Analysing the client’s financial situation – Retirement provision

Question 1

Outline the factors that Joshua and Amina should consider when deciding whether to increase their monthly pension contributions to their workplace schemes. (16 points)

Answer 1

• Affordability/expenditure.
• Liquidity/accessibility/normal minimum pension age due to increase to 57, likely to increase further.
• Views on pensions.
• Provision vs target amount.
• Annual allowance/contribution history.
• ATR/CFL.
• Availability of further matched contributions.
• Pound-cost averaging.
• Changes to tax rules/legislation.
• Priority vs other objectives/insurance cover.
• Child Benefit tax charge.
• State Pension entitlement
• Tax relief on contributions/40% for Joshua & Amina.
• Tax free income growth/IHT free/25% PCLS.
• Flexible death benefits/tax free before age 75.
• Low cost/ease of admin.

Question 2

Explain the factors Joshua and Amina’s adviser should consider when evaluating whether the current investment holdings within their ISAs and pensions are suitable for their needs. (11 points)

Answer 2

• Significant UK weighting/limited diversification.
• ESG focus may limit investment opportunities.
• Andrea’s views on ESG investing/specific areas of concern/do existing funds align.
• Her understanding of ethical investing such as positive and negative criteria, ESG factors.
• Equity investments are appropriate given time horizon.
• Charges/platform.
• Performance/versus benchmark.
• ATR/CFL.
• Target date/intended retirement date.
• Fund switches/alternative fund options.
• Legislation/economic/market conditions.

Question 3

Outline the strengths and weaknesses in Joshua and Amina’s current investment and pension provision and whether they are likely to be suitable to meet their retirement needs. (11 points)

Answer 3

• Limited pension provision.
• They have a long time horizon to make contributions.
• Good/suitable level of emergency funds.
• Good level of ISA savings/scope to use future allowances.
• Scope to make further pension contributions/Joshua’s contributions are minimal.
• Contribution method is not tax efficient/consider further company contributions.
• Amina is an ESG investor/may limit investment opportunities.
• May also have higher charges/more volatility/potentially lower growth.
• Heavy exposure to UK/country weighting.
• Equity weighting appears appropriate for time horizon.
• Need to know asset/sector allocation for some holdings.

Question 4

State the key risks associated with the investment in Amina’s UK ethical equity fund. (6 points)

Answer 4

• Concentration risk/weighted towards UK.
• Political/government/economic risk.
• Limited scope for diversification with ESG.
• Market risk/systemic risk/capital loss/volatility.
• Regulatory/legislative risk.
• Event/non-systematic/environmental/operational risk.

Question 5

Explain to Amina the screening processes that can be used by ethical fund managers and give the reasons why a fund manager may choose not to invest in a particular company. (11 points)

Answer 5

• Positive screening.
  o Companies that meet set criteria/ethical standards/values.
• Negative screening.
  o Avoids companies which breach criteria/ethical standards/do not align with values.
• Poor corporate governance.
  o Unethical business practices/tax practices/excessive remuneration.
• Does not meet screening criteria.
  o Poor employee welfare standards.
  o Tobacco/alcohol/gambling/arms/.
  o Pollution/nuclear power/oil.
  o Animal testing.

Question 6

Explain to Amina the potential advantages of ESG investment. (6 points)

Answer 6

• Holdings can be aligned with personal values.
• Positive impact on society.
• Strong corporate governance.
• Lower legal and reputational risk/positive brand image.
• Some evidence of better potential long-term returns.
• Greater transparency and accountability in dealings.

Question 7

Describe the issues that an adviser will need to consider when formulating a sustainable and responsible investment strategy for Amina. (14 points)

Answer 7

• Strength of her beliefs/motivation/shades of green.
• Positive/negative screening.
• ESG factors.
• Range of funds/restricted fund choice/less diversification.
• Lack of standardisation in assessing ESG status.
• Companies not required to disclose all information relating to sustainability practices/ can make comparison difficult.
• Higher costs due to additional research.
• Potential for greenwashing.
• Fund performance/increased volatility.
• Reputation of fund manager/expertise.
• ATR/CFL.
• Tax wrappers/Investment wrappers.
• Ethical banking.
• Timescales/objectives.

Question 8

State the key factors that a financial adviser should take into consideration before recommending a fund switch within Joshua and Amina’s workplace pensions. (9 points)

Answer 8

• Fund choices available/ethical options.
• Actual return/benchmark/against other funds.
• Ongoing charges.
• Cost of switches.
• ATR/CFL
• Inflation.
• Intended retirement date.
• Liquidity/market conditions.
• Vesting intentions.