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AF5 Flashcards

1
Q

HOURLY FEES

THE BENEFITS

A

HOURLY FEES- BENEFITS

EASY/TRANSPARENT/KNOWN/COST
FAMILIAR / SAME AS OTHER PROFESSIONS
BASED ON WORK UNDERTAKEN - CHEAPER FOR LOWER AMTS
FEE CAN CAN BE AGREED

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2
Q

HOURLY FEES

THE DRAWBACKS

A

ADVISER COULD RUN UP THE CLOCK
EXTRA COST MAY PUT OFF CLIENTS
PAID FROM OWN FUNDS
FINAL COSTS UNKNOWN - CAN BE HIGH ON SMALL AMTS

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3
Q

FUND BASED FEES

THE BENEFITS

A

MAY NEGOTIATE LOWER FEES
PAID FROM FUND NIT OWN MONIES
INCENTIVE FOR ADVISER TO GROW FUNDS
LOWER FOR LOWER AMTS

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4
Q

FUND BASED FEES

THE DRAWBACKS

A

HARD TO PREDICT COSTS
MAY NOT REFLECT ADVICE PROVIDED/TIME SPENT
MAY BE EXTRA CHARGES FOR OTHER WORK
REDUCES GROWTH AND MAY COME FROM TAX EFFICIENT INVS

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5
Q

BENEFITS OF FINANCIAL ADVICE

A 
PRIORITISE OBJECTIVES
ENSURE TAX EFFICIENCY
ADVISE ON SUITABILITY OF INVS
REVIEW EXISTING CHARGES
ADVISE ON HOW BEST TO FUND FEES
WHETHER TO KEEP P/BONDS
DETERMINE INCOME SHORTFALL
RECOMMEND PROTECTION
REGULAR REVIEWS
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6
Q

FACTORS AND ASSUMPTIONS OF CASH FLOW

A 
FUTURE EXPENDITURE
FUTURE INCOME PATTERN
FUTURE GIFTING
LONGEVITY
NEED FOR CARE
ATR
CFL
EXPECTED GROWTH RATES
ASSUMPTION OF FEES
INFLATION
USE OF TAX WRAPPERS
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7
Q

BENEFITS OF CASH FLOW MODEL

A

ALLOW ADVISER TO COMPARE INCOME NOW AND IN RETIREMENT
STRESS TEST DIFFERENT SCENARIOS TO UNDERSTAND IMPACT
IDENTIFY POTENTIAL SHORTFALLS
ALLOWS FOR GROWTH AND INFLATION ASSUMPTIONS
CAN BE ADJUSTED AND REVIEWED
DETERMINE SUITABLE ASSET ALLOCATION

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8
Q

RISKS OF CASH FLOW MODELLING

A 
WRONG ASSUMPTIONS
NEED REGULAR REVIEWS
CIRCUMSTANCES CHANGE
CASH FLOW RETURNS ARE LINEAR
TAX RATES CHANGE
DIFFICULT TO ALLOW FOR MARKET RISK
DOES NOT ALLOW FOR LIQUIDITY RISK
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9
Q

STRESS TESTING CASH FLOW

A 
PERMANENT LOSS OF INCOME
FUTURE RETURNS LOWER
INCOME REQUIREMENTS HIGHER
LARGE UNPLANNED WITHDRAWALS
HIGHER INFLATION
LIVE LONGER
CHANGE OF CIRCUMSTANCE EG DIVORCE
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10
Q

DETERMINING CAPACITY FOR LOSS

A

ADEQUATE EMERGENCY FUNDS
ADVENTUROUS AND MEDIUM RISK APPROACH SO VOLATILITY OK
BOTH HAVE INCOMES BUT LOSS OF ONE LEAVES SHORTFALL AS NO IPP AND POOR ASU
AMOUNT NEEDED TO SAVE OVER 15 YEARS FOR RETIREMENT
TERM OF MORTGAGE IS 9 YEARS PAST RETIREMENT AND NO LIFE PLAN
CHILDREN ARE DEPENDANT AND WILL CONTINUE TO BE

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11
Q

ADDITIONAL INFO FOR LIFE AND CIC

A 
INCOME AND CAPITAL REQUIRED OVER WHAT TERM?
LEVEL OF STATE BENEFITS
BUDGET
WILLS ON 2ND DEATH
COST OF UNI?
HOW LONG AT UNI
WILL BUSINESS CONTINUE IF UNABLE TO WORK
WILL HE PAY THROUGH BUSINESS
WHAT SICK PAY DOES GRACE GET?
RUGBY - PLAY?
ANY TIME OFF DUE TO RUGBY?
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12
Q

ADDITIONAL INFORMATION - SUITABILITY OF PENSIONS SAVINGS AND INVESTMENTS

A 
EMERGENCY FUND REQUIRED
WILLING TO SELL PREM BONDS
PERFORMANCE OF ISA’S AGAINST BENCHMARK
ASSET SPLI
CHARGES ON ALL
WILLINGNESS TO SWITCH TO NEW INVS
ARE ISAS ON PLATFORM
ANY REGISTERED LOSSES
BASE COST OF SHARES
AMOUNT OF INCOME REINVESTED
WILLINGNESS TO CHANGE OWNERSHIP 
PREPARED TO MAX ISA’S
HOW MUCH CAN CO PAY INTO PEN
ANNUAL ALLOWANCE AVAILABLE TO CARRY FORWARD
WOULD GRACES EMPLOYER MATCH CONTS
WILLING TO MAKE GRACE SHAREHOLDER
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13
Q

ADDITIONAL INFO FOR UNI COSTS

A 
HOW LONG IS HARRYS COURSE
HOW LONG IS EMMAS LIKELY TO BE
HOW MUCH WILL THEY PAY FOR EMMA P/M
HOW MUCH WILL INFLATION INCREASE THIS
WILL EITHER GET A JOB AT UNI
INTEREST RATE ON STUDENT LOANS
AMOUNT LIKELY TO BE OWED ON STUDENT LOANS
LIKELIHOOD OF CLEARING LOANS
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14
Q

ADDITIONAL INFO - TO GENERATE SUFFICIENT INCOME IN RETIREMENT

A 
IMPORTANCE OF RETIRING AT 60
INCOME AND CAPITAL REQD
LEVEL OF INFLATION REQD
STATE PENSION ENTITLEMENT BR19
ANY GUARANTEED/PROTECTED BENEFITS
AFFORDABILITY AND WILLINGNESS TO COMMIT FUNDS
WILLINGNESS TO SELL PREM BONDS AND SHARES FOR BETTER GROWTH
ASSET ALLOCATION OF PEN AND INV TO FUND RETIREMENT
FUND CHARGES
PROJECTIONS
VALUE OF BUSINESS THEN?
LIKELY FUTURE EARNINGS
HOW MUCH COULD CO PAY INTO PENSIONS
UNUSED ALLOWANCE FOR CARRY FORWARD
INTENTIONS TO REPAY MTG
CAPACITY FOR LOSS
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15
Q

ADDITIONAL INFO - TAX EFFICIENCY OF PENSIONS AND INVESTMENTS

A

SIMON HAPPY TO PAY PERSONAL CONTS INTO PEN
PUT MORE ASSETS IN GRACES NAME TO USE BRTB AND MAKE SHAREHOLDER
HAPPY TO FULLY FUND ISA’S
HAPPY TO PAY MORE INTO PENSIONS
BASE COST OF UK SHARES
HAPPY TO BED AND ISA
HAPPY TO SELL AND BUY SHARES TO USE CGT
HAPPY TO ASSIGN SHARES TO GRACE FOR CGT
HAPPY TO ASSIGN BOND TO GRACE OR TO CHILDREN FOR TAX REASONS

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16
Q

ADDITIONAL INFORMATION - STRATEGY TO REPAY MTG BEFORE RETIREMENT

A 
ANY EARLY REDEMPTION PENALTIES
HOW MUCH CAN OVERPAY
PLAN TO STAY OR DOWNSIZE
BUDGET TO THIS AREA
WOULD THEY USE INVESTMENTS FOR THIS AREA
HOW IMPORTANT TO RETIRE AT 60
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17
Q

COMMENT ON WEAKNESSES IN PROTECTION ARRANGEMENTS

A

LOSS OF ONE INCOME WILL LEAVE SHORTFALL
MTG NOT PROTECTED FOR LIFE OR CIC
ASU WILL LEAVE SHORTFALL AND FINISHES SOON
WILL QUALIFY FOR STATE BENEFITS IF DIES OR ILL BUT LOW VALUE
NOMINATIONS FOR PENSIONS COMPLETED BUT VALUES LOW
HAVE WILLS BUT NO 2ND DEATH PROVISION LEADING TO DELAYS
NO PMI

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18
Q

SIMONS BUSINESS RLP

A

COMPANY AS POLICY HOLDER SETS US WITH SIMON AS LIFE ASSURED
PAYMENTS ARE DEDUCTIBLE BUSINESS EXPENSE
NOT CLASSED AS BENEFIT IN KIND
MUST BE WRITTEN UNDER DISCRETIONARY TRUST SO NOT OART OF ESTATE FOR IHT
NOT WRITTEN UNDER PENSION RULES SO NOT SUBJECT TO LTA
PLAN HAS LIFE ONLY NOT CIC
TERM UNTIL HE RETIRES
SUM ASSURED TO PROTECT LOSS OF INCOME AND SHARE VALUE
SHOULD BE INDEXED

19
Q

IPP RECOMMENATION

A

IPP AS ALLOWS MULTIPLE CLAIMS AND CANNOT BE CANCELLED BY INSURER
PROVIDES REGULAR TAX FREE INCOME TO MAINTAIN STANDARD OF LIVING
SUM ASSURED BASED ON SALARY ONLY AND SHOULD BE FOR MAX POSSIBLE
TERM UNTIL RETIREMENT
OWN OCCUPATION BASIS TO MAXIMISE CHANCE OF CLAIM
DEFERRED PERIOD 3 MONTHS TO RELY ON CASH AND MINIMISE COST
GUARANTEED PREMIUMS FOR BUDGET
INDEX LINKED
PROPORTIONATE BENEFIT SO CAN RETURN WORK PART TIME

20
Q

WHY EXECUTIVE IPP?

A

HIGHER LEVELS OF COVER AS DIVIDEND PAYMENTS COVERED AS WILL HAVE SHORTFALL
ALSO COVER EMPLOYER NICS AND PENSION PAYMENTS
ENSURES STATE BENEFITS ACCRUE AND PENSION PAYMENTS CONTINUE
INCOME PAID BY CO AS PAYE SO COUNTS AS RELEVANT EARNINGS SO CAN PAY PENSION
AS A RESULT SHOULD MAINTAIN LIFESTYLE WHICH IPP WOULD NOT

21
Q

BENEFITS OF DTA

A 
CHEAP COVER
ENSURE MTG REPAID IN EVENT OF EITHERS DEATH
NOT PAYING FOR EXCESS COVER
SIPLE
BOTH IN GOOD HEALTH SO SHOULD BE ACCPTED
22
Q

DRAWBACKS OF DTA

A 
NO ADDITIONAL FUNDS PAID OUT ON DEATH
NO CIC
IF HEALTH DETERIORATES SHOULD HAVE GOT MORE COVER
COVER MAY BE INSUFFICIENT
NO INVESTMENT CONTENT/RETURN
23
Q

WHY IS ASU POLICY UNSUITABLE

A 
COVER OF 2K IS TOO LOW AND LEAVES SHORTFALL
NOT INDEXED
MAX PAYMENT TERM OF 2 YEARS
NOT PERMANENT AND CAN BE CANCELLED
INSURER CAN INCREASE PREMIUM
DOES NOT OFFER PROPORTIONATE BENEFIT
DIFFICULT TO CLAIM EG UNEMPLOYMENT
24
Q

PROCESS TO ENSURE PENSION AND SAVINGS ARE ON TRACK FOR RETIREMENT

A

ESTABLISH LEVEL OF INCOME REQUIRED AT 60
OBTAIN BR19’S
AGREE INFLATION AND TAX STATUS
AGREE GROWTH RATES
OBTAIN FUND PROJECTIONS OF PENSIONS AND OTHER ASSETS TO PROVIDE INCOME
FACTOR IN ONGOING CONTRIBUTIONS AND INCREASES
WORK OUT SAFE WITHDRAWAL RATE/ANNUITY BASED ON LONGEVITY
DETERMINE FUND REQUIRED TO PRODUCE INCOME
CALCULATE LEVEL OF CONTRIBUTION REQD
REVIEW REGULARLY

25
Q

FACTORS TO CONSIDER IF TO CONSOLIDATE INTO ASSURE LIFE PPP

A 
COMPARISON OF CHARGES
ANY PENALTIES
ANY GUARANTEES OR LIFE COVER
COMPARISON OF FUND CHOICES
EASE OF ADMIN AND ONLINE ACCESS
AVAILABILITY OF FLEXIBLE ACCESS
WILL ASSURE LIFE ACCEPT TRANSFERS IN
COST OF ADVICE
TIME OUT OF MARKET
26
Q

BENEFITS IF SIMON INCREASING EMPLOYER CONTRIBUTIONS

A

TAX FREE EXTRACTION OF PROFITS AS IS AN ALLOWABLE EXPENSE
NOT A BENEFIT IN KIND SO NO INCOME TAX FOR SIMON
AVOIDS NICS FOR SIMON AND EMPLOYER
HIGHER AMOUNTS OF CARRY FORWARD CAN BE USED FOR TAX RELIEF AS NOT LIMITED BY NRE
HIGHER INCOME IN RETIREMENT
HIGHER TFC
BETTER CHANCE OF RETIRING AT 60
TAX FREE GROWTH
LARGER AMOUNT OUTSIDE OF IHT BEFORE 75
IN TRUST SO PROTECTED FROM BANKRUPTCY

27
Q

KEY BENEFITS IF SIMON INCREASES HIS PERSONAL CONTRIBUTION TO PENSION

A

WILL GET UP TO 45% TAX RELIEF ON PAYMENTS AS DIVIDEND INCOME WILL FALL BACK INTO BASIC RATE AT 7.5% NOT 32.5%
ALL GROWTH FREE OF IT AND CGT
HIGHER TFC
HIGHER INCOME
BETTER CHANCE OF RETIRING AT 60
MORE IN TRUST SO NO BANKRUPTCY
MORE FUND OUTSIDE OF IHT IF DIES BEFORE 75

28
Q

BENEFITS OF SALARY SACRIFICE AND HOW DOES IT WORK

A

AGREEMENT WITH CO SHOULD BE IN WRITING
GROSS SALARY REDUCED BY SPECIFIED AMOUNT
TREATED AS AN EMPLOYER CONTRIBUTION AND REDUCES CORPORATION TAX
SIMONS SALARY WILL REDUCE SO WILL INCOME TAX
SIMON AND EMPLOYERS NICS REDUCED
HIGHER PCLS AND IHT EXEMPT ASSETS

29
Q

RISKS OF SIMONS SHARES IN WICKROW PUBLISHING

A

ILLIQUID AS UNQUOTED
IF UNABLE TO WORK DUE TO ILLNESS UNLIKELY TO PROVIDE INCOME
TAX BENEFITS SUCH AS ENTREPRENEURS RELIEF MAY REDUCE/REMOVED

30
Q

Tax Treatment of Company Shares on Death or Sale

A

Entrepreneurs Relief - Shares qualify for EP so CGT rate 10% on gain above CGT exemption
Gets this as is Director of Co and held more than 5% of shares and voting rights for over 2 years
Also entitled to at least 5% of profits available for distribution/disposal proceeds on sale of co
No CGT payable if share held at death

Business Relief - 100% available on death as shares in unlisted company and held for 2 years
This will reduce IHT to nil

31
Q

Factors to take into consideration if advising Simon to encase shares and premium bonds and invest into a VCT

A

Allowed to invest all into VCT as below 200K maximum per tax yr
Tax relief of 30% paid as a tax reducer in tax year shares are issued
IT relief is capped in tax year shares are issued so unlikely he will pay sufficient IT to receive full benefit and cannot carry back
IT relief lost if not held for 5 years
All gains within VCT exempt of CGT immediately
Tax Free income with no IT and as a higher rate taxpayer is valuable an doesn’t use all dividend allowance
VCT’s are high risk and meets adventurous ATR
Compare investment return/yield/growth on shares vs VCT
Return on VCT is likely to be higher and more volatile than premium bonds
Will he pay CGT on sale of shares
Time out of market
Have sufficient capacity for loss and can hold it for that term

32
Q

Factors to consider before advising on Bed and ISA of OEIC shares

A

Sale will be liable to capital gain and if over exemption of 12K will be taxed at 10% for Grace and 20% Simon
Time out of market so could lose growth
If buy back shares unit price may fall
Could choose to invest elsewhere so Grace can match medium ATR and ethical preferences
returns may not be as good as the OEIC elsewhere
Future divs in ISA will be tax free which really helps Simon as higher rate taxpayer and will reduce tax liability and increase disposable income
Compare growth on company shares vs OEIC
UKL shares are certificated so would have to be sold
Could fund ISA from Premium Bonds which do not match ATR and not matching inflation
Any capital registered capital losses to bring forward or any other capital gains

33
Q

Key Risks of investing in UK Commercial Property Fund

A

Liquidity Risk
Value of property not guaranteed / opinion
May force sale of property reducing fund value
High ongoing charges/transaction costs
Income returns not guaranteed - systematic risk
Only UK so no geographical diversification
Taxation Risk
Interest rate risk on any lending

34
Q

Potential drawbacks of Targeted Absolute Return Fund

A

Complicated
Reliant on managers expertise and reruns may suffer is not performing well
Can include performance fees/higher charges
Does not guarantee positive return over time period
Performance track recorded likely to be short and hard to compare
Funds normally for drawdown and Grace is years away
Returns unlikely to be high and subject to market risk and could do better elsewhere

35
Q

Explain how they could use Offshore Investment Bond to provide tax efficient funds for Uni Costs

A

As no tax paid within fund all chargeable gains subject to IT
Can withdraw 5% of 55K for each year bond in force as tax deferred
This is 13,750
Can assign into Graces name as BRT payer as Simon is HRT payer
Will then save 20% IT on proceeds and can then top slice
Assign to Harry & Emma so can encash them and income taxed against them
Proceeds likely to be tax free as have personal allowances, starting rate band and savings allowance
As funds to be used for living expenses will be exempt from IHT and not count as a gift
Assignments are not chargeable events and will not trigger tax charge

36
Q

Benefits of using wrap/platform for OEICS/ISA’s

A

Greater fund choice /choice of fund managers
Access to different asset classes
Automatic rebalancing available
Ease of admin/online access/all in one place
May offer reduced costs
No CGT or time out of market
Easy to use ISA & CGT allowances

37
Q

Explain factors to consider when reviewing tax efficiency of their pensions and investments

A

Bank acc - no tax interest as within savings allowances
Prem Bonds - winnings tax free

Offshore Bond - no tax within fund /gross roll up

                           - 5% tax deferred withdrawals not tax efficient over-longer term
                            - chargeable event taxed at 40% Simon & 20% Grace
                             - assignment to Grace will reduce tax payable / top slicing relief available
                              - assignment to children would allow tax free withdrawals

Simons shares - Dividends will use up all of Simons DA
- Excess will be taxed at 32.5%

OEICS - in excess of DA so Simons taxed at 32.5% on reinvested income & Grace at 7.5%

           - placing OEIC in Graces sole name would save 25% tax on half the holding (32.5% reduced to 7.5%)
           - can be used to fully fund both their ISAs this and future years
            - CGT payable on sale of OEICS and shares exceeding CGT exemption as 20% for Simon and 10% for Grace if within BRT

ISA’s - Tax efficient especially for Simon as HRT

        - ISA wrapping will remove tax on future growth and income
        - Tax efficiency maintained on first death as can be transferred to spouse 
        - No CGT
38
Q

Benefits if they set up LPA

A

Can ensure wishes are know / avoid disputes
Can choose who will act as attorneys and replacement attorneys if unable to act
Can set up health and welfare LPA’s and provide guidance on how they wish to be cared for but cannot be used until lost mental capacity
Can set up property and financial affairs LPA to allow attorney to help with finances and can be used before lose mental capacity if they wish to
Will save cost and complexity and lengthy time through Court of Protection

39
Q

Process to calculate CGT if sold some of shares in OEICS

A

Base cost established
Deducted from sale value plus all reinvested income
Deduct sale and purchase costs to provide capital gain
Any same year losses deducted and then CGT exemption can be applied
If still a gain and have registered previous years losses then these can be used
If still gain the Simons will pay 20%as HRT
Grace will any 10% within BRT band

40
Q

10 Financial Planning issues to discuss at next review

A 
Ensure ISA’s nd CGT exemptions are used
Review pension funding
Changes in tax/legislation
Any additional funds to invest
Any changes to will - 2nd death?
Changes in income/expenditure 
Reconfirm risk profile and Capacity for loss
Review investment performance against benchamarks
Review protection needs
Health
Economy / politics
Any new products
41
Q

10 Events that would trigger immediate review

A 
Change in risk profile 
End of tax year to use ISA/CGT
Grace loss of job
Simons business struggles
Divorce/death
Change to wills
Inheritance/windfall
Health issues
Tax changes
Adverse market conditions
42
Q

Six benefits of regular reviews

A

Adjust cash flow and plans if any changes
take account of tax status changes or salaries
Review performance against benchmark and rebalance if needed
Change of legislation or new products
Review Uni costs and plans to fund
Check still on track to retire at 60
review protection

43
Q

Six issues to discuss on pension planning at next meeting

A

Any changes to retirement date
Any change to target income
Asset allocation/fund performance/ethical views/ATR
Simon increased employer pension contributions?
Has Simon transferred old schemes to Assure Life
Any change to expenditure/affordability etc
Economic and market conditions
changes in pension/tax legislation

AF5 (1 decks)

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