Case Study 1 (2024-04)

Question 1

State the additional information that a financial adviser would require in order to advise Andrea on the suitability of the assets that she has received from Carl in the divorce settlement to meet her financial objectives.
(15)

Answer 1

• Current income needs/current capital needs/emergency fund.
• Retirement income needs/capital needs in retirement.
• Planned retirement age.
• Base cost of holdings on transfer from Carl (did they use spousal exemption?)
• When was divorce finalised? (for CGT purposes).
• Current capital gains on holdings/any registered losses
• Use of CGT exemption.
• Use of ISA allowance.
• Dividend yield on pharmaceutical shares/ interest on OEIC.
• Interest rate on savings.
• Asset allocation/fund breakdown/fund choices/diversification.
• Platform/are shares directly held?/Administration difficulties on shares/is Andrea willing to deal with the admin?
• Downsizing.
• Charges.
• Capacity for loss (CFL).

Question 2

Explain, in detail, to Andrea the current and future tax treatment of the individual equities and OEICs that she has received from Carl.
(12)

Answer 2

• Income from shares and Equity OEICs are treated as dividend income.
• She has dividend allowance of £1K/ £500.
• Excess dividend income taxed at 33.75%
• Corporate Bond OEIC produces ‘savings income’/interest.
• She has £500 Personal Savings Allowance.
• Excess income taxed at 40%.
• Gains subject to CGT.
• She receives investments at Carl’s base cost.
• She has CGT exemption of £6,000/ £3000.
• Can offset losses/ does she have capital losses?
• CGT at 20%.
• ISA/Bed & ISA.
• All assets liable to IHT on death/No CGT on death.

Question 3

Explain the key reasons why Andrea should invest some of her current cash holdings in other asset classes.
(8)

Answer 3

• She has too much cash/excess emergency fund.
• Deposit account exceeds FSCS limit of £85K
• Can match her ATR/Cash does not meet her ATR.
• Limited growth potential on cash/potential for growth on investments.
• Interest rate risk.
• Inflation risk on cash/can reduce inflation risk with investments.
• Exceeds her Personal Savings Allowance (PSA) of £500
• Interest charged at 40%

Question 4

Explain the issues that Andrea should take into consideration when exploring the options available to her for future PMI cover, following the termination of her membership of Carl’s employer’s scheme.
(10)

Answer 4

• Can she continue cover with Carl’s provider?
• Cost of individual private cover/cost of joining her employer scheme.
• Affordability/is she willing to self-insure?
• Existing scheme may cover pre-existing conditions/new scheme may not cover pre-existing conditions/new scheme will require underwriting/moratorium basis.
• Level of cover available.
• Has she made any claims under Carl’s policy?/any current treatment?
• Excess?
• Benefit-In-Kind (BIK) tax charge?
• Willing to rely on NHS/speedy return to work.
• Employer cover will end when she retires/ limited timeframe/ can she continue with cover in retirement?

Question 5

State six benefits and six drawbacks for Andrea of retaining the existing portfolio of individual pharmaceutical shares.
(12)

Answer 5

Benefits:
* Potential for growth/provides dividend income.
* Can use her dividend allowance.
* Can use CGT exemption/offset losses.
* Can bed and ISA.
* Low-cost/no cost to retain shares.
* Diversification.

Drawbacks:
* Ongoing monitoring/ administration/ tax reporting/ must report dividend income via Self-Assessment.
* Dividend is taxable at 33.75%
* Not held within an ISA/not tax-efficient.
* Concentration risk/lack of diversification (all pharmaceuticals).
* Risk of capital loss/volatile holdings.
* Do not match ATR.

Question 6

Explain to Andrea why it is important to review her pension arrangements in advance of retirement.
(8)

Answer 6

• Update her nomination.
• Check her NI record/BR19/may be able to purchase extra years/fill any gaps.
• Can make higher contributions now/limited to salary/she has pensionable earnings/higher employer matching?
• Tax relief available at 40%
• Her ATR may change closer to retirement/does fund match ATR?
• Charges.
• Retirement income flexibility/do pensions offer FAD/UFPLS/plans to purchase annuity?
• Performance/new funds available/better investment options/review to ensure sufficient income in retirement?

Question 7

Recommend and justify a range of actions that Andrea could take to improve the tax-efficiency of her financial arrangements.
(12)

Answer 7

• Bed & ISA OEIC/share holdings.
• Increase pension contributions.
• 20%/40% tax relief.
• Pensions are outside estate for IHT purposes.
• Tax-free income and growth (Pension and ISA).
• Reduce income below Basic Rate band.
• Recovers £1K PSA/she has £500 PSA now/reduces dividend tax from 33.75% to 8.75%
• Use annual CGT exemption/Register any CGT losses.
• Reduce cash balances/consider tax-free NS&I.
• Reduces 40%/ 20% tax on savings.
• Update pension nominations/use gifting allowances/Potentially Exempt Transfers (PETs)
• IHT efficiency.