Case Study 1 for Andrew and Carrie Flashcards
Protection (death) - What further information would you need before you could advise Andrew and Carrie in this area?
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?
Protection (critical illness) - What further information would you need before you could advise Andrew and Carrie in this area?
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?
Features of income protection
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.
Features of Personal Accident and Sickness
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.
Explain why Andrew might not want to rely on his employer’s death in service benefit as part of their protection planning
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
State the benefits of an employer’s death ‐in‐service scheme
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
Andrew’s employer is introducing a group income protection scheme. Describe how such a plan would work and describe the tax treatment
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
What State benefits would Andrew and Carrie be eligible to receive should one of them die?
Bereavement Support Payment
Lump sum of £3,500
Plus £350 per month for 18 months
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?
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?
What are the advantages of using the money inherited from Andrew’s uncle as a deposit?
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.
What are the disadvantages of using the money inherited from Andrew’s uncle as a deposit?
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.
Explain why opening Lifetime ISAs may not be of help to Andrew and Carrie for the purposes of their property purchase
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
How much Stamp Duty Land Tax will Andrew and Carrie have to pay if they purchase the property valued at £480,000?
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
What other potential costs are there when purchasing property?
Conveyancing costs Searches, land registry fee Valuation costs Fee for mortgage Estate agent fees Moving costs Insurances eg building and contents insurance
Explain the impact of owning a property as Joint Tenants and Tenants in Common
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
Andrew and Carrie are thinking of using their pension funds as the means of paying off a mortgage. What are the advantages of this?
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.
Andrew and Carrie are thinking of using their pension funds as the means of paying off a mortgage. What are the disadvantages of this?
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.
Describe how an offset mortgage works
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.
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?
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?
Explain the process a fund manager might use for assessing ethical investments
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.
What are the possible drawbacks of ethical investment?
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
List the key areas for investment which may be excluded by socially responsible investment managers.
Tobacco/alcohol.
Religious issues.
War zones/weapons/armaments.
Environmental issues/pollution/energy companies.
Animal welfare.
Social/political policies.
Exploitation of labour/excessive remuneration.
Describe the factors an adviser should consider when formulating an ethical investment strategy.
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.
Environmental social and governance (ESG) factors
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
Comment on their existing investments
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
Explain the method that would be used to see if Andrew would be subject to a tapered Annual Allowance
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
Explain the method that would be used to calculate Andrew’s maximum pension contribution in the current tax year
£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
What type of trust has been created in Andrew and Carrie’s wills and what are the main features of such a trust?
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).
Carrie is receiving Child Benefit. What are the implications of this and what alternative courses of action could she have taken?
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
What is the position with regard to National Insurance contributions for Carrie?
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
