Case Study 2 (25-01)

Question 1

Outline the additional information that a financial adviser would need to obtain to provide retirement planning advice to Bartek and Zofia.
(14)

Answer 1

• Affordability/current surplus income/ purchase cost of house.
• Job security/ planned job changes.
• Target income in retirement.
• Expected cost of travel at age 60/budget for travel.
• Duration/ likely cost of school fees.
• Family health/longevity.
• Employer matching (for Bartek).
• Salary sacrifice / bonus sacrifice available.
• Death benefit nominations.
• Charges.
• Inheritances expected/ windfalls.
• Fund choices available within their plans.
• Ethical concerns/considerations.
• Priority of this objective (retirement vs. property purchase?).
• Capacity for loss.

Question 2

Identify six advantages and six disadvantages for Bartek and Zofia of purchasing a property, rather than remaining in their current rental property.
(12)

Answer 2

Advantages:
* Security/cannot be evicted/no restrictions on use of property.
* Lifetime ISA available / Government bonus.
* Mortgage may be cheaper than rent.
* Potential for long-term capital growth.
* Tangible asset.
* Could assist with retirement plans (sell or rent).

Disadvantages:
* Interest rates could rise.
* Debt/liability (currently debt-free).
* Lack of liquidity/ lack of flexibility.
* Might impact retirement plans/lack of affordability for other objectives/loss of emergency fund/ pay deposit.
* Maintenance/buildings insurance costs/solicitor costs and purchase costs.
* Cost of Life cover (insufficient Death-In-Service).

Question 3

Outline the key family and financial issues that a financial adviser should take into account when identifying Bartek and Zofia’s protection needs.
(12)

Answer 3

• Affordability/planned capital expenditure/monthly expenditure/emergency fund requirements.
• Liabilities/debts /credit cards.
• Employer sick pay? / How long is this paid?
• No personal protection in place (PMI/CIC/IPI/ASU).
• Period of dependency for Kara/more children planned?
• Job security/change in jobs? /Loss of Death-in-Service for Bartek.
• Cost of childcare/school fees/no cover in place for childcare / Full school fee cost for Kara (if Zofia changes employment).
• Support from family/financial or practical/ State benefits.
• Inheritances/windfalls expected.
• Will? /Nomination?
• Willing to use current assets/savings/investments.
• Family health history /health/hazardous pursuits/ smoker?

Question 4

Recommend and justify a range of actions that Bartek and Zofia could take to help them meet their objective of retiring at age 60.
(14)

Answer 4

• Increase pension contributions.
• Salary sacrifice.
• Tax relief at 40% Bartek/20% for Zofia.
• Reduce to Basic Rate Taxpayer (BRT) for Bartek.
• Recovers £1K Personal Savings Allowance (PSA).
• Employer matching available for Zofia (10%).
• Use ISA/Lifetime ISA (LISA).
• Tax-free growth and income (on pension and ISA).
• Government bonus of 25% on LISA.
• Switch into equity funds (pensions).
• Switch Cash ISA to S&S ISA.
• Greater potential for growth.
• Take out Income Protection (IPI) policy.
• IPI protects future income/retirement savings.

Question 5

Explain to Bartek and Zofia the financial benefits for tax purposes of their new married status.
(6)

Answer 5

• Interspousal transfer of assets is CGT free.
• Transfer of assets allows greater use of Dividend Allowance/Personal Savings Allowance/CGT exemptions.
• Can use Zofia’s lower tax rate for CGT and Income Tax.
• Nil Rate Band and Residence Nil Rate Band can be inherited on first death.
• No IHT on first death.
• Additional Permitted Subscription (APS)/inherited ISA/retains tax-free ISA status.

Question 6

Explain to Zofia why an investment into a global Real Estate Investment Trust (REIT) fund within her pension is likely to be more suitable than a traditional UK commercial property fund.
(8)

Answer 6

• Global exposure/not just UK.
• Larger number/wider range of properties/sectors held/ diversified.
• Shares/not bricks and mortar.
• Liquidity/traditional funds can be illiquid.
• Cannot impose withdrawal restrictions.
• Must pay out 90% of income to retain REIT tax benefits/ beneficial internal tax treatment.
• Cost-effective/ usually lower charges.
• Does not have to hold large cash reserves/could outperform traditional fund/ improved growth.

Question 7

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

Answer 7

• Change in personal circumstances/health/any more children?
• Change in income/expenditure/tax status/salary increases for either/bonuses for Bartek/ loss of job.
• Attitude to Risk/Capacity for Loss.
• Rebalance/asset allocation/performance.
• Have they purchased a property? /Mortgage details? /protection needs.
• Use of allowances/Lifetime ISA/ISA/Pension.
• Charges.
• Change in legislation/taxation/new products/economic conditions/interest rates.