2. Savings And Investment Products Flashcards by Lily Kersey (2024)

• people save for long periods because they make a decision now to save out of their current income to finance a future medium-term or long-term need, want or aspiration
• these future needs, wants and aspirations will require a significant amount of money and so people must save for a longer period of time to achieve them
• they hope their savings and investments will grow over the period to give them a good return on the money by the time it matures
• however, if the economy performs badly they may not get as good a return as they hoped, with some types of investments they might even get back less than they have paid in

• they can hope for capital growth, ie that the market value of investment is greater when sold than the amount they paid for it. When they cash in the investment, they will receive a lump sum (ie its full value), which they can use to finance their planned project
• they can use their fund for income - the investment will pay out a regular amount that they can use as part of their monthly income

• savings products and investment products are both way in which people can put their surplus money and earn a return on it
• there is a relationship between the risk taken by the saver that they might lose money and the return they might earn - this applies to all financial products
• the higher the risk the greater the return, other things being equal - if someone wants to earn a higher rate of interest on savings or investments, they need to take a higher risk

• savings accounts are held at financial services providers - e.g. banks, building societies, credit unions
• savers deposit money + earn interest over the period - the capital sum they deposit is not at risk - a saver will not get back less money then they paid in, even if the provider fails (£85,000 protect by FSCS)
• since there is no risk, savings accounts don’t pay very high interest rates
• investment products are higher risk because their value at any time depends on the performance of assets in which the money has been placed + also on general movements in the financial market
• returns can be higher than on savings accounts due to risk but the value of investments can fall as well as rise

• an investors combination of chosen types of savings and investments
• e.g. one person might have instant access savings together with investments in stocks and shares and a life assurance policy

• statistics show that money that people have invested in stock markets over the medium and long term has given a higher return that cash left in a savings account over the same period
• but stocks and shares move up and down continuously + investors always take the risk that they might need to sell their investment at a time when the value is low

• banks
• building societies
• credit unions
• the Post Office

(All except credit unions)

• short term savings accounts
• some also provide long term savings, investments, life assurance, pensions and annuities

• long term investment products that incorporate life assurance and pensions
• pension funds accept people’s savings throughout their working lives and invest the money so that savers will eventually have a pension to finance their retirement

• investment products that either aim to grow the money over time or those that provide a regular income from money invested
• investors need to choose a product according to whether they want growth, income, or some combination of both

• someone who wants capital growth from an investment is trying to make the total sum grow over time
• their objective might be to accumulate as much money as possible in order to fulfil long-term wants or aspirations - e.g. sum available to pay for their children’s university in 15 years
• since they are taking a higher risk than if they put it in a normal capital protected savings account, they will want their investment to grow faster than average savings interest
• managers of growth funds usually invest in companies that they believe will give them above average returns

• someone who wants income from an investment is using the sum of money that they already accumulated to give them an annual return, which they can regard as part of their household income
• e.g. someone who wins the lottery or inherits a large amount of money might see this as an opportunity to stop working + to fulfil a lifetime aspiration such as travelling
• they need to place their money in a fund that will give them an income so that the money is working for them - rather than leave the interest earning in the fund they sacrifice growth in order to take the income out and spend it

• an example of income from an investment
• a retiree who wants to use their money to buy them an income their old age
• they buy an annuity - hands over their lump sum to an insurance company and in return they are paid an income for the rest of their lives

• some people may want their money to grow but also want some income at the same time
• they will have to sacrifice some of one for some of the other
• e.g. they will get less growth out of their fund if they are taking some income out of it than if they had chosen growth alone - the need for some income will mean that the capital will grow more slowly

• help to achieve an investors objective
• also taking into account their attitude to risk, the amount to be invested and the length of time of which they can invest it

• unit trusts
• open-ended investment companies (OEICs)
• investment trusts

• look after a portfolio of various types of financial products such as shares and bonds on behalf of customers who have a seizable sum to invest
• they make investment decisions on behalf of the investor in order to try and meet an agreed investment objective

• easy access savings accounts offered by providers are intended for short term savers
• however, it is possible for a saver to hold on of these accounts for a number of years and turn into a long term savings account
• but the fact that the money is instant access means providers pay a low interest rate
• if a person wants to put money aside for a fixed period - they can earn a higher rate without taking a risk by buying a fixed-term savings account from a provider - ‘bonds’

• maturity periods available usually between six months and five years
• interest rate usually fixed
• some don’t allow withdrawals during maturity period + some do allow withdrawals but impose an interest penalty

• useful ways of savings money in the medium term for people who need to accumulate a medium-sized lump sum but need the discipline of a product that doesn’t allow them to spend the money in the meantime

• small range of savings accounts but most of these are short term
• in the past it has offered other longer-term savings products

• children’s bonds for under 16s by a parent, legal guardian, grandparents or great-grandparents
• these bonds pay a fixed interest rate for a set term
• the minimum investment was £25 and the maximum was £3,000 per child per issue
• the bonds can be cashed in early but there is an interest penalty equivalent to 90 days
• these bonds have been withdrawn from sale but existing ones still earn interest
• income bonds for over 16s
• calculates interest daily
• you can open with a £500 minimum deposit + can hold up to a total of £1 mil
• can manage your account online, by phone or by post

• 100% backed by UK government

• their returns are not high
• do not offer the potential for big rewards that some investors seek

• stocks and shares
• stocks and shares ISAs
• corporate and government bonds
• property

• people can invest their money themselves by choosing and buying specific assets, such as shares or property
• but this is not a good option for many small investors as they do not have enough money to allow them to spread their risks over a well-diversified range of assets
• they are also unlikely to have the knowledge or the time to select suitable shares, properties etc. and to track their performance on a day to day basis
• this is why people choose to give their money to a specialist investor - either a collective or a fund

• also known as equities, or ordinary shares
• a share is a part ownership in a company - most people buy shares in a company listed on the stock market

• directly from the company (if it is a new issuer of shares)
• on the stock market from a previous owner

• it is almost always possible to sell shares if they need their cash back
• but they take the risk that they may be selling when the share values have fallen

• capital growth
• dividends

• a share of the annual profits made by the company
• paid on a regular basis, usually half yearly or yearly

• if the company does badly - there may be no dividends and the share price may fall
• as a result, the shareholder receives no return + suffers capital loss
• not only do individual companies’ fortunes change but also stock markets rise and fall according to global economic conditions

• allows a person to put money into different types of investment on a tax-efficient basis
• everyone in the UK has an ISA allowance each tax year - a person can either invest it all in a cash and stocks ISA or split it with a cash ISA in any proportion they like

• people are advised to only use a stocks and share ISA if they are willing to tie their money up for at least 5 years
• this is because the value of the ISA will fluctuate with changes in market value and the investor needs time to take advantage of periods when values rise

• buy a readymade product from a provider and let the provider manage the investment for them
• or choose and buy their own + put them in what is known as an ISA ‘wrapper’

• using an ISA ‘wrapper’ means they can earmark shares up to the permitted limit for ISAs (the allowance) + receive tax free returns on these shares, regardless of any other investments they may have

• tax-efficient because they are free of UK income tax and capital gains tax that would’ve been paid on an investment outside of ISAs
• tax is paid on dividend income where relevant
• investors also have to pay charges to their financial advisers and to fund investment managers in the investment company they use

• companies, governments and other bodies that need to borrow money issue bonds
• investors lend their money to the issuer by purchasing the bonds
• they are lending money to the company so they are creditors, not part-owners as shareholders are

• all bonds are a way in which the issuing bank or company can borrow money from the purchases of the bonds
• fixed-term savings bonds are a type of long-term savings account where the capital sum is safe
• where as, bonds issued by the government and by companies are traded on the financial market + their values fluctuate

• issued for a specific period of time
• at the end of that period, the bond matures and the issuing company or other body repays the capital value of the bond

• receive income in the form of interest on their bond
• usually at a fixed rate
• usually twice a year

• there is a market in bonds
• holders can sell them before maturity if they want their money back

• bonds issued by the UK government
• regarded as very safe because it is extremely unlikely that the UK government will be unable to repay its capital or to keep up the interest payments

• mainly land and buildings
• normally residential property (flats, houses) or commercial property (office blocks)

• a good investment because property prices tend to move upwards in the long term
• individuals and companies can include property in their investment portfolio
• however, it is quite risky because prices can fall in an economic downturn + it is not easy to sell the asset at such a time

• many people see their own house or flat as part of their long term investment portfolio, especially if it’s value is quite high
• on retirement they can sell it, downsize to a smaller property + invest the cash difference to give them an income
• some people buy additional properties by taking out a buy to let mortgage - can rent out the property to give them an income - which they hope will cover mortgage repayments + they can benefit from any increase in capital value of the properties

• quite risky in current economic circ*mstances as buy to let mortgages have been more difficult to access since the financial crisis

• always seen as the safest asset - scarce, durable, and tends to keep its value
• since the financial crisis gold prices have been high due to uncertainties about the economic + political situation
• but the price is volatile (frequently fluctuates) + is affected by the view of prices taken by those who trade in existing gold + by overall supply

• a technical study carried out by the United Nations international seabed authority has reported that new technology has been developed to make it possible to extract gold + other metals from the sea bed
• if this occurred on a large scale - global supply of gold would rise + its price would fall - affecting the value of peoples gold holdings

• banks
• building societies
• friendly societies
• insurance companies

• packages
• flexible ones that allow investors to choose the types of asset that are included

• limits on the amount of the investment
• the time period to maturity
• sometimes the age of investor

• they make it clear that investments are riskier than savings
• the value of funds can fall as well as rise

• multi- asset funds
• impact investment funds

• easy for beginners to invest in
• hold a range of assets: equities (shares), property, bonds, commodities
• people can choose their fund that suits their goals + their risk appetite
• Barclays invests the money + monitors + actively manages some of the funds - other funds are passive investments where money is invested + not monitored
• people should be prepared to invest for at least 5 years

• focus on sectors with potential to create positive outcomes that benefit society, while also generating a financial return
• they invest in companies with good ethical records and address areas such as environmental challenges

• people can deal online + by phone in shares on the London Stock Exchange + other markets through the Lloyds bank share dealing service
• they can also deal in unit trusts, open-ended investment companies, investment trusts + exchange-traded funds
• the TradePlan service allows people to arrange to buy or sell as share when it reaches a ‘trigger’ price that they set
• people can set the price at which they want to buy or sell + Lloyds will execute the trade

• foresters friendly society offers a bond designed to provide growth potential over the long term
• UK investors between the age of 18 and 80 can contribute between £5,000 and £150,000 with growth potential over five years or longer
• the bond can be taken out in joint names, in a way designed for couples to invest
• may lead to bonuses on the investment, depending on how Foresters’ funds perform - investments can also access membership benefits (such as grants) to help cover higher education + healthcare costs
• however still a risk - investors cautioned they may get back less then they put in

• specialist organisations that carry out investment on behalf of their clients, who are individuals with money to invest
• also know as fund management firms

• sometimes called ‘pooled investments’ as the money contributed by many people is put into a common pool + investments are made out of that money
• an individual investor might contribute by paying in a lump sum or by making regular payments into the fund

• a wide range of shares, bonds, commodities, cash and property
• this means that each investor’s risk is spread or diversified across many different holdings

• unit trusts, investment trusts and OEICs
• they offer various combinations of growth + income
• some funds allow individual investors to choose the types of company they want to put their money into - e.g. UK companies, or a particular sector such as financial firms or mining
• or they might leave it up to the fund manager to make the choice for them

• the risk is reduced - funds invested in a large number of different types of company -> the impact of any one investment falling in value is less severe than if the investor were to own only one type of investment - ‘diversification’ … however small investors can’t take advantage as they do not have enough money to buy multiple individual stocks + shares
• the investor takes advantage of the expertise of the investment manager - the individual doesn’t have to research particular companies or understand financial information in order to choose a company - the investment fund manager has expert knowledge + can choose the best stocks + shares - can buy + sell shares quickly when the prices in the market change
• the cost of hiring the services of a skilled fund manager is shared among all the investors
• fund managers deal with millions of pounds worth of investments + can negotiate reduced dealing costs for their investors - an individual investor would pay prohibitive fees to a fund acting for them alone
• there is a wide choice of investment funds + collectives which cater for all types of investors, preferences + risk profiles

• most common form of collective investment in the UK + appeal to investors who want to buy shares but who are too small or inexperienced to be able to invest on their own
• a unit trust is established under a trust deed, which is entered into by the promoters of the unit trust (managers) + the trustees
• unit trusts are unitised funds - each unit representing a proportion of the funds total asset value
• they are open-ended - more units can be created when more money is invested

• managers are responsible for investing the funds
• valuing the assets
• fixing the prices of units
• offering the units for sale
• buying units back from unit holders

• the trustees are responsible for ensuring that the managers comply with the terms of the trust deed
• they hold + control the trusts assets on behalf of the unit holders
• collect income from these assets and distribute the income to the unit holders

• common in UK but not unitised funds like unit trusts
• not actually trusts but a public limited companies

• they issue shares, which are purchased by investors + traded on the stock market
• the money they receive from the share issues is used to trade in the stocks + shares of other companies and in certain other investments - e.g. commodities (gold, wheat)

• the number of shares they issue is limited by the investment trust’s constitution + cannot be easily increased
• so they are described as ‘closed-ended’

• the shares in which the investment trust company has invested might fall in value
• the shares of the investment trust company itself might fall in value

• pooled collective investment vehicle + cross between unit trusts and investment trusts
• they are a corporate structure + issue share but the number of shares can vary and can be created or liquidated according to the number of buyers + sellers in the market
• the OEICs expands as people invest + shrinks as they withdraw their money

• managed by an authorised corporate director whose role is similar to a manager of a unit trust
• there must also be a depositary who is responsible for overseeing the operations of the company + making sure that it complies with the requirements for the investor protection - this roles is equivalent to a trustee in a unit trust

• type of life cover that isn’t an investment policy
• an insurance plan that runs for a fixed period of time + pays out a lump sum if the insured person dies during the term

• life insurance contract that pays a lump sum after a specified term or if the insured person dies before this date
• endowments are a type of long term savings vehicle
• can be surrendered before maturity but the insured person is likely to lose quite a lot of money by doing this

• often used to provide a lump sum to pay off a mortgage or other long term debt
• they can also be used to fund a specific event in the future

• a product that provides an income for people when they retire
• a person takes the lump sum which they have already saved (usually via a pension plan or other investment vehicle) + uses it to buy an annuity
• this provides them with a guaranteed income for a fixed number of years or until the holder dies
• an annuity gives the holder the security of knowing what their annual income will be until they die

• they rise with inflation
• but they cost more than those that are not index-linked

• a personal pension is a type of investment fund - a long term savings plan that is tax-efficient
• it is purchased by an individual throughout their working life in order to save for their retirement

• occupational pension plan + individual pension plans
• both work on a similar principle - people pay money into a fund which uses their money to invest in assets + to provide them with a retirement income

• employers
• who may also pay contributions into them for their employees

• pay an employee a pension based on the number of years they have worked for the employer + linked to to the amount of their salary at the time they retire
• most schemes require the employee to make regular contributions from their salary + the employer also has to make payments to ensure that the agreed benefits can be paid at retirement
• these are also known as ‘defined benefit’ schemes as the employee knows what their future benefit will be

• they pose a greater risk to the employer
• many firms are now closing them down + substituting them with a money purchase scheme

• employee pays into the pension plan over their working life
• the scheme is invested + provides the employee with the resulting lump sum on retirement
• in most cases the employer also makes regular payments into the scheme
• the amount the the employee receives depends on how the scheme has performed

• they can use it to buy an annuity to provide an income for retirement

• long term money-purchase products provided by banks, insurance companies + other providers to help customers to build up a pot of money that they can use to buy an income for retirement
• they are tax-efficient because their is tax relief at the basic rate of income tax on the payments made into the plan

• regularly
• one off payments when they can afford them

• the maximum annual amount a non-taxpayer can pay + receive the tax relief is £2,880
• a tax payer will receive tax relief on contributions of up to £40,000 known as the annual allowance

• the government believes that people are not saving enough for their retirement + so introduced auto-enrolment into workplace pensions
• this means most workers must be automatically enrolled by their employer into a workplace pension scheme - they have the option to leave if they wish -> this obligation was introduced in the Pension Act 2008
• if it is a final salary scheme - must provide a minimum level of benefits
• if it is a money purchase scheme - employers must pay a minimum contribution

• must be either the Nation Employment Savings Trust (NEST)
• or an equivalent qualifying workplace pension scheme with benefits that are broadly equal to or better than those of NEST

• National Employment Savings Trust
• a large, trust-based, defined contribution, multi-employer pension scheme
• aims to ensure the majority of workers are enrolled in an occupational pension - this means that when they retire they won’t have to just rely on their state pension
• NEST is open to employers of any size + to self-employed

• makes it easier for working people to save because they have a singe retirement pot into which they can continue to contribute even if they move to an new employer or if they stop working

• a regular payment by the government to people when they reach the state pension age
• they must have paid or been credited with sufficient National Insurance contributions
• the basic state pension increases every year to compensate for inflation

• increase to keep pace with increasing life expectancy
• October 2020 it increased from 65 to 66
• government proposals aimed at to raise it from 66 to 67 between 2026 and 2028 and then to 68 between 2037 and 2039

• for people who reached the state pension age before 6 April 2016 - the amount of pension they receive depends on the NI contributions they made over 30 years
• people who reached state pension age on or after 6 April 2016 receive the new state pension - people are eligible for the full state pension if they have 35 qualifying years of NI contributions

• other things being equal, the greater the risk in a product, the higher the rate of return that must be offered to investors to motivate them to put their money into it
• each individual should choose a savings or investment product that is suitable to their circ*mstances

• a share of profits paid by a company to its ordinary shareholders
• when a company calculates its profits it decides how much to save in reserve + to use for expansion, it also has to pay corporation tax - the amount left can be distributed to the shareholders as dividend which is the return of their shares

• paid to shareholders on a regular basis
• usually in two half-yearly payments - the interim dividend + final dividend

• don’t have a fixed rate of dividend
• the company decides on the percentage each year according to the amount of profit made

• if the company does not make enough profit, or if it makes a loss, it will not declare a dividend and a shareholder will get no return for that year
• this is the risk they take, and it balances the fact that they may receive a higher percentage in a good year

• They are more unusual
• They carry a fixed percentage rate of dividend, so they are slightly less risky than ordinary shares
• Although they too do not receive a dividend, if the company does not make a profit

• Capital gains tax is a tax on any profit made when someone disposed of an asset - when they sell it, give it away, transfer it to someone else, or exchange it for something else
• The tax is levied on the gain and not on the amount of money received for the asset
• Capital gains tax applies to most assets, but not to someone’s main home their car or personal possessions disposed of for £6000 or less 

• also know as annual exempt amount
• tax is levied on gains over and above this amount - if gains are below the threshold no taxes paid
• The taxable amount of the capital gains is added to individuals taxable income
• The capital gains tax rate depends on the tax plan that the total income falls into the rate of the capital gains within the basic tax rate is 10% (or 18% or residential property)
• Higher rate taxpayers pay 20% (or 28% on the residential property) on their taxable capital gains

• £6,000
• £3,000 for trusts