This risk) Moderate (Medium Risk) Dynamic (Upper-Medium Risk) Adventurous

This document has been prepared for your training day, and thefocus is on the different types of regular savings plans that private clientscan utilise when saving money over the longer term. What toexpect from this document  IntroductionAssets Classes Different types of products: including Summary, Risk, Taxation andsuitabilityWays of Investing Summary  .

 Introduction: Regular savings can be crucial to your future financial situation.And could increase your wealth significantly if done correctly.    There are however a number of different areas you need to consider when making a regular savingscontributions. Risk and attitude to risk, Accessibility/ liquidity, taxation, suitability, pound cost average.

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 What is the clients attitude to risk (ATR).  How much risk is the client willing to take. understanding the balance between how much risk to take versus thereward.  According to SJP “Almost alltypes of investment carry the risk that their value could fall, particularly inthe short term. This may be due to stock market fluctuations, changes in interestrates or other factors.” (SJP Website,2018) According to Royal London the “Risk attitude hasmore to do with the individual’s psychology than with their financialcircumstances. Some clients will find the prospect of volatility in theirinvestments and the chance of losses distressing to think about. Others will bemore relaxed about those issues” (Royal London Website, 2018)  There are a few different types of risk: Conservative ( Low Risk ) Balanced (Lower-Medium risk)  Moderate (Medium Risk)Dynamic (Upper-Medium Risk)Adventurous (High Risk) What accessibility dosethe client have to the funds.

Are they easily accessed or are the funds lockedaway for a certain period of time.  How are the funds treated within the product. In terms of taxationand growth.   Is the product suitable and affordable for the clients currentsituation.

Does it make financial sense for the client to utilise the product.     pound cost average. According to the Beaufort Group “‘pound costaveraging’ – or, in laymen’s terms, regular saving – can come into play. Poundcost averaging works on the basis that putting smaller amounts of money into aninvestment reduces the overall risk of investing at the wrong time. Comparedwith sinking one large sum in a single transaction, the risk is mitigated bythe fact your smaller, regular sums will buy in over a period of time at avariety of prices.” (the Beaufort group website,2018) AssetClasses  It is veryimportant to look at the asset classes which you have exposure to, as this willaffect the risk which you face as well as the return which you are likely toachieve. What we want to do in this Document is show youhow to diversify assets provide a healthy income as and when you want/need toaccess your assets.

 The key with any investment is that you must diversify the assets whichyou hold. When I say assets there are really 5 different areas which you caninvest in within most regular savings products: Equities/Shares – investments into companies from across the world.These will carry risk and the values will change on a daily basis but over thelong term they tend to outperform most other asset classes.  Bonds/Gilts – These are essentially a loan to a company for which you receivea return, they are generally lower risk than shares.Commodities – Refers to raw materials such as gold, copper, coffee etc.

They can all go down in value.Property – Commercial property such as an office building. The growthcomes from the increase in the value of the building and the rent which thetenants pay. Property can go down in value.Cash – No risk to the value of the investment however your money may beeroded by inflation (the rate at which goods increase in price). For exampleinterest rates are currently at 0.

25% and according to BBC “inflation is at 2.3%”(The BBC website) so keeping cash will mean that the purchasing power of yourmoney is decreasing. Asset classes 1 to 4 all carry risk to the value of your initialinvestment and you may get back less than you invested. However, they are theonly way which you will be able to beat inflation and ensure that you make ameaningful return. It is very important that any investment you make isdiversified across all of these asset classes as this reduces the risk youface. We will touch on this in more detail in a later section.               Differenttypes of products: including Summary, Risk, Taxation and suitability Depositbased- Bank Accounts:  According toWikipedia “A deposit account is a savings account, current account or any othertype of bank account that allows money to be deposited and withdrawn by theaccount holder.”(Wikipedia2018) as mentioned above although cash has little orno risk your cash savings may be eroded by inflation.

However it is a goodplace to keep an emergency fund ( easily accessible cash incase of anemergency)  Pension Schemes: accordingto the Pensions Advisory service “a pension scheme is just a type of savingsplan to help you save money for later life. It also has favorable tax treatmentcompared to other forms of savings” (Pensions Advisory Service 2018) while apension scheme is a long-term regular savings plan here is a brief example ofhow a pension works:If you wereto have a pension pot of £1M at retirement it would be taxed as Follows:Pension Pot                                                        £1,000,00025% Tax Free Cash                                           £    250,0005% tax free income from tax free cash    £      12,500Amount Remaining for Income                  £    750,0005% Income                                                          £      37,500Tax on income                                                   £        5,380Net Income                                                        £      44,620Marginal Rate ofTax                                             10.76% The point here is that if managed correctly you will receive 40%tax relief on pensions, tax free growth and you will only pay 10.76% whentaking money out of your pension. Therefore using pensions as a long termregular savings product makes a lot of sense. The downside is you will not haveaccess to the funds until the age of 55.

 Individualsavings accounts (Isa’s): according to GOV.UK “there are 4types of ISA’s”Cash Isa Stocks & Shares Isa innovative finance ISAs ( mix between cash and Stocks )Lifetime IsaIsa are really the first starting point from a Long term savingsstandpoint as they allow you to invest with the possibility of tax free growth(Maximum you can invest is £20,000 per year). They come in two forms; cash andstocks & shares. The great thing about an ISA is that is grows tax free soit makes sense to put something in there that will have an opportunity forgrowth. By doing this you will be exposing yourself to assets which do carryrisk (if investing in stocks and shares) but will undoubtedly outperform cashin the long run. overtime equities will outperform cash – the key is to holdthe investment for a minimum of 5 years. After pensions, ISAs are a brilliant way to be tax efficient andas described above this can be a really efficient use of savings income and itcan provide you with flexibility to access the capital should you ever need it.Income from pensions is liable to tax however income from an ISA is completely taxfree.

Therefore this is a great way for you to top up retirement income withoutevery paying higher rates of income tax. With regular contributions you canactually benefit from volatility as it means that you are picking up units ininvestment funds at a lower price. (as mentioned above pound cost average) UnitTrusts: After ISA’s and Pensions the next place to be saving is into aUnit Trust. According to David Burnell Financial Services “A unit trust isa collective investment created under trust. The trust pools the money ofnumerous individual investors to create a fund with a specific investmentobjective – income, growth, or both.(David Brunell 2018)When making an investment you usually make your return in twoways:Growth in the value of the share price/asset priceDividends or Income which is paid out to investorsEach return is taxed in a different way ‘Growth’ and ‘Dividends’.A Unit Trust is another way in which we can shelter the majority of returnsfrom tax. After an ISA allowance you should look at using your Capital GainsTax (CGT) allowance.

Everyone in the UK has a CGT allowance of £11,300 a yearwhich means you can make gains from investments up to £11,300 and pay no tax onthis growth. CGT allowances are like ISA allowances in the fact that you losethem each year, therefore some assets are only measured against your CGTallowance when you come to disposing of the asset, for example property.However by investing into more liquid assets, such as unit trust funds, you canget into the habit where you are using this allowance every year. The way inwhich this works is as follows:You hold a unittrust fund and at the end of the tax year we calculate the gain over that yearWe then instructyou to make a fund switch to ‘crystallise’ the gainWe then file thison your tax return and as long as the gain is under £11,300 it is all tax freeIf you make aloss in a year we can crystallise this and you can offset this loss againstfuture gainsAfter 30 days youcan rebuy your original funds and the gain is washed away essentially they are washing away their gains each year so theynever have a large taxable gain as you would with a buy to let. This means thata £100,000 gain over 10 years could pretty much be completely tax free whereaswith other assets this could be as much as losing £17,780 (20% rate) or £25,000(28% rate) to tax.

In addition, new rule changes mean that the first £5,000 ofdividends earnt each year will be free of any tax. This therefore means that wecan set up a Unit Trust investment which, if managed correctly, will grow taxfree up to £16,300 per annum. Assuming a growth rate of 5% pa.Bonds: After maximisingISA allowances, Pensions, Capital Gains Tax allowances and Dividend allowances,we then need to look at what other regular savings investments thatare tax efficient.  Bonds are a great productto look at. When it comes to the taxation of bonds there are two options you canlook at.Onshore and offshore  According toSanlam “Comparison of onshore and offshore bonds This document comparesonshore and offshore bonds and how they differ in areas such as taxationtreatment.

Our comments are confined to UK resident investors. Offshore bondsare generally issued by subsidiaries of well-known UK life offices in financialcentres such as Ireland, Luxembourg, the Channel Islands or the Isle of Man.One of the major differences between onshore and offshore bonds is thattaxation is deferred within an offshore bond due to low (or no) tax on gainsand income arising on the underlying investments during the term of the investment.” Sanlam website 2018)     Onshore Offshore Taxation 1. Tax deferred withdrawals up to 5% per annum (over 20 years). 2. UK dividend income is received net of 10% withholding tax.

This is non recoverable, but satisfies the provider’s corporation tax liability in respect of the dividend. 3. Investment funds are subject to tax on interest and capital gains realised within the funds.

4. On surrender, the fund is deemed to have already paid tax at 20% (even if the effective rate in the bond is below 20%). For a higher or additional rate taxpayer, any chargeable gain will be subject to the difference between basic rate and higher or additional rate income tax. A basic, starter or nil rate taxpayer pays no further tax unless the gain, when added to their other income, takes them into the higher rate tax bracket (in which case ‘topslicing’ will be available). 5. For chargeable excesses arising from part surrenders or part assignments, the ‘top-slice’ is calculated by dividing the gain by the number of complete years since the policy commenced or, if lower, the number of years since the previous chargeable excess. 6. Corporation tax relief applies during the term on expenses, therefore £100 of expenses costs an 1.

Tax deferred withdrawals up to 5% per annum (over 20 years). 2. Dividend and other income may be subject to withholding tax which is non recoverable. 3. Income and realised gains in the funds are not taxed locally or may suffer a low rate of tax. 4.

On surrender, a higher or additional rate taxpayer pays tax at the higher or additional rate on any chargeable gain. A basic rate taxpayer pays 20% on any chargeable gain and a starter rate taxpayer 10%. Top-slicing relief will be available to basic rate taxpayers who become higher rate taxpayers on receipt of the bond proceeds, or higher rate tax payers pushed in to the additional rate band. 5. For chargeable excesses arising from part surrenders or part assignments, the ‘top-slice’ is calculated by dividing the gain by the number of complete years since the policy commenced, even if there have been previous chargeable part surrenders or assignments. 6.

The compounding effect of income and gains rolling up gross can make a big difference to the overall return, particularly over the longer term.