This report has been produced as evidence for Unit 9 - 'Financial Services' - as part of a Vocational A' level in Business Studies.

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Andrew Braganca Unit 14

Financial Services

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This report has been produced as evidence for Unit 9 – ‘Financial Services’ – as part of a Vocational A’ level in Business Studies.

To: Peter

From: Andrew Braganca

Subject: Unit 14 Financial services

Date:

Synopsis: This report breaks down and examines the financial services needed; I will be looking at three different customers types of financial needs.

1.0

I will look and analyse the financial needs of the following customers:

  • A- Jamie McPherson, first-time home buyer
  • B- Paul and Anna Day, a couple with children
  • C- TBI engineering, a business customer

2.0

Case study A

I will now look at the personal customers, the first customer I will look at Jamie McPherson the financial need are the following:

  • Mortgage
  • Insurance
  • Bank account
  • Credit card
  • Shares
  • Saving
  • Pension

I will now look at the following mortgages available.  

2.1

There are two main types of mortgage - interest only and repayment - and there are advantages and disadvantages in each one. It is advisable to research the subject carefully and seek appropriate financial advice before deciding which policy you prefer. A mortgage is a long-term commitment - often 25 years or more - so get the right mortgage to suit you. It can save thousands. 

Interest-only mortgages allow you pay the interest due to your mortgage lender every month. You also invest separately in a policy that is designed to pay off the mortgage as it matures, an ISA, pension or endowment.

As with any investment, there is some investment risk in that the final payout could be lower than expected. With repayment mortgages, there is no such risk. Here you pay off the interest and the capital over the life of the mortgage - it guarantees that you will have paid off the mortgage by the end of its term. However, they require you to pay more on a monthly basis than interest-only.

Capital repayment loans require payments to the lender, which consist of a combination of Interest and capital repayment. In the early years the interest element forms the major component of the payments and as a result the borrowing will reduce very slowly during the first third of the mortgage term. The repayment of the amount borrowed then accelerates and the amount outstanding falls rapidly during the last third of the term of the loan. Providing that payments have been amended in line with the interest rate being charged, the loan should be repaid by its expiry date.

Advantages of a capital repayment mortgage

Disadvantages of a capital repayment mortgage

Interest only loans require payments, which cover the interest but make no reduction to the amount borrowed. The lender will require the borrowing to be repaid in a lump sum at the expiry date of the loan. It is usual for an investment plan to be put in place to provide for the repayment of the loan on the due date. Capital repayment is usually enabled by regular investment over the required number of years into one or more of the following plans: Individual Savings Account, Unit Trusts, Investment Trusts, Endowment Policies and the Tax Free cash from personal pension plans.

Disadvantages of an Interest only mortgage

Advantages of an Interest only mortgage

+ Your monthly outlay is lower

Interest rates 

Once I have decided on interest-only or repayment, the second consideration is the type of mortgage product. Here the choice offers fixed, variable or capped interest rate.

With fixed rate, the amount you pay per month is fixed over a period of time - this could be one year or more. During this time, no matter what happens to interest rates, your repayments stay the same.

A variable rate mortgage can go up or down depending on what happens to the Bank of England base rate in the meantime.

Flexible mortgages 

Other types of policy that are growing in popularity are flexible mortgages and current account mortgages. With a flexible mortgage, you can make extra payments to your mortgage at any time without incurring any penalty. This means that you could pay your mortgage off far earlier than you had originally planned with a traditional mortgage.

Current account mortgages combine a mortgage and a current account. By paying in a salary the capital is instantly reduced and so is the interest. While your salary may only be in there for a day or two, it is working to pay off your mortgage and helps to reduce the length of the mortgage.

Mortgage Deals Explained


Variable Rate

Your monthly payments to the lender are variable, and depend on the interest rate at the time. Therefore, as interest rates change, so do your payments.

Discounted Rate
this is a variable rate, with a discount applied for a period of time, for example, a 1% discount off the standard variable rate for two years.

Cash back
This is a variable rate, but when the money is lent to you, the lender will also pay you a cash bonus, for example, 3% to 5% of the amount borrowed.

Fixed Rate
The lender will fix the interest rate for a set period of time - usually between one and five years. After the fixed period ends, your payments will revert to whatever the variable rate is at the time.

Capped Rate
This is a variable rate with a specified maximum interest rate that your payments cannot exceed, for a set period of time usually one to five years. You know at the outset what your maximum monthly payments will be (the capped rate). However, if the variable interest rate falls below the capped rate, your mortgage payments will go down. At the end of the capped rate period, your payments will revert to whatever the variable rate is at the time.

 Recommendation for mortgage

I would recommend repayment mortgage to be a repayment mortgage I would recommend a flexible mortgage so it give Jamie McPherson pay off his mortgage as early as possible, so he able to overpay when it suits him. I have look at the provider of mortgages and I have decided to choose a Flexible Current Account Mortgage with company Britannic they have a flexible mortgage with the option to combine a current account. Interest is calculated daily and salary can be paid in directly to the Current Account. When looking in the Sunday telegraph best fixed rate at 3.39% for 2 years and a fee of £295.

 I have also recommended a repayment mortgage because I feel in the current financial there is too much to risk involved. Many people who have invested in ISA’S and pension linked to the stock market have lost considerable amount of money due to the recent collapse of the stock market. Because this is such Jamie’s biggest investment and because there is a higher element of risk with them.

What is the meaning of APR?

The APR is the figure which takes into account of interest that is paid and other fees (including arrangement fees for setting up loans e.g. mortgages). An APR also takes into consideration when and how often interest charge must be paid. I will be looking a various rates of APR (interest rates) Jamie would be paying when he takes out a mortgage. There are a range of choices from which Jamie can look at, they include:

  1. Fixed rates: The amount you pay per month is fixed over period of time over one year or more. During this time no matter what happens the interest rates stay the same.
  2. Variable rates: These rates could go both up or down depending on what happened to the Bank of England.
  3. Capped deals: This mean that interest can’t go up, but it can go down depending upon if the Bank of England’s interest rate drop.

My final Recommendation on Jamie mortgage and provider

I shall evaluate the type’s mortgage for Jamie they are:

  1. Jamie should have a repayment Mortgage

Jamie should have flexible Mortgage

  1. He should have a repayment mortgage there is no guarantee the mortgage will be fully paid by the end of the mortgage.
  2. Investments made in the stock market carry a high level risk. Shares in the stock market can both increase or decrease, and the investor can liable for a big loss in the value of there investments, shares cannot be reliable to pay of the mortgage.
  3. If the capital during the period of the mortgage cannot be acquired, then this would mean that the Bank or mortgage provider would technically own the property. The consequence of this is that the person paying the mortgage would have to extend more interest. So the mortgage could last more than 25 year  

The latest rates for life insurance has gone up, Tesco now offer £9.20 a month. Source: FIGURES COMPILED ON: 31 March 2003 life insurance money facts

The insurance are not needed below the following:

  • Car insurance
  • Personal accident plan
  • Hospital accident plan
  • Travel insurance
  • Business insurance
  • Life insurance

Bank accounts

The number of different types of savings accounts available can be bewildering. They range from monthly savings plans through to lump sum investments. It's important of course to make sure that what you put your money into is exactly what you need.

Standard savings accounts 

Most banks and building societies offer a standard savings account. Usually these require a minimum amount to be put away each month. Withdrawal conditions vary for each account but savers may find that they are offered limited access without penalty or a bonus if they refrain from making withdrawals. Savings accounts are also offered by National Savings and increasingly by supermarkets and retailers. Interest is typically between 3% and 5% per year (AER).

Current account 

These can be a useful way of putting money to one side but leaving it available in an emergency without being charged a fee. Some of these accounts also offer full banking facilities such as cheque books, cheque guarantee and credit cards. But in return for that flexibility savers can expect to get a lower rate on interest on their money. In late 2002, instant access accounts offered between 2% and 4% AER - but all these savings account rates track the Bank of England base rate closely.

Basic accounts 

These accounts allow savers to withdraw money after giving a set period of notice of their intention to do so. The required period varies from account to account but is typically between 30 and 120 days. Notice accounts will usually offer interest at 2% to 4.5% AER.

I would recommend a current account mortgages because they offer debit card and cheque book. I would recommend with the same company Britannic you have your mortgage with, they give you excellent rates, up to 4.75% gross/AER you can link your mortgage with a Current Account to get further savings, and instant access to your savings.

Credit card

Money fact

Recommendation for credit card

I would recommend a credit card with Halifax they offer the lowest standard 9.90 APR % as you can see I have listen five account that offer credit card. The risks with credit cards the higher the APR% the more you pay back that why it’s important to compare the rates on credit cards and chose the one that offer the lowest APR%. There are alternatives that Jamie McPherson could do such as take out a credit card that offers 0% interest for 6 months and cancel the card just before it reaches 6 months.

Pensions

Pension is basically a long-term savings account, which you can access after your retirement. Every year you delay taking out a pension, you could be substantially reducing your security and standard of living in the future, because pension investments grow over time. The average worker works 35 years and need to save enough towards for their retirement.

How much to save

At today’s rates if you had £100,000 in your pension fund this would buy you an annual income of about £6,000 if you brought an annuity when you where 55. Jamie McPherson may likely to receive fewer pensions if he retires at 55, because if he retires at 60 he has provided a longer service to his job as may have a higher pension.

At what age should you retire?

Most company pension schemes set at the age of 60 as a normal retirement. The longer you leave your money in schemes, the bigger your pension will be. You can draw a pension from one source and still carry on working somewhere else.

Before committing to a pension, Jamie McPherson must think carefully about the lifestyle he want when you retire and calculate how much you can afford to contribute towards your pension fund each month. You'll also need to take into account when you want to retire and whether you have income coming from other sources.

Occupational pension

Occupational pension schemes are set up by employers to provide pensions and life assurance benefits for employees, for example, a tax-free lump sum payable if they die before retirement to their widow/widower or other dependant(s). From 6 April 2001, some employers may set up stakeholder pension schemes. Such schemes will be subject to the same conditions as other occupational schemes, as well as the general conditions for stakeholder personal pension schemes (see below).

There are two main types of occupational pension scheme:-

  • final salary, in which the pension is a proportion of the your salary at or near retirement date and is linked to the number of years you have worked for the particular employer; or
  • Money purchase, in which the pension is based on the total value on retirement of the money paid into the scheme and on how the investment has performed.

Final salary schemes
These schemes are sometimes called 'defined benefit' schemes.

The level of pension is based on your earnings. This is a huge advantage, because your earnings are likely to keep up with inflation.

The amount you receive will usually depend on the number of years you have been in the scheme. This will be applied to a fraction, such as 1/60th or 1/80th.

For example, if you have been in a scheme for 20 years, your pension will be based on 20/60 times the final salary.

Some schemes do not base it on the final salary, but the best year's earnings within, say, 3 or 5 years of your retirement.

If you work in the public sector, like the NHS, you may receive a tax-free lump sum automatically in addition to your pension at retirement. However, with other schemes you may be required to give up or 'commute' part of your pension income if you want to take some cash. This is sometimes called the 'commutable lump sum'.

All pension schemes are required to produce information about how they work and what your benefits are. Your personnel department or pension’s administrator will be able to tell you how much you can expect at retirement.

Join now!

Money purchase schemes
These are sometimes called a 'defined contribution scheme'.

Effectively, you put your money into a form of investment, where it grows, and you eventually draw the proceeds by way of a pension.

The great advantage of this type of scheme is its simplicity. It is also easy to transfer it. But it is more difficult to plan for retirement because there is no guarantee that the pension will keep up with inflation.


Many schemes set a fixed amount of how much you contribute. The average is just under 4%, but some employers will give you a choice as to how ...

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