Case Study (24-07)

Question 1

State briefly the reasons why you might consider Karina to be a vulnerable client.
(7)

Answer 1

• Currently off sick/back injury.
• Salary ceases in 4 weeks/50% of gross income from IPI from next month.
• Reduced affordability/reduced income/reduced Capacity for Loss/may need to erode savings.
• High outgoings/mortgage/may have costs to adapt home due to injury.
• No other personal protection (Private Medical Insurance).
• Unknown recovery period/could be long-term sick.
• Limited State Benefits.

Question 2

(i)
Explain to Karina how any payment she receives from her employer’s income protection insurance scheme will be paid to her and how it will be treated for tax purposes.
(10)
Karina’s employer’s income protection scheme provides a proportionate benefit if the relevant conditions are met.
(ii)
Outline to Karina how the proportionate benefit operates and how this may be of use to her during her recovery.
(6)

Answer 2

(i)
* Employer pays benefit.
* Paid to Karina under PAYE/taxed at source.
* Based on 50% salary/£26,000
* Taxed as Income Tax.
* Employee National Insurance (NI) continues to be paid.
* Employer NI continues to be paid.
* Karina maintains NI record (for State Pension purposes).
* Reduced Income Tax (20%) as income is below Higher Rate band.
* Not taxed as Benefit-In-Kind (BIK)/P11D.
* Employer maintains pension contribution.

(ii)
* Scheme allows partial/gradual return to work.
* Salary paid by employer.
* IPI tops up to full 50% of salary (so no loss of IPI).
* IPI paid again in full if unable to work.
* No delay in payment if return to work fails (no deferred period).
* Could return to a lesser paid position (if unable to do previous job)/reduces pressure to return to work full time.

Question 3

Explain to Karina why she may be eligible to receive Personal Independence Payment (PIP) and the benefits that it might provide for her.
(10)

Answer 3

• She is under State Pension Age (over age 16).
• Will have been off sick for 3 months (by next month).
• Eligible if expected to be off sick for a further 9 months 12 months in total.
• Unable to perform some Activities of Daily Living (likely with back injury).
• Likely mobility issues/difficulty walking.
• Benefit is £68.10/£101.75 per week.
• Mobility rate is £26.90/£71.00 per week.
• Not means tested.
• Paid tax-free.
• No impact on employer Income Protection Insurance (IPI).

Question 4

State the reasons why Amir and Karina should not consider taking a mortgage payment holiday at the present time.
(10)

Answer 4

• Karina is receiving full salary for another month/IPI starts in a month.
• Mortgage is affordable.
• They have been over-paying.
• Can reduce monthly overpayments (temporarily).
• They have accessible assets (cash and ISA).
• Interest continues to accrue.
• Payment holiday increases outstanding mortgage/could extend term of mortgage.
• Mortgage payments will be higher at end of payment holiday.
• Impact on life policy/decreasing term/sum assured may be too low after payment holiday.

Question 5

Recommend and justify a range of actions that Amir and Karina could take to improve their current retirement savings provision.
(14)

Answer 5

• Increase pension contributions.
• 40% tax relief for Amir/20% for Karina.
• Use salary sacrifice/employer matching.
• National Insurance (NI) saving/employer may rebate NI saving.
• Use ISA allowance.
• Tax-free income and growth (pension and ISA).
• Use Lifetime ISA.
• Both eligible as under 40.
• Receive 25% Government Bonus/ £4,000 max PA
• Can access Lifetime ISA at age 60/use as tax-free retirement pot.
• Switch from Fixed-Interest (F-I) funds for Amir/increase equity exposure.
• Low potential for growth on F-I/improves potential for growth.
• Monitor charges/ Use Tracker funds for lower charges.
• Transfer Deposit account to Karina.
• She has higher Personal Savings Allowance (£1,000).

Question 6

Explain to Amir why he should consider switching a portion of his current global fixed-interest fund within his pension plan into an equity-based fund.
(9)

Answer 6

• Growth potential on equities/limited growth on Fixed-Interest (F-I).
• Matches ATR/current fund does not match ATR.
• Long-term investment.
• Inflation protection/ inflation risk on F-I.
• Interest rate risk/credit risk.
• Diversification/geographical diversification.
• Low correlation with F-I.
• Reinvested dividends can boost growth.
• No/low switch charges on pension.

Question 7

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

Answer 7

• Change in personal circumstances/health/any children.
• Change in income/expenditure/tax status/salary increases for either.
• ATR/CFL.
• Rebalance/asset allocation/performance/ESG views.
• Has Karina returned to work/still receiving IPI/Claimed for Personal Independence Payment (PIP)/taken mortgage payment holiday?
• Use of allowances/Lifetime ISA/ISA/Pension.
• Charges.
• Change in legislation/taxation/new products/economic conditions/interest rates.