3 : 2b - Collecting the Client's Information

Question 1

How do assets change upon death?

Answer 1

On death, assets which have previously not appeared as an asset, for example a pure protection contract, will now realise a value.

Likewise, death in service benefits will add to the overall value, although there is likely to be a significant impact on cash flow.

The net worth statement would then change to reflect these additional assets.

Question 2

How can the amount of the client’s investable capital be determined?

Answer 2

Using a Net Worth Statement (or balance sheet)

Question 3

What does the Net Worth statement break down?

Answer 3

The client’s assets and liabilities - it is effectively a snapshot of the client’s assets and liabilities at a particular point in time.

(It is, therefore, essential that you state the applicable date when preparing the net worth statement)

Question 4

What different client scenarios could a paraplanner create separate net worth statements for?

Answer 4

Default: Client(s) remains alive

Alternatives:

• On retirement
• If the client had fallen ill yesterday
• If the client had died yesterday

Question 5

What is the reason for producing different net worth statements to model different client scenarios?

Answer 5

Depending on the scenario, some assets may or may not be available, and some may have different
values.

Question 6

How does a Term assurance policy change across scenarios?

Answer 6

A term assurance policy has no value during a client’s lifetime but does have a value on the client’s death (assuming the sum assured is paid into their estate).

Question 7

How does an Endowment or whole of life policy change across scenarios?

Answer 7

An endowment or whole life policy may have a surrender value today that is substantially less than the amount that would be paid out on death.

Question 8

How does a Money purchase (/DC) plan change across scenarios?

Answer 8

A money purchase or DC pension plan may have a significant fund value today, but if the client has not attained the age at which it can be vested, the capital may not be available for general financial planning

If the client has attained an age at which it can be vested, the available capital value could be the amount of tax-free cash that the client could receive together with any other lump sum amounts that are intended to be withdrawn but taxed as income.

Question 9

How does a Family home change across scenarios?

Answer 9

The family home may be regarded as somewhere to live by the client, rather than as an investment, and therefore may not be seen, in all or in part, to be investable capital, whereas another client may intend to ‘trade down’ at retirement, thereby freeing up some of the value of the family home as investable capital.

Question 10

Why is it valuable to set rules?

Answer 10

While there are no set rules to determine which assets and liabilities should (or should not) be included -
it is important that the client understands why an asset or liability is (or is not) shown on the net worth statement, and its value.

Question 11

How should it be presented if the value shown is different to the value the client may expect?

Answer 11

This should be covered using
a note –

EG: “I have not included the value of your personal pension funds as these are not available to you until you attain the age of 55, and even then, only a maximum of 25% of the fund can be taken as a
tax-free cash lump sum with the balance being taxed as income”

Question 12

What does the income and expenditure analysis generally compare?

Answer 12

The client’s incomings and outgoings over a
defined time period (for example, over a tax year).

Income includes both earned and unearned, regular
and irregular income.

Question 13

What is Earned income?

Answer 13

Income from employment or self-employment.

Question 14

What is Unearned income?

Answer 14

Such as investment income or interest.

Question 15

What is Regular income?

Answer 15

Salary

Question 16

What is Irregular income?

Answer 16

Bonuses or commission.

If the client receives regular capital amounts, these may be treated, for the purposes of financial planning, as income.

Question 17

How should income be shown?

Answer 17

Income should be shown gross (or grossed up)

AND the client’s liability to income tax, National Insurance (NI) and other taxes calculated (as these will also form a part of the client’s expenditure)

Question 18

How should pension figures be shown?

Answer 18

If pension figures net of tax relief are shown as expenditure and this tax relief has already been taken
into account in the income tax calculations, tax relief will have been (incorrectly) granted twice.

Question 19

What are tax calculations used for?

Answer 19

The tax calculations are generally used to provide an estimation of the client’s tax liabilities, unless of
course the financial planner is completing the client’s self-assessment tax return.

(If the client is looking for detailed information on their tax affairs, it may be worth considering referring the client to a tax adviser or accountant.)

Question 20

EG:

Example template for income tax calculation

Answer 20

** Refer to pages 194 - 198 for examples **

Question 21

What should be included if you are making recommendations that change the client’s tax position?

Answer 21

It may be worth including ‘post-recommendation’ tax calculations in the financial plan to support those recommendations.

Question 22

What is the dividend allowance?

Answer 22

From 6 April 2016 a new £5,000 per annum dividend allowance has been introduced.

The first £5,000 of dividend received is tax-free.

The tax rate for dividends in excess of £5,000 are for basic rate taxpayers, 7.5%, higher rate 32.5% and additional rate, 38.1%.

Question 23

EG:

Example template for Income and Expenditure Analysis

Answer 23

** Refer to page 198 for example **

Question 24

What is required to calculate income shortfall?

Answer 24

The calculation of net spendable income or income shortfall is relatively straightforward once the
client’s surplus (or shortfall) monthly income has been calculated.

Question 25

EG:

Calculating income shortfall

Answer 25

For example:

After completing a detailed calculation of a client’s income, a planner has identified that the client has
an annual net income of £50,000 per annum. The planner has established via fact-finding that the client
spends £53,000 per annum.

Annual net income - £50k
Minus annual expenditure - £53k
——-
Annual income shortfall - £3k

Question 26

How is income shortfall then used?

Answer 26

The financial planner or paraplanner can identify ways in which the client could boost net income or reduce expenditure and these ideas should be noted in the financial plan, and could form part of the recommendations.

Question 27

Further tax calculations may also be required depending on the client’s goals and objectives. These could include what?

(2)

Answer 27

• CGT calculations if the client is contemplating disposing of assets or restructuring investment
portfolios

• Inheritance tax calculations to model potential IHT liabilities in the event of the client’s death.

Question 28

How is the nil-rate band treated in tax calculations?

Answer 28

Although the introduction of the transferable IHT nil-rate band (NRB) has appeared to simplify inheritance tax planning, IFAs should prepare separate IHT calculations for each partner (eg, on A’s death assuming B has died first and on B’s death assuming A has died first).

This will ensure that assets such as death in service cover, pension death benefits and life assurance written under trust are treated correctly

Question 29

What does the time value of money look at?

Answer 29

The relationship between cash flows arising at different points in time; it deals with equivalence relationships between cash flows with different dates.

Question 30

Among other things, time value of money calculations can help to calculate the following:

(4)

Answer 30

• how much an investment will be worth after a certain period of time
• how much is needed to save per month/year to reach a target capital amount in the future

• the effective rate of return investments would need to achieve to ensure a target capital amount is
achieved in the future

• how long it will take before an initial investment grows to a target amount.

Question 31

EG:

The answers to these questions can be used to build a cash flow forecast which forms the foundation of a financial plan.

For example, if a client would like to save for their child’s university education and they know how much money they need in the future and how many years this is needed…

Answer 31

Then a financial planner could calculate how much they need to save per month based on an assumed rate of return.

By identifying the amount that needs to be saved each month, cash can be allocated for this and a plan can be implemented to ensure the client’s objective can be achieved.

A cash budget can be developed for the client as part of the financial plan.

Question 32

What kind of impact could a marriage (/civil partnership) have upon a client’s financial position and future needs?

Answer 32

The wedding itself could be a major financial commitment and may require loans to cover the costs of the wedding and honeymoon and/or travel insurance depending on the personal and financial circumstances of the couple.

Post marriage, there may be a situation where two incomes come into a household, couples are able to transfer assets between each other with no CGT liability arising, and life assurance to protect the finances of each in the event of the other’s death may become a priority; this includes changing the beneficiary on any death in service plans/employer pension plans.

Question 33

What are the cash flow implications of a marriage (/civil partnership)?

Answer 33

• two incomes
• accommodation costs – rent or buy
• budget (outgoings) changes , including wedding costs
• children (?)

Question 34

What are the cash flow implications of a having a child?

Answer 34

• potential loss of income
• costs of childcare
• education costs
• house move
• planning for the financial impact of receiving maternity pay (as opposed to normal pay) including potential periods of no pay
• tax credits that may apply
• IHT planning

Question 35

What are the different insurance options available to deal with the issues of having a child?

(5)

Answer 35

• life assurance with a lump sum – written into a flexible trust to provide immediate continuity of school fees
• critical illness cover – providing a lump sum payment for school fees
• income protection plans – to pay school fees in the event of illness or accident
• monthly benefit plans – to meet the rising cost of school fees
• IHT planning – by writing protection products in trust, any benefit is not subject to inheritance tax

Question 36

A bespoke school/university fee plan should consider a variety of circumstances:

(6)

Answer 36

• the tax status of client, eg, for non-taxpayers or non-UK residents, offshore investments may be more suitable
• appropriate diversification of investments and assets
• the use of tax-efficient vehicles where appropriate
• taking account of children’s annual CGT allowance
• the appropriate use of trusts
• products that complement protection policies already in place.

Question 37

What is the definition of divorce?

Answer 37

The legal, personal and financial separation of two sets of finances that may have been previously combined.

It requires careful financial planning and organisation.

Question 38

What settlements does divorce usually involve?

Answer 38

Financial settlements may involve reassigning policies and assets and may involve taking on new financial liabilities.

Previously held policies, assets and accounts as well as details of beneficiaries may have to be changed, disposed of and untangled.

Future plans and priorities are also likely to change, effectively requiring a completely new KYC record to be made up for each client involved.

Question 39

Rather than use the term ‘retirement’, many planners prefer what term? and why?

Answer 39

‘financial independence’ - which is where the client has enough capital and other assets available so that work is optional and their desired lifestyle is affordable.

Question 40

What is the basic retirement planning process?

Answer 40

Once the planner knows what the client needs in real terms to live on comfortably, they can compare this with the expected state and private pension and other capital resources likely to be available at the time.

A cash flow forecast can then be built, from which the planner can establish whether the client is on track or needs to allocate more resources or time.

Question 41

How does disability and/or critical illness impact financial plans?

Answer 41

From the adviser’s point of view, much is dependent on the nature of the disability and future prospects for employment, care and the assets of the client.

The client may rely on health and/or income protection policies to cover financial burdens for a period of time; however, these do not provide for the long term, and other options will require investigation.

Question 42

How does the impact of death differs from all the other significant events?

Answer 42

In that it is final.

Question 43

When can death planning be made?

Answer 43

Different choices and other alternative strategies can be adopted in financial planning even if planning does not occur until a very late stage.

BUT, if financial planning is not put into place for the event of death, potential beneficiaries or those for whom the client had financial responsibilities can suffer adverse effects from the lack of planning.

Question 44

How can sufficient OR up to date information be collected?

Answer 44

It is often necessary to obtain a letter of authority from the client which is sent to a provider together with a questionnaire requesting details required by the adviser.

The letter of authority is often valid for 12 months; it may or may not include an instruction for any servicing rights to be transferred if there is no present relationship with another adviser, or if the client is planning to change their adviser.

Question 45

What is the difficulty for clients in assessing their investment performance?

Answer 45

Even if a client has the time, inclination and knowledge to assess the performance of their investments, most clients do not have the same access to industry knowledge and comparison data that advisers do.

Furthermore, investment markets, indices and funds change quickly and in response to a variety of economic, regulatory and legal changes as well as internal changes.

New products appear in the marketplace that may be better suited to a client’s risk profile, tax status and other financial provision.

Question 46

How can regulation changes affect product choice?

Answer 46

Regulatory changes and the occasional financial scandal may close certain options for clients and open others that were previously not viewed as suitable.

EG: the use of some derivative products to hedge risk was once viewed as inappropriate for anyone other than the most sophisticated institutional investors, but now these are seen as part of a financial solution by certain groups of private investors.

Question 47

What are examples of factors that influence risk tolerance?

6

Answer 47

Personality, past investment experience, job security, proximity to retirement, asset values, family and health issues