2 - Serving the Retail Customer Flashcards
How can expenditure be broken down
- Essential spending
- Everyday spending
- Non-essential spending
What is DMP
Debt management plan - to manage debt for individuals. Consolodiate all debts and place it into one monthly affordable payment with a fee
What is the transfer of property in exchange for a mortgage called
The assignment
Two main types of mortgage
- Capital and Interest Repayment
- Interest-only
Different mortgage types
- Cap and Collar
- Capped
- Discount
- Euro
- Equity-linked (SAMs)
- Fixed interest
- Flexible
- Green
- Offset
- Tracker
What are the 2 equity release schemes
- Lifetime Mortgage
- Home reversion plan
What is a lifetime mortgage
Roll up mortgage -> interest added to loan -> client gets a lump sum of money or regular income. Contract interest + loan paid when client dies.
Fixed repayment lifetime mortgage
Interest-only mortgage
Home income plan
What is a no negative equity guarantee?
guards against excess debt from lifetime mortgages. Lender promises that the client or beneficiaries will never have to pay back more than the value of the home even if debt has grown larger than this.
What is drawdown facility?
Drawdown facility -> taking out occasional small amounts than one big loan (cheaper as clients only pay interest on money they need).
Home reversion plan?
The client sells all or part of their home for a cash lump sum, a regular income or both. The home or part of its sold then belongs to home reversion provider. The client is allowed to carry on living in it under lease until they die or move into a long-term care facility
What are home purchase plans
Help to purchase home without paying interest
What are the two types of home purchase plans?
Ijara -
monthly payments made towards buying the property are held by firm and used to buy home at end of agreement
Diminishing Musharka
Payments buy an extra slice of firm share until entire share is bought
What is Sales and rent bank schemes
Sale and rent back (AKA flash sales) schemes are when a firm quickly purchases the property and rents it back to the customer for a short fixed period of time.
Risks of sale and rent back schemes?
- Could be evicted
- Property could be repossessed
- May have to leave when term ends
Two types of loan
Structured
Unstructured
Unstructured loans definition
In unstructured loans like mortgages and commercial property loans these can be varied. Usually they are secured and so have low rates.
You can repay the loan at any time without penalty
Structured loans definition
Structured loans and usually smaller for things like sofas or cars, have fixed repayment schedules and high interest rates.
penalty for repaying the loan early
Financial protection factors
- Age
- Dependents
- Income
- Financial Liabilities
- Employment Status
- Existing cover
What is the amount of money needed to maintain standard of living when retired
2/3 of final year employment income
What are 3 main types of life assurance contracts
- Term Assurance
- Enowment Policies
- Whole of Life policies
What are three stages of financial life cycle
- Vulnerable years
- Relaxed years
- Anxious years
Term Assurance
Nature
Life cover/investments split
Illness cover?
Is only in place for a fixed period of time.
Pays a lump sum (or several lump sums to members of a family) on death.
Does not pay out on illness
No savings/investments element.
Usually the cheapest method.
Endowment Policy
Life cover/investment split
Illness cover?
Pay a lump sum on death but they are primarily savings vehicles.
Can also include critical illness cover.
Not a great way of providing life cover since most of the premium is directed towards the savings element.
Whole of Life Policy
Nature
Life cover/investment split
Offer a guaranteed level of cover for the lifetime of the assured.
Usually a small element of investment, although this can vary, primarily these are for life cover.
Non-profit Whole of Life Policy
The non-death whole of life policy guarantees to pay a fixed amount of life cover on the death of the life insured, whether this is 1 or 30 years later.
May accumulate a surrender value but likely to be low.
With Profit Whole of Life Policy
Guarantees a minimum level of life cover, but this amount increases each year by the addition of annual (or ‘reversionary’) bonuses (which may not be guaranteed).
Once added they boost the minimum level of cover.
Also there is likely to be an additional final bonus paid on death, especially if there has been a high level of reversionary bonuses.
What is a flexible Whole of Life Policy cover
“Unit-linked wol plans”
Allows you to choose between minimum and maximum level of cover. Can change this at any time within these limits.
Over the life the policy holder can choose to purchase units as premiums are paid. The policy grows in value as the number of units accumulates.
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Term Assurance**
Level
Diminishing
Family Income Benefity policy
Increasable
Convertible
Renewable
Level term assurance has a fixed payout throughout the life, whilst diminishing assurance pays a lower payout as time goes by to match the profile of a falling liability (eg mortgage). Both have fixed premiums throughout the life.
Family income benefit pays out a series of regular payments instead of a lump sum, a type of diminishing contract.
Increasable assurance allows the customer to increase cover with no additional health checks in the future.
Convertible can be converted into an endowment or whole of life policy with the same sum assured.
Renewable policies benefit from a low initial premium but guarantee you can continue to be covered. Premium will increase in the future, but no need for future health checks.
Income Protection (IP)
Once the insured has been out of work for at least the ‘deferred period’ benefits are paid, continuing until they die, return to work or the contract ends (usually retirement).
Benefits from an individual policy are exempt from tax.
What are the common deferred periods for income protection
4, 13, 26 and 52 weeks
Personal Accident and Sickness Insurance
Payouts - time
Other comparisons to income protection
Regular benefit, can also pay one-off lump sum if disememberment occurs.
The deferred period is likely to be very short (1 to 14 days) but benefits are only paid for one to two years.
There will be fewer health and occupation questions compared to income protection and fewer occupations are excluded.
Accident, sickness and unemployment (ASU) cover
Similar payouts to personal accident and sickness
Only pays for 1-2 years
Addition premium charge for unemployment
Sickness/Health Insurance
Critical Illness Cover
3 differences to income protection
- Lump sum not regular income
- Based on diagnosis of specific illnesses, not whether you are unable to work
- Can be provided by stand-alone policies or incorporated in whole life, term or endowment policies
Private Medical Insurance two types
Full Medical Underwriting requires questions about health of the insured. Based on the results the insurer decides the conditions of cover.
Moratorium basis doesn’t ask health questions but any health conditions suffered from in the last 5 years are automatically excluded.
Long term care Insurance two types
- Immediate care LTCI - bought when care is needed
- Pre-funded LTCI - Bought in advance, in case care is needed in future
PPI
Also known as
Usually only available in connection with a loan. Packaged to offer one or more of:
Accident benefit
Sickness benefit
Unemployment benefit
So known as ASU policies
Mortgage PPI
4 features
Must
* Provide ASU cover
* Payout after maximum of 60 days of work
* Provide cover of at least twelve months
* Pay out self-employed
Who is benefit Cap set by
DWP: Department for work and Pensions
What is the benefit cap for Couples/single parents with children?
Outside Greater London: £423.46 (per week)
Inside Greater London: £486.98 (per week)
What is the benefit cap for Single/no children
Outside Greater London: £283.71 (per week)
Inside Greater London: £326.29 (per week)
When does benefit cap not apply generally
If anyone in household qualifies for Working tax credit, gets Universal Credit
How is Universal Credit paid
Government includes standard allowance on claimants age and whether they make a single or joint claim.
Any extra amounts are called “elements” - dependent on circumstances e.g. children, disability
State Benefits
7 Benefits for Parents
Child Benefit - Universal, non-means-tested.
Child tax credit - Paid to families with children regardless whether parents work. Integrated within tax system and administered by HMRC. New claims can only be made by those who already receive working tax credit. It has been replaced by Universal Credit for other new claimants.
Child trust fund - Ended in 2011, voucher to invest on behalf of children.
Statutory adoption pay - 39 weeks of pay at min(standard rate, 90% earnings).
Statutory maternity pay - 6 weeks @ 90% earnings, 33 weeks @ min(standard rate, 90% earnings).
Statutory paternity pay - 1 or 2 consecutive weeks at min(standard rate, 90% earnings).
State Benefits
4 Benefits for Unemployed
- Income Support (Must apply for Universal Credit for new claims)
- Job seeker Allowance (eligibility depends on Class 1 NI contributions
- Statutory Redundancy Payments
- Working tax credit: Paid by HMRC to people on low incomes, can include a childcare element. If you’re over 25 you must work at least 30 hours per week.
State Benefits
Mortgage Interest Support
Amounts, waiting periods, limits
Get help paying mortgage interest if you’re receiving certain benefits.
If you get State pension credit it’s on £100k of your mortgage with no waiting period.
Otherwise it’s on £200k but 39 week waiting period.
State Benefits
6 sick and disabled benefits
Attendance allowance - Tax free for those over 65 years old who are disabled and need care.
Carer’s allowance - Taxable benefit to look after somebody disabled (don’t need to be related).
Personal Independence Payment (PIP) - Successor to DLA.
Disability living allowance (DLA) - Tax-free for disabled who have difficulty walking and so need care. Ending for those born after 1948 and over 16 years old.
Employment and Support Allowance (ESA) - Successor to incapacity benefit, paid to the ill or disabled but aims to get them into work.
Statutory Sick Pay - Standard weekly rate paid for up to 28 weeks if unable to work.
State Benefits
3 pensioner benefits
- New/basic state pension
- Pnesion credit
- Additional state pension
What is the annual allowance for pension contributions per year
£60,000
What did pension act 2014 say regarding ages
Raise to 66 by 2020 and 67 between 2026 and 2028
By how much is the annual pension contribution allowance reduced if you earn over £260,000
For every £2 over, the allowance is reduced by £1 to a minimum of £10,000
How have pensions provided retirement benefits (Two forms)
- Income
- Tax free pension commencement lump sum
Retirement
2 annuity types
Tax treatment
CPA (Compulsory Purchase Annuity) is bought from the proceeds of a pension. Income is taxed based on income paid at 20%/40%/45%.
PLA (Purchase Life Annuity) is purchased from other funds (usually get better rates) and income is separated into an income and capital element for tax purposes (capital is tax free).
What is a UPFLS
Uncrystalised fund pension lump sum (UFPLS)
Take 25% tax free cash
75% TAXED AS EARNED INCOME
What is the current maximum weekly state pension amount under the single tier state pension
£203.85 per week (2023/2024)
Old - £156.20
What are the conditions for receiving the maximum state pension amount for single tier
35 year NIC contributions and haven’t been contracted out at any time
What is the minimum years to work to receive any state pension
10
Additional state pensions (for thoser who retired before April 2016
- State Graduated pension - no inflation linked
- State earnings
- state second pension
3 types of private pension
3rd sub-type
Occupational pensions are set up by employers, DC or DB basis.
Personal pensions are funded by savings of the policyholder.
Group Personal Pension
Stakeholder pensions are personal pensions which meet some additional requirements.
What are: Career average revalued earnings (CARE) schemes
- Still a DB scheme, but promises a proportion of salary averaged over a worker’s whole career rather than final salary at retirement. Much less pension paid out
How are earnings usually calculated for DB pensions
1/60th of earnings per year or 1/80th
What is it called when clients can see share of funds in DC schemes?
Earmarked money purchase scheme
Providers of occupational pension arrangements
2 divisions
Further subdivisions
- Public sector schemes (i.e. civil servants)
- Private sector schemes
Private sector schemes can be either:
Self-administered schemes (managed by the company itself) or
Insured schemes (managed by a life assurance or pension provider)
What are employer minimum contribution to DC scheme
8%
What is the minimum earnings threshold above which employers have to pay into auto enrolment scheme
£6,240.00
Savings and Investment
Definition of short, medium, long term
Short term: 0-5 years - accessible emergency fund
Medium Term: 5- 15 years
Long term: 15+ years
3 Priorities of money
- Pay off debt
- Protect family
- Emergency fund
5 types of saving products
- Savings
- Cash ISA
- Notice
- Fixed-rate bond (term accounts)
- High interest regular savings
Help to buy ISA
Get a £50 bonus for every £200 invested, up to a max of £3k on £12k saved.
Available for purchases up to £450k in London, £250k outside.
Maximum initial deposit is £1k, maximum monthly saving is £200.
Tax on Savings
New policy on tax deducted at source
Tax payable on savings for different tax brackets
Since 6 Apr 16 banks, building societies and NS&I can pay interest gross.
Basic rate tax payers get £1k tax free interest, £500 for higher rate (after which 40% tax) and additional rate pay 45% on everything.
NS&I
NS&I provide government-backed savings and investment products. Money invested is totally secure.
They are deposit based
What are the 4 asset classes of investments
- Shares (equity)
- Bonds
- Property
- Cash
Deposit products what are they suitable for
Suitable for emergency funds and for short term use, for which they are the only asset that can reliably maintain nominal value of capital and achieve a return.
For medium term use the impact of inflation can erode their value.:
What are the layers of investments
- Underlying investment itself
- Pooled investments
- Tax wrapper
Advantage of platform trading
- Switch between holdings from different investment companies quickly and cost effectively
- Aggregate holdings from several different companies onto the same system.
What is sustainable funds?
These funds pay specific attention to environmental or social issues and collectively referred as sustainable. Sustainability issues as fund manager considers contribute to where a fund will and not invest.
What is ESG funds
Focus primarily on ESG risk and how business operate. ESG funds may invest in well-run but controversial and unsustainable companies.
What is the most volatile of the 4 asset classes
Equity/shares
What is investor sentiment
The perceived value of the shares often based on company performance or predictions on economic conditions
What is the main factor affecting share price
Investor sentiment
What is the short term use of equity investments
Speculation
What is the medium term use of equity investment
Can provide an income via dividends
What is the long term use of equity investments
Real growth and capital preservation
Permanent Interest Bearing Shares (PIBS)
Fixed interest investments issued by building societies.
Similar to corporate bonds except they have no expiry date and interest payments can be missed in exceptional circumstances (don’t need to be caught up later).
If the building society demutualises they convert into Permanent Subordinated Bonds (PSBs).
What are bonds also known as
Loan stock, fixed interest, debt securities
How long do pooled investments have to delay payments in property investment
6 months delay payments
Types of pooled investments
- OEICs
- Life and Pension
- Endowment
- Investment Trusts
What is an index linked fixed interest investment
Usually gilts, where both the capital and interest is linked to RPI
What is open-ended investments?
Open-ended investment funds (collective, pooled investment schemes) are run by fund management companies. unit trusts or as OEICs w
What is close-ended investments?
Investment trusts:
These are closed-ended investment companies.
They are allowed to borrow money to invest (geared).
Definition of Derivative
A derivitaive is typically a right or an obligation to buy or sell another type of asset – such as a share, a fixed interest investment or a commodity – at a specific price to someone else at a specific future date. Called options and futures.
What is a CFD
Contracts stating that one of two parties will pay the other the difference between the current value of an asset and value at later date. CFD is spread betting.
Different types of ISAS
- Cash
- Stocks and shares
- Innovative Finance
- Lifetime
Whats the age cap of lifetime isa
Less than 40
What is a tax wrapper
ISA and Pensions
ISA limit per annum
£20,000
JISA Limit
£9,000
What is the aim of passively managed funds
To track the market
What is the IHT limit at which nil rate band is reduced by £1 for every £2 over
£2million
What is the nil rate band for IHT (NRB)
£325,000
What is residence nil rate band (RNRB)
£175,000
How to reduce IHT
- WOL Policy
- Lifetime gilts
- Allowances
- Property in trust
What is PETs in IHT
Potentially exempt transfers - - no IHT if donor survives 7 years
What type of life insurance policy should be used to cover IHT liability
Whole of life policy written on a last survivor basis under trust
