Case study 1 Flashcards
Outline the main reasons why Ken should opt into his employer’s qualifying workplace pension scheme (8 marks)
-Free employer contributions which will otherwise be lost
-Likely to be low cost as employer sponsored
-Builds further pension funds for the future / greater income in the future / less reliance on existing SIPP / investments
-Tax free growth within pension / potential for growth
-Fund choice can match his ATR
-Employer may pay more than the minimums, or match employee contributions, so higher overall monies being invested
-His contributions attract tax relief at his highest marginal rate (20% at source)
-Tax free cash/pension commencement lump sum once ceases work again
-Funds can be passed on to beneficiaries free of Inheritance Tax and may pay benefits income tax free if death before age 75
-Benefits from pound cost averaging
Explain to Ken whether he is eligible to join his employer’s qualifying auto-enrolment pension scheme (8 marks)
-As Ken has reached State Pension age, but is under age 75
-And his salary of £20,000 exceeds the threshold / he will be earning more than £10,000
-He will be classed as a non-eligible job holder
-This means his employer does not have to automatically enroll Ken into the pension scheme
-But Ken can request to be enrolled / he is entitled to enroll if he wishes to / he has the right to opt in
-If Ken asks to be enrolled his employer must allow this
-And his employer must make at least the minimum contributions in line with the scheme rules
-3% from the employer / 5% from Ken
-If Ken does not ask to be enrolled there is no obligation on the employer to automatically enroll him every three years
-As Ken is already drawing pension benefits his combined contributions for tax relief purposes will be restricted to MPAA/£4,000 (increasing to £10,000)
Explain briefly why Ken and Mary should have regular review meetings with their adviser (6 marks)
-React to changes in their circumstances / priorities / attitude to risk / tax status
-React to changes in legislation / tax
-React to new products
-Ensure use of tax allowances and exemptions
-Reinforce client relationship / forms part of service agreement
-Ensure plans are on track / react to market / economic changes / rebalancing / asset allocation / performance
-Changing situation as Ken returning to work
State the process an adviser should follow to advise Ken and Mary on their investment planning (6 marks)
-Establish the relationship / disclosure of status / adviser fee
-Goals / expectations / objectives / affordability / timescales
-Attitude to risk / capacity for loss / asset allocation
-Analysing the client’s situation
-Formulating recommendation / develop the financial plan / maximise tax efficiency
-Implementation
-Annually review / rebalance / monitor
State the additional information that an adviser would require to advise Ken and Mary on their savings and investments (8 marks)
-ATR/CFL in this area
-Any planned Capital expenditure
-Any gifts to children / grandchildren planned
-Level of Emergency Fund required
-Income or growth required / their objectives / timescales
-Interest rate / notice period on Mary’s deposit account
-Any winnings on Premium Bonds
-Income being received from the ISA investments in each of their names and Ken’s OEIC
-Has this year’s ISA allowance been utilised
-Performance of ISA investments
-Performance of Ken’s OEIC investment / charges / original amount invested / any withdrawals or additions
Ken is concerned about the decrease in the value over the past year of the funds within his SIPP. As Ken is drawing funds from his SIPP via flexi access drawdown explain why sequencing risk should be a concern to him when drawing his retirement income in this way (4 marks)
-Reverse pound cost averaging
-Drag on investment returns if in early years
-Withdrawals in poor markets amplify effect of poor returns
-Increases possibility fund exhausted early
Outline and explain four strategies that may help to reduce sequencing risk (8 marks)
-Invest in decumulation-targeted fund
-Reduces volatility
-Maintain cash reserve
-Draw on this in falling markets
-Reduce spending
-Until markets recover
-Rising equity glide path
-Reduce vulnerability to early falls in market
Explain the potential benefits to Ken and Mary if they decide to receive and act on advice received from a qualified financial adviser (8 marks)
-Help meet conflicting objectives
-Benefit from research
-Budgeting/cash flow
-Assess suitability of existing investments
-Tax planning
-Assess ATR/CFL
-Create financial plan
-Specialist knowledge
-Ongoing service/reviews
-Consumer protection
State seven areas that an adviser should address at an annual review meeting with Ken and Mary (7 marks)
-Update on retirement position
-Income/expenditure analysis
-Review new pension arrangements
-Investment performance
-Use of tax exemptions/allowances
-Legislative changes
-New products
-Change in objectives
-Change in circumstances
Outline the factors that you would take into account in determining Ken and Mary’s capacity for loss (10 marks)
-High emergency fund
-Medium to high ATR
-Can tolerate some volatility
-Sufficient non-savings income
-Not reliant on cash assets to meet monthly outgoings
-Ken returning to work, reducing reliance on pension incomes
-Children financially independent
-No outstanding mortgage
-High liquid & illiquid assets
-Joint, secure & indexed income of £31,400
-Assets held broadly match ATR
State two benefits and two drawbacks of Ken and Mary paying any advice fees via:
-Hourly rate
-Fixed fees
(8 marks)
Hourly rate benefits:
-Method familiar to clients
-Not linked to investment performance
Hourly rate drawbacks:
-Rewards inefficiency
-Potentially subject to VAT
-Costs may exceed estimate
-Difficult to quantify time to work completed
Fixed fee benefits:
-Clear
-Not linked to investment performance
-More willing to talk to adviser/cost less impediment
-Easy to compare
Fixed fee drawbacks:
-Could be excessive for work done
-May be hard to understand
List the main benefits and drawbacks of Ken and Mary drawing up a Lasting Power of Attorney (6 marks)
Benefits:
-Avoids delays with Court of Protection
-Document wishes
-Choose decision maker
Drawbacks:
-IHT planning restrictive
-Irrevocable if mental capacity lost
-Expensive
Ken and Mary would like to ensure they have sufficient income throughout their lifetime. Identify the main factors and assumptions that you would discuss with Ken and Mary when formulating a cash flow model. (9 marks)
-Future expenditure pattern
-Timings of Ken’s employment
-Expected gifting
-Longevity
-Long term care
-ATR
-CFL
-EGRs
-Charges
-Inflation
-Use of tax efficient wrappers
Ken and Mary would like to ensure they have sufficient income throughout their lifetime. Explain the benefits of using a cash flow forecast in establishing a strategy for meeting this financial objective. (7 marks)
-Income v expenditure comparison
-Stress test
-Understand impact of various future events
-Allows adviser to identify shortfalls
-Plan for these
-EGR assumptions input
-Inflation assumptions input
-Adjust as circumstances change
-Determine suitable asset allocation
Ken and Mary would like to ensure they have sufficient income throughout their lifetime. Explain the risks of relying solely on cash flow modelling to help them meet this financial objective. (6 marks)
-Assumptions can be incorrect
-Requires regular reviews
-Objectives can change
-Returns modelled as linear
-Tax rules may change
-Systemic risk not considered
-Liquidity risk not considered
