Case Study 2 (2024-04)

Question 1

Explain, in detail, to Joshua and Amina how they could make use of the existing Limited company structure to improve their current financial arrangements.
(12)

Answer 1

• Reduce salary/salary sacrifice.
• Reduces Income Tax and National Insurance (NI).
• Child Benefit eligibility.
• Reduces employer NI.
• Pay salary above Lower Earnings Limit (LEL) for NI credits.
• Pay Dividends.
• Can use Dividend Allowance (DA) for each of them.
• Dividend Tax is lower than Income Tax.
• No NI on dividends.
• Increase employer pension contributions for Joshua/pay contribution for Amina.
• Reduces Corporation Tax.
• Can set up company protection policies (e.g. PHI/PMI).
• Taxed as Benefit-In-Kind (BIK).

Question 2

Explain briefly to Joshua how his future profits would be treated for tax purposes if he decides to become self-employed.
(6)

Answer 2

• Taxed to Income Tax at 20%/40% each year/can use £12,570 Personal Allowance.
• Cannot delay taking profits/ cannot retain profits/ treated as taxable when earned.
• Can set work expenses against earnings.
• Pays Class 2 & 4 NI/Pay class 4 NI.
• No ability to take dividends/dividends taxed at lower rate (8.75%)
• Cannot set up company benefits for tax purposes.

Question 3

State five advantages and five disadvantages for Amina of investing the bonus in her employer’s workplace pension scheme, rather than taking this as salary.
(10)

Answer 3

Advantages:
* Builds up pension fund/potential for growth.
* 40% tax relief/ can retain £1,000 Personal Savings Allowance (PSA).
* Saves NI (if bonus sacrifice used).
* Tax free wrapper.
* Wide choice of funds/can match ATR/can invest in ESG.

Disadvantages:
* Lack of liquidity/not accessible until retirement (57).
* Could use to fund any capital needs/additional protection needs.
* Impact on borrowing/may reduce future borrowing capacity.
* Costs/charges on pension fund.
* Potential capital loss (equity fund).

Question 4

Explain to Joshua how the target date fund held by his qualifying workplace pension scheme operates.
(8)

Answer 4

• Joshua chooses a future retirement date.
• Joshua can change fund if retirement date changes.
• Active management/automatic switching/no input required from Joshua.
• Invests in a wide range of asset classes.
• Higher risk in earlier years/targeting growth.
• Reduced risk in later years to preserve capital.
• Investment strategy designed to protect investment growth.
• Joshua can choose fund to match ATR.

Question 5

Explain to Amina why she should review the fund choices in her Stocks & Shares ISA and pension fund on a regular basis.
(8)

Answer 5

• High risk funds/her ATR may change.
• Risk of capital loss/check performance/high levels of volatility/good performance.
• She is an ethical investor/her ESG views may change.
• Rebalance/ Funds may change ethical screening criteria/change of investment manager/ fund strategy.
• Market conditions/economic conditions.
• New funds available/new investment options.
• Charges.
• Currency risks (on ISA).
• Diversification risk/concentration risk/geographical risk (on pension).

Question 6

Identify the key areas of weakness in Joshua and Amina’s current protection arrangements.
(7)

Answer 6

• Insufficient life cover for Joshua/Amina has Death-In-Service/only protection is for mortgage.
• No lump sum for Amina if Joshua dies.
• No business protection/ no keyman cover.
• No key employees to maintain the business/ likely failure of business.
• No PHI/ASU for either.
• No CIC/PMI for either.
• No cover for childcare/fully dependant on both incomes/no Family Income Benefit.

Question 7

Recommend and justify a suitable personal protection product that would provide a tax-free lump sum for Amina in the event of Joshua’s death prior to the children attaining age 18.
(14)

Answer 7

• Term Assurance/Whole of Life (WOL).
• Single life basis/Joshua is life assured.
• Term of 13 years (minimum)/for whole of life.
• Sum assured sufficient to meet Amina’s costs/cover loss of Joshua’s income.
• In Trust/life of another.
• Speedy payment/no delays via Probate.
• Guaranteed Premium.
• Known cost.
• Indexation.
• To keep pace with inflation.
• Waiver of Premium (WOP).
• Pays premium in event of sickness.
• Simple underwriting/he is in good health/young.
• Terminal illness cover.

Question 8

Identify eight key issues that a financial adviser should discuss with Joshua and Amina at their next annual review.
(8)

Answer 8

• Change in personal circumstances/family/death/divorce/more children.
• Change in financial circumstances/income/expenditure/change of job.
• ATR/CFL.
• Performance/fund values/rebalance.
• Protection needs/did they close Limited Company?/ is Joshua self-employed?
• Use of Tax allowances/pension/ISA.
• Charges.
• Change in legislation/taxation/regulation/market conditions/economy.