AF5 Flashcards
HOURLY FEES
THE BENEFITS
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
HOURLY FEES
THE DRAWBACKS
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
FUND BASED FEES
THE BENEFITS
MAY NEGOTIATE LOWER FEES
PAID FROM FUND NIT OWN MONIES
INCENTIVE FOR ADVISER TO GROW FUNDS
LOWER FOR LOWER AMTS
FUND BASED FEES
THE DRAWBACKS
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
BENEFITS OF FINANCIAL ADVICE
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
FACTORS AND ASSUMPTIONS OF CASH FLOW
FUTURE EXPENDITURE FUTURE INCOME PATTERN FUTURE GIFTING LONGEVITY NEED FOR CARE ATR CFL EXPECTED GROWTH RATES ASSUMPTION OF FEES INFLATION USE OF TAX WRAPPERS
BENEFITS OF CASH FLOW MODEL
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
RISKS OF CASH FLOW MODELLING
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
STRESS TESTING CASH FLOW
PERMANENT LOSS OF INCOME FUTURE RETURNS LOWER INCOME REQUIREMENTS HIGHER LARGE UNPLANNED WITHDRAWALS HIGHER INFLATION LIVE LONGER CHANGE OF CIRCUMSTANCE EG DIVORCE
DETERMINING CAPACITY FOR LOSS
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
ADDITIONAL INFO FOR LIFE AND CIC
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?
ADDITIONAL INFORMATION - SUITABILITY OF PENSIONS SAVINGS AND INVESTMENTS
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
ADDITIONAL INFO FOR UNI COSTS
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
ADDITIONAL INFO - TO GENERATE SUFFICIENT INCOME IN RETIREMENT
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
ADDITIONAL INFO - TAX EFFICIENCY OF PENSIONS AND INVESTMENTS
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
ADDITIONAL INFORMATION - STRATEGY TO REPAY MTG BEFORE RETIREMENT
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
COMMENT ON WEAKNESSES IN PROTECTION ARRANGEMENTS
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
SIMONS BUSINESS RLP
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
IPP RECOMMENATION
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
WHY EXECUTIVE IPP?
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
BENEFITS OF DTA
CHEAP COVER ENSURE MTG REPAID IN EVENT OF EITHERS DEATH NOT PAYING FOR EXCESS COVER SIPLE BOTH IN GOOD HEALTH SO SHOULD BE ACCPTED
DRAWBACKS OF DTA
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
WHY IS ASU POLICY UNSUITABLE
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
PROCESS TO ENSURE PENSION AND SAVINGS ARE ON TRACK FOR RETIREMENT
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
FACTORS TO CONSIDER IF TO CONSOLIDATE INTO ASSURE LIFE PPP
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
BENEFITS IF SIMON INCREASING EMPLOYER CONTRIBUTIONS
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
KEY BENEFITS IF SIMON INCREASES HIS PERSONAL CONTRIBUTION TO PENSION
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
BENEFITS OF SALARY SACRIFICE AND HOW DOES IT WORK
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
RISKS OF SIMONS SHARES IN WICKROW PUBLISHING
ILLIQUID AS UNQUOTED
IF UNABLE TO WORK DUE TO ILLNESS UNLIKELY TO PROVIDE INCOME
TAX BENEFITS SUCH AS ENTREPRENEURS RELIEF MAY REDUCE/REMOVED
Tax Treatment of Company Shares on Death or Sale
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
Factors to take into consideration if advising Simon to encase shares and premium bonds and invest into a VCT
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
Factors to consider before advising on Bed and ISA of OEIC shares
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
Key Risks of investing in UK Commercial Property Fund
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
Potential drawbacks of Targeted Absolute Return Fund
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
Explain how they could use Offshore Investment Bond to provide tax efficient funds for Uni Costs
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
Benefits of using wrap/platform for OEICS/ISA’s
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
Explain factors to consider when reviewing tax efficiency of their pensions and investments
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
Benefits if they set up LPA
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
Process to calculate CGT if sold some of shares in OEICS
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
10 Financial Planning issues to discuss at next review
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
10 Events that would trigger immediate review
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
Six benefits of regular reviews
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
Six issues to discuss on pension planning at next meeting
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
