Case Study 1 Flashcards
1
Q
Target Date Retirement Fund - overview (7)
A
- Member selects fund that aligns with their retirement date
- first invests in riskier assets and then less volatile as approach retirement
- fund is actively managed (unlike lifestyle) so can account for market movements
- driven by target year and not by members age
- can switch fund if change retirement date
- Vidas likely in growth phase wherein target investment growth that covers inflation + 3% net of charges, has long term volatility of 10-12% and aims for steady real growth through diversification.
- moves into consolidation phase 10 years prior to retirement
2
Q
First time buyers (6)
A
- 0% stamp duty payable on purchases under £300k
- 5% if between £300k-500k
- should not exceed this otherwise will be taxed at normal rates
- their parents lending money for the deposit does not effect first time buyer relief
- can use LISA towards property if not over £450k - may want to consider this otherwise government bonus lost
- may be eligible for help to buy equity loan if purchasing new build (no charges due in first 5 years)
3
Q
JISA - Advantages (6)
A
- Tax efficient and gives potential for investment growth - £100 rule does not apply to income produced from JISAs
- Does not use their allowances
- Range of available funds they can invest in
- £9k per annum likely to be sufficient for further education costs
- Can contribute lump sum or via regular contributions
- anyone can contribute
4
Q
JISA - Disadvantages 6
A
- Children can choose funds from age 16
- No access to funds until child becomes 18
- Is child’s product and they may not use it for education when turning 18 (lack of control for parent)
- investment risk or inflation risk if invested in cash
- charges applicable may be high
- may require advice for investment and most appropriate provider etc
5
Q
Benefits of using a financial adviser (18)
A
- Help the client to identify financial problems and goals
- Identify financial strategies by showing and discussing options available
- Setting priorities in line with clients aims and objectives
- Researching the market for the best products
- Executing the planning as client may not have the time or knowledge to do themselves
- Wealth creation and preservation
- Helps clients to avoid common financial mistakes
- Adviser expertise and regulated advice
- Less admin for client
- they have an adventurous ATR therefore will be able to suggest higher risk investments
- charges review
- financial planning tools available to adviser
- likely to result in improved returns
- ongoing monitoring of investments
- diversification can be achieved
- Review the market for new products
- keep up with changes in taxation and legislation
6
Q
Multi-Asset funds (4)
A
- funds that invest across all asset classes including cash, fixed interest securities ad equities producing diversification
- can also be fund of funds
- tailored to specific risk profiles, here, 40-85% equities would be most suitable for Vatil’s ATR
- also include 0-35%, 20-60% and flexible (up to manager)
7
Q
Benefits of Family-Income Benefit (10)
A
- Tax free income paid out
- sum assured is not limited
- term can be set to match needs
- low cost cover
- can get guarantee premiums
- can be set up under trust
- indexation is available
- meets objectives
- simple underwriting as both in good health
- cannot be cancelled by insurer
8
Q
LISA - Drawbacks (9)
A
- max contribution of £4K
- early access leads to penalties
- penalty on withdrawal exceeds government bonus
- can only use for mortgage or retirement purposes
- investment risk or inflation risk
- may have high charges
- need for financial advice
- limited choice of providers
- add admin as may need to set up another S&S or Cash ISA to fulfil allowance
9
Q
What are advantages of making regular contributions into S&S JISA rather than cash JISA (7)
A
- no prospect for investment growth
- Juna young so long timescale for growth
- pound cost averaging
- benefit from investment volatility
- can stop and start contributions when they want
- assists with budgeting
- reduces risk of poor investment timing
10
Q
What are the risks of relying on death in service benefits for family protection (5)
A
- may lose cover if change/leave employment
- employer can change terms
- benefit level may not be right for requirements
- as based on income, if part-time, level of cover decreases
- only covers death and not long term or serious illness
11
Q
Recommend and justify suitable policies to provide protection in the event of long-term illness or disability (16)
A
- IP policies for both as this pays out tax-free regular income on the event of long term illness or disability
- these should be taken out as single life policies in order to maximise benefits and deferral periods will be different
- the sum assured will be 50-60% of their earnings
- the deferral period should be 6 weeks for Vidas as he receives SSP during this period, and 13 weeks for Viktoria for the same reason
- the term should be to their selected retirement ages
- indexation should be included to ensure benefits keep up with inflation
- the policies should be taken out on an own occupation basis as this increases the chance of a pay out
- guaranteed premiums should be selected in order to maintain certainty of costs throughout the term
12
Q
Recommend and justify suitable policies to protect the family in the event of the death of Vidas or Vik (12)
A
- both should take out level term polices as they provide a tax-free lump sum on their deaths
- these should be in the form of two single life policies, as the amounts needed on death may differ
- the sum assured should at a minimum cover any impending mortgage, and be sufficient enough to provide for the survivor and family
- the term should be until their retirement age, to ensure they are covered up to this point
- the policies should be put into discretionary trusts as this will avoid probate and keep the proceeds outside of their estate
- waiver of premium should be included so they are able to maintain cover in the event that they cannot pay their premium
13
Q
Recommend and justify suitable protection policies in the event of serious illness (16)
A
- they should take out level term standalone CIC for each of them as this will maximise benefits for little difference in cost and pays out a tax free lump sum on the diagnosis of a critical illness
- single life policies should be taken out as amount needed may differ
- the sum assured should be sufficient enough to maintain the families current lifestyle and pay off impending mortgage
- the term of the policy should be to their nominated retirement ages
- they should select premiums to be guaranteed as this allows for certainty of costs throughout the policy term
- waiver of premium should be included to maintain cover in the event that they are unable to pay premium
- should meet ABI best practice guidelines for CIC as this is the best level of protection available
- CIC policies may include child cover and will pay out if their children are diagnosed with a CI
14
Q
State the factors an adviser should consider when identifying a suitable sum assured for life cover and/or CIC (6)
A
- debts
- expenditure
- cost of adapting home for CIC
- childcare costs
- availability of state benefits
- income
15
Q
Assuming they are not yet married and have not drawn valid wills they will; (4)
A
- die intestate
- only inherit jointly held assets
- they are unmarried
- single owned assets will pass to child
16
Q
If they are not yet married but draw up valid wills before they marry (3)
A
- up to point of marriage, JOA will pass to survivor
- single owned assets pass according to will
- if wills werent drawn up in anticipation of marriage, wills are invalidated on marriage
17
Q
what are the advantages (4) and disadvantages (4) of saving for the childrens further education costs by setting up a bare trust
A
- income tax based on childrens tax position
- same with CGT
- does not impact ISA contributions
- choice of funds can match ATR
Disadvantages;
- if trust funded by parents and income exceeds £100, income tax liability falls on parent
- children can demand access at 18
- may not use funds for further education
- separate trust needed for second child add admin
18
Q
what are the advantages (2) and disad (3) of Vidas’ parents helping them build a deposit via loan
A
Adv;
- repayments more flexible
- interest charged may be low
Disadv;
- may need formal agreement
- lenders may feel that loan repayment affects affordability
- may restrict amount that can be borrowed via mort
19
Q
what factors should be consider if repaying car loan early (5)
A
- any penalties
- early settlement figure obtained?
- how would this pay off impact deposit for property
- having an outstanding loan will affect mortgage amount
- lenders may have affordability concerns
20
Q
Outline pros (8) and cons (5) of being invested in a tracker fund
A
Pros;
- low cost
- run by computer system and therfore no human judgement
- potential for growth
- performs in line with index
- can track any index
- liquid
- easy to follow performance
- active managers dont always outperform
Cons;
- will underperform market due to charges
- tracking error means will never match exaclty
- perform poorly in falling market
- no active management
- lack of control over underlying asset
21
Q
Explain how multi-asset fund works and how they match ATR (9)
A
- fund that invests in various asset classes to achieve diversification such as cash, FIS and equities
- funds diversified and can be spread over sectors
- cautious funds have greater amount in FIS
- adventurous has higher amount in equities
- Vidas best option is 40-85% fund
- actively managed
- greater potential for growth with lower vol due to diversification
- rebalances regularly
- access to specialist investments
22
Q
Benefits of a target retirement date fund (5)
A
- can be used for drawdown
- good growth potential in growth stage
- actively managed unlike lifestyling
- can switch retirement date if needed
- can select fund to match ATR
23
Q
Compare CIC and IP policies (11)
A
- IP pays out regular income whereas CIC lump sum
- IP pays out on being able to work due to sickness whereas CIC is on diagnosis of CI
- IP allows multiple claims where CI only once
- IP cover decreases over the term
- CIC can be WOL therefore longer term available
- IP % of salary whereas CI no linked to earnings
- IP pays out after deferral period whereas CIC after survival period
- IP based on occupational definitions
- CIC can include life cover and other benefits such as child cover
- IP has more detailed underwriting
- CIC can be set up under trust
24
Q
Implications of parents making a gift for deposit (7)
A
- considered a PET and no immediate tax charge
- value of PET reduces over 7 years
- once 7 years have past, sits outside estate
- if exceed NRB than considered a CLT and immediate tax charge of 20% may be applicable
- able to utilise £3,000 per parent gift allowance and can use allowance from previous year if not used
- if die within 3 years may be subject to IHT at 40% and 3-7 years tapered relief
- could use life cover policy to cover any potential IHT liability
25
Q
Considerations for parents loaning deposit to Vidas (6)
A
- will need to draw up formal loan agreement and needs to be signed/handwritten
- this sets out term of loan such an interest rate, term and monthly repayment amount
- will loan be secured against property
- need to cover off what happens on divorce or default on loan
- what happens in the event of death of the parents
- loan remains in their estate
