AF5 Practise Test 1 Flashcards
Oct 2018
- Identify and explain in detail the key client-specific factors that you would take
into consideration when assessing Nick and Jane’s capacity for loss.
(10)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 1
- They have significant assets/wealth/adequate emergency fund.
- They can tolerate some loss/volatility.
- They have earned income/Nick starts his new job soon.
- Level of income required.
- Guaranteed income from Defined Benefit scheme/State Pension.
- No potential inheritances.
- No liabilities.
- Loan/gift to Daniel.
- Short time frame to retirement.
- History of poor family health/they are currently in good health.
- With regards to the benefits on offer from his new employer:
(a) Identify the key additional information you would require to enable you to
evaluate the health-related benefits available to Nick.
(12)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 2 (a)
Income Protection Insurance
* Level of benefit and term/retirement date.
* Company sick pay policy/period paid/deferred period.
* Is policy indexed in payment?
* Are pension contributions covered.
* Taxable benefit.
Private Medical Cover
* Comprehensive/restricted cover/level of cover.
* Exclusions/pre-existing conditions covered/moratorium.
* Cover for Jane available.
Critical Illness Cover
* Conditions covered/matches Association of British Insurers definitions/exclusions.
* Survival period.
* Underwriting (initially).
* Value for benefit-in-kind charge/tax charge.
- With regards to the benefits on offer from his new employer:
(b) Explain in detail the benefits to Nick of joining his new employer qualifying
workplace pension scheme. (12)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 2 (b)
Candidates would have gained full marks for any twelve of the following:
- Tax relief on contributions at 20%/40%.
- Paid net/deducted from payroll/no administration/no need to reclaim tax.
- Matched employer contribution up to 7%.
- Could use salary sacrifice to save National Insurance contributions.
- Employer may rebate National Insurance saving into plan.
- Benefit from death in service scheme/otherwise unavailable.
- Death-in-service is valuable to Nick as he has poor family health/smoker.
- Inheritance Tax efficient fund for Jane/children.
- Tax-efficient growth within fund.
- Range of income options in retirement/flexible income.
- Can draw benefits at age 62.*
- Wide range of investment funds/to meet attitude to risk.
- Normally lower cost/employer sponsored.
- Increased pension in retirement/pension commencement lump sum (PCLS).
- With regards to the benefits on offer from his new employer:
(c) Explain to Nick how a Target Date fund operates and why this may be a
suitable fund choice for him within his new employer qualifying workplace
pension scheme. (7)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 2 (c)
- Target date matches his normal retirement date.
- Can be used for drawdown/not targeted solely to annuity.
- Growth potential in consolidation phase/ to normal retirement date.
- Actively managed/no forced sales/market timing.
- Can switch retirement date/switch to new target date.
- Asset allocation changes to reduce risk/volatility.
- Nick can select fund to match his attitude to risk.
- In respect of Nick’s deferred defined benefit scheme:
(a) Explain to Nick the reasons why he might wish to consider transferring the
deferred benefit into a personal pension arrangement. (10)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 3 (a)
Candidates would have gained full marks for any ten of the following:
- Defined Benefit scheme may offer enhanced/attractive Cash Equivalent Transfer Value
(CETV). - Financial strength of employer/funding position of Defined Benefit scheme.
- Nick cannot take benefits before 65/he wishes to retire at 62*.
- Personal Pension offers flexible death benefits/personal pension provides death
benefits to children/Defined Benefit provides spouses’ pension only. - Inheritance Tax-free/it meets estate planning objectives/larger estate for family/
Income tax-free on death before age 75. - Nick has poor family health/longevity.
- Nick is a smoker so enhanced annuity rates may be available.
- Potential for growth/can match attitude to risk/adventurous risk.
- Personal Pension can vary income/Defined Benefit income is fixed at outset.
- Personal Pension can manage Income Tax/Defined Benefit inflexible for Income tax.
- Personal Pension may offer higher Pension Commencement Lump Sum.
- They have substantial assets so do not need guaranteed income/can use other assets
for income.
- In respect of Nick’s deferred defined benefit scheme:
(b) Outline the key drawbacks for Nick and Jane of transferring this benefit to
a personal pension arrangement. (8)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 3 (b)
Candidates would have gained full marks for any eight of the following:
- Loss of guaranteed lifetime income.
- Loss of guaranteed spouse’s benefit.
- Loss in index-linking/expensive to replicate.
- Cost of transfer/advice charges/cost of setting up alternative scheme/ongoing costs.
- Administration/time to monitor/complexity.
- Investment risk.
- Loss of Pension Protection Fund (PPF) protection.
- Cash Equivalent Transfer Value (CETV) may improve in future/CETV may not be
attractive. - Does not match Jane’s attitude to risk.
- Longevity risk/Nick may live for a long time.
- (a) Explain to Nick and Jane how a lifetime cashflow model could be used to
assist them in meeting their objectives. (8)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 4 (a)
- Identify shortfalls.
- Based on existing portfolio/contributions.
- Returns required/increased contributions required.
- Stress-test existing portfolio (losses/market crash).
- Apply range of growth rates/based on attitude to risk.
- Show impact of inflation.
- Impact of withdrawals/sequencing risk.
- Can be adjusted/reviewed as circumstances change.
- (b) Recommend and justify the actions that Nick and Jane could take to ensure
that they will be able to generate a tax-efficient and sustainable income
from all of their pensions and investments throughout retirement.
Candidates should assume that Nick and Jane do not take out any new
investment plans. (14)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 4 (b)
- Use ISA allowance for tax efficiency.
- Use Capital Gains Tax exemption/£3,000.
- Transfer some of Nick’s unit trust to Jane.
- Uses Jane’s dividend allowance/Nick exceeds his dividend allowance.
- Interspousal transfer/base cost transfers to Jane.
- Switch ISA/unit trust holdings to income-generating funds.
- Retain investment bond until both basic rate taxpayers/assign bond to Nick.
- Can take 5% tax-deferred cumulative withdrawals.
- Top-slicing available.
- Draw benefits from Jane’s inherited self-invested personal pension (SIPP).
- Tax-free as brother died aged 59/before age 75.
- Use flexi-access drawdown (FAD)/uncrystallised funds pension lump sum (UFPLS) to
draw benefits from Jane’s defined contribution scheme. - Can use SIPP for Inheritance Tax efficiency/use SIPP last.
- Maximise pension contributions for tax relief/for employer matching contributions.
- (c) Outline the key issues that Nick and Jane should consider when planning a
strategy to meet any long-term care costs. (10)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 4 (c)
- Family health for Jane/longevity.
- Type of care required/at home/care facility.
- Estimated cost of long-term care.
- Care fee inflation/general inflation.
- Budget/affordability.
- Availability of state benefits e.g. Attendance/Carer’s Allowance.
- Willingness to downsize/equity release.
- The use of an immediate needs annuity.
- Investment bond not considered for care fees.
- They have significant assets so must self-fund.
- Jane is considering her options in respect of her late brother’s self-invested
personal pension scheme (SIPP).
(a) Recommend and justify why Jane should use a diversified portfolio of
collective investment funds within this SIPP. (8)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 5 (a)
Candidates would have gained full marks for any eight of the following:
- Cash holdings are losing real value/effects of inflation.
- Reduces risk/volatility.
- Non-correlation of assets/negative correlation of assets.
- Invest in real assets/equities provide inflation proofing/growth.
- Can select different management styles/active/passive/can match Jane’s attitude to
risk. - SIPP allows wide range of investments.
- Geographic diversification can improve returns/minimise volatility.
- Meets her income needs.
- More potential for a legacy.
- Jane is considering her options in respect of her late brother’s self-invested
personal pension scheme (SIPP).
(b) Identify the key factors that you should consider when establishing a
reasonable rate of withdrawal from Jane’s SIPP plan in the future. (10)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 5 (b)
- Income needs in retirement/capital needs.
- Income available from other sources/State Pension amount.
- Future tax position for Jane/use of Jane’s Personal Allowance/tax allowances/SIPP
income is tax-free. - SIPP investment strategy.
- Projected SIPP value/growth assumption.
- Economic conditions/inflation rate.
- Sequencing risk/pound cost ravaging.
- SIPP charges/admin charges/cost of advice.
- Longevity/Jane’s state of health.
- Death benefits/Nick or children/Inheritance Tax free.
- (a) Explain in detail to Nick and Jane why their existing choice of investment
funds within their non-pension investments may not be suitable to meet
their longer-term objectives. (10)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 6 (a)
Candidates would have gained full marks for any ten of the following:
Nick:
- US Equity fund/European Equity fund lacks diversification/all equity.
- Currency risk/all overseas.
- Investment risk/potential for significant capital loss.
- Dividend income exceeds his allowance/tax due of 8.75% on excess.
- Capital gain within Unit trust/potential Capital Gains Tax of 10% on disposal.
- US Equity fund lacks geographical diversification.
- Limited income stream/growth funds/accumulation units.
Jane – UK Corporate Bond:
* May fall in value if interest rates rise/interest rate risk.
* Lack of growth potential/may not keep pace with inflation.
Joint – With-Profit bond:
* With-Profit fund does not match Nick’s attitude to risk.
* Opaque/investment strategy unclear/taxed at 20% internally/cannot use Capital
Gains Tax exemption.
* No guarantee of final value on encashment /reliant on actuary/market value
adjustment.
- (b) Explain in detail to Nick and Jane how investing in Alternative Investment
Market (AIM) ISAs could help them to mitigate their future Inheritance Tax
liability. (7)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 6 (b)
- Alternative Investment Market (AIM) shares qualify for Business Relief.
- Inheritance Tax does not apply to qualifying Business Relief assets/saves 40%
Inheritance Tax. - After two years.
- Asset must be held on death to qualify.
- Monitoring required/Business Relief can be lost.
- ISA can be transferred to spouse/use Additional Permitted Subscription on death.
- Holding period transferred to beneficiary/Inheritance Tax efficiency retained.
- (c) Identify the key drawbacks for Nick and Jane of using AIM ISAs. (7)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 6 (c)
- Can be illiquid.
- High annual charges.
- Does not match Jane’s attitude to risk.
- Shares may lose qualifying status/legislation may change.
- Limited income potential.
- Limited number of providers/complex investment.
- Very high investment risk/volatility/risk of capital loss/lower reporting standards.
AF5: Financial planning process Practice Test 1
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- Nick and Jane would like to consider using their existing Investment Bond to
provide a lump sum to assist their son with the purchase of his first home.
(a) State five benefits and five drawbacks for Nick and Jane if they choose to
fully encash their Investment Bond when it reaches the twenty-year
anniversary. (10)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 7 (a)
Benefits
* No market value adjustment guarantee on 20th anniversary.
* Can reinvest in more tax-efficient fund/can reinvest in more diversified
portfolio/more in line with attitude to risk/income objective.
* Money available for gift to Daniel.
* Top slicing may be available.
* Market currently high/may offer terminal bonus/crystallises accumulated bonuses.
Drawbacks
* Loss of 4% annual guaranteed bonus.
* Loss of smoothing/reduces volatility.
* Loss of ability to take tax-deferred income in retirement.
* Tax charge/could lead to loss of personal allowance.
* Bond cannot be assigned to children in future.
- Nick and Jane would like to consider using their existing Investment Bond to
provide a lump sum to assist their son with the purchase of his first home.
(b) (i) Explain in detail to Nick and Jane how an interest-free loan to Daniel
would be treated for Inheritance Tax purposes on second death. (6)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 7 (b) (i)
- Loan remains part of the estate/debt owed to estate.
- Loan must be reported to HM Revenue & Customs (HMRC).
- Executors can demand repayment of loan.
- Loan can be written off by executors.
- Loan is not a gift/exemptions cannot be used.
- Estate liable to Inheritance Tax at 40% if exceeds Inheritance Tax exemptions
on 2nd death/Inheritance Tax still due on debt.
- Nick and Jane would like to consider using their existing Investment Bond to
provide a lump sum to assist their son with the purchase of his first home.
(ii) State the actions Nick and Jane could take to protect Daniel from a
forced repayment of the loan on their deaths. (5)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 7 (b) (ii)
Candidates would have gained full marks for any five of the following:
- Re-write Will to reflect loan details.
- Draw up loan agreement and full details/interest-only.
- Write letter of wishes to be given to executors.
- Request that loan be written off on second death.
- Discuss and gain agreement from Sally.
- Insure against debt/whole of life, joint life last survivor (£50,000).
- State six factors you should consider when reviewing Nick and Jane’s pension
arrangements at your next annual review.
Candidates should assume that there have been no changes in Nick or Jane’s personal circumstances since your last
review meeting. (6)
CLIENTS’ FINANCIAL OBJECTIVES
You have now been able to determine from the information in the fact-find that your clients have
the following financial objectives:
Immediate objectives
* To analyse the benefits offered to Nick through his new employer.
* To assess the suitability of Nick and Jane’s current savings and investments.
* To evaluate Nick’s options in respect of his deferred pension benefits.
* To provide a lump sum to assist their son in purchasing his first home.
Longer-term objectives
* To ensure that Nick and Jane are able to generate an adequate and tax-efficient income in
retirement.
* To maximise their estate for the benefit of Sally and Daniel.
* To establish a suitable strategy to ensure that any long-term care fees can be met.
Model answer for Question 8
- Change in income needs/budget/affordability/tax status/objectives/State Pension forecast.
- Investment performance/attitude to risk/capacity for loss/rebalance/charges/SIPP
invested/asset allocation. - Pension contributions increased for employer matching/contributions.
- Change in market conditions/inflation/economy.
- Change in regulations/legislation/new products.
- Has Nick transferred Defined Benefit scheme/has Jane drawn from SIPP/pension
nominations made.
