A funding vehicle is any entity operated as a hedge fund, pooled investment vehicle or a private equity fund. The pension funding vehicle operates by pooling funds from members involved in the investment (Turner 2004). However, investment managers can operate a given funding vehicle either as a single entity or merge it together with other related funding vehicles involved in a similar marketing process. In addition, the marketing process should be managed by the same investment manager or general partners to maintain uniform investment objectives and investment lockstep. Some fund vehicles may have high risks while others involve low risks. The high-risk fund vehicles include stocks while the lower risk ones include bonds (Megginson & Smart 2009).
The types of loans provided by funding vehicle
The pension fund vehicles provide various types of loans. The first one is personal loans given to the members. The personal loans are said to be unsecured because they cannot be secured by collaterals, such as real estate or vehicles (Quarter et al, 2003). Their approval relies majorly on the applicant’s credit report and date-to-income ratio. The second type of loans is vehicle loans. According to Green (2011), a member of a pension union can borrow from the funding organization to purchase a vehicle of their choice and repay later. The loans offered for vehicles are secured loans because the vehicles can act as collateral. The third type of loan offered is the education loans.
The education loans may be used for post-graduate degrees, college educations, certificates, and other educational establishments (Megginson & Smart 2009). The loans can also be used to repay your education debts if the debts were majorly used for education purposes. The payments for the education loans can be ten years maximum. Mortgage or home loan is the next type of loan that pension funds offer (Choudhry, Cross & Harrison 2003). The mortgage terms may range from three years to fifteen years. In addition, the rates can be fixed or variable. The fixed rate cannot be changed throughout the loan period, but the variable rate can either reduce or increase within the loan period. Those who already own homes can apply for the mortgage loan to renovate their homes while others can apply to build homes or real estates.
Description of typical company/individual that utilizes the fund
The individuals who mostly utilize finances from a funding vehicle are older and self-employed people. The older people invest in funding vehicles through trust agreements to get financial securities. There are benefits that people enjoy in the pension funding vehicle, as they get older. However, there are rules about the benefits determined by age and in some cases they change as people get to state pension age. At pension age, people can choose to start receiving their state pension; the state pension age for women is 60 while for men, it is 65. However, a pension credit is one of the benefits of a pension fund for older people. It is determined by the sum of money that the investor has been earning. The pension credit has savings credit and guarantee credit. If a person has been earning a small amount, he or she can benefit from the savings credit.
However, a person can claim the pension credit either when working or not. In addition, he or she does not require to have paid a national insurance contribution to get benefits. Another benefit of a pension vehicle is a winter fuel payment. It is “a tax-free payment” for people who reach specific age and it is paid every winter to assist older people with their fuel cost. Furthermore, a person can decide on what to do with the money apart from paying fuel cost. However, self-employed people are also among the individuals who mainly utilize funds from a funding vehicle. In Personal Pension Plans, self-employed people have a privilege of fair and straightforward investment position. An investor has freedom to choose the kind of investment he or she requires. There are options, such as “traditional with-profit policy” and “a unit-linked fund.” If an investor who is involved in paying premiums chooses the “traditional with-profit policy”, he or she is limited to the range of funds for investment. However, if the investor chooses the “unit-linked fund”, he or she is open to a wider variety of funds.
The source of funds
The main source of funds for pension schemes is the contributions from the members investing in a given funding vehicle. The members come together to contribute cash in terms of savings, and these savings may accumulate as time passes by (Bergoffen, 2005). The other sources of funds are the accumulating interests received after lending cash to members.
The rates
The borrowing rate depends on various factors, including the period that the finance is required, the nature of the assets to be acquired, the interest rate and the cost (Garman & Forgue 2012). When there is a large period for the loan to be repaid, the rates may be low but cumulative in the long run. Short period usually involves higher interest rates (Taylor, 2008). When the asset to be acquired is of high value, then the rates might be high so as to cover its price. The interest rate and the cost at the end of the loan period are also factors to consider (Bergoffen, 2005). There should not be a high-interest rate to make it double the price of the vehicle.
The typical terms
There are three main categorical terms of transactions. The first one is the fixed interest; fixed repayment rate. The second one is fixed interest reducing repayments and the last is floating interest rate (Taylor, 2008). In fixed interest; fixed repayments the interest rate are fixed right from borrowing period to the end of that period. In other circumstances, the repayment is usually set at a certain fixed amount, such as per month. In fixed interest; reducing repayment the interest rate is only fixed at the start of the loan but not fixed throughout the period. In this type of system, the repayment is done in the bank in two parts. First, the originally borrowed money is repaid, and then the interest is paid later. In Floating Interest rate, it is similar to fixed interest; reducing repayment in that the payment is also done in two parts (Garman & Forgue 2012). However, instead of the interest rate being fixed at the beginning of the loan, there is a variation throughout the loan period. The interests are usually above bank Base Rate and might be 2.5% or 3% above Base Rate.
The three companies that offer funds
- New Zealand Superannuation.
- Basic Retirement Pension of Mauritius.
- The “Supplemental Security Income” of the United States of America.
References
Bergoffen, G. (2005). Commercial bus and truck safety. Commercial motor vehicle driver safety belt usage. Washington, D.C: Transportation Research Board.
Choudhry, M., Cross, G. H., & Harrison, J. (2003). The gilt-edged market. Oxford: Butterworth- Heinemann.
Garman, E. T., & Forgue, R. E. (2012). Personal finance. Mason, Ohio: South-Western Cengage Learning.
Ghosh, S. R. (2006). East Asian finance: The road to robust markets. Washington, DC: World Bank.
Green, C.H. (2011). The SBA Loan Book: The Complete Guide to Getting Financial Help Through the Small Business Administration. Littlefield Street Avon, MA: Adams Media.
Megginson, W. L., & Smart, S. B. (2009). Introduction to corporate finance. Mason, Ohio: South-Western Cengage Learning.
Newnham, M. (2011). Funding your retirement: A survival guide. Richmond, Vic: Wrightbooks.
Quarter, J., Carmichael, I., & Canadian Centre for Policy Alternatives. (2003). Money on the line: Workers’ capital in Canada. Ottawa, Ont: Canadian Centre for Policy Alternatives.
Taylor, P. (2008). Book-keeping & accounting for the small business: How to keep the books and maintain financial control over your business. Oxford: How To Books.
Turner, C. (2004). International funds: A practical guide to their establishment and operation. Oxford: Elsevier.