7 - MANAGING CLIENT'S WEALTH

Question 1

Cash flow projection

Answer 1

Prepared for ST and LT planning purposes to differentiate between living expenses and anticipated cash needs/surprises

ST (<3yrs)
- estimates of expected inflows/outflows
- plan use of surplus funs
-identify shortfalls that require funds

LT (3-5yrs)
- Identify potential future CF needs
- drive development of strat to fund LT needs
- provide input to need for ST assets within investment portfolio
-pension planning (Estimate how much one needs to save before retirement)

Question 2

Emergency liquidity reserve

Answer 2

Readily avail source of funds to meet unexpected events
Need will revolve around health/home/job/job security/fixed costs/health
Impractical to plan for all eventualities
May take 6m to find a new job - 6m of reserves?
doesnt have to be in instant access - can be ST bonds or notice accounts with penalties etc

Question 3

ISA TYPES

Answer 3

ISA = tax efficient savings/investments

STOCKS AND SHARES - 18y
- corp/gov bonds, UK listed ITs, life assurance prods, AIM shares and listed shares, UK auth unit trusts and OEICS, shares acquired via employee stock plan in past 90 days even if not listed

FLEXI ISAs
- money can be wtihdrawn and replaced in same tax year (not JISAs)

CASH- 16y
- cash on deposit with building society/bank + some NSI prods

H2B
- now closed to new savers, 25% gov contribution up to 3k on 12k investor contribution
- must invest 200pcm with initial 1.2k
- house price 250k, 450k London

LISA - 18 - 40
- 25% gov bonus max investment 4kpa,
- proceeds used for first home 450k house London or >60yrs/terminally ill
- 25% penalty for early withdrawal
- can continue contributing until 50

INNOVATIVE FINANCE >18y
- P2P loans and cash investments, must be facilitated by FSMA auth operatory

JISA
- LT saving for children, 9k sub limit
- both cash and stocks and shares

Must be UK resi to subscribe to ISA (except crown employees) but can retain ISA

Question 4

HMRC ISA charging rules

Answer 4

Charges that can be paid outside (to maximise amount invested TF)
- admin fees
- charges for opening/closing/maintaining ISA

Charges that must be paid within an ISA
- Charges relating to sale and purchase of ISA investments
- including dealing comm/stamp duty/inital charges on OEIC/untit trust purchases

Question 5

Innovative finance ISAs

Answer 5

Quali investments are P2P loans, crowdfunding debentures and cash
- eligible P2P loans must be facilitated by FSMA authorized operator

Question 6

ISA on death

Answer 6

Can pass to surviving spouse without losing tax free status = Additional permitted subscription
- get this additional sub amount even if you dont inherit ISA

If no - can remain in wrapper for 3yrs post death or whenever administration of estate is finalised whichever is 1st

Day after this wrapper is lost and account becomes taxable

Question 7

Living together vs marriage

Answer 7

Coupes that lived together but arent married/in civil partnership = have no special rights

• no right to share assets or request ongoing financial maintenance for themselves
• if one dies intestate - survivor doesnt automatically inherit anything unless property was owned jointly
• survivor may have to go to court and claim from estate under inheritance act 1975
• can enter into cohabitation contract to formalise aspects of living together
• sets our how each will support eachother/children and how assets would be split

Question 8

Pre and post nups

Answer 8

Pre = before marriage
Post = after marriage
Not legally binding in England

Supreme court 2010 ruling = introduction of presumption that family courts should hold spouses or partners to agreements if both understood the implications of entering into the agreement

Question 9

Powers of attornery

Answer 9

Main reason to create is as a protection in case one loses their mental capacity
Once capacity is lost financial institutions cant accept instructions and deputy must be appointed on their behalf

POA = legal doc where a person gives person/s the power to make decisions with regard to financial affairs and/or health and personal welfare on your behalf

Question 10

Answer 10

(Ordinary) POA
- give attorney power to look after financial affairs of donor or undertake specific task on their behalf
- often when donor going abroad
- usually ends at specific time
- doesnt have to be registered with office of public guardian
- not operative once someone loses capacity

EPA (eduring)
- Before EPA - had to go to court of protection and get guardian appointed annually
- EPA avoided this - indiv appoints someone to act for them when the donor can no longer has capacity - for financial affairs only
- can’t make a new one since 07 but old still active
- have to reg with office of public guardian

LPA
- Replaced EPA in 07, allows you to choose someone ot take on decisions if they lose capacity
- LPAs extend into health and welfare matters as well as property and financial affairs
- two types P&A LPA and H&W LPA
- must be registered by office of public guardian

Question 11

Deed of revocation

Answer 11

Can be used to cancel

• OPA = at any time after power has been granted
• EPA = at any time prior to registration of power and whilst donor still has mental capacity
• LPA = at an any time while donor still has mental capacityDe

Question 12

Deputies

Answer 12

Appointed when someone loses capacity but doesnt have an LPA in place
Application made to court of protection to appoint deputy on ongoing basis
Deputy has duty to act in best interest of person and only make decisions the court has authorised them to make
OPG = asseses each case and places in band to receive low/med/intermediate/high level of supervision

Question 13

Wills

Answer 13

= Statement by indiv on how they wish their property to be divided after death
Person making = testator
If you die w/out executing will = intestate

Must be in writing (handwritten/typed)
Signed on last page by testator
Must be witnessed (Attestation) - must see the testator sign in presence of at least 2 witnesses- witnesses themselves must also sign and cannot be beneficiary or will or married to beneficiary

Question 14

Effect of marriage on a will

Answer 14

Marriage revokes a will - will become intestate + will have to make a new one unless you made a will ‘in contemplation of marriage’ with specific person before

Divorce cancels any benefit due to former spouse under will - law of intestacy decides how these assets are distroed if you dont make a new one

Question 15

Intestacy

Answer 15

Surviving spouse no issue = full estate to spouse
‘Issue’ = children + their children if they died before you

Surviving spouse + issue = Spouse receives statutory amount £322k (index linked) + chattels + half the residual amount
Issue = receive other half of residual estate at 18 distributed equally (will be held in statutory trust if they are minors)

No surviving spouse = in this order
- Issue
- parents (equally if more than one)
- brothers and sisters whole blood
- half blood brothers and sisters
-grandparents
- uncles and aunts (whole blood then half)
- crown as bona vacantia

Question 16

Reasons to make a will

Answer 16

Basically essential - avoids property being distributed in a way you wouldnt want
Allows unequal distribution
COmplex family matters e..g stepchildren
Big issue for those living together but not married particularly if house is owned by one person
Allows you to gift to charity/ friends
Allows you to honour personal wishes - e.g. burial etc
Allows creation of trusts for vulnerable people
Allows you to pass particular items to particular people
Allows funeral instructions
Allows you to appoint testamentary guardians for your kids

Question 17

Process of administering the estate

Answer 17

• must 1st register the dead
• Executors/administrators (known collectively as Legal Personal Representatives) may need to obtain grant of probate, letters of administration (collectively known as grant of representation
• Make funeral arrangements
• Compile a list of assets and liabilities + place statutory notice in gazette for any creditors
• apply for grant of representation (IHT normally payable on application up front)
• once granted, LPRs will register a copy with branks, registrars etc to prove title
• they will then administer the estate - collct/transfer asset, pay liabilities, deal with HMRC regarding income tax and IHT payable
• provide accounts to main beneficiaries

Question 18

Key elements of trusts

Answer 18

Settlor
- person who decides to set up trust and arranges for their assets to be transferred into it (transfers legal ownership to trustees)

Trust property
- assets to be gifted into trust

Trustees
- legal owners of assets held within a trust but beneficiaries have equitable ownership
- obliged to manage assets according to the settlor’s wishes, as set out in the trust deed or their will

Trust deed
- sets out powers and duties of trustees (also statutory powers)
- contains terms of the trust

Beneficiaries
- people for whose benefit peoperty is being held (both settlors and trustees can be beneficiaries but if settlor is there can be tax consequences due to reservation of benefit rules)
- where all beneficiaries >18 they can bring trust to an end by unanimous agreement

Protector
- to ensure trustees act in accordance with settlors wishes
-role is usually to monitor, oversee or exercise a degree of control over the trust by the trustees
- can remove and replace trustees and can nominate further beneficiaries

Question 19

Writing policies in trust

Answer 19

Means client making a git for IHT purposes and policy normally wont form part of estate (CLT) if client lives for 7y after setting up the trust
- can ensure death benefit is payable without need for grant of probate/letters of administration
- can choose who benefits from assets and who you want to manage them
- protect beneficiaries from IHT
- decision is irrevocable, once done any further decisions must be signed off by named trustees

Question 20

IHT loss relief

Answer 20

Allows executor to substitute sale value of shares with the ones used for probate and claim a refund of the IHT payable (if value has fallen since date of death)

• for quali investments sold in the 12m following death
• listed shares and secs listed on a foreign exchange and CIS
  -not AIM and unlisted shares
• only avail where sale proceeds are less than date of death values (all sales of quali investments have to be included in claim not just those that have fallen in value)
• must be sold before transfer to beneficiaries
• need to calc if IHT repayment would be more than the value of the losses carried forward for the beneficiaries )(if they were transferred the assets and then sold themselves)
• also affects the £2m estate limit for the RNRB

Question 21

Deed of variation

Answer 21

Legal doc that can be used to change distro of estate as set out in will or under laws of intestacy
- equalising distro of estate as set out in the will or clearing up uncertainties
- making provisions for someone who doesnt benefit (e.g. grandchild born after will was made, or someone who laws of intestacy doesnt cover e.g. stepchild)
- intergenerational planning e.g. passing assets to grandchildren rather than children
- tax planning - e.g. will not written in most tax efficient way, gifting to charity to reduce IHT, moving assets into turst

• those giving away interest in estate must be >18 and of sound mind
  -Deed must be signed by anyone giving away anything
• no consideration can be paid for completing the deed
• deed must be completed within 2y of death

Not a CLT or PETs - just as if this was originally written in will

Question 22

Uses of trusts

Answer 22

• mitigate tax - outside of estate if settlor survives for 7 years
  -preservation of wealth (prevents dilution of ownership)
• asset protection - to protect from claims by future creditors (tho if this is intention it is likely that the trust can be set aside)
• to provide for fams with complicated dynamics
• to benefit charitable objectives
• to avoid forced heirship laws in certain countries
• may arise as a result of a will ‘will trust’
• to make confidential disposal of an asset (can be fully secret or half secret trust)
• to give property to someone who cannot legally hold it (minors or those mentally incapable)
• to provide a pension
• to gain protection from creditors and spendthrifts
• statutory trusts can arise from intestacy (when assets given to minors)

Question 23

Three certainties

Answer 23

To be valid a trust usually needs to meet the 3 certainties test

Certainty of intention
- must be clear the settlor had the intention to create a trust or the trust is void

Certainty of subject matter
- subject matter/trust property must be clearly defined/identifiable. Benefit must also be clearly defines

Certainty of objects (who can benefit)
- Refers to all intended beneficiaries
- fixed/interest in possession trusts = must be poss to indentify exactly all the beneficiaries
- for disc trusts - trustees must know who to consider when deciding how to distribute the trusts properly

Cy Pres (nearest thing) doctrine aplies to charities which can save a gift to charity from failing due to uncertainty of object (e.g. if charity no longer exists) - gift can go to similar charity

Question 24

Law against perpetuities trusts

Answer 24

• property cannot be tied up for indefinite periods
• max length of settlements made in wills executed post April 2010 = 125yrs (interests must vest within this time)
• doesnt apply to charities or pensions

Question 25

Law against accumulations

Answer 25

No longer have this - abolished for trusts set up after April 2010
Previously

• 21 years from making the disposition (max time before income must be distributed)
• still applies to charities unless set aside by court or charities commission

Question 26

Fixed vs discretionary trusts

Answer 26

Fixed trusts : one where beneficiaries are determined at the outset in the trust deed

Disc trusts: class of beneficiaries is specified in the trusts deed and trustees given power to determine which beneficiaries of that class will benefit and when

Question 27

Summary of trust types

Answer 27

IIP trusts

Disc trusts

Accumulation trusts

Question 28

Bare trusts

Answer 28

• beneficiaries have immediate and absolute right to both capital and income (18+)
• aka simple trusts
• commonly used to transfer assets to minors - trustees hold assets on trust until beneficiary comes of legal age @ which point they can demand trust fund is transferred to them
• could be a blind trusts = used by politicians to avoid having to declare an interest (beneficiary has no knowledge of holdings/no right to intervene in handling)

Question 29

Bare trust tax

Answer 29

Income tax
- assets treated as if beneficiary holds them for tax purposes (as if trust did not exist)
- if set up by parent = parental settlor rule - if income is >£100 it is taxed on the parent to avoid parents hiding income (doesnt apply to CGT)

CGT
- on beneficiary as if no trust

IHT
- settlor: assets placed in bare trusts treated as PETs (beneficiary pays any IHT due since capital and income belongs to them absolutely
- if beneficiary dies = included in part of their estate

Question 30

Interest in possession trusts

Answer 30

2 types w/ different IHT
Settlement: CLT made during lifetime
Will trust: instructed in will

Life tenant: has right to receive income generated by the trusts or right to enjoy trust assets for present time (e.g. living in property)
Capital paid to remaindermen : usually on the death of the life tenant (tho there may be a successive life interest or power of appointment where life tenant can appoint a 2nd on death)

Trustees must maintain a balance between the interests of both sets of beneficiaries (e.g. yield and capital growth)

Question 31

Tax on interest in possession trusts

Answer 31

Income tax
- taxed at basic rate within the trust by trustees
- life tenant pays at marginal rate (can reclaim if non taxpayer)

IHT
post March 06 - interest in possession settlement = CLT (Along with discretionary trusts)

• will trusts or settlements pre 06 = aggregated with life tenants estate and then trust pays proportion of IHT that trust made up of estate
• 10 yr periodic charges (max 6%) and (proportional to every 10ys) exit charges apply

CGT
- taxed @ 20% (unless resi prop then 24%)
-£1500 annual exemption but must be divided by total no. of trusts set up (min £300 each)
- disabled person’s trust = 3k annual exemption

Question 32

Discretionary trusts

Answer 32

Trustees have discretion over the use of income and the distribution of capital - exact rights of each beneficiaries not determined in advance

Useful in family situations - settlor may be able to control conduct of beneficiaries with the trustees’ use of disc power

More flexi - can create a class of beneficiaries e.g. grandchildren

Good for complex succession planning e.g. 2nd marriage/step children

Cater for changes in circs like bankruptcy and remarriage

Guard against spendthrift beneficiaries

Can protect family assets from forming part of divorce settlement in certain jurisdictions (not really UK)

Can be used in a will to utilise the NRB on the first death - particularly when assets are expected to grow faster than the NRB

Question 33

Tax on discretionary trusts

Answer 33

IHT = disc trusts are relevant property (along with interest in possession lifetime settlement) so taxed as CLT
- 10 year periodic charges (max 6%) and proportionate exit charges apply unless a vulnerable/disable person’s trust

-vuln/disabled person trust requires receipt of disability allowance
- taxed like a bare trust on beneficiary and IHT tax on settlor like a PET

Income tax
- first £500 of income taxed @ basic rate (shared between trusts, min £100)
- rest taxed @ additional rate (45%/39.95%)
- distributions paid net of 45% tax (no PSA, PA, divi allowance)
- beneficiaries can reclaim some/all tax paid
- trustees must manage the tax pool

CGT
- taxed at 20% (unless resi prop 24%)
- annual exemption 1.5k shared min 300
- vulnerable person’s trust 3k

Question 34

Charitable trusts

Answer 34

Set up for cause/social purpose to benefit a large group of people in society in general (not specific group)

• relief of poverty
• advancement of religion
• advancement of education
• purposes beneficial to community

Charities act 2006 - advancement of
- health or saving lives
- citizenship/community development
- amateur sport
- arts, culture, heritage, science
-human rights, conflict resolution, equality and diversity
- environmental protection or improvement
- relief of those in need (age, disability)
- animal welfare
- promotion of efficiency of armed forces
- or any other charity defined in law

No IT, CGT or stamp duty

Question 35

18-25 trusts

Answer 35

Created under will of deceased parent/step parent or under criminal injuries compensations scheme

Property to be held on trust for person under 25 and beneficiary becomes absolutely entitled to whole prop on or before 25th bday

May be an IHT charge on capital transferred out to children between 18 and 25 and when it is paid out at 25

Question 36

Trusts for vulnerable people

Answer 36

Special tax treatment
Include
- people under 18 whose parented died
disabled people eligible for any of the below benefits
* Adult disability payment.
* Armed forces independence payment.
* Attendance allowance.
* Child disability payment.
* Constant attendance allowance.
* Disability living allowance (adults and children).
* Industrial injuries disablement benefit.
* Personal Independent Payment (PIP).
* Someone unable to manage their own affairs due to a mental health condition

Income tax
- trustees are entitled to a deduction of tax against the amount they would otherwise pay (calc IT based on type of trust, calc IT if beneficiary recieved it themselves - claim difference as deduction on IT liability)

• similar for CGT

IHT
- no IHT charge is settlor lives 7y and on any transfers out to vulnerable beneficiary
- no 10 yearly IHT charge
- when beneficiary dies any assets held in trust on their behalf are treated as part of estate and IHT may be charrged

Question 37

Discounted gift trust

Answer 37

Allows settlor to give away assets but stil enjoy regular payments for life
IHT planning tool
Single premium bond written irrevocably in trust
Withdrawals set @ outset to 5% max - cannot change in future
Normally a discretionary trust but can be absolute
If settlor survives 7 years - will be outside of the estate
If not - discount will reduce value of the gift

Generally put in amount that will discount down to 325k which uses up NRB but can get around 600k out of estate for this price (depending on age and HMRC discount)

To be effective for IHT, payments should be spent by the settlor and not retained in the estate

The right to the regular payments ceases on the settlor’s death and has no value

Beneficiaries are unable to benefit from the trust until after the settlor has died

‘discounted’ is used because the value transferred on establishing the trust is less than the amount invested.

Question 38

Loan and gift plan

Answer 38

Useful where client doesnt want discounted gift trust because they are scared they may need money in the future

Client loans the discretionary trust funds - 5% withdrawal rate is interest on loan

On death - trust pays original amount back and growth only is outside of estate

Can gift the loan to beneficiaries in will (will pay IHT)

Question 39

Two other types of interest in possession trusts (non discretionary for tax purposes)

Answer 39

Immediate post death interest trust
- IPDI only created by a will and is an IIP trust for tax purposes
- Can make a will leaving estate in trust for beneficiaries and for that indiv’s lifetime the trust will not be taxed like a disc trust but like an IIP trust

Bereaved minors trust
- Can only be set up by will
- must be created for the benefit of children of the deceased
- income can be retained within trust or paid out for benefit of the child
- all capital must be paid out to child/children when they reach 18

Question 40

Ownership of trust property

Answer 40

A trust = legal vehicle into which assets are transferred which is then managed by trustees
they have to hold and apply the assets for the benefit of the beneficiaries

legal title to assets is vested in name of trustee
beneficiary has beneficial ownership
assets of the trust = separate fund and not part of trustees estate
trustee has duty to manage the assets on behalf of the beneficiaries and in accordance with the terms of the trust

Question 41

Main powers of trustees + 3 duties

Answer 41

Powers of maintenance
- to be able to pay income to beneficiaries for their upkeep

powers of advancement
- to be able to advane funds from the trust prior to the date specified in the trust deed - e.g. to pay school fees

powers to make dispositions from discretionary trusts
- to appoint funds within names class of beneficiaries

powers of appropriation
- permits trander of assets to beneficiary in settlement of their entitlement rather than having to sell the asset and transfer the cash raised

power to appoint nominees and custodians
- allows trustees to take advantage of the safe custody services offered by brokers and custodians + be able to settle transactions using CREST

power to appoint investment managers
- to manage the trust portfolio on their behalf

Duty to
- keep the trust accounts
- deal with and distribute assets according to trust terms
- invest the trust’s funds

Question 42

Trustee liability

Answer 42

is joint and several

meaning beneficiaries can claim and execute judgements against one or all of the trustees

if trustee breaches duties = personally liable for a breach of trust - beneficiaries can sue for breach of trust for as long as the trustee lives or against estate if they have died

can claim and execute judgement againt one/all/some trusteesT

Question 43

Trustee Act 2000 main goal and raison d’etre

Answer 43

Before - if trust deed didn’t stipulate wide powers of investment - the old 1961 act requires 50% in narrow investments aka fixed income

Main goal = widen investment powers and powers of delegation for trusts that dont specifically have wide investment powers

trustees must follow Act unless trust deed specifically overrules provisions

Question 44

Trustee Act 2000 main changes (5 areas)

Answer 44

INVESTMENT POWERS
- much wider than previously available - may make any investment of the kind they could if funds were their own except land outside of the UK
- subject to fundamental duty of acting in the best interests of beneficiaries

Investment duties
- be aware of need for diversification + suitability of investments (both = standard investment criteria) - suitability r.e. income/capital growth and meeting needs of beneficiary
-to review investments regularly
- to obtain and consider proper advice where necessary before exercising investment powers

POWER TO DELEGATE
- can delegate duties to agent - include powers of investment
- Act requires policy statement from trustees if this occurs giving guidance on how IM functions should be managed in the best interest of the trust -
- certain responsibilities cannot be delegated - appointment of trustees, distro of trust asset, whether fees should be allocated out of inc/capital

NEW STATUTORY DUTY OF CARE
- imposes statutory duty of care when employing agents/using nominees/investing trust prop/acquiring land etc - higher standards expected of investment professionals than lay people
-duty to look after interests of all beneficiaries impartially
- must satisfy themselves that advisor is properly qualified

TRUSTEE REMUNERATION
- Regulates arrangement for paying a trustee appointed in their professional capacity
- Allows payment of out of pocket expenses without need for authorizing clause in the deed (for layperson)

POWER TO INSURE TRUST PROPERTY
- Created power for trustees to insure 100% of a trust’s property - purchase of investments with capital guarantees would normally fall within these powers (previously only 75% allowed)
- premiums can be paid of of income or capital

Question 45

Private trust companies/foundations

Answer 45

When there is a large family bis that professional trustees may find difficult to manage - settlor may also be reluctant to hand over control

• trust holds family bis as asset
• private trust company is create to act as a trustee of family trust
• The private trust company is a limited company and the board of the company can be selected
  to ensure that there are suitably qualified advisers appointed who understand the nature of the
  business along with the settlor.
• Whilst the settlor could own the shares in the private trust company directly it would probably be
  undesirable to have any direct link with its ownership, whether for tax, disclosure or for a variety of
  other reasons. Instead, a non-charitable purpose trust is often created which holds the shares in a
  private trust company as its sole asset.

Question 46

What is a family office

Answer 46

No clear definition - every family office is different. Generally used to describe an organization dedicated to holding and managing the wealth of a family
- flexible and bespoke, supports family’s vision and legacy
- can be single family where offering is fully customized + highest level of confidentiality and only one family served. or multi family which is wealth managements firms that manage a group of families.

• expensive vs investment management as normal. Average cost = 0.6%. SFOs often dont have economies of scale

Question 47

Equity release

Answer 47

= range of prods that allow clients to borrow money against value of house

sometimes elderly clients are asset rich and cash poor - equity release allows them to utilise their largest asset to generate income/release capital

uses
- repay existing mortgage
- home improvements/essential repairs
- consolidate burdensome debts
- reduce working hours/retire early
- domiciliary/social care
- gifting to children/grandchildren

3 main ways
- lifetime mortages
- home income plans
- home reversion plans

Question 48

Lifetime mortgage

Answer 48

• most common form of equity release
• taking out mortgage that doesnt require monthly repayments - interest can be rolled up until loan is repaid on death or when person moves into LT care
• borrowing money secured on property
• continue to own and live in property

Question 49

Home income plan

Answer 49

• Equity released from property is used to buy a lifetime annuity (can be ifl linked)
• part of annuity payment pays for mortgage interest so not rolled up
• mortgage repaid on sale of home
• not suitable for people <75 really as annuity rates will be too low to cover mortgage generally
• havent been popular recently due to low annuity rates
• obvciously lose out if you die soon after taking out plan

Question 50

Benefits/drawbacks of lifetime mortgages/home income plans

Answer 50

BENE
- moneies can be released as guaranteed income
- can stay in own home for as long as poss
- mortgage repaid on death
- can still benefit from future increase in property val
- fixed interest rates could cap costs
- no negative equity guarantee feature
- some inheritance still possible
- monies released are tax free
- IHT reduces
- can still move subject to new prop being acceptable to provider as continuing security for equity release loan

DRAWBACKS
- certain pension benefits may be negatively affected
- local authority financial support may be negatively affected
- reduces family inheritance
- associated costs (Advice fees, valuation fee, legal fees for conveyancing, application fee)
- inflexibility
- lenders permission required for any property adaptations (BAD, STAIR LIFT)
- allowing interest to roll up may be more expensive than traditional mortgage

Question 51

Home reversion plans

+ bene/drawbacks

Answer 51

• part/all of the property sold (instead of getting a mortgage) for cash lump sum or regular payments
• sold under value transfer (not market value, generally it is a very reduced value)
• you retain life tenancy rent free for the remainder of your life
• peppercorn rent payment (£1/yr)

BENE
- monies released to pay for care
- could be via immediate needs annuity
- can stay in home for as long as poss
- some inheritance still poss if partial reversion utilised
- IHT reduced

DRAWBACKS
- certain pension benefits may be reduced
- local authority financial support may be negatively affected
- reduces family inheritance
- less than market value will be paid
- poor value on early death
- inflexibility if circs change
- need permission to adapt which they will likely not give - can force you to sell if you need adaptions they wont allow you to make - can argue it reduces the value of their share

Question 52

Regulatory position on equity release

Answer 52

• Regulated activity under FSMA 2000
• Subject to COBS rules - packaged prods
• Advisor must hold appropriate quali
• Limited product range makes value for money comparisons difficuly
• Prod specific risks - review of premiums, ADLs (activities of daily lviing, info on perf not given until after point of sale)

FCA review was mixed
- when good advice given - allowed people to release capital from largest asset without monthly payments
- when advice was bad - there was insufficient challenge when customers believed a lifetime mortgage was for them
- also inadequate evidence to demonstrate suitability - suitability letters were generic

Question 53

Long term care insurance

Answer 53

Care home fees v expensive (41k care home, 40k nursing home) - not much government support (anyone over 23k assets pays in full)

2 main types of insurance

Immediate Care LTCI
- lump sum investment paying regular income until death
- immediate needs annuity
- underwriting required
- market not v competitive and only 2 real providers

Pre funded LTCI
- regular prem or lump sum premium (lump sum care bond)
- pays out tax free regular sum if care is needed
- dependent on not being able to perform a certain number of activities of daily living
- similar to income protection in that it pays out when you cant do x no. of ADL - often unit linked so risky if units dont grow