Btec business - unit 3 - personal finance - different types of saving and investment

Premium bonds - explanation

A government scheme that allows individuals to save up to a set amount by buying bonds. The bond holder does not receive interest on their savings but each bond is placed into a regular draw for cash prizes

Premium bonds - advantages

Can win substantially more than could be earned in interest. Can be easily withdrawn with no loss or penalty.

Premium bonds - disadvantages

No monthly interest payments and no guarantee of any return on investment. The amount invested will lose value over time due to inflation if no wins are received.

Bonds and gilts - explanation

Fixed term securities where the lender (the individual) lends money to companies and governments in return for interest payments. The money is invested for a specified period of time.

Bonds and gilts - advantages

Regular fixed returns. Spreads risk across a range of markets.

Bonds and gilts - disadvantages

Risk of losing some of the original investment if the value of the bond falls. Risk of not receiving interest payment if the company or government are unable to pay.

Shares - explanation

An investment in a business in return for equity (partial ownership of the company). The shareholder will receive dividends from the company's profits and will also want the value of the shares to increase over time.

Shares advantages

High potential returns if shares are going up in value. Returns can include dividends if the company is profitable as well as an increase in the value of the shares. The company may also offer additional rewards such as discounts

Shares disadvantages

Share prices can fluctuate substantially so the investment can involve high risk. No guarantee of any return if the company is not profitable and/or the value of the shares falls

Pensions - explanation

Long-term savings plans where individuals make regular contributions called premium payments throughout their working life. This is then repaid as either a lump sum , regular payments or a combination of the two upon retirement. Pensions can be provided by the state, by a company or by a private pension scheme.

Pensions - advantages

Encourages individuals to save throughout their working life for their retirement. Depending on the policy, savings may be boosted by an employer's contributions. Regular payments are deducted from the individuals salary before they see it (at sure) so they are tied into making the contributions. Contributions are made before tax is paid, so effectively tax is not paid on that part of an individual's income.

Pensions - disadvantages

Movement between jobs may mean one policy stops and another starts, reducing the overall cumulative value of the savings. Final outcomes are hard to predict. Individuals cannot stop the payments monthly even if they are short of cash for other essentials.

Individual savings accounts (ISA) - explanation

Type of savings account where the holder is not charged tax on the interest received

ISAs - advantages

Tax is not charges on the interest earned so the rewards for saving are increased. Interest rates are sometimes slightly higher than other savings accounts.

ISAs - disadvantages

Withdrawals are restricted. If there is a limit on withdrawals that is exceeded a penalty may be charged. There is a limit on the annual amount an individual may place in an ISA

Deposit and savings accounts - explanation

Accounts where interest is paid onto balance and normally the holder needs to give notice before withdrawing funds

Deposit and savings accounts - advantages

Interest is earned on positive balances. Accounts sometimes require regular deposits of a set amount forcing the saver to follow a savings plan

Deposit and savings accounts - disadvantages

Interest is taxed as income. The percentage rate of interest earned on savings is likely to be lower than the interest paid on borrowing.