Andrea Questions Flashcards
Outline to Andrea the key issues that may result in her failing to meet her plan for a sustainable income throughout retirement
• Health/loss of income through ill health or redundancy.
• Periods of high inflation.
• Lower future interest rates.
• Asset allocation/amount held in cash will not offer real growth.
• Annuity rates reducing/ amount held in equities in pension funds.
• Changes to legislation/taxation.
• Reduction in real terms of Income Tax allowance.
• Reduction in other tax allowances/reduction of CGT AEA will impact return on disposal of shares & OEIC.
• Market downturn/lack of actively managed funds to outperform during downturns.
• lack of guaranteed private pension/relatively low contribution levels
• unknown/unexpected costs of running household on one income
State the additional information that a financial adviser would require in order to advise Andrea on the suitability of her financial. arrangements.
• Family health/longevity.
• Current expenditure/willingness, ability to economise.
Were the OEICs, shares and house her full entitlement following divorce.
• Employment plans/retirement date - will it be phased?
• Expected income and capital needs in retirement.
• Views on flexibility/secured income.
• Need for escalation/views on inflation in retirement.
• Any plans for the downsizing?/future lumps sums or inheritance expected.
• Plans to gift money to sons/grandchildren/desire to leave a legacy.
• Views on long term care funding.
• Priorities of objectives.
• State Pension entitlement/BR19.
• Affordability/willingness to make additional pension contributions/contribution history•
• Details of existing pension/charges/performance/salary sacrifice available?
• Nomination forms completed and updated since divorce?
• Emergency fund required now and in retirement.
• Why is she holding £180,000 in cash/are deposit and current accounts with the same bank (for FSCS limits)?
• Interest rates on her current and deposit account/any term on deposit account?
• Yield on OEICs & shares/performance/base cost of shares/OEICs.
• Performance, charges and details of platform for ISAs.
• Timescales and priorities for each investment.
• Has she used her ISA allowance for the current year?
• What is the cost to Andrea of joining Group PMI scheme?/type of cover offered…
• Views on NHS/joining her employer PMI scheme/when can she join?
• View on other protection needs
• CFL.
State the additional information that Andrea’s financial adviser would require in order to advise her on the OEIC and pharmaceutical shares she has received as part of her divorce settlement.
• Yield on OEICs and shares.
• Where are they held - platform/how easily could they be transferred to her ISA platform?
• Base costs of individual shares & OEICs.
• Any dividends reinvested?
• Any withdrawals from OEICs/encashments from shares?
• Views on holding these investments?
• Types of individual shares held (large companies, start-ups?)/risk profile/performance.
• Details of funds/risk profile/performance/charges/type of corporate bonds held, investment or non-investment grade?
• Views on diversifying with actively managed funds/more global holdings/fixed interest/commercial property?
State the process that an adviser should follow when advising Andrea on her financial situation.
• Establish/define relationship/confirm scope of service/fees.
• Andrea may be classed as a vulnerable client due to recent divorce, if so
- adviser should make it easy for her sons or a friend to be present at any meetings.
- offer flexibility around appointment locations, times of day and duration.
- choose method of communication that best suits Andrea.
• Fact find/determine immediate and future objectives post-divorce including:
- Establishing retirement needs inc. retirement date, views on flexible vs guaranteed income/views on PMI/protection/providing for family.
- Realistic timescales/priorities of each objective.
• Confirm capacity for loss (CFL) now Andrea has received all the assets from her divorce/ATR (currently cautious).
• Analyse current situation/existing investments/identify shortfalls/obtain BR19/ensure nominations are updated following divorce.
• Develop financial plan/research.
• Present financial plan/recommendations/discuss.
- Consider staggering advice over several meetings to allow time for consideration if adviser feels Andrea is a vulnerable client.
• Provide key information documents/suitability report.
• Provide jargon free information.
• Implement plan/ obtain client agreement.
• Monitor financial plan/vulnerable status and review.
Explain the benefits to Andrea of a current cash flow statement when devising her financial plan.
• Will consider her expenditure needs post-divorce/shows difference between expenditure and income.
• Highlights areas for cost reduction.
• Will consider retirement needs and identifies opportunities to fill gaps whilst still working.
• Can be used for analysing future cash flows in retirement.
• Can stress test for periods of high inflation and how her portfolio might perform in a downturn.
• Will identify the point Andrea could potentially run out of money if she chooses FAD.
• Enables Andrea to understand the long-term impact of large items of expenditure.
State the main factors that might affect Andrea’s attitude towards investment risk following her divorce.
• Timescale/intended retirement age.
• Age.
• She is now solely reliant on her own income.
• Income and expenditure following divorce.
• She has significant assets following receipt of the shares, OEICs and the family house, so her CFL has increased
• Large emergency fund.
• She does not appear to have any liabilities and is mortgage free/ability to downsize.
• Experience/understanding of market/investments.
• She is in good health/lack of protection products.
• Objectives.
• State Pension entitlement.
State the benefits and drawbacks of using an asst allocation model when devising an investment strategy for Andrea
Benefits
• Can match her cautious ATR.
• Considers past and expected future returns.
• Considers volatility.
• Identifies issues in current portfolio.
• Can include geographical, sector allocations as well as asset allocation.
• Can consider income and/or growth requirements.
drawbacks
• Doesn’t recommend an appropriate tax wrapper/take account of Andrea’s tax position.
• Charges are not considered.
• Questions asked aren’t always relevant.
• Different models produce different results.
• Underlying assumptions subject to change/based on historic data.
• Needs to be reviewed.
Identify the key issues that a financial adviser should discuss with Andrea at the next annual review.
• How is Andrea coping following divorce a year on/vulnerability status?
• Changes to views or objectives.
• Changes in income/ expenditure.
• Changes in employment/tax status.
• Any inheritances or capital sums received?
• Changes to risk profile/CFL.
• Use of tax allowances/pension contribution history.
• Did Andrea decide to keep the OEICs and individual shareholding?/priorities for these investments? /Any income taken or reinvested?
• Did Andrea reduce cash holdings? /are cash holdings now under the FCSC limit?
• Asset allocation/performance/rebalance/did she switch from UK equity tracker funds in ISA?
• New products available/political/economic changes/market conditions.
• Any changes to health/family/other personal circumstances.
• Did she join her new employer PMI scheme?/cost
Explain to Andrea why she should review her investments as soon as possible and then on a regular basis.
• Recently divorced so income and capital needs may be unclear.
• ATR/CFL may have changed now she is divorced and may change once she has adapted to the change in her personal circumstances.
• Assets from Carl do not match Andrea’s ATR/need to align asset allocation to suit
Andrea.
• Make use of allowances in the current year (and ongoing) e.g. CGT AEA/ISA allowance.
• Review performance/charges.
• Personal circumstances may change.
• Ensure income and dividends from OEICs and shares match needs/options to take natural dividend income, reinvest or take fixed monthly income from OEICs.
• Individual shares and OEICs require regular monitoring.
• Political/economic/legislative/taxation changes/new products.
State the factors an adviser would need to consider before advising Andrea on a strategy to meet her retirement objectives?
• Potential vulnerability status.
• Longevity/she is currently in good health.
• Precise retirement date/plans for retirement - full, phased, working part-time?
• Age/less than 2 years from State Pension age/option to defer if she wishes to carry on working.
• State Pension entitlement/BR19.
• Views on/need for secured or flexible income.
• Capital and income requirements now and in retirement.
• Surplus income/ability to fund increased pension contributions/pension contribution history/regular or single premiums
• ATR/CFL
• Fund choice available/active vs passive/asset allocation/need to align to vesting plans.
• Tax position/she is a higher-rate taxpayer currently, likely to be basic-rate taxpayer in retirement.
• Other possible inheritances/capital sums.
• Purpose of other assets/will they be used for retirement income.
• Amount held in cash/above FSCS limit.
• Cash flow analysis.
• Existing pension provision.
• Growth assumptions and stress tests.
• Inflation assumptions.
• She is in good health/family longevity/how long will income be needed?
Outline the key issues that Andrea should take into consideration before making any changes to the underlying investments in her pension plan.
• ATR (cautious)/CFL.
• Andrea’s funds are 100% equity (adventurous).
• Vesting plans - annuity or flexible income.
• More caution is required for annuities/for taking maximum PCLS.
• Timescales for vesting/retirement plans.
• Past performance/benchmark performance/management style/fund choice.
• Charges for switches/charges on funds/fund options.
• Diversification (asset and geographical).
Identify the factors that an adviser would need to consider before advising Andrea on whether to increase her pension contributions to her workplace scheme.
• Current level of contributions.
• Level of income required now and in retirement.
40% tax relief on contributions within higher-rate band/tax-free fund growth.
• Contributions will be immediately outside of the estate for IHT.
• 25% tax free PCLS/may not be a higher-rate taxpayer in retirement so income taxed at basic-rate.
• Andrea has access to significant other investments which are not as tax efficient.
• Can access pension funds at any time/flexible benefits.
• Will employer match any increased contributions?
Explain why Andrea’s cash holdings may be unsuitable for her retirement needs.
• Too much held in cash even for cautious investor.
• Lack of diversification.
• Rate of return from cash will not keep pace with inflation.
• Interest rates likely to reduce in the future.
• Current account may be earning no interest.
• Appears to be an instant access deposit account (as no mention of term) could achieve higher interest in a fixed rate account over longer term.
• Likely to be paying tax at 40% above her £500 PSA/can use cash ISAs, these are more tax efficient.
• Default risk as exceeds FSCS limit of £85,000.
• Six months temporary additional FSCS protection up to £1,000,000 for proceeds of divorce unlikely to apply as the cash funds were not part of the assets from Carl.
• Lack of potential for growth/better growth potential may be available elsewhere.
• Inflation risk/interest rate risk.
Explain to Andrea why her current pension funds may or may not be suitable.
• 100% equities does not match her cautious ATR.
• High volatility/may experience a downturn as approach retirement so unlikely to be suitable if looking to purchase an annuity.
• Will not offer protection against falling annuity rates if annuity is required.
• Lack of asset diversification.
• Currency risk on global equity funds.
• Will offer little protection against falling market as she approaches retirement.
• Good growth potential.
• Potential to outperform inflation over longer term.
• Offers global diversification
Explain to Andrea why her current savings and investment portfolio (excluding pensions) may or may not be suitable for her long-term retirement planning needs.
Cash
• Too much held in cash even for her cautious ATR/inflation risk/interest rate risk.
• Too much held in current account likely earning no interest.
• Appears to be an instant access deposit account, could achieve higher interest in a fixed rate account.
• Can use cash ISAs - more tax efficient.
• Default risk as exceeds FSCS limit of £85,000.
Fixed Interest
• Underweight in fixed interest holding.
• Only investment grade bonds suitable for her cautious ATR.
• Good potential for income.
• Lack of global diversification/all UK based
Equities and shares
• Lack of global diversification/predominantly UK based.
• Individual shares unlikely to be suitable for Andrea’s ATR.
• Over exposure to pharmaceutical industry sector.
• Good potential for income and growth.
• Lack of actively managed funds/no alpha.
• Tracker funds are low cost and easy to follow/active managers do not always outperform.
• Tracker funds will underperform the market due to charges/tracking error/will never match the market exactly.
• Lack of control over underlying assets/ perform poorly in falling market.