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.
Explain to Andrea how her State Pension entitlement will work.
• Andrea will receive her State Pension at age 66.
• Minimum of 10 years needed to receive any State Pension.
• Full rate in 2023/24 = £203.85.
• For a full new State Pension - 35 qualifying years are needed.
• Qualifying years can be met through contributions or credits.
• Starting amount calculated as at 5/4/2016.
• Triple lock/State Pension increased by higher of earnings, prices and 2.5%.
• Taxed as earned income.
• Option to defer (see below).
Explain to Andrea the process for claiming her state pension and the rules should she consider deferring
• Andrea will need to actively claim the pension.
• This can be done by post, phone or online.
• If not claimed then deferral is automatic.
• Increased by 1% for each 9 weeks of deferral/minimum 9 weeks deferral.
• Equivalent to 5.8% per annum.
• In addition to annual increases.
• This can also be done once the pension is in payment.
• No lump sum option available.
Identify the key factors you would need to consider when advising Andrea on the suitability of the assets she has received from Carl.
• ISAs and pensions are more tax efficient than the individual shares and OEICs.
• No CGT liability at the time of transfer of assets to Andrea as they were subject to formal divorce agreement.
• Vulnerability.
Pharmaceutical shares
• Type of stocks within portfolio ie, are they large companies or upstart biotech stocks?
• The shares are likely to be high risk/this does not match Andrea’s cautious ATR.
• She has adequate capital so no need to take high risk.
• Good potential for growth and income.
• Regular monitoring/ongoing administration/need for simplification/need for tax reporting/certificated/harder to sell.
• Recent reduction in dividend payments (UK economy)/ current economic conditions/dividends are not guaranteed.
• Lack of asset diversification/single sector/equities.
• All UK based/lack of geographic diversification.
• Uses dividend allowance.
• Dividends taxable if exceeds DA, as she is a higher rate taxpayer taxed at 33.75%.
• Cost of selling/liquidity shares.
• She may have a CGT liability on sale/the base cost used is Carl’s acquisition cost/liability over CGT AEA of £6,000 (£3,000 from 24/25) taxed at 20%.
OEICS
• Charges/performance.
• Provides some fixed interest holdings in her portfolio/adds asset diversification.
• Only investment grade corporate bonds suitable for her cautious ATR.
• UK global equity tracker funds likely to be low cost.
• Will perform in line with equity index/easy to monitor.
• Provides global diversification.
• Good potential for growth.
• No actively managed funds/no alpha.
• Uses dividend allowance (DA).
• Dividends from equity OEIC taxable if exceed DA, as she is a higher-rate taxpayer taxed at 33.75%.
• Income from corporate bond fund taxed as interest/40%.
• Cost of selling/liquidity shares.
• May have CGT on sale/base cost used is Carl’s acquisition cost /liability over CGT AEA of £6,000 taxed at 20%.
Property
• Ability to downsize in future to help fund retirement.
• May be larger than required for just Andrea/expensive to maintain on her own.
• Home is approximately 50% of assets (excluding pensions).
• NO SDLT on transfer from Carl/no CGT on sale.
• Good potential for capital growth.
• Does not need capital from house currently.
Explain to Andrea how diversification may be used to manage and reduce risk.
• Diversification reduces risk by reducing concentration/increasing the number of asset classes.
• Some asset classes are not strongly correlated - a loss with one asset class might not mean a loss in another.
• Downside risk of one investment can be offset by the upside potential of another.
• Geographical diversification spreads the risk across a number of different economies / currencies / national markets.
• Sector diversification reduces the risk associated with specific areas of the economy or particular firms.
• Diversification can reduce investment specific risk but not market risk.
State the factors an adviser would need to consider when deciding if Andrea should consider consolidating all her assets onto the platform she currently uses for her ISA.
• Ease of transferring other assets onto platform.
• Range of providers/asset classes/funds/investments/tax wrappers available.
• Limitations of platforms - which products are not available.
• Does it have access to the same funds/shares (or share class) as OElCs and individual shares.
• Is an in-specie transfer possible to avoid the sale of assets?
• market movements if existing assets need to be sold.
• CGT liability on OEICs and shares.
• Initial charges/exit charges or fees for moving existing OEICs and shares.
• Platform charges/adviser charges.
• Andrea’s age/ease of paperwork/time/effort as she gets older.
• Wealth can be seen at the press of a button.
• Performance is easy to obtain.
• Can apply asset allocation strategies across different tax wrappers/possibility of automatic rebalancing.
• Online switching/easy to gradually bed and ISA OEICs and shares.
• Consolidated tax statements are automatic.
• Charges/discounts for large portfolios such as Andrea’s.
• Which calculation tools are available.
• Reports and valuations can be stored online.
• Other platforms may offer more choice/cost/comparison
What factors would you take into account when reviewing the tax efficiency of Andrea’s existing portfolio?
• Andrea is currently a higher-rate taxpayer, likely to be a basic-rate taxpayer in retirement.
• She has a PSA of £500/likely to be paying tax on savings income from deposit account and now corporate bond OEIC (at 40%).
• Use of her ISA allowances/no tax on income or growth.
• Appears not to have maximised tax relievable pension contributions/limited IHT
efficient investments.
• No CGT liability on the transfer of gains to Andrea.
• Dividends from equity OEIC and individual shares are taxable if exceed DA of £1,000, as she is a higher rate taxpayer this is taxed at 33.75%.
• Income from corporate bond fund taxed as interest at 40%.
• May have CGT on sale of OEICS and individual shares/base cost used is Carl’s acquisition cost/liability over CGT AEA of £6,000 taxed at 20%.
• All assets except her pension will be added to estate for IT purposes/her RNRB plus NRB is £500,000 hence she has a significant IHT liability.
** As the assets were passed to Andrea as part of a formal divorce agreement there is no CGT on the transfer of the shares or OEICs.
She will be assumed to have acquired them at their original base cost and will be liable to CGT on gains (above her AEA) if she sells them prior to death.**
What factors would you take into account when reviewing potential options to ensure Andrea’s savings and investment portfolio is tax efficient as she approaches retirement?
• ISA allowance of £20,000pa/tax free income and growth.
• Annual allowance on pension contributions is £60,000 per annum. Limited to earnings for tax relief (£56,000 in 2023/24 for Andrea.
• Pensions offer tax relief on contributions, tax free income and growth, PCLS but income taxable/IHT free.
• Andrea has a £500 PSA currently/could receive £1,000 PSA if she increases pension contributions.
• Income from corporate bond OEIC and interest from cash savings accounts use
PSA/excess taxed at 40%.
• NS&I premium bonds are tax free.
• She has a DA of £1,000 (reducing to £500 in 2024/25).
• OEICs and shares produce dividends, as Andrea is a higher-rate taxpayer currently taxed at 33.75% over DA.
• Use of investment bonds/non income producing/offer 5% tax deferred income.
• She could make gifts for IHT/£3,000 pa annual exemption/small gifts £250/gifts from normal expenditure/could be used to help fund Junior ISAs for grandchildren if appropriate.
Explain to Andrea how the OEICs and individual shares will be taxed if she decides to retain them and how they would be taxed if she decided to sell them.
• She has a PSA of £500/her savings income from deposit account likely to use up all her PSA hence income from corporate bond OEIC will be taxed at 40%.
• Dividends from equity OEIC and individual shares are paid gross/taxable if exceed DA
of £1,000.
• DA reducing to £500 from 2024/25.
• Dividends taxable if income taken or reinvested.
• As she is a higher-rate taxpayer excess is taxed at 33.75%.
• May have CGT on sale of OEICs and individual shares/can offset taxable gains with any losses she has carried forward from previous years.
• Base cost used is Carl’s acquisition cost/liability over CGT AEA of £6,000 taxed at 20%.
• Assets are liable to IHT.
Explain in detail to Andrea how benefits would be paid from her workplace pension plan on death and why it is important that she updates her death benefit nomination as soon as possible.
• If Carl is named as the beneficiary on the nomination form, death benefits could be paid out to him even after divorce, ultimately at the discretion of the Scheme Administrator.
• Updating it following divorce ensures it will be passed to her intended beneficiaries (her two sons).
• This simplifies the process on death/minimises delays in payment.
• It ensures her sons receive the benefits and have option to use flexi access drawdown
(FAD).
• They will also have the option of taking a lump sum or buying an annuity.
• Improves tax-efficiency for children/tax free growth/protects tax free pension wrapper.
• Retains IHT-free wrapper/can pass IHT free to future generations.
• Income (or lump sum) is tax free if Andrea dies before age 75/taxed at their marginal rate if Andrea dies after 75.
