topic 2

• Savings


  Decision now to save out of current income to finance a future medium-term or long-term need, want or aspiration
• Ways to use savings as investment funds

  • Hope for capital growth (market value)
  • Use funds for income
• Savings

  Do not pay very high interest because the capital sum is not at risk and FSCS covers 85,000 pounds
• Long-term savings accounts


  Pay a slightly higher interest rate than short-term savings (notice accounts)
• Investments


  • Suitable for people willing to invest for the medium to long term
  • Investors hope capital value will grow and/or income received will be higher than savings products
• Investment products


  • Higher risk because their value depends on performance of assets and financial market movements
  • Higher risk means returns can be higher than savings but value can also fall
• Portfolio


  Collection of investments a person or organisation holds
• Over history, money invested in stock markets over the medium to long term has shown growth
• Providers of long-term savings and investment products

  • Banks
  • Building societies
  • Credit unions
  • NS&I
  • Insurance companies
  • Investment companies
  • Stock brokers
• Credit unions


  Mainly focus on short-term savings
• Long-term saving products


  • Fixed-term savings accounts
  • National savings and investment
• Fixed-term savings accounts


  • Intended for short-term savers, can turn to a long-term account
  • Pay lower interest as always accessible
  • 6 months to 5 years
  • Some providers do not allow withdrawals in fixed period
• National savings and investment


  • Children's bonds can be bought for child under 16 by legal guardian
  • Income bond accounts designed for over 16s, calculate interest daily
  • Can hold 1 million pounds
  • 100% backed by UK government, but returns not very high
• Investment


  Process by which people with surplus funds lend money to companies and governments that want to borrow it over long period
• Investment product assets


  • Stocks and shares
  • Corporate and government bonds
  • Stocks and shares ISAs
  • Property
  • Commodities
• Stocks and shares


  • Shares aka equities or ordinary shares
  • Can be bought directly from company or on stock market from previous owner
  • Shareholders hope to receive dividends, paid regularly, usually half-yearly
  • High-risk investments offering both capital and income
• Corporate and government bonds


  • Fixed-term saving bonds are safe as capital sum is protected
  • Government bonds by companies traded on financial market, values fluctuate
  • Bondholders receive income in form of interest, usually at fixed rate and twice yearly
  • 'Gilt-edged bonds' or 'gilts' issued by UK government, very safe
• Stocks and shares ISA


  • Allows investing in different types of investments on tax-efficient basis
  • Every adult has ISA allowance each tax year
  • Can invest entire amount or split between cash ISA and stocks and shares ISA
  • Advised to use only if willing to tie money up for at least 5 years
  • ISA 'wrapper' means investor can earmark shares up to permitted limit and receive tax-free return, regardless of other investments
  • Tax-efficient as free of UK income tax and capital gains tax
• Property


  • Seen as good investment as value tends to move upward long-term, but can fall in economic downturns
  • Some buy additional properties with buy-to-let mortgages to rent out and earn income, also benefit from capital gains
• Commodities


  • Such as gold, silver, art and wine
  • Offer potentially high capital gains but very risky, only suitable for very wealthy or experienced people
  • Gold seen as safest asset as relatively scarce, durable and tends to keep value
• Investment fund providers


  • Banks
  • Building societies
  • Friendly societies
  • Insurance companies
• Investment fund providers

  • Use extensive networks and specialist investment managers to combine various assets into funds
  • Some funds are packages, others more flexible allowing investors to choose asset types
• Collective investments


  • Specialist organisations that carry out investments on behalf of clients
  • Money contributed by many people is put into common pool and investments made from that money
  • Investors can contribute lump sum or make regular payments
  • Investments spread across many different shares, bonds and other assets, reducing individual risk
• Collective investment types


  • Unit trusts
  • Investment trusts
  • OEICs
• Advantages of collective investment

  • Risk reduced due to diversification across many different investments
  • Cost of skilled fund manager shared among investors
  • Wide choice of funds catering to all investor types and risk profiles
  • Investors benefit from expertise of investment manager
• Insurance-linked products


  • Term assurance
  • Endowment policy
  • Annuity
• Term assurance


  Insurance plan that runs for fixed period and pays lump sum if insured person dies during term, not an investment policy
• Endowment policy


  Life insurance contract that pays lump sum after specified term or if insured person dies before, a long-term savings vehicle often used to pay off mortgages or fund specific future events
• Annuity


  • Product that provides income for people when they retire
  • Person takes lump sum they have saved and uses it to buy annuity, providing guaranteed income for fixed number of years or until holder dies
  • Some are index-linked to rise with inflation but cost more
• Pension plans


  • Personal pension
  • Occupational pensions
  • State pensions
• Personal pension


  Long-term investment fund that is tax-efficient, purchased by individual throughout working life to save for retirement
• Occupational pensions


  • Operated by employers, who may also pay contributions
  • Final salary scheme pays pension based on years worked and final salary
  • Money purchase scheme where employee and employer pay into plan, amount received depends on plan performance
• Auto-enrolment and NEST

  • Most workers must be automatically enrolled by employer into workplace pension scheme
  • NEST is large, trust-based, defined contribution, multi-employer pension scheme to ensure majority of workers enrolled, open to employers of any size and self-employed
• State pension


  • Regular payment made by government to people when they reach state pension age, as long as they have paid or been credited with sufficient national insurance contributions
  • Basic state pension increases annually to compensate for inflation
  • State pension age increases to keep pace with increasing life expectancy
• Dividends


  • Share of profits paid by company to its ordinary shareholders
  • Companies pay corporation tax on profits first, then distribute remaining amount as dividends
  • Ordinary shares have no fixed dividend rate, company decides annually based on profits
  • Preference shares have fixed percentage dividend rate, slightly less risky
• Capital gains tax


  • Tax on any profit made when disposing of an asset
  • Tax levied on gain, not amount received
  • Applies to most assets but not main home, car or personal possessions under 6,000 pounds
  • Everyone has annual tax-free allowance, tax paid on gains above this at 10% for basic rate, 20% for higher rate taxpayers