Financial Services Products and Markets: Features, Tax Wrappers and Suitability
Domain 4 tests the main retail products and markets: savings, investments, pensions, protection and mortgages. You must know product features, tax wrappers, risk and liquidity, and how markets operate so you can match products to client needs.
Savings and investments
Cash deposits and National Savings and Investments products offer capital certainty but inflation risk. ISAs provide tax-efficient wrappers: cash ISAs, stocks and shares ISAs and Lifetime ISAs. Collective investments include unit trusts and OEICs, which are open-ended, and investment trusts, which are closed-ended companies. Equities, gilts and corporate bonds have different risk and return profiles. Diversification reduces specific risk, and charges reduce net returns.
Pensions and protection
The State Pension provides a foundation. Workplace pensions use auto-enrolment, with defined contribution and defined benefit schemes. Defined contribution pots depend on contributions and investment returns; annuities convert capital into income, while drawdown keeps the fund invested. Tax relief applies to registered pension contributions, subject to limits. Protection products include life assurance, critical illness cover for specified conditions, income protection and private medical insurance.
Markets
In the primary market, new securities are issued to raise capital. The secondary market trades existing securities, providing liquidity and price discovery. Money markets handle short-term instruments; capital markets handle longer-term debt and equity. Regulated exchanges and OTC markets operate under conduct and transparency rules.
Worked example
A 35-year-old basic-rate taxpayer has an emergency fund and wants long-term growth over 15 years. Reasoning: a stocks and shares ISA can provide tax-efficient growth and is suitable for a long horizon, using a diversified fund. A cash ISA is better for short-term needs but may lose real value after inflation. An investment trust is closed-ended and may trade at a discount or premium; an OEIC is open-ended and priced at net asset value. Charges, risk tolerance and access needs must be checked.
Traps that cost marks
- Confusing investment trusts with unit trusts or OEICs.
- Assuming critical illness cover pays for every illness.
- Ignoring the effect of charges and inflation.
- Treating all pensions as identical.