Case Study 1 for Andrew and Carrie

Question 1

Protection (death) - What further information would you need before you could advise Andrew and Carrie in this area?

Answer 1

 What is your available budget?
 Andrew - would you want to ignore or include your death in service benefits in any
life cover calculations?
 Would you want to ignore or include any State benefits?
 What level of income would the survivor need if one of you were to die?
 Would you need any lump sums to pay out in the event of serious illness?
 In the event of death, would the survivor want a lump sum or regular income?
 For how long would you want any life cover to be in place?
 Do either of you smoke/family history/dangerous hobbies?
 What is your attitude to risk in this area?
 What is your capacity for loss?
 Nomination on pension plans completed?

Question 2

Protection (critical illness) - What further information would you need before you could advise Andrew and Carrie in this area?

Answer 2

 What is your available budget?
 Andrew – what sick pay provision does your employer offer?
 What level of income would you need if you were unable to work due to long-term
illness?
 For how long would you want any benefit to be payable?
 What are your preferred retirement ages?
 Would you want your benefit to increase in line with inflation?
 Do either of you smoke?
 What is your attitude to risk in this area?
 What is your capacity for loss?

Question 3

Features of income protection

Answer 3

Provides tax-free income if unable to work due to illness or injury.
No protection against unemployment/redundancy.
Permanent cover until selected retirement/death/return to work.
Choice of deferred period.
Policy cannot be cancelled by insurer.
No lump sum benefits.
Could include proportionate benefits.

Question 4

Features of Personal Accident and Sickness

Answer 4

Provide tax-free income if unable to work due to illness and injury.
Could also include cover against unemployment/redundancy.
Benefits will only pay out for 1 or 2 years.
Deferred period usually 4 or 8 weeks.
Annually renewable policy - insurer could decline to renew.
Possible lump sum benefit in the event of loss/hearing etc.

Question 5

Explain why Andrew might not want to rely on his employer’s death in service benefit as part of their protection planning

Answer 5

 Cover would be lost if he changed employer
 Cover would get more expensive to replace as Andrew gets older
 His employer could change terms of cover or eligibility
 His employer could change the level of cover
 May not provide enough cover to protect family and cover any mortgage
 Only provides cover for death not for serious illness or long-term illness
 Cover would be reduced if Andrew worked part time or if salary sacrifice was
introduced

Question 6

State the benefits of an employer’s death ‐in‐service scheme

Answer 6

 Employer meets cost/no cost to employee/non-contributory for employee
 Not a benefit‐in‐kind
 Cover will increase as salary rises
 Benefits payable outside estate/speedy payment
 Not medically underwritten/free cover limit/no admin for employee
 Tax‐free benefits.
 Provides valuable family protection

Question 7

Andrew’s employer is introducing a group income protection scheme. Describe how such a plan would work and describe the tax treatment

Answer 7

 Employer selects the level of benefit payable – typically up to 75% of earnings
 They also select the deferred period and for how long benefits would be payable
 Employer pays premiums and claims them as a business expense for tax purposes
 It would not be treated as a benefit in kind for Andrew
 Any benefits are paid to the employer
 Benefits are then passed to the employee subject to income tax and NICs

Question 8

What State benefits would Andrew and Carrie be eligible to receive should one of them die?

Answer 8

 Bereavement Support Payment
 Lump sum of £3,500
 Plus £350 per month for 18 months

Question 9

Ensure that they have adequate funds available to purchase a property
What further information would you need before you could advise Andrew and Carrie in this area?

Answer 9

 What is your available budget for monthly mortgage repayments?
 How big a deposit are you thinking of putting down?
 Do you have a good credit history?
 Do you have any loans that you might wish to repay?
 Andrew – how long have you been with your current employer?
 Carrie – how long have you been self-employed?
 What term would you want for your mortgage?
 Would you be looking for an interest only or a capital and interest mortgage?
 Are you both first time buyers?
 How much of your existing assets would you want left as an emergency fund/available for investment?
 What is your attitude to risk in this area?
 What is your capacity for loss?

Question 10

What are the advantages of using the money inherited from Andrew’s uncle as a deposit?

Answer 10

Smaller mortgage = lower monthly payment.
Interest on mortgage higher than interest earned on deposit.
Higher deposit may attract lower mortgage rates.
Life assurance will be cheaper - lower sum assured required.
Could enable them to reduce the term of the mortgage.

Question 11

What are the disadvantages of using the money inherited from Andrew’s uncle as a deposit?

Answer 11

Loss of access to money that could be on deposit.
Loss of growth potential on the money.
Loss of emergency fund.
Does not match attitude to risk.

Question 12

Explain why opening Lifetime ISAs may not be of help to Andrew and Carrie for the purposes of their property purchase

Answer 12

 They could both open Lifetime ISAs and contribute up to £4,000
 They would normally earn a 25% bonus
 But the ISA needs to have been open for at least a year before they can use the money
and receive the bonus

Question 13

How much Stamp Duty Land Tax will Andrew and Carrie have to pay if they purchase the property valued at £480,000?

Answer 13

 If they buy the property before 31/3/21 they will pay no SDLT as the property is valued at less than £500,000
 After that date, as first time buyers, they will pay £9,000 in SDLT:
o No SDLT up to £300,000 and 5% from £300,000 to £480,000

Question 14

What other potential costs are there when purchasing property?

Answer 14

 Conveyancing costs
 Searches, land registry fee
 Valuation costs
 Fee for mortgage
 Estate agent fees
 Moving costs
 Insurances eg building and contents insurance

Question 15

Explain the impact of owning a property as Joint Tenants and Tenants in Common

Answer 15

Joint Tenants
On death their share automatically passes to the survivor

Tenants in Common
On death their share (not necessarily 50%) passes according to the terms of the Will of the deceased

Question 16

Andrew and Carrie are thinking of using their pension funds as the means of paying off a mortgage. What are the advantages of this?

Answer 16

Tax efficiency- Andrew will get up to 45% income tax relief and Carrie 20% on pension contributions.
Only need to pay interest on the mortgage.
Could make ad-hoc payments from other sources to reduce mortgage balance.
Good potential for growth/matches ATR.

Question 17

Andrew and Carrie are thinking of using their pension funds as the means of paying off a mortgage. What are the disadvantages of this?

Answer 17

No guarantee that funds will be sufficient to pay mortgage.
Only 25% of funds can be taken as PCLS.
Funds cannot be accessed until minimum pension age - set to rise beyond 55.
Reduces the funds available for retirement.

Question 18

Describe how an offset mortgage works

Answer 18

 The balance in an offset mortgage linked account is deducted from the mortgage
 Mortgage interest is only charged on the remainder
 Money held in the savings account is always available but, if money is withdrawn, the
amount on which mortgage interest is charged will increase
 If money is added to the savings account then the amount on which mortgage
interest is charged will decrease
 No interest is produced by the savings account so there will be no income tax liability
 This may be useful if clients are additional or higher rate taxpayers.

Question 19

Arrange for some of their holdings to be invested in an ethical manner.
What further information would you need before you could advise Andrew and Carrie in this area?

Answer 19

 How much will you put down as a deposit for your property purchase?
 How much of an emergency fund would you feel comfortable with?
 Have you used your ISA allowances this tax year?
 How much are you wanting to invest in an ethical manner?
 Which types of company would you not want to invest in?
 Are there any religious or moral considerations?
 Do you both want to invest in an ethical manner?
 What is your timescale for this investment?
 When does your 1 year fixed rate deposit account end?
 What penalties would there be if you withdrew money early?
 Andrew – how much has been contributed to your pension in the last 3 tax years?
 Andrew – does your workplace pension offer ethical funds?
 Andrew – does your ISA/unit trust provider offer ethical funds?
 Carrie – how did you select the ethical funds that you currently use?
 What is your attitude to risk in this area?
 What is your capacity for loss?

Question 20

Explain the process a fund manager might use for assessing ethical investments

Answer 20

 Environmental, social and governance is a set of criteria that can be used to assess a company’s practices
o Environmental – effects on climate change and pollution o Social – human rights
o Governance – quality of the company’s management
 Two main approaches to ethical investment;
o
o
Positive screening – fund will invest in companies that make positive contributions to society/have a responsible approach to business practices, products and services. There may be an element of negative screening, companies in certain industries, eg arms and munitions. A committee may have to be consulted before the fund manager can make a particular investment.
Negative screening – not investing in companies involved in certain industries – alcohol, tobacco, oil and gas, animal trade etc or not investing in certain countries, eg those with a poor record on employee rights etc.

Question 21

What are the possible drawbacks of ethical investment?

Answer 21

 Restricted fund choice
 Lack of diversification within the fund
 May be more volatile
 Charges may be higher – cost of research etc.
 Limited dividend income
 Potentially lower growth
 Difficult to screen larger companies

Question 22

List the key areas for investment which may be excluded by socially responsible investment managers.

Answer 22

 Tobacco/alcohol.
 Religious issues.
 War zones/weapons/armaments.
 Environmental issues/pollution/energy companies.
 Animal welfare.
 Social/political policies.
 Exploitation of labour/excessive remuneration.

Question 23

Describe the factors an adviser should consider when formulating an ethical investment strategy.

Answer 23

 Strength of client’s beliefs/motivation/how much they wish to invest.
 Shades of green/Positive/negative screening/Engagement/Best in class/ESG*.
 Range of funds/restricted fund choice/less diversification.
 Fund performance/increased volatility.
 Charges.
 Reputation of fund manager/expertise.
 Attitude to risk.
 Tax wrappers/Investment wrappers.
 Ethical banking.
 Timescale/objectives.

Question 24

Environmental social and governance (ESG) factors

Answer 24

o A set of criteria used to assess how a company conducts its business o Environmental factors include pollution, climate change
o Social factors include human rights
o Governance factors include quality of company management

Question 25

Comment on their existing investments

Answer 25

 Andrew will not have a Personal Allowance – his income is more than £125,000  Andrew is an additional rate taxpayer – he will not have a PSA  Interest from his deposit account plus 1/2 from the joint account taxed at 45%  He has £2,000 dividend allowance to be used against income from his Unit Trust  Anything above this taxed at 38.1%  Carrie is a non-taxpayer – she has no income tax liability on the interest from her deposit account or from her share of the interest from their joint account  They appear to have very little exposure to fixed-interest or property investment  Any ethical investment appear to be in Carrie’s name  If their deposit accounts are all with the same provider then they are not fully protected by the Financial Services Compensation Scheme  They would appear not to have made full use of their ISA allowances

Question 26

Explain the method that would be used to see if Andrew would be subject to a tapered Annual Allowance

Answer 26

 Calculate his Threshold Income: o Gross taxable income is £170,000 plus interest from his deposit accounts plus income from unit trust holding o Deduct his personal pension contribution (8% of £170,000 = £13,600)  If this is more than £200,000 then move onto calculating Adjusted Income  As this is unlikely to be the case, Andrew will not be subject to a tapered annual allowance

Question 27

Explain the method that would be used to calculate Andrew’s maximum pension contribution in the current tax year

Answer 27

 £27,200 will be contributed to Andrew’s workplace pension this tax year – 8% of £170,000 by both him and his employer  This leaves £12,800 of unused annual allowance  In addition, any unused annual allowance from tax years 2017/18, 2018/19 and 2019/20 can be carried forward  Any additional contribution would be made net of 20% tax relief  Andrew would be able to claim some relief at 25% via self-assessment

Question 28

What type of trust has been created in Andrew and Carrie’s wills and what are the main features of such a trust?

Answer 28

 It will be classified as a Bereaved Minor’s Trust as set up by the parents in their Will  The children would become entitled on reaching age 18  Up until age 18 any capital must be used for their benefit and any income earned must be used for their benefit (or accumulated)  Trustees can however pay a limited amount of money other than for the benefit of the children; this is the lower of £3,000 or 3% of the maximum value of the trust fund during the tax year and they would not have to prove it’s for the benefit of the children.  Assets will be liable to tax on Income and Capital Gains: o Income tax on retained income - standard rate band £1,000/excess taxed at 45%/38.1% o Capital Gains Tax – half the normal annual exempt amount then taxed at 20% or 28% for residential property o Holdover relief available where property transferred to children at age 18  Inheritance Tax - there is no liability to periodic charges (10 yearly) or exit charges (when capital distributed).

Question 29

Carrie is receiving Child Benefit. What are the implications of this and what alternative courses of action could she have taken?

Answer 29

 Because Andrew earns more than £60,000 per annum he will have an additional income tax charge equal to the amount of Child Benefit being received – currently £35 per week for both children (first child £21.05 and second child £13.95 per week)  Carrie will receive credits for State benefit purposes e.g. State pension entitlement Alternatives;  Carrie could remain registered for Child Benefit but elect not to receive payments  This avoids the income tax charge on Andrew and Carrie still receives NIC credits  Carrie may not have applied for Child Benefit because of the income tax charge  She will not be receiving credits for State benefit entitlement as she currently does not earn enough to have to pay Class 2 NICs

Question 30

What is the position with regard to National Insurance contributions for Carrie?

Answer 30

   Carrie does not have to pay Class 2 NICs as her profits are less than £6,475 This means she is not building up entitlement to State benefits e.g. State pension She could voluntarily elect to pay Class 2 NICs to protect her entitlement to State benefits