interest rates and fees.
• Mortgage


  A secured loan where the security is the property being purchased. Most people use mortgages to buy their house or flat.
• Factors assessed when applying for a mortgage

  • Income
  • Security of employment
  • Outgoings
  • Loan-to-value ratio
• Mortgage


  A secured loan where the security is the property being purchased
• Most people use mortgages to buy their house or flat
• Mortgages tend to be taken out over a long-term (most run for 20 or 25 years)
• You can also take out 'buy-to-let mortgages to purchase rental properties
• Factors assessed by mortgage lenders

  • Income
  • Security of employment
  • Outgoings
  • Loan-to-value ratio
• Loan-to-value ratio


  The size of the loan in relation to the value of the property being purchased
• The higher the loan-to-value ratio, the more risky it is deemed by lenders
• If the risk is deemed to be higher, the borrower will probably have to pay higher rates of interest
• Before the financial crisis of 2008, some lenders were offering 100% mortgages with borrowers not required to contribute a deposit
• Borrowers with larger deposits tend to be offered lower rates of interest
• Default


  When the borrower fails to make the agreed repayments and/or the interest payments on the mortgage
• If the borrower defaults, the lender can re-possess the property, sell the property (often at auction) and then reimburse itself with the proceeds
• Any money left over after repayment of the outstanding loan is returned to the former property owner
• A second mortgage is sometimes taken out on a single property, and if the borrower defaults, the first mortgage ranks ahead of the second one in terms of being repaid out of the proceeds of the property sale
• Variable Rate Mortgage


  The lender's standard variable rate then increases and decreases with fluctuations in the base rate of interest set by the Bank of England
• Fixed Rate Mortgage


  The lender charges the homebuyer a fixed rate of interest for an initial period of time e.g. 3.5% for 2-5 years