Financial investment opportunities assignment 1

Old people are tend to savings more than investment  Lower risk attitude than young people Income MacCrimmon and Wehrung state that “upper income and millionaires tend to takegreater ri

Outcome 1.1.Assess the attitude of individuals to risk when evaluating the suitability ofinvestments

In order to find out of risk attitude of individuals, we need follow 3 steps: collect information

of characteristics, identify financial objectives of investors and evaluate risk tolerance

Reasons

Gender

Through many results

of report, Barber and Odean finds that

“women show less confidence than men in areas related to finance”

[ CITATION Bar00 \l 1033 ]

Male are more adventurous and have the ambition

to make a profit than female

Age

Rui Yao, an assistant professor of personal financial planning in theCollege of Human Environmental Sciences

at MU found that "risk tolerance", decreases as investor’s age

(phys.org, 2012)

Old people are tend to savings more than investment

 Lower risk attitude than young people

Income MacCrimmon and

Wehrung state that

“upper income and millionaires tend to takegreater risks than

individuals with lower incomes” [ CITATION Mac86 \l 1033 ].

high income have stable financial status leads to a high financial source for investing, less fearfor loss  higher risk attitude than

[ CITATION Dav11 \l 1033 ]

Married people must to guarantee life for their family, especially their children Lower risk attitudethan single

Occupation

Roszkowski said that

“The difference occupation can be used

as classification factor which related to levels

of investor risk tolerance” [ CITATION Ros93 \l 1033 ]

professionals Professionals

Non-People who are doing professional job (finance or law) have much more knowledge about investment and the way to useinstruments

effectively  higher risk attitude

to trust in their decision  higher risk attitude

 People with different characteristics have different risk attitude on investment

b) Financial objectives

Investors must have some specific financial goals Goals must be capital preservation inwhich the real loss is minimized to the lowest risk; capital appreciation, capital gains aim to

provide real growth over time for future need; the current income generates spendable funds.Financial goal change through different stages as follows:

Financial objectives Risk attitudeAccumulation phase (20

- Long-term: Saving forretirement or theirChildren’s college

- Aggressive investors

- Willing to make investment withhigh risk to have maximum interestfor achieving their goals

- Long-term: Retirement

- Moderate Investors

- Willing to balance some risk for theopportunity for long term growthbased on family demands and theirposition in the society

- Less risky than accumulation phasebut still high because they want tosave for retirement

Spending phase (Gifting

phase) - begin after

 People who have big financial objective, will have high risk attitude on investment

c) Evaluate risk attitude of investors in scenario:

To learn more about the investment risk tolerance of this age group, we divided this age

group into 2 smaller age groups: 25 – 35 and 35 - 45 After all the analysis above, we have some conclusion:

+ The people in the age group of 25 – 35 and people who work as retail industries are high risk tolerance

+ The people in the age group of 35 – 45 and people who work as engineering are low risk tolerance

- Conservative investors: they do not accept high risk and they are willing to skip allpotential investments which will gain high interest but going with high risk They focus

on stability and less on growth in order to receive regularly interest

- Moderate investors: they desire for investment in long term They want good returns andaccept some risk to get their purposes

- Aggressive investors: they don’t care to market fluctuation, they accept high risk toreceive high growth and high gain in the future They might easily lose up to 40% andtake many years to recover these losses

- Very cautious: have very low level of knowledge, unlikely to have experience ofinvestment, prefer that their capital is safe rather than seeking high return

- Cautious: Have low levels of knowledge about investment/ do not like to take risk withtheir investment/ prefer to keep their money in the bank, but may be willing to invest inother types of investments if they are likely to be better for the longer term

- Moderately Cautious: Have low to moderate level of knowledge about investment, havesome experience of investment products, uncomfortable taking risk with theirinvestments, realize that risky investment are likely to be better for longer term returns

- Balanced: Have moderate levels of knowledge about investment matters/ Have someexperiences of investment/ understand that they have to take risk in order to be able tomeet their long-term goals

- Moderately Adventurous: Have moderate to high levels of investment knowledge/willing to take risk and understand that this is crucial/ accept that occasional pooroutcomes are necessary part of long-term investment

- Adventurous: have very high levels of knowledge investment/ willing to take risk/ able

to accepted that occasional poor outcomes are a necessary part of long-term investment

- Very adventurous: high levels of investment knowledge/ willing take risk/ accepted pooroutcomes without much difficulty

Outcome 1.2: Evaluate range of investments available from banks, building societies,insurance companies and national saving

In order to show the difference between four types of available investment, researcherprovides a table to compare the range of products

Institutions Products Interest rate Period for

12 months:

+ Annual interest (1.85%

AER*/Gross)+ Monthly interest (1.83%

AER*/Gross)

- Short term – 3 months -

12 months

- Mediumterm – 2 years

- Long term – 3 years or more

- Low risk

- Fix rate of return

- Enable you

to develop long-term financial plans

- Manage your money more

efficiently

- Low return

- Have to pay tax

- Cannot be accessed in the investment period

Cash ISA Earn 1.96%

AER, including0.25% variable rate and 1.71%

fixed rate bonus

term/

Short-Long-term

- Low risk

- Safe and insured

- Gradual earnings

- All interest paid tax free

- Easy access with unlimitedwithdrawals and no withdrawals penalties

- Low interest

- Have a maximum cap (£5,640 for cash and £11,280 for all subscriptions including stocks and share)

more

- High return

- Low tax on dividends

- Capital gain are 100% tax-

- High risk

- No guarantee

- Can’t handle the value of investment

- Flexibility and

diversification

CharityBond

1 year: 1.25%

Gross p.a./AER*

(fixed)

At least 1 year

- Low risk

- Tax exempt bonds

- Necessary for health

- Long term using

- Long term investment

Unit trust >2% Medium

and long term investment(5 years and longer)

- High return

- Have expert consultancies

- Flexible time for investment

- Tax-free for parent and child

- Low return

DirectISA

1.75% AER Long and

short term

- Low/no risk

- Tax benefit (Lower tax ondividends, Capital Gains are 100% tax-

- Low return

- Fixed amount

to be invested

- Flexible time for investment

In conclusion, there are many diverse investment products, and it is easy to recognize thatthe relationship between risk and return  products have higher risk, will get higher return.Products such as Stock and share ISAs, unit trust have high return and high risk which issuitable for high risk attitude customers, and products such as saving account, ISA, charitybond, children’s bond, cash ISA, and health insurance are low or no risk, but also lowamount of return, are suitable for low risk attitude people

Outcome 1.3 The suitability of these products for different people

Age

group

Risk attitude Reasons

20-35 Very high - Energetic

- Want to satisfy their needs (buy house, car)

- Investors are most likely to take high risk investments for greatreturn as the person is aware that he is still young and hasgrowing career Failed investments can be acceptable as there

is still time to correct the mistakes

45-60 Medium to

low

- Capacity to work decrease

- Opportunity to earn money is less

- Tend to saving more than investment >60 Lowest - Nearly or already retire

- Tend to enjoy

- Don’t want to lose accumulation

In the scenario, there are two types of customers The first investors work as engineers Thesecond investors work as retailers They are in the middle age (25 to 45 years old) Thesecustomers will be divided into two smaller age groups: 25-35 and 35-45 in order to have agood analysis about risk tolerance and find out which product can be suitable for them Because of the limitation of outcome 1.2, many products are not analyzed as follows:

- Appropriate products for aggressive investors: shares, common stocks, options, or futures

- Appropriate products for moderate investor: income stocks, preferred stocks, convertiblestocks, or high-grade bonds

- Appropriate products for conservative investors: Low risk income stocks, governmentbonds, quality corporate bonds, bank certificates of deposit

We can use these products to suggest products which suitable with investors’ characteristicand also their risk attitude in this outcome

*Assessment the risk tolerance and suitable products for engineers and retailers who are 25

to 35 years old

Age These people are aggressive They have a lot of goals and want to have

maximum interest

Occupation

/ Education

Professional jobThey have expert skills and specializedknowledge

Non-professional jobThey do not have expertknowledge

investment and taking risk

- Their income is low whichleads to a small amount ofinvestment finance

- Their job does not ensureany stability for theirincome

products - Common stocks

- Stock and share ISAs

- Unit trustBecause these people are young and haveability and long time to make investmentand take risk They have knowledge,expertise, and a big stable financial source

The longer standing an investment is, thebetter advantage they can take ofcompounding interest This investmentbrings back high interest

- Direct ISAThese products are safe, andcan increase the capital byadding interest They canaccess to the account at anytime they want Withouthaving an expert knowledgeabout investment, they canstill control these investments

*Assessment the risk tolerance and suitable products for engineers and retailers who are 35

to 45 years old

Age At this stage, these people are still

aggressive They belong toAccumulation phase The risktolerance is still high

These people tend to be moderate at themiddle age consolidation They startthinking about long term goals with lowerrisk tolerance

- High grade bonds

- Cash ISA

- Charity bonds

- Private health insurance

- Children’s bondsThe investors should reduce any riskinvestment such as mutual funds Theyshould invest in products which gainsinterest for their future, such as insuranceproducts They will need a guaranteed lifefor their family, especially their children

Investors Analysis risk tolerance Suggested investment products

A

B

Outcome 2.3 Tax-free investments and importance to different tax payers

a) There are 3 types of tax – free investment, namely Individual Saving Account (ISA), National Savings Certificates (NSC) and Premium Bonds (PB)

Individual Saving

Account (ISA) - ISA is

designed for the purpose

of investment and

savings with a favorable

tax status

- May be received agood returns because taxwill be free

- Money is safe in cashISA even when the bank

or financial institutehave trouble

- May withdraw anytime

- May receive a newallowance each year

- May be restricted by minimumand maximum investment values

- When investors withdraw moneyout from Cash ISA or a Stocks &Shares ISA, they will never beable to regain the tax free status onthe amount they have justwithdrawn

National Savings

Certificates (NSC) - A

certificate bought from

the National Savings

department which can be

redeemed tax-free with

accrued interest, usually

- No tax deduction atsource

- May get bank loan onNSC

- The investment remains fixed for

6 years

- The rate of interest is quite lowerthan other investment for the sameperiod

Premium Bonds (PB)

-bond that is trading

above its par value

- Investment is subject to decrease

in value due to inflation

- Chances of winning larger cashprizes are slim

- No regular interest earned

- No guarantees of win

- Minimum and maximum

- No fixed investmentterm

investment required

 Tax-free investments are all safe, having very low risk so they are suitable for all peoplewho want to either saving their money and still get interest, or making an amount of moneywhich do not have to pay tax

b) The importance of tax-free investment to different tax payers

Tax Free Investments are important in helping investors earn interest and benefits from their capital growth

Based on three rate band of payment, namely basic rate payment, higher rate payment andadditional rate payment, the influence of tax-free investment is different

For tax payers who fall into higher and additional rate payment range, they have very highincome so the amount they have to pay for tax also very high In this case, tax-freeinvestment is very important to them because it reduce that amount The more they invest ontax-free investment, the higher benefit they can get; the direct one is lower their tax payment.For tax payers who pay tax under basic rate band, they have lower income so they don’t havehigh risk taken to invest in high risk investment such as shares, they also have benefit As Imention above, invest on tax-free investment is a safe choice that not only has very low or

no risk, but also give them interest with no tax

INCOME TAX

1 Calculation taxable income

Totalincome

Otherincome

Savingincome

Dividen

d income

- Trading income

- Salary (Employment income)

- Business profits/ Property

business income

Building society interest

(number ×100/80)

- Bank interest (number x 100/80)

- Gift income/Saving income

Basic rate band (see on other income)

Normal rates Dividend

ratesStarting

3 Calculation tax payable

Tax liability

Less tax credit on dividend income (dividend income × 10%)

Less tax deducted at source on building society interest (Saving income × 20%)Tax payable

4 Gift aid

Net gift aid = number

Gross gift aid = number × 100/80

Extended basic rate band = Gross gift aid + £37,400 (if taxable income > 37,400) × 20%

* Calculation PA when have Gift aid

Net income

Less: gift aid donation (number × 100/80)

Adjusted net income

Less: income limit

Excess income

Personal allowance 6475 - Less half excess (excess × ½)

MARRIED COUPLE ALLOWANCE (MCA)

Where one member of a married couple/civil partnership is a basic rate taxpayer and theother a higher rate taxpayer, income tax liabilities can be minimised by transferring incomeproducing assets from the higher rate taxpayer to the other spouse or civil partner

If assets are owned jointly but in unequal proportions, then:

(a) if the higher rate taxpayer owns more

than 50% of the asset, no declaration of

beneficial interest should be made so that

the income is shared equally, or

(b) if the higher rate taxpayer owns less

than 50% of the asset, a declaration of

beneficial interest should be made so that

the other spouse or civil partner is taxed on

their full amount of income

Thus in the above example a declaration is

beneficial if Janet is a higher rate taxpayer

whilst John is a basic rate taxpayer

Such tax planning also applies if one

member of the married couple/civil

partnership is a basic or higher rate tax

payer and the other is an additional rate taxpayer

CHARGEABLE GAIN TAX (CGT)Chargeable gain

Less: annual exemptionTaxable gain

1 Tính CGTChargeable gain Less A.E = Taxable gain Xét taxable income với basic rate band đểxét xem cái j nhân với 18%

Nếu taxable income < 37,400

 Basic rate band: (Basic rate band taxable income) × 18%