Case Study 1 (24-07)

Question 1

State the additional information that a financial adviser would require in order to advise Max on the suitability of his current financial arrangements to meet his retirement objectives.
(15)

Answer 1

• Current income needs/capital needs/care costs for mother? emergency fund needs.
• Retirement income needs/plans for long-term care costs.
• Planned retirement age.
• Longevity/family health.
• Base cost of individual OEIC/Investment Trust (IT) holdings/current gains on holdings/any losses.
• Use of CGT exemption/use of ISA allowance/Pension contribution history.
• Interest rate on deposit account.
• Dividend yield on individual holdings/OEIC/IT/shares.
• Asset allocation of OEICs/range of funds available.
• Flexible/guaranteed income needed.
• BR19/State Pension entitlement.
• Any inheritances expected/downsizing.
• Charges.
• Priority of objectives.
• Capacity for loss.

Question 2

Explain to Max how his current pension lifestyle fund operates and identify the key reasons why this particular fund may not be suitable to meet his long-term objectives.
(8)

Answer 2

• Max is planning to retire after set life styling date/not retiring in September 2024.
• Fund reduces risk towards retirement.
• Fund aims to have 25% in cash at retirement date/holds £105k in cash.
• Inflation risk on cash.
• Limited equity content now/Fund may not be invested suitably now.
• Limited potential for growth.
• Max is an adventurous investor/does not match ATR.
• May be unsuitable for Flexi-Access Drawdown (FAD)/phased retirement/may be geared to annuity purchase.
• Fund switches are automatic/do not consider market conditions/Max has no control over switching or investments.

Question 3

Recommend and justify how Max could adjust the investment strategy within his OEIC and investment trust portfolio to generate additional tax-efficient income for him in retirement.
(12)

Answer 3

• Use ISA allowance/Bed & ISA.
• ISA provides tax-free income and growth.
• Use CGT exemption £3K/£6k
• Draw tax-free lump sums (within CGT exemption).
• CGT at 20%/10%
• Register capital losses (to use against future gains).
• Diversify funds (all equity).
• Invest in Fixed-Interest holdings/Interest-yielding funds.
• Can use Personal Savings Allowances (PSA) of £500/£1,000 on Fixed-Interest holdings.
• Savings interest taxed at 40%/20%
• Switch to dividend-generating equity funds/income units.
• Use Dividend Allowance of £500/ £1000
• Dividend Tax rate of 33.75%/8.75%

Question 4

Outline the key reasons why Max should monitor the suitability of his holdings in the AIM stocks on a regular basis.
(8)

Answer 4

• High risk/high volatility.
• Potential for capital loss.
• May not match ATR in future.
• He is unlikely to have IHT liability (unless he changes his Will)/is IHT a concern for Max?
• Are they all ‘qualifying’ for Business Relief/shares must be qualifying on death/may lose IHT qualifying status in future/ regulatory changes.
• Lack of diversification.
• Not designed to generate income/may pay low level of dividend/Max needs income in retirement.
• Liquidity issues/can be difficult to sell.

Question 5

Explain to Max why he should review his nominations and Will.
(8)

Answer 5

• Ensure it meets his wishes/his circumstances might change/health/his estate value may change.
• Any other family members who could dispute Will/make claim? /Avoids disputes.
• Trustees (Death-In- Service and pension) have discretion.
• Pension Trustees cannot pay to Charity unless clearly nominated (if brother pre-deceases)/ check registered status of charity.
• Nomination if brother pre-deceases him?
• Should review Will to ensure it is IHT-efficient/IHT rules may change/ changes in legislation.
• Are executors up to date? /Appropriate executors
• Funeral wishes up to date?

Question 6

Explain to Max the process that will be followed to wind up his estate on his death and how his estate would be treated for Inheritance Tax purposes. No calculations are required.
(10)

Answer 6

• Assets valued by executors/all outstanding debts deducted from estate/funeral expenses/identify any failed Potentially Exempt Transfers (PETs).
• Pension/Death-In-Service (DIS)/AIM not included in the estate.
• IHT paperwork submitted to Probate Service/apply for Grant of Probate.
• Confirmation that Charity beneficiary is a registered charity.
• Gift to brother uses part of Nil Rate Band (£325K)/IHT-free.
• Residence Nil Rate Band (RNRB) cannot be used (no direct descendant beneficiary).
• No IHT on charity gift.
• Estate is IHT free (value falls within NRB).
• Debts paid (after Probate granted).
• Gift paid to brother/residual estate paid to charity.

Question 7

Recommend and justify a range of actions that Max could take to improve the tax efficiency of his financial arrangements.
(15)

Answer 7

• Increase pension contributions/salary sacrifice.
• Tax relief at 40%
• Reduce to Basic Rate Taxpayer.
• CGT reduces to 10%/PSA to £1,000/Dividend to 8.75%
• Use ISA/Bed and ISA.
• Tax free growth and income (pension and ISA).
• Use annual CGT exemption £3K/£6k
• Register any capital losses/sell holdings to crystallise losses.
• Reduce Cash holdings.
• Interest taxed at 40%/ PSA is £500.
• Invest in Venture Capital Trust (VCT).
• Tax-free dividends/30% income tax relief.
• VCT matches his ATR/he is an adventurous investor.
• Defer his State Pension.
• Reduces Income Tax liability.