Financial Services – Explain the difference between ‘defined benefit’ and ‘defined contribution’ pension schemes

Question 1

a) Explain the difference between ‘defined benefit’ and ‘defined contribution’ pension schemes.
b) Compare them from the perspective of a member of a pension scheme.

Question 2
a) Explain Heuristic Simplification.
b) Give an example in support of the explanation.
c) Describe the benefits of understanding this aspect of Behavioural Finance.

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Question 3

a) In relation to investment decision making, describe the practice of Asset Allocation.

b) Explain the key considerations when designing an asset allocation strategy for a client.

Question 4
A first-time home buyer makes an offer on a property of £165,000, which has been accepted by the vendor. An 85% Loan to Value mortgage has been agreed which will be serviced on an interest only basis at a rate of 5.2% per annum. Showing your workings:
(a) What are the monthly interest payments and total (aggregated over the full period of the mortgage) interest payments for mortgages with terms of (i) 10 years, (ii) 25 years, and (iii) 40 years?

(b) Compare two different methods of repaying the capital at the end of the term.

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Question 5

Explain how financial services are regulated in the UK and give a typical example of how the regulator meets its statutory objectives?

Question 6

Giving a numerical example, explain what is meant by the term “Pound-Cost Averaging”.

Question 7

You have received an inheritance of £100,000 and you wish to invest it until your retirement. You are 25 and have a target retirement age of 70. Historically the rate of return on your chosen unit trust has been 9.5% per annum before charges. If you project the same rate of return to your target retirement age, what do you expect the future value of the fund to be:
(a) with no initial charge and an annual management charge of 0.5%
(b) an initial charge of 3.0% and an annual management charge of 0.5%
(c) Repeat the calculations in parts a) and b) but this time assume an annual management charge of 1.5%
(d) Comment on the difference in projected funds to the target retirement age.
(e) Explain the difference between actively managed and passive investment funds in terms of charges and returns.

Question 8

a) Define Human Capital.
b) Explain the workings and generic purpose of an Income Protection Policy.
d) Explain the workings and generic purpose of a Life Assurance Policy.
e) Explain the workings and generic purpose of Critical Illness Policy.

 

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Financial Services – Explain the difference between ‘defined benefit’ and ‘defined contribution’ pension schemes