84 Questions
What is the main purpose of a pension?
To provide a lump sum on retirement and an annual pension thereafter
Which statement best describes the tax efficiency of pension contributions?
They decrease taxable income and amount of income tax paid
Why do governments provide tax advantages for pension contributions?
To encourage people to provide for their old age
What is a common issue with state pensions according to the text?
They present serious funding issues due to longer retirement periods
How are state pensions funded in many countries?
Out of a government's current year income without investment for future needs
Which of the following is NOT mentioned as a type of retirement fund in the text?
Personal savings accounts
What is the forecasted dependency ratio in the UK by 2050?
5:2
Which type of pension scheme is known for providing an employee with a pension related to their final salary based on years of service?
Final Salary or Defined Benefit (DB) scheme
Why have many companies shifted from offering Final Salary schemes to Defined Contribution schemes for new employees?
Rising life expectancies and volatile investment returns
What is a key advantage for employers of Defined Contribution (DC) schemes over Defined Benefit (DB) schemes?
Lower costs and risks for employers
What are Personal Pensions also known as?
Individual pension plans
Who typically organizes personal pension schemes for employees?
'Companies'
What is a distinguishing feature of a non-contributory pension scheme?
'No contribution required from employees'
Why do many private sector employers no longer provide Final Salary schemes to new employees?
'Rising life expectancies and volatile investment returns'
What is one of the advantages of occupational pension schemes over personal pensions?
Lower running costs and employer contribution obligations
In what way do Defined Contribution (DC) schemes differ from Defined Benefit (DB) schemes regarding pension payouts?
Pension amount determined by investments in DC schemes, unlike DB schemes
What is the key responsibility that lies with the individual in a private scheme?
Monitoring the performance of their investments
Which country are Individual Retirement Accounts (IRAs) primarily found in?
United States
What determines if contributions to a traditional IRA are tax-deductible?
Taxpayer's income, tax filing status, and employer-sponsored retirement plan coverage
What is the consequence of having an unauthorised overdraft?
High fees and interest rates
How are retailers paid when customers use credit cards for purchases?
Retailers pay a small fee to credit card companies
What can customers choose to do when they receive a monthly credit card statement?
Pay all the money owed or a percentage of it
What is a characteristic of unsecured loans?
'Unsecured' by collateral
What is often offered by credit card companies to attract new customers?
$0 interest temporarily for balance transfers and new purchases
What should borrowers try to avoid when it comes to overdrafts?
Unauthorised overdrafts as much as possible
How do traditional IRAs differ from Roth IRAs?
One offers tax-deductible contributions while the other does not
What formula is used to calculate the effective annual rate (EAR)?
Quoted rate divided by appropriate frequency
What factor is added to the quoted rate when calculating the EAR?
1
In the UK, what does APR stand for in relation to borrowing costs?
Annual Percentage Rate of Charge
What is a mortgage typically provided for?
Financing property purchase
What term describes property bought with the intention to be let out to tenants?
'Buy-to-let' property
What type of mortgage involves only paying interest without reducing the principal balance?
'Interest-only' mortgage
What should be considered about capital gains related to a principal private residence?
Exempt from capital gains tax
What could be an additional cost associated with purchasing a property?
Legal fees for a lawyer
What is the potential perception about property investments compared to other investments?
'Property is seen as a reasonably safe investment'
'Buy-to-let' mortgages are commonly used for which purpose?
'Letting the property out to tenants'
What is the main difference between unsecured loans and mortgages?
Mortgages require security while unsecured loans do not.
If a borrower defaults on an unsecured loan, what is the typical action taken by the lender?
Start legal proceedings to enforce repayment.
In the context of borrowing costs, why are mortgages considered cheaper compared to credit cards?
Mortgages are usually secured by property.
What happens if a borrower with an unauthorised overdraft does not inform the bank of spending excesses?
The bank charges high fees, considering it as a form of financial penalty.
How are flat rates quoted by loan companies different from the effective annual rate (EAR)?
Flat rates do not consider compounding interest like EAR does.
What is the typical course of action for a lender if a secured loan is not repaid by the borrower?
Start legal proceedings to repossess the specific property.
Why do lenders prefer issuing secured loans for property purchases rather than unsecured loans?
Secured loans offer lower interest rates due to property collateral.
What is one advantage of having a mortgage over an unsecured loan in terms of non-repayment consequences?
'Lenders can repossess specific collateral for defaulted loans.'
What is a key differentiator between Islamic banks and conventional banks according to the text?
Islamic banks focus on asset-backed transactions.
What is a fundamental requirement for a contract to be considered valid under Islamic law?
Parties must possess perfect knowledge of the terms of exchange.
In Islamic finance, what plays a crucial role in ensuring the ethical conduct of financial activities?
Asset-backed transactions
What is the primary function of the Shariah Supervisory Committee (SSC) in Islamic banking practices?
To monitor compliance with Shariah principles.
What is the key feature of a Murabaha transaction in Islamic finance?
The bank purchases the property and sells it to the customer at a higher price.
How does Islamic banking differ from conventional banking regarding funding sources?
Islamic banks ensure their funding sources comply with Shariah law.
What is the main objective behind Islamic banking principles according to the text?
To provide ethical and socially responsible financial services.
How does an Ijara transaction differ from a conventional mortgage?
Ijara involves leasing the property but promises transfer of title upon final payment.
What is the main reason why Islamic banks are prohibited from investing in certain businesses?
They aim to comply with Shariah law by avoiding unlawful ventures.
How do home purchase plans offered by Islamic banks differ from conventional mortgage arrangements?
They are structured based on diminishing partnership and leasing principles.
What is the key advantage of a repayment mortgage over other forms of mortgage?
Guaranteed to pay off the loan over the term of the mortgage
What does an interest-only mortgage require the borrower to do?
Only make interest payments throughout the period of the loan
What is one of the main risks attached to an interest-only mortgage?
Having the property repossessed if repayments fail
In a repayment mortgage, when do payments become predominantly capital?
Towards the middle of the term
What does a lender consider when assessing applicants for a loan?
Projected income on the property
What is referred to as the loan-to-value ratio in mortgage applications?
Size of loan in relation to property value and applicant's income
When does the capital begin to reduce significantly in a repayment mortgage?
25
What happens if a borrower fails to meet repayments in an interest-only mortgage?
'The property is at risk of being repossessed'
In an offset mortgage, how are savings utilized for interest calculation?
Savings decrease the mortgage amount for which interest is charged
What is the primary benefit of an offset mortgage?
Flexibility in managing finances
In a variable rate mortgage, how does the interest change?
It tracks the official base rate
What is the key advantage of a fixed rate mortgage?
Protection from higher rates
How do capped rate mortgages protect borrowers?
By capping the maximum interest rate
What is a common feature of discounted rate mortgages?
'Lock-in' period after the deal ends
What is the primary reason charging or receiving interest is prohibited in Islamic finance?
'Haram' (prohibited) due to exploitative nature
'Risk-sharing' is emphasized in Islamic finance to avoid:
'Gharar' (risk or uncertainty)
'Capped rate' mortgages are designed to protect borrowers from:
'Interest rate risk' exceeding a set limit
'Lock-in' periods are commonly associated with which type of mortgage?
'Fixed rate' loans with penalty clauses
What is the main event insured in a life policy?
Death
What does a lump sum payment in a life policy depend on besides the date of death?
Investment performance
What is the main difference between whole-of-life assurance and term assurance?
Investment options
What does a term assurance policy provide coverage for?
For a specific period
In life policies, what determines the total payout to beneficiaries?
Investment performance and guarantee sum
What is the primary purpose of an investment-based life policy?
To provide financial protection upon death
What is the main purpose of a whole-of-life policy compared to a term assurance policy?
Serve both protection and investment purposes
Which type of whole-of-life policy pays a guaranteed amount plus any profits made between policy inception and death?
With-profits whole-of-life policy
What happens if an individual with term assurance is diagnosed with a terminal illness expected to result in death within 12 months?
The lump sum is payable immediately
What is the primary reason for purchasing a whole-of-life policy as part of protection planning exercise?
To provide funds for tax payments on death
In term assurance, how does the selected amount and cover period impact the policy?
Affects the premium amount paid by the insured
What distinguishes unit-linked whole-of-life policies from other types of whole-of-life policies?
The return is directly linked to investment performance
Explore the benefits, features, and risk characteristics of different types of pensions such as state schemes, corporate retirement plans, and personal schemes. Understand the importance of pensions as a long-term investment for retirement planning.
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