2 : 11 - Financial Planning and Advice for Retirement

Question 1

What are the broad considerations when analysing retirement objectives?

(4)

Answer 1

availability and prioritisation of savings and investments;

attitude and expectations as regards retirement and working in later life;

assumptions and impact; conflict with other objectives;

timescales and risk

Question 2

Do pensions receive tax relief?

Answer 2

Pensions receive tax relief from the government. This means that part of the retirement income is being paid for by the state.

Question 3

Are pensions taxed?

Answer 3

Although individuals will be taxed on their pension income, the tax-free lump sum and the possibility that they will be paying a lower rate of tax in their retirement make this worthwhile for most people.

Question 4

What happens if an individual were to die before they retired?

Answer 4

The whole of their pension fund should be available tax-free for their spouse or dependants.

Question 5

How would an employer be exempt from NEST?

Answer 5

Due to having fewer than two employees (this figure was five under the stakeholder pension) or by having a WPS that meets at least all the minimum requirements.

Question 6

What are Equity Release (ER) Schemes?

Answer 6

They are a type of product that can provide funds in a tax-free cash sum from an individual’s home while allowing them to continue living there as long as it is the main residence.

Question 7

What are the 2 main types of Equity Release (ER) Schemes?

Answer 7

Lifetime mortgages and Home reversion plans

Question 8

How else can long-term care provision be funded?

Answer 8

Through other assets such as an additional property, business assets or investments without the need for specific long-term care products.

Question 9

What is the key issue in terms of retirement planning for those using non-pension investments?

Answer 9

Ensuring that the client understands the implications of using alternative assets to fund retirement, as these do not offer the same tax incentives as recognised retirement plans, and there are many different options in types of retirement savings vehicles that afford the choice for the client to tailor for their needs and have much greater control over the investments within such vehicles (eg, SIPPs).

Question 10

What happens when a client sells a business?

Answer 10

Firstly there are tax implications in the form of CGT: the level charged depends on whether the client has sold the whole actual business or has sold their shares in the business.

Question 11

On the basis that the size of business allows the client to qualify for Entrepreneurs’ Relief, the CGT could be XXX on all qualifying gains?

Answer 11

10%

Question 12

To qualify for Entrepreneurs’ Relief, the client must do what?

(3)

Answer 12

• dispose of part or all of their business as a sole trader or partner including the assets which have been owned
• own at least 5% of the shares and voting rights in what is called a ‘personal company’
• sell shares acquired since 5 April 2013 through an Enterprise Management Incentive (EMI) or sell assets that were lent to the business.

Question 13

How long must the business or shares must have been owned before disposal for Entrepreneurs’ Relief to apply?

Answer 13

For at least one year.

Question 14

What happens if the business assets rather than just shares are sold?

Answer 14

The CGT charge may be as much as 20%.

Question 15

What are the implications of using the sale of a business to fund retirement?

Answer 15

It is not as tax-efficient as a retirement plan, where contributions are grossed up during the saving period and some benefits are paid with a tax-free lump sum in the drawdown stage.

In some cases, the payment received for selling a business is made in the form of the purchasing company’s shares, and this brings its own challenges in terms of risk profile and converting these to a steady income stream.

Question 16

What are the main drawbacks in using the proceeds of an inheritance to fund either retirement or long-term care?

Answer 16

It is impossible to plan when the funds may be inherited and in most cases it is difficult to plan how much the proceeds may be.

Question 17

Why might in inheritance be less than expected?

Answer 17

The parent’s long-term care costs or equity release activities may have considerably depleted the assets that the client would have expected to receive.

It might be in an illiquid form - eg: property, etc

It might face IHT issues

Question 18

Why is due diligence so important?

Answer 18

Without this, the client could be better off never having taken financial planning advice and even better off without making provisions.

Products and services which inherently do not actually provide what the client requires at the time when it is required put the client in a worse financial position than if they had not paid the premiums/ contributions for the product in the first place.

Question 19

What is an ISA for?

Answer 19

They are a tax efficient way of saving for the future as they act as a tax wrapper.

Question 20

What is the tax relief on funds going into an ISA?

Answer 20

Although there are no tax relief funds going into an ISA, the growth is tax-free and income can be drawn tax-free

Question 21

What are the 5 types of ISA?

Answer 21

• cash ISA
• stocks and shares ISA
• innovative finance ISA
• Lifetime ISA (LISA).

• Junior ISA (LISA).

Question 22

What is the limit for contributions to ISAs?

Answer 22

£20,000 in total for the tax year 2018–19

Question 23

What are the two exceptions?

Answer 23

• the LISA is limited to £4,000 per tax year

* the JISA is limited to £4,260

Question 24

What flexibility does an ISA have?

Answer 24

If the provider allows a flexible ISA, money can be withdrawn but also put back in in the same tax year without the allowance being reduced

Question 25

What is the max contribution for a LISA and what is the benefit?

Answer 25

£4,000 a year.

For every £1 the individual contributes, the government will pay in £0.25. With the current allowance of £4,000, this equates to an additional £1,000 from the government.

Question 26

How do withdrawal charges on LISA’s work?

Answer 26

Unlike other ISAs there may be a withdrawal charge of 25% of the amount withdrawn from a LISA if the withdrawal occurs before the individual is 60.

HOWEVER - The withdrawal charge will not apply if it is used towards a first home or the holder is diagnosed as having less than 12 months to live.

Question 27

What is the key issue in using BTL to fund retirement?

Answer 27

The lack of liquidity, eg, not being able to sell a property asset quickly enough to release capital when needed.

Question 28

When can BTL be a good strategy for funding retirement?

Answer 28

With enough diversification of rental properties, it is possible to create a relatively inflation-proof steady income stream; however, the income will be subject to income tax and the investor will have to be very wealthy to afford a large property portfolio with little exposure to borrowings

Question 29

What is the additional tax on BTL properties?

Answer 29

3% additional tax charge on top of the normal stamp duty land tax (SDLT), and the withdrawal of tax relief on the interest paid on mortgages on second properties.

Question 30

What are examples of Alternative Investments?

Answer 30

Alternative investments include but are not limited to hedge funds, derivatives, property, antiques and wine.

Question 31

What are the principles of Islamic Finance?

Answer 31

Financial transactions should be based on fairness, profit and loss sharing and real transactions.

The concept of interest (riba), where money earns money, is prohibited.

Investing in businesses that provide goods or services considered haram or against Islamic principles is also forbidden, eg, activities related to alcohol, gambling and pork products to name a few

Question 32

What are National Savings & Investments (NS&I) products?

Answer 32

These are backed by the government and, as such, are regarded as risk-free investments.

NS&I is an executive agency of the Chancellor of the Exchequer, and is accountable to the Treasury. It provides deposit and savings products to the investing public, and in doing so raises funds on behalf of the UK government. An investor holding an NS&I product is in essence lending to the government.

Question 33

What are examples of NS&I Savings Accounts?

Answer 33

• Investment account

* Direct saver account

Question 34

What are examples of NS&I Income-Providing Products?

Answer 34

• Guaranteed income bonds

Question 35

What are examples of NS&I Growth Products?

Answer 35

• Index-linked savings certificates
• Fixed-interest savings certificates
• Guaranteed growth bonds
• 65+ bond

Question 36

What are examples of NS&I Tax-Free Products?

Answer 36

• Premium bonds
• Direct ISA – this account is NS&I’s version of the cash individual savings account
• Children’s bond

Question 37

What do Pension funds normally comprise?

Answer 37

A mixture of equities, fixed-interest securities, property investments and funds, and could include derivatives

Question 38

What is an example of a Medium risk pension?

Answer 38

The fund aims to provide capital growth over the long term. The mix of investments gives the possibility of high returns from company shares, but with the safety of spreading the risk over a wide range of assets, including bonds, property and cash.

Question 39

What is an example of a Low/Medium risk pension?

Answer 39

The fund aims to provide capital growth over the long term with a low level of risk. The mix of investments aims to achieve a higher level of return than cash alone by investing in fixed-interest securities.

Question 40

When selecting funds, it is important to consider what?

Answer 40

The risks associated with the fund, how the fund is correlated with other funds or investments the client holds, and whether the overall risk is in line with the client’s attitude to risk and capacity for loss.

It is also important to measure the expected return of the portfolio to ensure that it is aligned to the returns required by the client to meet their objectives.

Question 41

EG:

A fund that may be suitable when the investor has less than five years to retirement is a fund that aims to track the performance of the FTSE Actuaries UK Gilt Index for gilts with an outstanding term of over 15 years. The fund invests in UK government fixed-interest stocks whose performance matches the costs of buying a pension income

Answer 41

An alternative approach might be a fund that aims to provide a safe return in line with bank and building society interest rates, by investing in cash investments with first-class banks and major UK companies. The fund has very little risk attached to it. It aims to protect values from falling but this is not guaranteed.

Question 42

What 2 elements constitute the client’s risk profile?

Answer 42

• risk attitude

* capacity for loss

Question 43

How can the two areas create a mismatch?

Answer 43

EG:

A client with a large portfolio of assets might have a low risk attitude but have a high capacity for loss, as their wealth means they can afford to take on more risk than an investor with the same risk attitude but a smaller pot of assets. A contradiction may arise where a client prefers the security of cash, which may over the longer term become a high-risk strategy because of inflation.

Question 44

What is available to capture and reflect the client’s risk profile?

Answer 44

A variety of tools are available in the market. Most are question-based, and apply scores to individual answers, then calculate an overall risk score. This translates to a risk profile, for example cautious, balanced, adventurous, or on a scale from 1–10.

Question 45

What is Principle 9 of the Principles for Businesses/.

Answer 45

That an adviser must act in the best interests of their customer (the best interests rule).

“a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement”.

Question 46

Providing retirement planning advice firstly involves what?

Answer 46

Discussing with a client their financial needs at and after retirement, which will then allow their goals to be identified.

Question 47

What would a Fact Find include?

5

Answer 47

• when the client would like to retire
• how they would like to retire (eg: will they stop working or work part-time for a time period)
• any capital needs at retirement – eg: the repayment of a mortgage or a special holiday
• how much income they will need through the various stages of retirement (eg: for holidays in the early part)
• how much income a spouse/civil partner or dependants will require on their death.

Question 48

How does the planning process change near retirement?

Answer 48

In the years leading up to an individual retiring, it is of vital importance that they review their financial plan at more regular intervals. The expected retirement income should be measured against the required income to identify if the individual’s objectives will be met or if action should be taken through additional funding or deferring retirement.

Question 49

What was the conventional approach when an individual got closer to retirement?

Answer 49

A client’s attitude to risk was likely to decrease to ensure their retirement plan is not dramatically affected by short-term volatility in investment markets prior to purchasing an annuity on retirement.

Question 50

What is the more modern approach when an individual gets closer to retirement?

Answer 50

To consider all of their retirement income options, such as an annuity, FAD, UFPLS or phased retirement.

Question 51

What is the problem with post-retirement pension flexibilities?

Answer 51

Not all schemes offer the full range of pension flexibilities. Older contracts are likely to only offer an annuity as a means of providing a retirement income; therefore’ if an individual wishes to flexibly access their pension, they would need to transfer their pension to an alternative pension scheme offering flexible retirement options.