Module 1 - NEW LEARNING

What makes an employee eligible to be enrolled for Auto-Enrolment Workplace pension?

Age: 22 - state pension age

Earnings: above £10k per year

What is the Auto-Enrolment Workplace Pension?

• government legislation states all eligible employees must be enrolled by their employer

• these are a type of DEFINED CONTRIBUTION scheme

What is the normal pension contribution split for an Auto-Enrolment pension?

• The employer - pays 3% of band earnings (£6240 - £50,270)

• The employee - pays 5%

• HMRC - pays 1%

What options are there for employers who do not want to set up their own occupational pension?

There are 3 main providers of “multi-employer” schemes:

• Nest

• Now: Pensions

• People’s Pension

What are Personal Pensions?

Quite simply - individual Defined Contribution Pensions

How do Personal Pensions work?

• the individual pays in, and receives tax relief directly into the scheme (for Basic Rate)

• any additional rate relief is claimed from HMRC by the individual

What is a Stakeholder Pension?

• a form of Personal Pension

• but has more regulation around Charge, Access and Terms

If an IFA is recommending a Personal Pension - what do they need to do?

They must demonstrate it is at least as suitable as a Stakeholder Pension

What are Group Personal Pensions and Group Stakeholder Pensions?

a collection of Personal / Stakeholder Pensions that are grouped together by the provider to give the look and feel of an employer’s pension scheme.

This has less admin hassle!

What is the tax-free annual allowance you can contribute to a pension?

£60,000

What is the tax-free allowance for pensions of higher earners?

Those earning above £260k have their tax-free allowance drop to £10k (from the usual £60k)

What is the difference between Savings and Investment?

• Savings are small amounts built up

• Investments are usually lump sums

If a person is younger can they afford to take more or less risk?

more

If a person is older can they afford to take more or less risk?

less

What is a short-term investment horizon?

Less than 5 years

What is a medium-term investment horizon?

Between 5 and 15 years

What is a long-term investment horizon?

More than 15 years

Rank these asset classes in order of riskiness (starting with the safest):

Cash

Equities

Property

Bonds

Cash

Bonds

Property

Equities

What types of Cash Investment accounts are there?

• Cash ISA

• Fixed Term Deposit

• High Interest account

• NS & I

What is a Cash ISA?

• up to £20k can be invested tax-free per year

• must be 18+

What is a Fixed Term Deposit account?

• a cash savings account

• the longer you are willing to tie your money up the higher the return

What is NS & I?

• National Savings and Investments account offered by the government

• generally a lower rate of return, but safer as backed by the government

• some products in this category are tax-free - e.g. Premium Bonds

What period of time is recommended for an emergency fund to cover costs for?

3 - 6 months

In terms of tax on interest earned (cash savings accounts):

What is the Personal Savings Allowance for a Low tax-band earner?

£5000

In terms of tax on interest earned (cash savings accounts):

What is the Personal Savings Allowance for a Basic-rate tax-band earner? And what tax is paid above that?

£1000 tax-free - 20% tax on interest earned above that

In terms of tax on interest earned (cash savings accounts):

What is the Personal Savings Allowance for a Higher-rate tax-band earner? And what tax is paid above that?

£500 tax-free - 40% tax on interest earned above that

In terms of tax on interest earned (cash savings accounts):

What is the Personal Savings Allowance for a Additional-rate tax-band earner? And what tax is paid above that?

£0 tax-free - 45% tax on interest earned above that

What are direct and indirect investments?

Direct is buying directly - e.g. stock picking shares

Indirect is buying via pooled funds

What are Equities?

• part ownership of the company

• can entitle the owner to a dividend as part of the company profits

What is a quick way to assess the likelihood of a good Equity income return?

Dividend Yield

What are bonds?

• fixed interest loans

• borrower pays a coupon on the issue price (aka nominal price)

• on maturity the face value is returned to lender

Are there any bonds where the face value being retuned on maturity is tax-free?

Gilts

For an index-linked Gilt - what is it linked to?

RPI

what are PIBS?

• Permanent Interest Bearing Shares

• These are bonds issued by building societies

• no end date, non-cumulative and subordinated

• therefore pay a higher coupon

do PIBS tend to pay high or low coupons?

high

What time horizon is property as an investment seen?

Medium to long term

What are OEICS and Unit Trusts?

• Collective Investment Funds

• May be managed as Active or Passive

• Both are similar but investors in OEICS own the underlying assets, Unit Trusts do not

What is an Investment Trust?

• similar to a Unit Trust - as in a collective investment fund

• however this includes GEARING

• higher risk due to this

What is an Investment Bond?

• you pay a lump sum to a life insurer

• they invest it - usually in a range of funds

• aims for medium to long term growth

• can provide income from withdrawals

• no fixed term but usually tied up for 5+ years

• includes a small life assurance - paying slightly more than the fund value on death

What is a stock and shares ISA?

• up to £20k yearly tax-free allowance

• Invests in cash / equities / both

• 18+

What is a Junior ISA?

Similar to a normal ISA but with lower investment limits and obviously for the benefit of the child

What is a help-to-buy ISA?

• these stopped in 2019 - but existing ones still open until 2029

• cash ISA for first time buyers

• government pays 25% bonus on savings up to £12,000 (max £3k bonus)

• property values of: <£450k in London, <£250k elsewhere

What is an Innovative Finance ISA?

• peer to peer lending

• your investment becomes a loan to borrowers or businesses who pay you back

• can be part of your tax-free ISA allowance

• implemented through a online platform

What is a Lifetime ISA?

• used for a first home or later life

• first payment: you must be 18+ or under 40

• you can deposit upto £4k per year up to age 50

• government will add 25% bonus each year (max £1k)

• counts towards tax-free ISA limit

What is Active vs Passive fund management?

Active - attempts to outperform the market

Passive - attempts to replicate the market - will always slightly underperform due to costs and tracking error

What is a Sustainable Fund vs an ESG Fund?

Sustainable - invests directly into having a positive impact on environmental and social issues e.g. recycling

ESG - focusses more specifically on how a company is run - rather than problem solving

What are the 3 sustainable investment approaches for stock selection?

• Positive Selection

• Negative Exclusion

• Responsible ownership - the PM encourages responsible investing

What is greenwashing?

• When a firm tries to exaggerate it’s green credentials

What did the FCA do to attempt to stop greenwashing?

The FCA introduced the SDR - making it easier for investors to compare companies