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r06 - july 2024 > Case Study 1 - Max > Flashcards

Case Study 1 - Max Flashcards

1
Q

Outline to Max the key issues that may result in him** failing** to meet his plan to generate a sustainable and tax efficient income in retirement
[11 points]

A
  • Timescale to retirement [Capacity for loss]
  • Overexposure and concentration to UK equities - diversification risk
  • Pension date and retirement date may be misaligned
  • Only has state pension (no secured pension)
  • High inflation possibility
  • Reduced Interest rates?
  • Currently HRT payer - more income tax liability
  • Reducing AEA tax liability on disposal of shares
  • Reducing dividend allowance - higher tax on dividends
  • Market downturn
  • Changes to health/no income protection
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2
Q

Fact finding [Generic]

State the additional information a financial advisor would require to allow them to advise Max on the suitability of his financial arrangements to meet his long term retirement needs

[22] [Get 12 at least]

A
  • Family health history
  • Current expenditure/future expenditure in retirements
  • Future inheritance?
  • Intended retirement date if not September
  • Views on inflation
  • Views on economic risk
  • Priority of objectives
  • State pension entitlement (BR19)
  • Workplace pension - what funds can be invested in?
  • Views on flexibility vs secured income
  • Affordability to make additional pension contributions
  • Emergency fund?
  • Income from OEICS, S&S ISAs, investment truists / lOSSES
  • Isa allowance for the year
  • Details of platform/costs
  • Interest rates on cash holdings
  • Notice on deposit account
  • Charges on funds
  • CFL
  • Experience of investments
  • LPA?
  • Does he hold health and financial POA for mother
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3
Q

Fact finding [Specific]

State the additional information that Max’s financial advisor would require to advise on his objective to adjust his invesment portfolio to generate an additional sustainable income throughout retirement

18 - Get 10

A
  • Intended retirement date
  • Required income in retirement/flexible or lump sum income needed
    * Purpose of each investment [are they all intended to support income?]
  • Flexible income or secured income?
    * Performance/returns/benchmark
    * Fund charges
    *** Switching/timescales **
    * Features/charges of platform
    * Where are OEICs and investment trusts held? can they be transferred to ISA?
  • Inflation protection
    * Gains on OEICS/withdrawls for CGT allowances
    * Income from OEICS, S&S ISA, Investment trusts
  • Use of annual ISA allowance
  • Any expected income? Downsizing?
  • Experience of investing?
  • Views on existing investments
    * Views on diversifying investments from equities
    * Are funds passively/actively managed
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4
Q

Outline the factors an advisor should consider and process they should follow when recommending a fund switch

14

A
  • Disclose Status fee/client agreement
  • Fact finding - know your client
  • Assess ATR/CFL
  • Timescales - when is Max retiring
  • Charges
  • Performance
  • Selection of funds
  • Asset allocation
  • Funds should match ATR and timescale
  • Present Max with documentation/recommendation
  • Include any risk in recommendation
  • Get client permission
  • Suitability letter to Max
  • Annual review
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5
Q

State the main factors that might affect Max’s attitude towards investment risk in the run up to his retirement

13

A
  • Current Age
  • Retirement age
  • Single/reliant on one income
  • Income and expenditure needed in retirement
  • State pension entitlement
  • Lack of other secured income
  • Vesting plans vs secured income
  • Sequencing risk
  • Significant assets/ CFL
  • Large emergency funds
  • No liabilities as we know
  • Good health
  • Objectives
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6
Q

Explain the benefits to Max of a current cash flow statement when devising his financial plan

7

A
  • Considers his expenditure needs [shows difference between expenditure and income
  • Highlights area for cost reduction
  • Will consider retirement needs and identifies opportunities to fill gaps whilst still working
  • can be used to analyse future cash flow in retirement
  • Can stress tests for inflation protection
  • Will identify point of run out of money UPFLS/FAD
  • Enables Max to learn impact of high expenditure
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7
Q

State the benefits and drawbacks of using an asset allocation model when devising an investment strategy for Max

5, 6

A

Benefits
* Match his Adventurous ATR/reblance
* Consider past and expected future returns
* Considers volatility
* Identifies issues in current portfolio
* can include geographical/sector allocations and asset allocation
* can conisder income/growth requirements

Cons:
* Does not recommend appropriate tax wrapper for Max’s position
* Charges are not considered
* Questions aren’t always relevant
* Different models different results
* Underlying assumption on historic data
* Needs to be reviewed

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8
Q

Client review [Generic]

Identify the key issues that a financial advisor should discuss with Max at the next annual review

13

A
  • Still working on retirement date?
  • Did he defer State pension?
  • Changes to any views/objectives
  • Changes to income/expenditure
  • Tax status
  • Any inheritance received
  • Changes to ATR/CFL
  • Use of tax allowance/pension contributions
  • Emergency fund still there
  • Any changes to portfolio/ asset allocation/ performance/ rebalancing
  • New products available/ economic changes/ market conditions/ available
  • Changes to health? He is in good health
  • Any changes to Will/LPA position
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9
Q

Explain to max the importance of conducting a review of his investments and reviewing them on a regular basis thereafter

11

A
  • Pension fund retirement date misaligned to reality of retirement date
  • Reduce risk and provide income with current objective
  • Review and monitor lack of diversification - all in UK equities
  • Monitor income and capital needs - to ensure tax efficiency
  • ATR/CFL may change in run up of retirement
  • Review allowance in current year CGT annual exempt amount /ISA
  • Review performance/charges
  • Circumstances may change
  • Ensure income and dividends from OEICs and shares match ongoing needs to take dividend income, reivnest or take montlhy income from them
  • Indivdual shares and OEICs require regular monitoring
  • Political/economic/taxation changes
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10
Q

Outline the factors Max’s financial advisor would need to consider when advising him on an appropriate strategy to meet his retirement income objectives

18

A
  • Intended retirement date/phasing
  • Longevity - he is in good health
  • State pension entitlement (BR19)
  • Capital and income retirements now vs retirement
  • Flexible or secured income
  • Adventourous ATR/CFL
  • Fund choice available (active/passive/allocation)
  • Tax position - Currently HRT may be BRT later
  • Inheritance from mother?
  • Purpose of assets will they be used as retirment income
  • cash flow analysis
  • Existing pension provision
  • growth assumptions and stress test
  • inflation assumption
  • yield on shares/performance
  • investment trust - premium or discount
  • Platform features
  • Interest on cash holdings
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11
Q

Outline the factors that Max’s financial advisor would need to consider before advising him whether to increase contributions to his workplace pension scheme

6

A
  • Current expenditure
  • Level of income now vs retirement
  • 40% Tax relief on contributions within higher rate band - tax free fund growth
  • 25% Tax free PCLS within lump sum allowance may not be a higher rate tax payer so income tax at basic rate
  • Access to significant other investments which are not as tax efficient
  • Can access pension fund as he is past min retirement age
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12
Q

Outline the process a financial advisor would use to evaluate the adequacy of Max’s retirement position

7

A
  • Establish income required allowed for inflation
  • Calcualte fund required based on assumed withdrawl rate
  • Allow for PCLS requirement
  • Calculate existing benefits using assumed growth rate
  • Include ongoing funding
  • Calcualate shortfall and increased cont required
  • Ongoing reviews needed
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13
Q

Explain to Max how his state pension entitlement will be determined

9

A
  • Recieve SP at 66
  • Min 10 years needed to recieve any state pension
  • Full rate 2023/2024 - £221.20
  • For a full new state pension (35 years)
  • Qualifying years can be met through contributions or credits
  • Starting amount calculated at 5/4/2016
  • Triple locked pension increased by higher of earnings, prices
  • Taxed as earned income
  • Option to defer
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14
Q

Explain to Max the process for claiming his state pension and rules should he consider deferring

8

A
  • Max will need to actively claim his state pension
  • Can be done by post, phone or online
  • If not claimed then deferral is automatic
  • Increased by 1% for each 9wks of deferral/min 9 wks of deferral
  • In additional to annual increases
  • Can be done once pension is in payment
  • No lump sum option available
  • If max passes away after reaching state pension can claim 3 months
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15
Q

Explain how a salary sacrifice arrangements works and how this may be used to maximise the tax efficiency of Max’s pension arrangements

12

A
  • Max signs a written agreement with employer
  • Agreement normally cannot be revoked
  • Salary reduced by amount of pension contribution
  • May reduce DIS benefit
  • May impact state benefit entitlement
  • May impact future salary increase
  • Employer puts this into pension scheme as employer contribution
  • Saves NICs
  • Increase his pension cont without affecting his net pay
  • More tax-free growth within funds
  • Greater PCLS entitlement
  • Administratively simple
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16
Q

Comment on the suitability of Max current investment and pension holdings

9

A
  • Pension fund does not match planned retirement date
  • Asset allocation may be inappropriate and not suit vesting plans
  • Equity focus match ATR
  • Lack of asset diversification
  • Currency risk on global equity funds
  • Sig volatility on self-managed portfolio
  • Offer little protection as he approaches retirement
  • Potential to outperform inflation over longer term
  • Only appears to use actively managed funds, no passive investments
17
Q

Explain to Max why diversification is important

5

A
  • Reduce risk in portfolio
  • Some assets are not strongly correlated
  • Downside of investment can be offset by upside of another
  • Sector diversifcation reduces risk with specific areas of economy
  • Geographical diversification spreads risk of across number of different economies
18
Q

Outline the factors Max advisor should consider when determining whether he should consolidate his investments onto the platform

12

A
  • Ease of transferring assets onto platform
  • Range of providers/tax wrappers/funds available
  • Limitation of platforms - what is not available
  • Does it have acess to same funds/shares as OEICs and indivdual shares
  • In specie transfer allowed?
  • Does platform offer ISA - what are rates
  • Exit charges/Entry charges
  • Platform charges
  • Performance is easier to obtain
  • Can apply asset allocation strategies across different tax wrappers
  • Online switching easier
  • Charges/discount for large portfolio
    *
19
Q

Outline the factors a financial advisor would need to take into consideration when reviewing potential options to ensure Max’s savings and investment portfolios is tax efficient as he approaches retirement

13

A
  • Use of ISA allowance
  • Annaul allowance pension cont - 60k limited to earnings (60k)
  • Pensions offer tax relief/ tax free income and growth, PCLS but income taxable, IHT free
  • Max currently HRT, likely to be BRT in retirement
  • PSA - 500 can be 1000 if pension cont makes him BRT
  • Interest from cash savings taxed at 40%
  • NS&I premium bond prizes are tax free
  • Dividend allowance reducing to 500 in 2024/2025
  • OEICs and shares produce dividends taxed at 33.75% over DA
  • Investment bonds offer 5% tax deferred income
  • Gains on OEICs and investment trusts subject to CGT 20% above AEA
  • CGT reduces to £3000 in 2024/2025
  • AIM shares are IHT efficient but limited benefit as estate is going to charity
20
Q

Recommend and justify a range of actions that Max should take in order to achieve his objective to generate an additional and sustainable income in retirement

8

A

1. Max should defer his state pension until he finishes work
* Does not need income at present
* Would be paying HRT on SP
* Deferring increases ecured income in retirement, assisting sustainability
* Likely to be BRT on retirement
* Good health so likely to benefit more in deferral

2. Consider investing some of his cash deposits/premium bond into fixed rate bonds
* Too much money held in cash (77k)
* Premium bonds do not offer guarantee returns
* He is higher tax rate payer
* Defer interest until he is retired/BRT

3. Sell some of the the smaller companies shares
* These are very high risk
* He is looking to de-risk/unlikely to meet risk profile in retirement
* He can use his CGT annual exempt amount

**4. Use bed and ISA **
* ISA income is free of income Tax and gains are free of CGT
* OEICs and investment trusts are less tax efficient
* uses CGT AEA

5. Make additional monthly pension contributions to his workplace scheme

6. Consider annuity purchase

7. Switch funds to suit vesting needs/reduce volatility
* Smaller company shares are very high risk
* Heavy exposure to equity market and UK in particular

8. Increased exposure to fixed interest/gilt and property funds
* Adds diversification of asset classes and lowers the volatility of the portfolio
* Fixed interest/gilts can be indexed linked to protect inflation

21
Q

Explain in detail why Max should consider increasing his pension contributions into his employer workplace pension scheme

13

A
  • Increased pension pot/meets objective of sustainable income in retirement
  • 40% tax relief on contributions
  • Potential for tax-free income and growth
  • His other assets are not as tax efficient (40% tax savings income, 33.75% on dividend over DA and potential for CGT on OEICs, investment trusts and shares)
  • Extend basic rate band/ could regain £1,000 PSA
  • Flexible options onretirement/ FAD/UFPLS/annuity
  • Can use pension to provide tax-efficient income via annuity
  • No admin done by employer
  • Limited time frame to cont £3,600 if no relevant UK earnings
  • Wide range of funds to match ATR
  • Employer may cont to NIC
  • Flexible death benefits - tax-free on death before 75
  • Other assets can be used prior to acessing the more tax-efficient pension
22
Q

32

Explain the benefits to Max of increasing his monthly pension contributions as an alternative to making a lump sum contribution

6

A
  • Pound cost averaging
  • Benefit from investment volatility
  • Can stop and start contributions/flexibility/convenience
  • Assists with budget
  • Reduces risk of poor investment timing
  • Contributions increase if salary increase
23
Q

Explain why max should consider securing part of his retirement income with an annuity purchase

12

A
  • Matches his desire to reduce level of risk
  • Provides Guaranteed income for life
  • Match essential expenditure/budgeting
  • He is in good health so value for money/long payment period
  • No cost/needs for ongoing advice
  • He hasno other guaranteed pension provision other than state pension
  • Can buy capital protection/guarantee
  • Single life offers a higher annuity rate as no spouse pension requred
  • No investment risk
  • No advice cost
  • Sufficient liquid assets elsewhere
  • No dependence hence inheritance not a concern
24
Q

Outline why Max should consider deferring his state Pension entitlement

6

A
  • Does not appear to require the income whilst working
  • Will save higher rate tax
  • Likely to be a BRT in retirement
  • Increase pension by 1% for each 9 weeks deferred
  • Increased secured entitlement helps achieve sustainable income
  • In good health so more likely to live long enough to benefit from deferral
25
Q

Outline the factors Max’s financial adviser should consider and the process they should follow when recommending a fund switch within his pension

11

A
  • Fact finding/ knowing your client/ client agreement
  • Assess ATR/CFL
  • Timescale
  • Charges
  • Performance
  • Fund choice available
  • Asset allocation/diversification
  • Select fund to match ATR
  • Present Max with documentation
  • Obtain client permission/implement
  • Suitability letter/recommendation letter to Max
26
Q

Outline the Key factors max financial adviser should consider when advising him whether to retain the smaller company shares held within his ISA

8

A
  • Smaller companies are extremely volatile
  • Can offer better long term growth potential than more established businesses
  • Growth focused - may not meet income need
  • Lack of diversification
  • Over-exposure to UK small cap
  • IHT relief for AIM ISA unlikely - majority estate going to charity
  • Max wants to de risk
  • Requires ongoing maintenence
27
Q

Explain the key factors Max’s financial advisor should consider when advising on whether his NS&I premium bonds are suitable to meet his longer term objectives

9

A
  • High level of cash-based holdings does not match ATR
  • No guaranteed income/interest on premium bonds
  • No potential for capital growth
  • Unkown returns
  • Inflation risk - returns may not match inflation
  • Suitable for short-term not long-term
  • Capital guaranteed
  • Offers potential for large-tax free prizes
  • Gambling element may suit adventourous ATR
28
Q

Explain to Max the concept of sustainable withdrawl rate (SWR) and the relevance of this to his retirement income planning

7

A
  • SWR rate is rate of withdrawl max can take from his portfolio annually without being at risk of exhausting funds
  • FCA guideline 4%
  • Depends on returns/risk and health
  • Max is soon to retire - decumulation phase
  • Needs to ensure that rate of withdrawl does not prematurely deplete his assets
  • Allowing for a lifespan longer than statistical life expectancy - he is in good health
  • Less relevant if needs were covered by secured income
29
Q

Explain to Max why he should consider investing his ISAs into global collective investment funds with a range of asset classes than individual UK equities

9

A
  • Country diversification/heavily exposed to UK small cap market
  • Increase use of other assets - he is overweight in equities
  • Diversification lowers volatility
  • Smaller companies are more volatile may not meet his objectives
  • Benchmarking/sector/fund comparison
  • Can use tracker funds which are lower funds than actively managed funds
  • Active managers do not always outperform
  • Can match ATR/CFL
  • Can match objectives
30
Q

Explain to Max the difference between an OEIC and an investment Trust and why both investments may be suitable to provide additional income in retirement

IT, OEIC, Both

A

Investment trust -
* Closed ended/fixed number of shares
* Discount/selling at premium
* Could trade at discount if Max wants to sell
* Investment trusts are companies with PLC board that oversees actions (more protection added layer of control)

OEICs-
* Open-ended
* No bid/offer spread
* Units can be created or cancelled
* OEIC investments controlled by fund manager

Both -
* Both allow investors to pool money together in shares/bonds/assets
* Can generate income stream
* Uses dividend allowance
* Likely to be BRT - Div 8.75%
* Can switch to fixed interest funds - uses PSA
* Encashments to use CGT AEA annually
* If held on platform easy to sell/rebalance/bed and ISA

31
Q

Recommend and justify the actions that Max could take immediately to improve the tax efficiency of his existing financial arrangements

5

A

Make additional Pension contributions
* Surplus income
* 40% tax relief on cont
* Extends basic rate band/PSA
* Tax free growth/income
* 25% PCLS

Uses Cash deposits/premium bond funds to purchase fixed-rate bonds
* Premium bonds may return nothing
* Can potentially defer payment of interest until lower tax rate payer
* Cash ISAs and NS&I premium bonds are tax-free products

Defer his state pension
* Does not look like he needs income
* Currently HRT
* By deferring can receive higher secured income when BRT

Ongoing use of ISA/bed and ISA
* Tax free income within wrapper

Use of CGT AEA
* £6000 2023/2024, £3000 2024/2025
* Can stagger disposals
* Opportunity to rebalance portfolio

32
Q

Explain why pension and ISA contributions should be used by Max to maximise the tax efficiency of his portfolio

A

Pension contribution
* Receive tax relief at highest marginal rate
* Can contribute up to 100% of relevant UK earnings (60k)
* Tax free income/gains and growth
* PCLS potential to reinvest into ISA
* Paid tax free to brother on death pre-75

ISA
* Tax free income and growth
* Can contribution 20k per annum
* Can bed and ISA shares and OEIC

33
Q

Explain in detail to Max how a lasting power of attorney may be set up and why he should consdier doing so, as well as any restrictions that may apply

13

A
  • Can cover decisions on property and financial affairs
  • Cover decisions on health and welfare
  • Can set up either one or both
  • Needs to register with office of the public guardian - fee payable
  • A property and financial affairs can be used as soon as registered - if max does not want he needs to say
  • Not possible to use health and welfare LPA until Max has lost mental capacity
  • Must be certificate from prescribed person confirming that Max understands LPA - also no pressured
  • Max can appoint his brother to be LPA
  • Attorneys can be appointed jointly
  • Health and welfare covers medical treatment
  • iF LPA not in place then application made to COURT of Protection for Deputyship order which can be expensive
  • Depuity is appointed by court rather than family
  • Putting LPA in place ensures Max’s wishes are met/provides peace
34
Q

Outline to Max the duties expected of him as attorney under his mother’s LPA and potential consequences if he shall fail

7

A
  • Required to make decisions/act out of her best interest
  • Decisions in line with authority in LPA
  • Consult with mother if she has capacity/ others who may have interest in affairs
  • keep his affairs separate from hers
  • Maintain confidentiality
  • Avoids conflict of interest
  • Failure can incur fines/penalties/ prison
35
Q

Outline to Max the difference between him and his brother appointed as attorneys for mother, jointly or jointly and severally

A

Jointly - if one dies/disqualified LPA lapse
Jointly and severally - can make decisions together or separately - if one dies LPA continues

36
Q

Explain the benefits that would be payable from Max’s workplace pension to his brother in event of his death

6

A
  • Benefits are paid at discretion of scheme admin
  • As brother is named beneficiary on nom form, death benefits would go to him
  • Lump sum return of fund
  • Annuity/beneficairy drawdown dependant on scheme
  • Tax free on death before 75 subject to lump sum allowance
  • Tax as income on death post 76
37
Q

Explain to Max how any inheritance Tax liability would be calculated on his estate

A
  • IHT is payable on an estate in excess of the NRB (325000) at 40%
  • Not have RNRB as only applies if home is inherited by direct descendants
  • Gifts to charity free from IHT
  • As over 10% of net estate going to charity IHT charged at 36%
  • 100,000 within NRB so IHT free

r06 - july 2024 (10 decks)

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