Build Up A Portfollio Of Objectives To Assit With Retirement Objectives Flashcards
Outline the steps you would follow when completing an individual risk profiling assessment for Bartek and Zophia
Explain the purpose
Question or complete questionnaire
Score risk- manually or using software
Asset allocation or efficient frontier suggested by score
Discuss the results
Agree suitable risk
Benefits of using a risk profiling tool
SHITS
Simple, repeatable, consistent and objective
Helps to understand risk
Indentify appropriate asset allocation
Tolerance for loss identifies maximum risk vs reward
Separate risk profiles for each objective
Drawbacks of using risk profiling
Terminology may not be understood
Different tools give different results and may be misinterpreted
May not give capacity for loss
Different clients or objectives may have different ATR
Does not take into consideration investment experience
Cannot be used in isolation
Does not consider taxation issues or charges
Based on historic data
Only relevant for that moment
Evaluate the suitability and tax efficiency of Bartek and Zophias pensions and investments
Consider themselves to be adventurous investors
Not reflected in investments, which are all cash
Capital lack protection from inflation and potential for growth
Pensions don’t match ATR and are closer to medium risk
Again, it limits growth potential and inflation protection
Capital all within FSCS
Not at risk of providers defaulting
ISAs benefit from aditional permitted subscriptions on first death as married
Meaning ISA funds of deceased can stay protected from income and CGT
Couple are using ISAs, although it does not look like they are using their full subscription each year
This presents an opportunity to maximise the funds that can grow free from UK income tax and CGT
Both should keep topping up ISA for tax-free accessible income in retirement
But cash ISAs are not online with ATR
The couple have lifetime ISAs meaning they will benefit from a goverment bonus each year in addition ISA tax wrapper benefits itself
LISAs are in cash
Which does not match ATR
But may suit Timescale for depoist
The couple have no taxable savings income to make use of savings allowance
The couple have no taxable dividend income to make use of dividend allowance
The couple have no investments to make use of CGT allowance
If afordability allows, they could both benefit from more tax relief by boosting their pension contributions
This would make retiring at 60 a more achievable goal
Making pension contributions would be especially tax efficient for Bartek
And could reduce or eliminate child benefit tax charge
Both should keep pension under review to confirm likely adaquacy of pension pots and both should keep topping up ISAs
In order to have accessible tax-free income in retirement
Why might Bartek be liable to the high income child benefit charge
The child benefit charge is placed on the highest earner in a household should their adjusted earnings (total income minus pension and charitable contributions) pass £60,000
It is then increased by 1% for every £200 up to £80,000 where the child benefit amount is effectively wiped out as individuals never pay more than the child benefit itself
Bartek does not need to be the person claiming child benefit to receive the charge
If either him or Zofia are in recipiet of childbenefit , he will need to pay the charge by self assement if for somereason his earnings go over £60,000
Bartek receives £60,000 a year plus his regular bonus of £15,000
The bonus would take him over the threshold
Bartek can make contributions to reduce adjusted income to prevent this charge
Bonus sacrifice might be an option to discuss with his employer
Outline how bonus sacrifice works and the income tax and NI implications of using one
Must ask for bonus to be sacrificed
Before the bonus is paid
Is paid directly to pension
As if Bartek receives directly, he will pay 40%income tax/2% NI and the child benefit tax charge
If paid into pension directly
Bartek avoids income, NI and child benfit charge
Employer also pays less employer NI, which they may agree to pay some of to Bartek pension but are not obliged to
What are the benefits of Bartek using bonus sacrifice agreement?
Bonus contribution not subject to NI and income tax, meaning Bartek would pay less tax than if he took the bonus
As higher rate tax payer tax saving is even more efficient for Bartek
Using bonus sacrifice could prevent high income child benefit tax charge
Company would pay less NI as Barteks employer
They could rebate some or all of this to his pension
Increasing the sum of the pension
And his potential amount payable in retirement
This would also increase the pension lump sum amount, which is tax-free
Outline the drawbacks of bonus sacrifice
Employer not obliged to rebate NI savings
Reduces annual take-home pay
Reduces income for employee benefits, state benefits and lending applications
May be an issue when saving for a mortgage
Cannot be used to reduce threshold income for tappered annual allowance (not an issue for Bartek as he is well bellow this)
Explain to Zofia the benefits of increasing her workplace pension contributions to 10%
Her employer would match this
It would increase the amount paid into her pension
This would be subject to compound investment returns and growth until removed in retirement
Therefore, increases retirement provision
Which is currently low
She would be entitled to 25%pcls meaning a quarter of the money she withdraws will be tax-free
This is likely to prove tax efficiency over the long run
Pension exemptions extend the basic rate band
Meaning she could earn more at the basic rate than the standard threshold if her income increases in the future
Pension funds are currently outside the estate for IHT purposes
Meaning contributions reduce liability to IHT
Funds will grow free of tax on income and gains
What are the benefits of using pension plans to fund Bartesk and Zofias retirement?
Tax relief at highest rate on own contributions
Employers can claim as an expense saving corporation tax
If salary/bonus sacrifice save income tax and NICs
Fund grows in tax free enviroment
25% tax-free PCLS
Contributions can reduce income-tax, high income child benefit tax charge, avoid tax at high rates
Access to professional fund management
Remaining 75% taxable withdrawls gives opportunity to use personal allowance
And creates income for normal expenditure exemption under IHT mitigation
Fund is non-accesable until 55/57, meaning there is no worry of loss of spending discipline
What are the drawbacks of using a pension
Contributions limited to £60,000 or 100% relevant earnings
No access until 55/57
75% taxable as income
Annuity may not match ATR
FAD/UFPLS fund remains exposed to stock market
From April 2027, pension funds could be part of the estate for IHT purposes
What are the benefits of using ISAs to fund retirement?
Income and CGT free
Fund grows in a tax-free environment
Access to a wide range of funds to suit ATR and diversity
Profesional fund management
No limit on accessing funds
No requirement to report income/ gains to the HMRC
Aditional permitted subscription avialable as married
What are the drawbacks of using standard ISAs to fund retirement rather than a pension?
£20,000 annual limit on contributions
No employer contributions
May be tempted to access funds pre-retirement, leaving a shortfall
Included in Estate for IHT
What are the benefits of using collectives to fund retirement?
Cht annual exempt amount avialable
CGT losses can be offset
Bed and ISA/bed and pension for greater tax efficiency
No limits on withdrawal contributions or access
Profesional fund management and diersification
What are the drawbacks of using collectives for funding retirement
CGT annual exempt amount only £3000
CGT rates have recently increased
No tax relief contributions
Possible CGT liability
All income is taxable
Time taken to switch to ISA and manage tax liabilities
No employer contributions
May be tempted to access funds pre retirement, leaving a shortfall
Included in estate for IHT purposes
