1.

1 Assess the attitude of individuals to risk when evaluating the suitability of investments Investment risk: Probability that an actual return on an investment will be lower than the investor's expectations. All investments have some level of risk associated it due to the unpredictability of the market's direction.( investorwords.com,2014) Return A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.( investopedia.com, 2014) Risk- return trade off : The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.( investopedia.com,2014) Income and expense High income Prefer lower risk Low income Prefer lower risk

High expense

Low expense

Prefer higher risk

Prefer lower risk

Base on scenario: Trevor has high income from index-linked teachers pension and State pension, this amounts to 57,000 p.a(gross) and low expense. Therefore, he can accept higher risk because he has enough money to recover the loss of high risk in investment. Mike and Lucy have stable job and high income ( 750,000) and low dividends expense (40,000). Therefore, they can suffer high risk because they can overcome and have enough money to recover the loss of high risk in investment. Financial position

Investors financial has strong effect on attitude to risk. Trevor has good financial position, he will accept the higher risk than bad financial position. For example, Trevor will accept higher risk when he has a big amount of money from pension of State and teacher although he is 67 age and he retired. He has ability to suffer the loss from inflation and recession of economic. Mike and Lucy have good financial position because they have stable job and a greate amount of money from Mikes late father ( 750,000) but low dividends expense and they are still young and they have many opportunities to invest and get more profit. Demographic Demographic Name Age Gender Occupation Income (1) Marital status Education Self- employment status Family size Trevor 67 Male Retired 57,000 for pension Married Teacher No From 1 to 4 people From 1 to 4 people Stable jobs 750,000 Married Philosophy Mike and Lucy 40

Depend on the age, gender, occupation, income, family size. Trevor, Mike and Lucy may have different risk attitude. Besides that, demographic have very strong effect on the investment goal of investor. There are three type of investment goal included: Short- term investment goal: invest in order to earn money in a short- term goal such as a car, holiday, a house. May be within one year and should be liquidity Long- term investment goal: invest to achieve long-term goal such as for retirement of childs study. Long- term goal should be more than 5 years

Medium- term investment goal: this is a mixed of long- term and short- term goal. Medium term goal usually within one to five years. Maybe saving money to set up own business In my opinion, Trevor should choose medium-term investment goal because he retired and got marriage, he can accept high or medium risk to get high or average profit. Mike and Lucy should choose short-term investment goal because they married and have a baby, they can accept high risk to get higher return, they need money to pay tuition for their child and other necessary expenses. Investor

Risk-indifferent: investor does not require a change in return as reward for higher risk. Risk-averse: investor requires greater return in when they get higher risk. They only accept invest in a high risk portfolio when the return is attractive. This is the most popular kind of investor Risk-seeking: investor will accept a lower return for higher risk. This kind of investor is very rarely. It usually is gambler. Trevor, Mike and Lucy belong to risk-averse, he can require bigger return when he get higher risk.

Individual investor life cycle: Accumulation phase: 25- 38 year old

Lucy has much life time career . She need to complete her short-term goals such as paying for loans (e.g. educational loans), purchasing a car or a home. Therefore, she has ability to recover the losses in their investments. She can accept high-risk investments. Consolidation phase: 38- 60 year old

Mike has a smaller career, he has some more important short-term goals such as childrens school and college fee and long-term goal such as retirement plans. He would prefer to make moderately risky investments and simultaneously he would not want to take very high risks. Spending/ gifting phase: over 60 year old

Trevor entered his retirement period. He doesnt have any career/working life left to earn money to offset the cost by investing in risky investments. As a result, He will invest in less risky investments. Finally, company should use questionnaire to identify the demographic, risk tolerance of investor and financial position. Questionnaire is an useful tool to recognize the important information of customer such as: gender, age, education, etc. Next useful tools to evaluate the attitude of customer to risk are the relationship between Risk Tolerance and Demographics. The relationship between demographic and risk tolerance Characteristic Gender Age Marital status Occupation Self- employment Income Race Education Low risk tolerance Female Older Married Clerical workers and labor Non- self employment Low Non- whites Less High risk tolerance Male Younger Single Professional Seft- employment High Whites More

1.3 Analyze the suitability of these products for different people Group 1: This group are young, have long life to earn money and recover the losses from high risk investment. They are single so they do not have responsibility with wife, child so they have high risk tolerance. This group of investor suitable with: Investment bonds Stock market Premium bonds Unit trusts and OEICs Group 2: This group is middle-age and they still have but not much life time career to recover losses from high risk investment. Moreover, they have responsibility with their family. So they should choose low risk investment product included:

National saving Saving account Government bond Group 3:

This group has been married but they are still young and have own business in retailer industry. They have to take care about their family and the future cost such as: baby born, education fees for child ,buy a house, car. Therefore, they prefer high risk to achieve higher return. They have own business which can recover the losses if inflation or recession of economic happen. There are some product suitable with this group: ISA tax- free accounts Stock market Unit trusts and OEICs Investment bonds Premium bonds

In my opinion, Mike and Lucy belong to Group 3 because they have been married but they still young and have equities bequeathed to them by his late father (750,000). They have to take care about their family and the future cost such as: baby born, education for child, buy a house etc. Therefore, they prefer high risk to can achieve high return. They have big amount of money which can recover the lost if their investment lose. There are some product suitable with this group: - ISA tax- free accounts - Stock market - Unit trusts and OEICs - Investment bonds - Premium bonds

Trevor belongs to Group 2 because he is 67 years old, he is still have but not much life time career to recover losses from high risk investment. Moreover, he has responsibility with their family such as wife/husband, child. So they tend to chose low risk investment product included: National saving Saving account Government bond

2.1 Calculated income tax payable for various individuals and couples, including income from dividends and interest.

Edmund Total income 40,000 10,000 15,000 65,000 6,475 58,525 Other income 40,000 Saving income 10,000 40,000 6,475 33,525 10,000 10,000 15,000 15,000 15,000 Dividend Income 63,889

Gross earnings Bank interest (8,000 x 100/80) Dividends receive (13,500 x 100/90) Total gross income Less: P.A Taxable income Income tax Basic rate band 37,400 x 20% Higher rate band (43,525 - 37,400) x 40% = 6,125 x 40% Saving income: 10,000 x 40% Dividend (15,000 x 32.5%) Tax liability Less tax paid Less tax payable

7,480 2,450 4,000 4,875 18,805 2,000 1,500

Tax payable Xena Non-savings income 20,000 20,000 6,475 13,525

15,305

Savings income 12,500 12,500 12,500

Total 20,000 12,500 32,500 6,475 26,025

Gross earnings Bank interest (10,000 x 100/80) Total income Less: P.A Taxable income

Income tax Basic rate band 13,525 x 20% 12,500 x 20% Tax liability Less: Tax tax deducted at source on bank interest Tax payable

2,705 2,500 5,205 2,500 2,705

Magaret did not subject income tax because her investment in NSA is exempt from tax.
2.2 Capital gains tax

(2) Yatch has CGT is zero because Yatch is a wasting chattels, here the yacht, they are not subjected CGT. (1) ER: Conditions asset must have held for at least 1 year, it must be a personal company, he/she must be An employee/ officer, must own at least 5% of shares in the company If he is eligible for ER, the gain is taxed at 10% Margaret Gains (650,000 550,000 = 100,000) CGT = 100,000 x 10% If he is not eligible for ER CGT = 28% x 100,000 Tax saving (28,000 10,000) Gains 100,000 10,000 28,000 18,000 CGT

2.3 Evaluate tax-free investments and their importance to different tax payers

Customers invest their money which they may not use in period time into portfolio with the willing that they can earn more money. But not all of them get more money. There are three situations when investment: gain, loss,

breakeven. If investors gain money they have to pay tax for the government. If you invest in tax- free investment product you can keep all of that money. Tax-free product not required investor pay tax for the money they earn. So you can earn more money because you do not have to pay tax.
Premium Bonds Disadvantages Investment is subject to decrease in value due to inflation Chances of winning larger cash prizes are slim Savings in interest-earning accounts may earn more than those in Premium Bonds No regular interest earned No guarantee of win Money is not instantly accessible Minimum and maximum investment required

Advantages Guaranteed 100% secure: total capital invested is returnable Can win valuable cash prizes Any winnings are tax-free Automatically eligible for monthly prize draw without registering / buying ticket Partial withdrawals from initial investment allowed No regular investment required No fixed investment term

- Premium Bonds of NS&I: Monthly draw, Pay no tax on your winnings, Easy access, Start with just 100; interest rate: 1.5% to 1.3% low income => pay no tax high income => high tax => how to reduce tax payable
National Savings Certificates Disadvantages Trusts cannot buy NSC. There is lock in period of 5 years for NSC VIII issue and 10 years for NSC IX issue. If rate of interest increases in next year, here it will be fixed on same rate of interest at which it was purchased, however it is more an advantage as the rates are in fact going to decrease in coming years. Thus if NSC is purchased every month for 5 years and is reinvested on maturity one can get a handsome amount of monthly pension on retirement.

Advantages NSC is short term investment and best for tax saving especially for Government employees, salaried people and businessmen. One can take loan by keeping NSC as collateral security. There is no maximum limit of investment, though tax benefit under 80cc is upto 1 lakh. There is no tax deduction at source. It can be purchased on behalf of a minor too. It can be purchased at any post office and can be transferred to any post office to collect maturity amount. Rate of interest is more than fixed deposits and once taken at any rate will not change in subsequent years. Interest is compounded 6 monthly and the interest is reinvested and provide tax rebate under 80cc.

- National Saving Certificates (NSC): Children's Bonds: Invest tax-free, Interest rate 2.50%; Index-linked Savings Certificates: tax-free returns, Interest rate 1.35%; Fixed Interest Savings Certificates: tax-free, interest rate 3.6%
ISAs Disadvantages Is the tax-free advantage so much of an advantage - If a Cash ISA account has 500 then the savings on the interest would amount to a few pounds at most. Not so much to get excited about Transferring can be messy - Sometimes transferring from one ISA provider to another (at different bank or building societies) can be complicated and time-consuming. Plenty of horror stories over the last few years where transfers have taken months

Advantages Tax-free - saves 20% for basic rate taxpayers and 40% for those who pay tax at the higher rate Simple to open and run - See Secret 3 - Buy simple and flexible you can't read the future - which is one of this site's 10 Secrets to Good Personal Finance Easy access to your money unless held in Notice Accounts No need to tell the taxman about income and capital gains from ISA savings and investments Guaranteed not to lose money with Cash, unlike shares where they can easily fall in value Available to anyone aged 16+, important as it encourage saving from an early age New 5,760 limit

In case those investors gain money they have to pay tax for the government.

Therefore, you have to pay tax for money you gain. However, if you invest in tax- free investment product you can keep all of that money. Tax-free product not required investor pay tax for the among of money they earn. As a result, you can earn more money because you do not have to pay tax. For example: a person invests in ISA and he earn 1,000. Assume that his taxable gain is 1,000. So he has to pay tax at 18% equal to 180. We can see that after pay tax he only keep 1000- 180 = 820. However, if he invests in tax free ISA. He earns 1,000 from his investment. He can keep all of that 1,000