2 - Serving the retail consumer

Question 1

Disposable income

Answer 1

• the difference between income and expenditure
• likely to be very approximate
• an advisor should know whether a client is living beyond their mans or whether there is surplus income

Question 2

Unstructured loans

Answer 2

e. g. mortgages and loans on commercial property
- able to increase loan repayments at anytime thus reducing the interest
- overdrafts and some personal loans fall into this category
- interest rate on the loans varies in win its the risk of default
- - 1% above base rate = good
- - 4% above base rate implies lender feels there is a higher the average risk of default

Question 3

Structured loans

Answer 3

e. g. smaller purchases such as buying a sofa
- has a fixed rate of interest payable over the term of the loan fixed repayment structure
- where the base rate changes the payment amounts
- falls at the higher risk end of the market and with no collateral to back up the loan, costs can be higher than the unstructured loan

Question 4

Occupational pension schemes

Answer 4

set up by an employer and can provide benefits

- these benefits can be a defined benefit or contribution basis

Question 5

Personal pension schemes

Answer 5

• set up between the policyholder on the scheme provider

- the policyholder decides how much they want to save

Question 6

Main types of deposit based savings accounts

Answer 6

• savings
• cash ISA (individuals savings account)
• fixed notice
• fixed rate bond (term accounts)
• high interest regular savings

Question 7

Pooled investment

Answer 7

where investors’ money is pooled together into a fund which is then invested in one or more asset classes by a fund manager

e. g.
- open ended investment funds
- life+pension funds
- endowments
- investment trusts

Question 8

What are the benefits of pooled investments?

Answer 8

+ professional expertise - an expert picks investments for the fund and watches daily
+ spreading risk - even with a small amount of money they can spread across a range of funds
+ reduced dealing costs - effectively buying in bulk; direct investments aren’t cost effective for diverse portfolios
+ less administration - fund manager manages the buying/selling/collecting dividends and income
+ choice - wide range of funds, choose one or several that suit you individually

Question 9

Endowments

Answer 9

• regular premium policies which combine investments with life cover
  
  • • some of the premium is used to buy life cover and the remainder of the premium is invested; amount of life cover will depend on: premium paid, age, length of policy

Question 10

Investment trust

Answer 10

• a listed company with a set number of shares
• it is allowed to borrow money to invest (this is called gearing)
• it is closed-ended

Question 11

Closed-ended trust

Answer 11

• a set number of shares available & this will remain the same no matter how many potential investors there are
• cannot create/cancel units (e.g. unit trusts/OEICs) depending upon the amount being invested so the demand for their shares will have direct impact on the price

Question 12

Derivatives

Answer 12

NOT an investment in its own right but one that derives its value from the price of an investment to which it is linked

A right or an obligation to buy or sell another type of asst at a specific price to someone else at a specific date

Question 13

IHT

Answer 13

Inheritance tax

• nil rate band = £325,000
• residence nil rate band = £175,000

Taxed at 40% after this up to £2m then taxed @50%

Question 14

Residence NIL rate band

Answer 14

• up to £175,000
• available when a parent leaves their main residence to a direct descendant
• also available to those who downsized or ceased to own their home after 7th July 2015

Question 15

Main approaches to tax planning

Answer 15

1. make the maximum use of tax allowance
2. choose the most suitable investments according to the investors own tax position
3. choose investments that provide tax free returns
4. choose investments that qualify for tax relief on the initial amounts invested

Question 16

What is the main difference between the underwriting considerations for income protection policy (IPs) vs life assurance policies (LAs)?

Answer 16

life assurance - based on the study of MORTALITY (the length of time someone is likely to live)

income protection - based on MORBIDITY (the rate of incidence/disease/medical problems)

Question 17

Annual pension contribution allowance

Answer 17

• limit for registered pensions = £40,000 per annum in the current tax year, except for those with adjusted annual allowance of over £240,000
  
  • • for every £2 of adjusted income over £240,000 the allowance is reduced by £1 down to a minimum of £4,000

Question 18

What is term assurance?

Answer 18

the paying of a lump sum on the death of the life assured

2 kinds:

• level term assurance
• decreasing term assurance

Question 19

Level term vs decreasing term assurance

Answer 19

Level term - level sum assured in return for a level premium throughout the term of the contract

decreasing term - the amount of the loan is constantly being reduced over the term by the borrow so the sum assured under the policy holder also reduces
- premium level remains the same throughout the term however premium n decreased term will be less than long term (with the same initial sum) as the amount of cover reduces over time

Question 20

New state pension vs basic state pension

Answer 20

new state pension: retire on or after 6 April 2016

• £175.20 per week
• paid or created with 35 yers qualifying NICs
• not been contracted out (if so deductions are made)
• a minimum of 10 qualifying years is required in order to receive any state pension

basic state pension: before 6 April 2016

• £134.25 per week
• same guidelines apply

Question 21

reviewable critical illness cover

Answer 21

premiums cheaper than those under a guaranteed contract

medical conditions of the policy holder are not reviewed just medical advancements considered

Question 22

how often is the state pension age reviewed?

Answer 22

every 5 years

Question 23

monetary gift - tax rules

Answer 23

• must be irreversible and can’t maintain any benefit
• have to be alive for 7 years after giving the gift (IHT could be applied if not)
• no tax payable at the outset

Question 24

definition of a debt management plan

Answer 24

an advisor negotiating with a clients creditors to consolidate the debt into one affordable payment which is distributed to creditors via the advisor
- these advisors must be licensed under the Consumer Credit Act