Case study 2 Flashcards
Comment on the overall tax efficiency of Nick and Shirin’s current financial arrangements, and identify the actions they could take to maximise their tax efficiency in these areas (12 marks)
-HRT
-Tax-free growth & income in ISA
-This is tax efficient
-Partial use of ISA allowances
-£2000 remaining to max ISA allowance
-No LISAs
-These offer government bonuses
-£500 PSA as HRT
-Any interest paid will be paid gross
-Excess over PSA taxed at 40%
-No NS&I investments
-Shirin’s employer will match her pension contributions by an additional 3%
-Not used AA/could make further pension contributions
-Higher contributions –> 40% tax relief –> higher pot
-Can result in regained CHB due to ANI < £60k
State seven areas that an adviser should address at an annual review meeting with Nick and Shirin (7 marks)
-Income and expenditure analysis
-Any further children planned
-Investment performance of ISAs / Pensions
-Use of current tax years’ exemptions / CGT / ISAs top-up to max / Pension contributions
-Legislative changes
-New products available
-Change to / new objectives
-Changes to personal circumstances e.g. health / job /salary
-Mortgage overpayments / house move
-Any Inheritances received / lump sums accrued
-Death benefit nominations completed?
List the principal duties and obligations of the trustees who have been appointed under Nick and Shirin’s Wills (8 marks)
-To deal with the trust property for the benefit of the beneficiaries in line with the specific powers in the trust deed / Will
-To act in a way an ordinary prudent businessperson could be expected to act
-Invest cash / assets wisely and appropriately
-Review investments / vary if necessary
-Diligence to avoid loss
-Proper accounts of all trust property
-Obtain and consider proper advice when investigating / review the trust property
-Tax reporting obligations
-Nick & Shirin’s wishes complied with
Identify the additional information you would need in order to advise Nick and Shirin on their financial protection needs (10 marks)
-Affordability / budget
-Expenditure / level of income needed in event of either death / CI / long term sickness
-Any savings/investments earmarked for protection needs?
-Expression of wish completed for pension death benefits / Death in Service
-Any inheritances expected?
-Smoker status / hazardous pursuits / family health history
-Liabilities other than the mortgage
-Sum assured / premium / term of LTA
-Is the mortgage protected in the event of critical illness / long term illness / redundancy
-LPA
-Any plans to move employer / career changes / anticipated retirement date / reliance on DIS
-Plans for more children
-Children’s health / anticipated dependency age
-ATR / CFL for this objective
-Priority of this objective
Describe the considerations which should be taken into account when reviewing Nick and Shirin’s investment portfolio for tax efficiency purposes (10 marks)
-HRT
-CGT/Dividend/PSA allowances
-Maximise ISA allowance
-NS&I investments
-Shirin should maximise employer matching contributions
-Maximise AA
-40% tax relief + more funds in tax efficient investment
-Reclaim some/all CHB if ANI<£60k
-Sufficient emergency fund
-Competitive interest rate on savings?
-High ATR
State the additional information that an adviser would require to advise Nick and Shirin on their current financial arrangements (8 marks)
-Anticipated changes in employment status
-Willingness to increase workplace pension contributions
-Employer matching contribution details
-Salary sacrifice
-ISA purpose
-Interest rate on deposit
-Emergency fund required
-Claiming CHB?
-Income from ISAs
-ATR/CFL in this area
-Planned capital expenditure
-Performance
-Charges
-Inheritances expected
-VCT/EIS considered?
State the process an adviser should follow to advise Nick and Shirin on their investment planning (6 marks)
-Establish relationship
-Objectives
-ATR/CFL
-Analyse client’s situation
-Develop financial plan
-Implementation
-Annually review
Comment on Nick and Shirin’s current protection arrangements (15 marks)
-C/R mortgage of £260k
-LTA to protect in case of death
-LTA provides excess cover as mortgage decreases
-No CIC?
-Shortfall in this area
-Nick 4x salary DIS
-Shirin 3x salary DIS
-Nick pension: £130k & Shirin’s pension: £96k
-Death benefit flexibilities
-DIS/DB could provide income to survivor
-Nomination forms completed?
-Ensure funds reach intended beneficiaries
-DIS would cease upon leaving employment
-Shortfall in this event
-SSP only
-No IPP?
-Shortfall in income if either can’t work
-No PMI?
-No health care flexibility
-Mirror wills
-Assets distributed as per wishes
-Guardianship of children in event of 2nd death
-Lasting Power of Attorney
-Redundancy cover
-Shortfall in this area
Outline the factors that you would take into account in determining Nick and Shirin’s capacity for loss (10 marks)
-Adequate emergency fund
-High ATR
-Can thus tolerate volatility
-Employed & good income
-Sufficient non-savings income currently
-Capacity to build savings & investments
-Children dependant for many years
-Outstanding mortgage
-No protection for CI/IP
-Life cover would cease if left employment
-Liquid & illiquid assets
-Long timeframe
-Assets match ATR
State four benefits and four drawbacks if Nick and Shirin decide to invest in an Enterprise Investment Scheme (8 marks)
Benefits:
-High growth potential
-30% income tax relief
-Business relief
-No CGT after 3 years
-Losses can be offset against taxable gains elsewhere
Drawbacks:
-High risk
-Expensive
-Illiquid
-Complex
Explain the taxation characteristics of a Venture Capital Trust (VCT) and why it maybe a suitable investment for Nick and Shirin to consider (10 marks)
-30% income tax relief (limited to IT liability for tax year invested)
-As a tax reducer
-Max investment: £200k
-Subject to IT liability in tax year completed
-Must be held for 5 years
-Tax free dividends
-CGT exempt
-Could benefit from reduce IT liability
-Tax free income stream
-Matches ATR
-High growth potential
When considering Nick and Shirin’s current protection arrangements and their stated objectives: Outline the areas where protection planning is necessary (7 marks)
-Income replacement for family
-CI lump sum to repay mortgage
-Income replacement in case of redundancy
-Income replacement if illness prevents them from working
-Private medical treatment
-LPA
-DB nomination forms
When considering Nick and Shirin’s current protection arrangements and their stated objectives: State the factors an adviser should take into account when constructing a plan to meet their needs (8 marks)
-DB nominations
-Future employment plans
-Reliant on DiS for family protection
-No CIC
-No IPP
-No PMI
-No redundancy protection
-Health/smoker status
-Affordability
-Emergency fund required
-LTA for mortgage
-Mortgage unprotected in case of CI
-State benefit eligibility
Recommend and justify a suitable plan for Nick and Shirin’s personal protection needs in the event of a serious illness (8 marks)
-2x single life level CIC
-Sum assured enough to maintain lifestyle
-Tax-free lump sum on diagnosis of specified illness after survival period (14-30 days)
-Term to retirement
-Waiver
-Protect premiums if unable to work
-Guaranteed premium
-Ensure affordability long-term
-Indexation
-Guard against inflation
-Own occupation for TPD
-Provides more scope for claim than any occupation
Nick and Shirin are unsure if their existing pension provision will be sufficient for their needs in retirement. Describe the process an adviser could use to ensure there are sufficient funds available to provide them the required level of target benefits when they retire (9 marks)
-Establish income required
-Inflation adjusted
-Use of existing assets
-State pension forecast
-Calculate fund required using assumed annuity rates
-Allow for PCLS
-Project existing benefits
-Including ongoing contributions
-Calculate shortfall
-Ongoing reviews
