Case Study 2 - Amir and Karina Flashcards
Identify the factors that could prevent Amir and Karina from achieving their financial objectives
12
- Reducing household income- Karina income will be reduced to 50% of salary
- Leaves them more exposed to future interest rate rises [mortgage repayment - longer as they are currently overpaying]
- They will be more exposed to high inflation/cost of living crisis - reduced income
- Reduced interest rates - would mean reduced returns on cash holdings
- Freeze on Personal allowance/tax rises can lower net household income further
- Karina IP salary - not inflation proof
- Amir has no IP and do not know his sick pay
- If Amir left employment, he loses DIS benefit
- Karina DIS may be reduced
- Karina IP benefits may only for a limited time
- Potentially reduced pension contribution for Karina
- If Karina is off work longer term, this is likely to reduce their CFL and affect ATR
State the additional ionformation that a financial advisor would require to advise Amir and Karina on their financial situation
17
- Current expenditure/surplus income
- Intended retirement date
- Any inheritance
- Priority of objectives
- State pension entitlement/BR19
- Details of pension schemes/funds/charges/salary sacrifice
- Willingness and can they afford to make more pension contribution
- Emergency fund?
- Interest rates on cash holdings
- CFL/ Confirm ATR since injury?
- Asset allocation/performance on funds
- Terms of mortgage/ how much are they paying
- How long is Karina off work?
- Does Karina need support on day to day living
- Is Karina getting state support?
- Details of Karina company IP plan, does it deduct any state benefits
- How will DIS be affected if Karina goes on IP
State the additional information that a financial adviser would require to advise Amir and Karina on their existing protection arrangements
14
- Severity of Karina Injury/treatment needed and cost/NHS or private
- How long is she likely to be off work
- Amir Sick pay entitlement
- Mortgage protection - How is their decreasing term assurance - PREMIUM, in trust, CIC?
- Employer income protection
- Term
- Will DIS reduce
- Benefit increase? - linked to inflation
- Does it include employer pension contribution
- Offset state pension?
- Partial benefit available if work park time
- DIS
- Nomination forms completed
- Will this cease/reduce when Karina IP commences
State the process that an adviser should follow when advising Amir and Karina on their financial situation
- Establish/define relationships/ confirm scope of services/ product and fees in writing
- Communication method should suit client
- If deemed vulnearable extra action is required
- Fact find/determine immediate and future objectives including
- Establishing current needs whilst off work
- Timescales/priorities of objectives
- Confirm CFL/ATR
- Establish Karina views on ESG
- Analyse current situation/existing investments/obtain BR19
- Develp financial plan
- Present financial plan
- Explain risks and consumer understanding
- Ensure no jargon on documentation that you give them
- Implement client agreement
- Monitor financial plan
Identify the key information that a financial adviser would need to consider when preparing a cashflow for Amir and Karina
12
- Expenditure/ cost of mortgage repayments, interest rate and terms
- Any inheritances due?
- Claims for back injury?
- Current assets/current income from earnings
- Likelihood of Karina returning to work full time
- Growth rate assumptions
- Interest rate assumption
- Inflation assumption
- ATR/CFL
- Longevity/health
- Market correction/stress test
- Impact of death of either Amir or Karina
State the main factors that might influence Karina and Amir’s attitute towards investment risk
8
- Karina ill health
- Timescales - Long amount before retirement
- Income/expenditure/disposable income - not reliant on one salary
- Assets
- Liabilities
- No financial dependents
- Understanding of markets
- Economy
- Changes in personal circumstances
Identify the key issues that a financial adviser should discuss with Amir and Karina at their next annual review
11
- Changes to views or objectives
- Health update on Karina Back injury/other changes in personal circumstances
- Has Karina returned to work?
- Changes in income/assets/ state benefits
- Mortgage details - term/interest rate
- ATR/CFL
- Use of tax allowance
- Interest rates on cash deposits
- Charges on assets
- New products available/ economic changes
- Protection needs/ has Amir taken any - Is Karina still receiving IP
Identify seven events relevant to Amir or Karina that will likely necessitate the need for a financial review
7
- Karina IP scheme commences
- Karina returns to work
- Changes in Amir health/personal circumstances
- Mortgage rate comes to an end
- Jan 2025 when cash ISA mature
- Changes in Amir employment situation
- Major changes in market/economy
Identify the key factors you would need to consider when advising Amir and Karina on their existing cash and ISA holdings
13
- Current income/ Karina health situation/ timescale to return to work/ State benefits available
- Good levels of savings available - to cover large liability (mortgage)
- High risk investors but may have low CFL due to injury of Karina and large mortgage
- 83k cash not match ATR
- Savings covered by FSCS
- Expenditure and capital sums required
- Karina ethical views - ESG
- Emergency fund - have 39k which is 6-9 months expenditure, may need more
- Karina has 1k PSA, Amir only 500
- They have ISAs but not used their ISA allowance
- Insufficient diversification
- What are investments used for? - objectives
*Current and expected interest rates
Identify the key factors you would need to consider when advising Amir and Karina on their finances in the short term due to Karina’s injury
12
- Expenditure whilst Karina is off sick/ capital sums needed
- Current income/ Amir Job security/ Karina health situation/ timescale to return to work
- Adequate emergency fund must be available [6 months, 39k instantly accessible, Amir sick pay, cash isa funds tied up until jan 2025]
- Cost of any care for Karina whilst injured
- State benefits they are entitled to
- Priority of objectives - mortgage, pension?
- Options and details of mortgage - current ir [fixed,term] what is 3 month holiday option going to do? Offset mortgage - use savings to fund mortgage?
- Changes to IR?
- CFL,ATR (has it changed due to ill health)
- Financial dependents
- Any other debts
- Cash flow analysis
Explain to Amir and Karina the importance of having a suitable emergency fund during Karina abscence from work
4
- Emergency fund ensures that can continue to meet expenditure needs
- Can meet unexpected expenditure
- Protects them from Amir sickness
- Reduces likelihood of getting in debt
Explain to Karina how PIP operates and why she may be eligible
10
- Assessed/reviewed by health professional
- Assess how difficult Karina finds daily/mobility tasks
- To qualify - 3 months difficulty and issues are expected to last another 9 months
- Daily component - Needs help with everyday task
- Mobility component - Help getting around
- She is able to claim both
- Not means tested
- Does not depend on NI
- Tax free
- Payable to SP Age
Explain to Karina the eligibility criteria for “new style” employment and support allowance (ESA) - why she may be eligible
8
- She is under SP age and an employment
- Needs to NI in last 2/3 years
- Paid if illness/disability affects how much she can work
- Assessed by healthcare professional
- If eligible can earn class 1 NIC towards SP
- Karina will placed in work-related group if she can get to work, otherwise she would be placed in a support group
- Can be claimed alongside PIP
- Future pension may affect level of income
Outline the key factors that Amir and Karina will need to take into account, when establishing their current protection needs
10
- Smoker status/ family health history
- Affordability/income/expenditure needs
- Priority of protection?
- Morgages - any other liabilities
- Capital/assets
- Both have DIS/ would stop once leaving job
- Details of Amir sick pay
- No CIC/ PMI cover
- Any family inheritances
- State benefits available
Explain to Amir and Karina why their existing employer DIS may not be adequate
6
- Cover lost on death
- May not be sufficient
- Employer may change terms
- Can potentially change once Karina takes on IP
- Benefits fixed by employer
- Only provides cover for death
Outline the factors a financial adviser woujld consider need to consider when advising Amir and Karina on their retirement planning
15
- Longevity - currently in good health/ we do not know how long Karina will be injured
- Age/timescale to retirement
- State pension age and entitlement (BR19)
- Will Karina pension employer contributions reduce when she is on IP
- IP benefits will be UK relevant earnings so can receive tax relief on contributions
- High risk ATR/CFL
- Is salary sacrifice available
- Are they going to inherit any other assets
- Capital and income requirements
- Tax position
- Planned retirement age
- Cash flow analysis
- Growth assumptions and stress test
- Views on inflation protection
- Views on pension - longer term planning
Outline the key factors that Amir and Karina should take into consideration before making any changes to the underlying investments in their pension plan
8
- ATR/CFL
- Amir Funds are overcautious for high risk investor
- Lack of equity in Amir funds
- Lack of asset diversification in Karina funds
- Fixed interest funds may perform well if interest rates fall
- Past performance/benchmark performance within their plans
- Karina ethical views
- Charges on funds
Explain to Amir why continuing to hold the global fixed-interest fund within his pension may not be suitable for his longer-term needs
6
- Not suited to his ATR
- Not diversified/lack of asset diversification
- Vulnearble to IR movement/ economy environment
- Limited growth potential
- Could provide income
- Risk of capital loss
State the issues an advisor should consider when formulating a sustainable and responsible investing strategy for Karina
12
- Strengths of belief - how much she wants to invest in area
- Positive/negative screening
- Engagement
- ESG factors
- Range of funds - limited - less diversification
- Fund performance - more volatility
- Charges
- Repuation of fund manager
- ATR
- Tax wrappers
- Ethical banking
- Timescale/objective
Recommend and justify the actions Amir and Karina could take to improve the tax-efficiency and suitability of their current financial arrangements
5
Amir to switch S&S ISA funds to multi-asset funds
- Current funds are only invested in equities
- Can be risk rated to match ATR
- Wide range of assets
- Diversification
- Good prospects for long term growth
- Reblances regularly
- Acess to specialist investments
Karina to switch her funds to globally managed ethical funds
- Global diversification
- Can benefit from currency movement
- Non-correlation of global markets
- Potential for increased growth
- Reduces volatility in global markets
- Matches ATR
Amir to make additional pension contributions subject to affordability
- 40% tax relief
- Tax free income/ PCLS 25%
Continue to fund S&S ISAs if affordable
- Tax free growth
Ensure no tax is paid on deposit account
- Switch to Karina name - she is BRT and has higher PSA
Recommend and justify a suitable investment strategy for Amir and Karina S&S ISA funds
3
Amir to use multi-asset funds in addition to his global equity funds
- Current funds are only invested in equities
- Can be risk rated to match ATR
- Wide range of assets
- Diversification
- Good prospects for long term growth
- Reblances regularly
- Acess to specialist investments
Karina to Switch S&S ISAs to globally managed ethical funds
- Global diversification
- Can benefit from currency movement
- Non-correlation of global markets
- Potential for increased growth
- Reduces volatility in global markets
- Matches ATR
Consider use of tracker funds
- Reduces cost
- Easy to follow
- Active managers dont always outperform
Objective - Financial arrangements - absence
State the advantages and disadvantages of Amir and Karina using their savings to continue to make overpayments to mortgage
9,5
Advantage:
* Mortgage reduced - increase equity in house
* Option reduce monthly repayment amount
* Could repay mortgage earlier
* No investment risk
* Reduced debt satisfaction
* Reduces interest payable over term
* Increase credit rating
* Protection against fluctuation interest rates
* Excess amount in cash/ does not match ATR
Disadvantages:
* Loss of liquidity/loss of emergency funds (Bank accounts)
* Loss of tax-free status - ISAs
* Loss of potential growth on stocks and shares ISA
* Does not match ATR
* Cannot use funds for other purposes
Objective - Financial arrangements - absence
Explain the benefits and drawbacks of Amir and Karina taking a payment holiday on their mortgage if Karina is off work for an extended period
3,3
Benefits
* Eases short term financial strain
* Suitable for short term financial problems as he only has small impact on mortgage repayments
* Wont impact their credit rating as within terms of mortgage
Drawbacks
* Not suitable in long term
* Will be accuring interest on “holiday”
* Repayments will be higher if term is the same
Objective - Financial arrangements - absence
Explain to Amir and Karina how an offset mortgage works and why it may be suitable for them to consider moving to an interest-only offset mortgage
13
- The balance in an offset mortgage linked account is deducted from the mortgage
- Mortgage interest is only charged on remainder
- Money in saving account is always available but if withdrawn the amount on which mortgage interest is charged will increase
- If money is added to saving account, amouint on mortgage interest decreases
- No interest is paid on saving account - no income tax liability
- Might be useful to Amir
- Reduces monthly payments whislt Karina is reduced salary
- Should be able to fund this mortgage when Karina is sick
- Less interest over term compared to payment holiday
- Maintains emergency funds and tax free status of ISA
- potential growth on S&S ISA
- matches atr
- can uses funds for other purposes
Objective - Financial arrangements - absence
Recommend and justify the adjustments Amir and Karina should make to their exisiting arrangements whilst Karina is absent from work
9
1.Stop making overpayments to the mortgage but continue repayments - still have significant income so should be able to afford mortgage even with Karina reduced salary
**2.Use savings to continue monthly mortgage repayment ** have sufficient savings and excess in cash for stated ATR
3.Do not take payment holiday - just defers cost
**4.Switch deposit holdings to instant access cash ISAs **- Currently likely to be paying interest (psa 500 for Amir and will pay 40% tax above this) - isa are tax free
**5.Continue to fund pension cont **- tax free growth, PCLS
6.Use instant access cash ISA instead of fixed-term when existing cash isa mature - ensure they have enough assets whilst karina off work, maintains tax efficiency of isas
**7.Apply for state benefits **- PIP/ESA for extra income
8.Ensure protection eneds are met - Amir should take CIC/IP or ASU policy as no protection
9.Ensure regular reviews - ensure finances are suitable/ changes in circumstances and monitor funds
Objective - Financial arrangements - absence
Recommend and justify a suitable policy to provide a regular income in the event of Amir unable to work though illness or injury
6
Income protection
- Pays an ongoing tax-free income
- Good health/simple underwriting
Term to intended retirement age
- Covers remainder of his intednded working lifetime
- Multiple claims/cannot be cancelled by insurer
Own occupation
- Provides the widest level of cover/best chance to claim
Deferred period in line with employer sick pay or longer
- Savings adequate to fund a short period of time/keeps cost down
Guaranteed premiums - known cost
Reviewable premiums - reduces cost currently whilst karina is off work
Indexation - keeps pace with inflation
Objective - Financial arrangements - absence
Recommend and justify a low-cost protection policy to provide Amir with financial protection for his loss of earnings through ill health or unemployment
3
Accident, sickness and unemployment cover
* Cheaper than IP
* Amir in good health, easier underwriting and lower cost
* Tax free benefit
* Covers ill health and unemployment
* Lump sum benefits may be available for perm disability
* Could suit short-term needs if karina expected to return to work
Deferment period in line with Amir employer sick pay entitlement/can have shorter deferred period than IP
* Does not eat into emergency fund
Benefit level set to coveressential expenditure
* Covers mortgage and other essentials are covered
Improve current retirement saving plans
Recommend and justify a range of actions Amir and Karina should take regarding their pension arrangements to improve their retirement position
5
Amir to increase his pension contributions to workplace scheme
* Increase pension provision
* 40% tax relief on cont
* Salary sacrifice available
* NIs may be shared from employer
* Can match ATR
* Flexible options - FAD/UFPLS/ANNUITY
* IHT Free fund
* No admin
* Wide range of funds
Karina to maintain pension contributions
* More tax efficient
* Will still receive employer cont - even if reduced
* Use casholdings to match pension as they are less tax efficient
Diversify investment holdings
- Reduces volatility
Amir to increase holdings in equity
- Match with his ATR Higher growth
Use tracker funds and actively managed funds
- Reduces cost
Obtain BR19
- Show projected state pension
- Confirms SP age
- Indicates cost to fill gaps
- Helps with retirement forecast
Improve current retirement saving plans
Explain to Amir and Karina the advantage in prioritising pension and ISA contributions over mortgage overpayments
8,6
Advantage:
* Meets objectives to improve retirement funding
* Tax relief on cont - 40% and IHT free
* Tax free growth
* Can choose funds to match ATR
* High risk investor so more growth in longer term
* Mortgage guaranteed to be repaid over term with current repayment mortgage anyway
* Increases liquidity as ISA funds can be used for other purposes
* May be able to get higher rates on a cash isa than current mortgage interest rate
Disadvantage
- Will pay more interest on mortgage over time
- Pension fund tied up unti 57/58
- Lower credit rating
- Can use ISA fund for overpayments in future
- Currently IR are high
- Investment risk
