Case Study 2 Exam Questions Flashcards

Question

Outline the steps you would follow when completing the individual risk profiling assessments for Sanjeev and Maya.

Answer 1

 Explained the purpose of the risk profiling tool to Sanjeev and Maya  Completed a risk questionnaire/series of questions including Sanjeev and Maya’s capacity for loss  Used computer software/manually/to produce a risk- rating/score/results  Risk rating suggests a suitable asset allocation/an efficient frontier model  Discussed the results with Sanjeev and Maya and agreed a suitable risk profile for each of them

Answer 2

Benefits:  Simple/understandable/consistent/repeatable process/objective  Helps Sanjeev and Maya to understand/consider risk  Separate risk profile for each client/objective established/attitude to risk can change over time  Assists with appropriate asset allocation  Identifies the maximum loss tolerance/risk and reward Drawbacks:  Sanjeev and Maya may not understand the terminology/questions  Adviser may misinterpret the results/different tools give different results  May not establish capacity for loss  Different objectives/clients may have different attitude to risk/may not consider timeframe  May not take into consideration their investment experience/behavioural finance/emotion  Cannot be used in isolation/further discussion needed  It does not consider taxation issues or charges  Based on historic data  Only relevant for that particular moment

Answer 3

 As a couple they have an adequate emergency fund, though not much excess wealth  Affordability is an issue at present  They are saving for a deposit  At the expense of Maya’s pension contributions  They are expecting an increase in Sanjeev’s income  But we do not know when  They can tolerate some loss / volatility in their investments in the longer term  They have many years to go before retirement  There is no mortgage as yet and no apparent debt  They are reliant on their earnings for income  No employer sick pay  They do not have income protection  Only Sanjeev has DIS  Neither has CIC  Neither has PMI  No information on their health, but both working so assume OK  They are married and have a will  They have no children / are not planning on having children in the foreseeable future

Answer 4

Option 1 - Pension Benefits  Tax relief at highest rate on own contributions  Matching contributions may be available from employer  If salary sacrifice is available, save income tax and NICs  Fund grows in tax-free environment, 25% taken as PCLS  Contributions can reduce income tax payable  Access to professional fund management  Remaining 75% taxable withdrawals gives opportunity to use personal allowance  And creates ‘income’ for ‘normal expenditure exemption’ under IHT mitigation Drawbacks  No access to benefits until 57  75% taxable as earned income  Annuity would not match ATR  FAD / UFPLS fund remains exposed to stock market  Annual allowance charge effectively limits tax relief on contributions Option 2 – Collectives Benefits  CGT AEA of £6,000 (2023/24) available  Can switch to ISA over time/ move lump sums into pensions  No limits on contributions / withdrawals / access  Professional fund management / diversification  Use dividend / personal savings allowances Drawbacks  No tax relief on contributions  Possible CGT liability  CGT AEA is falling next year  All income is taxable  Dividend allowance is falling next year  Time taken to switch to ISAs / manage tax liabilities  No employer contributions Option 3 - ISAs Benefits  Income and capital gains tax-free  Fund grows in tax-free environment  Access to wide range of funds to suit risk / diversify  Professional fund management  No limit on accessing funds  No requirement to report income / gains to HMRC  APS on death of 1st spouse Drawbacks  £20,000 annual limit on contributions  No employer contributions  May be tempted to access fund pre-retirement leaving a shortfall  Included in estate for IHT purposes Option 4 – Lifetime ISAs Benefits  Eligible due to being under 40  25% government bonus (equivalent to basic rate tax relief)  Income and capital gains tax-free  Fund grows in tax-free environment  Access to wide range of funds to suit risk / diversify  Professional fund management  Funds can be accessed penalty free at age 60  No requirement to report income / gains to HMRC Drawbacks  £4,000 annual limit on contributions  If either become a higher rate tax payer would not receive as much tax relief as if they were to save into a pension  No employer contributions  25% penalty if access before age 60  Included in estate for IHT purposes

Answer 5

 To perform cashflow exercise  To determine surplus income / identify where discretionary expenditure can be cut back  To use Lifetime ISA to fund deposit required  Freeing up savings to be redirected into Maya’s pension  Maya to write to her employer to request opt-in  So she can contribute and benefit from tax relief  Subject to affordability, Maya to contribute up to 6% of her salary  To benefit from matching contributions from her employer  And tax relief  Maximising the potential for fund growth which will be free of tax on income and gains  And a larger income for the couple during retirement  Pension assets are also free of IHT  Obtain State pension forecast  To confirm how much she will both receive and from when  Any gaps to be plugged with Class 3 NICs if possible  To maximise the amount of State pension that can be received

Answer 6

 Changes in circumstances / objectives / lifestyle / health  Changes in income and expenditure  Investment performance / benchmarking / on track / asset allocation / rebalance  Change in ATR / capacity for loss  Charges  Use of tax allowances  Tax changes  Pension contributions  ISA contributions

Answer 7

 Level of income and/or capital required and for how long?  Do they wish to protect their standard of living in the event of death as well as illness?  Do they wish to protect any future mortgage in the event of death as well as illness?  Would expenditure change at all in the event of death/illness?  Confirmation that the only other protection cover they have is Sanjeev’s DIS  Is the DIS cover under trust?  Has Sanjeev nominated a beneficiary for DIS cover?  Entitlement to State benefits?  Willingness to use pension funds as death benefits?  Has Sanjeev nominated a beneficiary for his pension fund?  Willingness to use other assets, or downsize in future?  ATR and capacity for loss in relation to this objective?  Affordability / budget to be spent in providing solution?  Smoker status / hazardous hobbies that would impact underwriting?  Does their will reflect their current wishes?  Who will look after their estate in the event of second death while Sanjeev’s nephew is still a minor?

Answer 8

 That Sanjeev’s firm will continue to provide the same benefits while he is in service / increase his benefits when his pay rises  That company benefits will be lost if he leaves his employer  They would like any debt to be protected against incapacity as well as death  They will remain healthy  Both would continue to work in the event that one or the other were to die or become ill  They are willing to pay for financial protection cover where necessary  If they have children in the future, the children’s dependency will cease when they leave full time education  Their Wills reflect their current wishes  They will make nominations for DIS / pensions as soon as possible if they haven’t done so already

Answer 9

If Sanjeev or Maya were to die:  Sanjeev has 2 x DIS of basic salary  His pension would provide a return of fund  No other life cover in place  They are married  Current account and deposit savings account held as joint tenants, survivor would inherit by the right of survivorship  Remainder of estate subject to the Will and left to survivor  No IHT payable on either death at present due to size of estate  No income for either in the event of the other’s death  Bereavement support payment at the lower rate would be available, but this is unlikely to be sufficient  There is no mention of whether Sanjeev has nominated Maya to receive the DIS benefits / death benefits for their pensions  If any lump sums are taken out of the pension environment, they will form part of the survivor’s estate on their subsequent death If Sanjeev or Maya were unable to work through ill-health:  No employer sick pay  Entitled to statutory sick pay, but that’s around £100 a week and only pays out for 28 weeks maximum  After that, may be entitled to employment support allowance / universal credit  No income protection  We do not know what their outgoings are, so we need to establish this, but it’s probably safe to assume that the couple’s standard of living would be severely impacted in the event of ill-health, as would their ability to repay any mortgage (assuming there is no mortgage payment protection insurance in place)  NoCIC  NoPMI

Answer 10

 Sanjeev has 4 x DIS of basic salary, Maya has nothing  Both pensions would provide a return of fund  No mention of death benefit nominations for DIS or pensions  No mortgage as yet, no debts mentioned  No other life cover or CIC  No employer sick pay for Sanjeev or Maya  Neither has income protection  NoPMI  No unemployment cover  The income required on death / illness of either Sanjeev or Maya  Their current good health  Their budget  The term required  Existing savings  Entitlement to state benefits  Married  Wills in place  ATR/capacity for loss

Answer 11

Benefits  No cost to Sanjeev  Not classed as taxable benefit (benefit in kind)  Cover may increase over time as pay rises  Benefits payable outside estate assuming written under trust  No medical underwriting  Benefits paid tax-free  Provides valuable cover where the couple are otherwise under- protected Drawbacks  No control over the amount of cover  Cover most likely lost if change employer  Employer could withdraw cover at any time  Proceeds of 1st to die most likely to be in estate of 2nd to die if they are not spent / placed under trust beforehand  May not be enough to support Maya  Death only – no CIC, limited income protection  If enter salary sacrifice agreement / reduce hours cover may fall

Answer 12

 Tax-fee lump sum / ‘income’  Select sum assured to match required standard of living  Term to match needs  Low cost  Guaranteed premium  Can be set up under trust where appropriate  Indexation available  Provides peace of mind  Simple underwriting as both in good health  Cannot be cancelled by insurer

Answer 13

 IP pays regular income, CIC a lump sum  IP pays out if unable to work through sickness, CIC pays out if diagnosed with listed illness  IP may pay out multiple claims, CIC only once  Cover decreases over term for IP, constant for CIC  IP linked to earnings, CIC is not  IP has deferred period, CIC survival period  IP based on own/any/suited occupation, CIC can have life cover / TPD added  IP individual policy, CIC may be joint and/or offer children’s cover  IP greater underwriting  CIC can be set up under trust

Answer 14

 Multiple claims / wider cover  Proportionate benefit available  Indexation available  Choice of deferred period  Provides a regular income  Own occupation available  Houseperson’s cover available

Answer 15

Benefits:  Cannot be cancelled by insurer / can claim more than once  Can claim for a longer period  Own occupation  Indexation of benefits  Proportionate benefit  Guaranteed premiums Drawbacks:  Usually more expensive  Longer deferment period before receipt of claim  Does not cover unemployment  No lump sum cover / no cover on death  Stricter underwriting

Answer 16

 Pays just around £100 per week if too ill to work  Paid by employer  For up to 28 weeks  Providing they are eligible to receive it (this generally means being an employee, having paid sufficient Class 1 National Insurance contributions and have been ill for at least four days in a row)  It is not means tested  It is subject to income tax and National Insurance  After 28 weeks, may then be entitled to Universal Credit or Employment Support Allowance

Answer 17

 Employees enter 13-week assessment phase after 28 weeks (once entitlement to SSP ends)  Complete questionnaire and attend assessment centre – then work capability assessment divides into :  Support group (unable to work)  Work-related activity group  Contribution based (taxable) or income-related (means-tested but not taxable) versions available  Payments stop at State pension age.

Answer 18

 Payable assuming survivor under State pension age  Lump sum of £2,500 as no children under 20 in full time education  Then maximum of 18 monthly payments of £100  It is neither taxable nor means-tested  Though it is NI dependent (deceased’s record)  Must claim within 3 months of death to be eligible for all payments

Answer 19

 Income protection – one policy each  To cover household expenses / maintain standard of living  Maximum benefit (50-65% salary)  Paid tax-free  Term to expected retirement  Own occupation  To provide widest cover  Deferred period to match emergency fund available  To keep costs down  Indexation  To keep pace with inflation  Guaranteed premiums  To ensure affordability  Permanent cover  Cannot be cancelled by insurer providing premiums are paid

Answer 20

 Critical illness policy (single or joint)  Sum assured and term to match needs  To pay make any adjustments to lifestyle/house/repay mortgage  Paid tax-free  Indexation  To keep pace with inflation  Guaranteed premiums  To ensure affordability  Waiver of premium  To ensure premiums continue if sick.

Answer 21

 Level term (or FIB)  JL1D (or 2 SL policies for wider cover)  Sum assured to replace lost income / expected outgoings  To maintain standard of living  Paid tax-free  Term to expected date of retirement  Indexation  To keep pace with inflation  Guaranteed premiums  To ensure affordability  Written in trust  To ensure speedy payment / no impact on estate  Waiver of premium  To ensure premiums continue if sick

Answer 22

 Whether they bought a property  If Sanjeev qualifies and his income increases  Changes in need for income / capital  Change in employment status  Change in State benefits  If they have children in the future