Case Study General Questions Flashcards
Identify the additional information a financial adviser would require to advise Alex?
- What are his short and long term objectives
- Future Expenditure (Including increased cost of childcare) and one off costs
- Future Income, both in short term and longer term
- When is his target retirement date
- Any plans to downsize the house?
- Has Alex used his ISA allowances?
- Has Alex used his CGT exemption?
- Does he have any ethical investment criteria?
- Are his assets held on a platform?
- Are there additional employer contributions possible or employer matching?
- Contributions history & amount of carry forward available
- State Pension entitlement
- Current inflation rates and what are the market conditions
- Current overall asset allocation?
- What are the available funds within each plan?
- What are the performance of the current investments?
- Have they done any IHT planning, including gifting?
- What is the required growth rate to achieve objectives?
- What are the current annuity rates?
- Have their pension nominations been updated or completed?
- What are the cost & charges to their plans
- What is his capacity for loss
- Are there any guaranteed benefits or protected tax free cash on Alex’s Pension
- Is flexi-access drawdown and UFPLS available on Alex’s pension?
- Are flexible death benefits available on Alex’s pension?
- Death value (base value) of funds and shares in GIA
- Have dividends been reinvested
- Are pension contributions covered by income protection
- Is his income protection a taxable benefit?
Identify the key issues that should be considered when identifying a good withdrawal strategy?
- How much income is needed?
- Are there any guaranteed income sources?
- MPAA would be triggered on taxable pension withdrawals from Alex’s pension
- What are the current annuity rates?
- Do they have an IHT liability if so we should retain the IHT efficient pension
- Capital erosion if withdrawals are too high
- Are they using all tax exemptions?
- From GIA – capital withdrawals could be liable to CGT
- What would the natural income be
- Are there any cash reserves or other assets available to them
- Projected value of pots
- Economic conditions eg inflation rate
- What are the growth expectations
- Do they need flexibility in how they draw money?
- Charges and cost of advice
- Pound cost ravaging & market timing
- Longevity/Health or needs of survivor
- Will they be downsizing in the future
- Will they receive further capital in the future?
- Are there any liabilities to pay?
State how Junior ISAs can be set up for Alex’s children?
- Must be set up by a parent or guardian
- Set up in child’s name
- Parent selects ISA or Investments within it
- Not taxable on the parent
- Anyone can contribute up to £9,000 PA
- Child controls investment at age 16
- Child gains full access at 18
Identify and explain in detail the key client-specific factors that you would take into consideration when assessing Alex’s capacity for loss?
- He is significant assets and emergency fund
- He can tolerate some loss and volatility
- He has quite a long time frame to retirement
- He has earned income
- His future income and expenditure is relatively unclear
- He has no liabilities
- He has no potential inheritances
- He is in good health
- He will have guaranteed income from the state pension
- He has 2 children who are financially dependent
Explain to Alex how a lifetime cashflow model could be used to assist him in meeting his objectives?
- Identify shortfalls.
- Based on existing portfolio and current contributions.
- Returns required/increased contributions required.
- Stress-test existing portfolio (losses/market crash).
- Apply a range of growth rates/based on attitude to risk.
- Show impact of inflation.
- Show impact of withdrawals/sequencing risk.
- Can be adjusted/reviewed as circumstances change.
Recommend and justify why Alex should use a diversified portfolio of collective investment funds within the pension he has inherited.
- Cash holdings are losing real value due to the effects of inflation.
- Reduces volatility.
- Non-correlation of assets if they are diversified
- Invest in real assets, for example equities provide inflation proofing/growth.
- Can select different management styles/active/passive/can match Alex’s attitude to risk.
- The pension likely allows a wide range of investments.
- Geographic diversification can improve returns & minimise volatility.
- Investing can help meet his income needs.
- More potential for a legacy.
- Can grow these funds tax free and they are immediately accessible as Tanya died before age 75
State six factors you should consider when reviewing Alex’s pension arrangements at your next annual review.
- Change in income needs/budget/affordability/tax status/objectives/State Pension forecast.
- Investment performance/attitude to risk/capacity for loss/rebalance/charges/SIPP invested/asset allocation.
- Have pension contributions been increased for employer matching/contributions.
- Change in market conditions/inflation/economy.
- Change in regulations/legislation/new products.
- Have new pension nominations been made.
Outline the process you would follow to enable you to review the performance of Alex’s existing Stocks and Shares ISA?
- Letter of authority/obtain plan details.
- Confirm date of purchase.
- Base cost/any further investments/withdrawals/fund switches.
- Identify reinvested income.
- Calculate performance history.
- Assess asset allocation.
- Identify suitable benchmark.
- Identify Alpha/compare against benchmark.
- Review charges.
- Comparison with risk-free return/risk adjusted return.
- Review volatility/risk rating of fund.
- Assess funds against attitude to risk & capacity for loss.
Explain to Alex why it is important to carry out regular reviews of his financial arrangements.
- Changes in personal/financial circumstances/objective/attitude to risk.
- Monitor performance
- Rebalancing funds.
- Identify any shortfall against targets
- Increase contributions
- Costs/charges/cheaper products available/new products available/existing product still suitable.
- annual allowance issues/protection available/tapering.
- Economic/legislative changes/tax.
Explain, in detail, to Alex how he could consolidate the existing ISAs, OEICs and pension onto an investment platform and why this may be suitable for him?
- Can re-register ISAs
- retains tax efficiency.
- Consolidate ISAs using additional permitted subscriptions
- Can transfer open-ended investment companies (OEICs) in specie/re-register.
- No market timing risk.
- No Capital Gains Tax (CGT) triggered by transfer
- Can Bed & ISA from OEIC funds.
- Quick transfer process/minimal effort for Alex
- Online access/easier to monitor/fund switches/rebalance/inter spouse transfers.
- Lower cost/large fund discount.
- Simplified tax reporting/consolidated reports/access to research.
- Wide fund choice/cash account/can match attitude to risk.
- Potentially improved growth.
Outline the key client-specific issues that you would consider when advising Alex on the investment of the death benefit lump sum
- Income needs/planned expenditure/emergency funds/how much to invest/investment needed into new business.
- Cash fully protected up to £85k per provider
- Capacity for Loss/they have no debts.
- Ethical considerations/Environmental Social Governance (ESG) concerns.
- Timeframe/investment term/liquidity/need for access.
- Use of Tax wrappers/tax efficiency.
- Use of trusts.
- Pension contributions/carry forward.
- Inflation/Growth expectations/current market conditions.
- Investment experience.
- Existing protection arrangements
Recommend and justify why setting up a Bereaved Minors trust in this will can ensure that the children will be financially protected if Alex dies too?
- Simple/clear process/reduced admin/reduced cost.
- Can use Residential Nil Rate Band if property is in Trust/IHT efficient.
- Children inherit automatically at age 18.
- Monies can be used for education/schooling/maintenance.
- Trustees of choice can be appointed by Alex
- Letter of wishes can be put in his Will
- The assets would be managed for benefit of children.
- Not taxed at trustee rates/effectively taxed at children’s rates.
- No periodic/exit charges.
- Trustees can amend Trust at 18/transfer to new Trust (18 - 25).
Explain to Alex the importance of reviewing his attitude to risk on a regular basis.
- Attitude to risk (ATR) differs for different objectives/school fees/retirement.
- Changes based on investment experience/knowledge.
- Changes based on personal circumstances/health/death.
- Changes based on income/expenditure/inheritance
- Changes as they get older/changes over time/term of investment.
- Children’s needs may change so ATR may need to be adjusted.
- Fund performance/market performance/to ensure investments match ATR.
- How much risk do they need to take/how much risk can they afford to take/what if target is achieved?
State the main reasons why you should consider Alex to be a ‘vulnerable’ client at present.
- Recently lost his wife
- Newly single parent with 2 young children
- Sudden and unexpected change in circumstances
- Potentially limited Capacity for Loss (CFL).
- Uncertain childcare expenditure
- Loss of Tanya’s income source
- Wills and Nominations are out of date
Explain to Alex why he should review his current Will, nominations, and Lasting Powers of Attorney, following Tanya’s death
- Will is out of date/needs updating.
- Tanya would be removed
- Need a Trust for children/bereaved minor’s trust.
- Appoint Trustees of choice for children’s money.
- Executors may need to be changed.
- Update nominations on pension & Death in Service.
- Nomination improves benefit options.
- Set up new LPA for alex
- Considers new family circumstances
- Ensures wishes are reflected.
- Ensures Residential Nil Rate Band (RNRB) can be used if left to direct descendants.
Identify five key benefits and five key drawbacks for Alex of using a portion of the lump sum from the death in service to top up his existing pension contributions.
Benefits:
* Increases chance of retiring early.
* Potential tax-free growth/Tax relief/extends Basic Rate (BR) band.
* Employer matching/lower charges/less admin.
* Carry forward available.
* IHT-free
Drawbacks:
* Limited affordability/loss of liquidity/loss of access to capital;
* Can’t access it until 57.
* No pound cost averaging/investment risk/limited capacity for loss (CFL).
* Only 25% Pension Commencement lump sum (PCLS) and income is fully taxable.
* Contributions limited by annual allowance/earnings limit.
Explain to Alex how Tanya’s pension arrangements will be treated for Alex following her death?
- DC schemes are nominated for survivor/Trustee discretion.
- Benefits can be taken as lump sum/annuity/adhoc/flexi-access drawdown (FAD).
- No age restriction on access
- As death was before 75, benefits are tax-free.
- So there is no Pension commencement lump sum
- There is no impact on the money purchase annual allowance
- Tax free wrapper is retained
- Survivor can nominate successors for pension fund eg. the 2 children
- Tax treatment reverts to age of death of Alex.
- Can retain IHT-benefit of pension wrapper/IHT free.
Can leave this invested for the foreseeable - It is possible but unlikely that Alex could inherit some State Pension.
Explain in detail to Alex the process that must be followed to establish and make use of his maximum carry forward pension allowance.
- Establish personal and employer contribution for current tax year.
- Earnings for previous 3 tax years.
- Contributions made in previous 3 tax years.
- Calculate residual allowance (each tax year).
- Use current year maximum allowance first (£60,000).
- Can use residual allowance for 2020/2021 tax year first.
- Tax relief limited to earned income in current tax year (£90,000 or £70,000 if he takes new income level).
- Pay contribution net of 20% and claim back 20% via self-assessment (SA).
- No need to inform HM Revenue & Customs (HMRC)/keep own calculations.
Explain to Alex why he should review his personal tax position on a regular basis.
- Future pay rises for Sam could result in a loss of some of his Personal Allowance.
- He is paying tax on savings interest as it is above the personal savings allowance of £1,000
- He will be paying tax on dividends received as dividend allowance is now £1,000
- Pension allowances/carry forward available.
- Use of all ISA/CGT exemptions/gift exemptions.
- CGT could be due on Tanya’s Unit trust in the future depending on value at death
- Change in tax rates/legislation.
Identify other events that would trigger an immediate review of Alex’s financial arrangements.
- Death of one of the children
- Remarriage (and potential future divorce)
- loss of mental capacity
- Significant change in health.
- Need for significant income/capital/windfall.
- Loss of Job
- Significant change in objectives
- Alex having to go into long-term care.
- Severe market turmoil/good market conditions/take profits.
- Change in tax regulations/pension legislation
Explain how Tanya’s investments will be transferred over to Alex and what the tax treatment will be?
ISA:
- Alex can make an additional ISA contribution up to the level of Tanya’s ISA eg. £87,000
- This is in addition to his normal £20,000 ISA allowance
- Eligible to those with a deceased spouse who are not separated
- Can be moved as an asset transfer or via cash
- Alex’s provider has to accept the APS request and then the transfers can happen
- Retains tax free ISA status with no income tax or CGT
GIA:
- No CGT on death so assets are revalued on date of death eg. £70,000
- These assets can be transferred via an asset transfer or via cash
- They become taxable for Alex and with the new base costs and the income is taxable on Alex once it is in his name.
Explain to Alex the similarities and differences between accumulation funds and income funds?
- With Income funds, income is paid out to investors as cash
- With accumulation funds, income eg dividends are automatically re-invested into the fund.
- The tax treatment is the same regardless of whether income or accumulation
- If an investor in an income fund looks to re-invest, they may have to pay more commission or dealing costs
- Accumulation funds allow for investors to set it up and leave it, wheras income funds could lead to a cash balance building up
- For investors drawing a regular income, income funds may be more suitable as they do not require making sales of units that could incur CGT
Explain to Alex the pros and cons of using a passive tracker fund rather than an active fund?
Pros:
- Low cost/cost-effective.
- Run by computer system/no human judgement/Efficient Market theory.
- Simple to understand/ease of access to markets.
- Allows for constant rebalancing within each fund.
- On average has been proven to outperform active management over time.
Cons:
- Will underperform the market due to charges/cannot outperform market/No Alpha.
- Tracking error/will never match market exactly.
- Participate in all of market downside
Explain the factors that should be taken into consideration when identifying a suitable level of emergency fund for Alex
- Current expenditure/planned expenditure/Future Expenditure.
- There is uncertainty around what his expenditure will be
- At least 3+ months expenditure required.
*He does not have any debts.
*He currently has surplus income/future part-time income.
*His income may reduce in the future
*He has accessible cash funds/Premium bonds.
*Liquidity of investments/willingness to erode capital.
*Health/longevity of Alex
*Market conditions/inflation risk/low interest rates.
*Sequencing risk/pound cost ravaging.
*He is far away from retirement
*He has employer protection in place and employer sick pay
Recommend and justify a suitable protection policy for Alex to provide a regular income to ensure funds are available to meet any childcare costs in the event of his death while the children are still at school
- Family Income Benefit (FIB).
- Single Life
- Sum assured to meet annual childcare costs.
- Indexed to protect against inflation.
- Pays out regular income tax-free.
- Term covers children’s needs
- Guaranteed premiums for affordability/known cost.
- He is in good health & is young.
- Simple underwriting process/cheap premiums.
- Can be written in Trust for benefit of children
Comment on the suitability of Alex’s existing protection arrangements.
- Simon needs his full salary to cover his expenditure.
- Income Protection payout wouldn’t cover the household expenditure
- His expenditure may increase due to childcare costs and his income may decrease, meaning the income protection level covered is not big enough
- He has no unemployment cover in the form of Accident, Sickness and Unemployment cover
- No Critical Illness cover/inadequate cover in event of serious illness.
- His Death-In-Service would be lost if he leaves company.
- Term life cover may be inadequate as it only provides cover until his youngest child is 19.
- He has no Private Medical Insurance which would help him get back to work quickly.
- His pension and his inherited spouses pension can provide a lump sum on death.
Explain why a Multi-Asset Fund may be suitable for Alex’s attitude to risk.
- Diversification across all asset classes/geographical spread.
- Potential for growth.
- Correlation of assets controlled/non-correlation.
- Reduces volatility/risk.
- Actively managed/professional management.
- Rebalances regularly.
- Risk rated to match attitude to risk.
- Access to specialist investments
Recommend and justify a suitable protection policy for Alex to provide a lump sum in the event of a serious illness?
- Critical Illness Cover
- Covering Alex and the children
- Sum assured to meet needs of children eg. 10 years of expenditure above income protection level
- Pays a lump sum on diagnosis of a serious illness if a 14 day period is survived
- Pays out the lump sum tax-free.
- Term covers children’s needs
- Guaranteed premiums for affordability/known cost.
- He is in good health, doesn’t smoke & is quite young.
- Simple underwriting process/cheap premiums.
Recommend and justify a suitable protection policy for Alex to provide a regular income in the short term if he became unemployed, and the eligibility requirements?
- Accident, Sickness and Unemployment Policy
- Covering Alex
- Covers periods of temporary unemployment and incapacity, pays out up to 12 months
- Covers involuntary redundancy
- Pays a regular income tax-free, normally up to 70% of gross income
- Has a shorter deferred period than income protection, normally 4 weeks
- Guaranteed premiums for affordability/known cost.
- Generally cheaper than income protection
- He is in good health, doesn’t smoke & is quite young.
- Simple underwriting process/cheap premiums.
- He is eligible as he is over 18, working, and assuming he is registered with a UK doctor
Recommend and justify the actions that Alex should take in respect of his pensions and investments to improve his overall position
- Claim the Bereavement Support Payment
- Claim council tax reduction as he is a single parent
- Make a large personal pension contribution using cash lump sum.
- 40% Tax relief for Alex and he may benefit from employer matching contribution.
- Carry forward may be available.
- Check BR19 for State pension/pay voluntary contributions if necessary.
- Invest excess cash for greater returns and to ensure he isn’t paying tax on savings income.
- Use ISA allowance for tax efficiency.
- Move Tanya’s ISA to Alex’s ISA via an additional permitted subscription to retain the ISA status
- Tax-free growth on ISA and Pension
- Switch funds to match ATR/better growth prospects and reduce dividend yield
- Excess dividends in Unit Trust taxed at 33.75% so reduce this if possible.
- Monitor fund performance/charges/ensure appropriate diversification.
- Review expenditure/cut excess discretionary spending.
- Ongoing future reviews.
What are the key factors for Alex to consider if he decides to select ESG investments?
- His level of engagement/commitment.
- Negative/positive screening/ESG/what does he want to exclude?
- Can be higher risk/more volatile/smaller companies.
- More limited fund choice.
- Difficult to assess large companies/opaque in terms of catagorising what is ESG
- Limited diversification.
- Potentially lower returns/higher charges.
Describe the benefits available to Alex that could improve his position given the fact that Tanya has recently passed away and why is he eligible?
- Bereavement Support Payment
- Not means tested
- He is under state pension age
- Tanya paid NI contributions more than 1 tax year
- Alex and Tanya were married
- Can claim within 3 months for the full amount
- You receive a first payment of £3,500 and up to 18 monthly payments of £350 if eligible for child benefit.
- If not eligible for child benefit, you receive a first payment of £2,500 and up to 18 monthly payments of £100.
- If you claim after 12 months after death you just get the monthly payments
- May be able to get a council tax reduction as a single parent
How many minutes per mark should you aim for?
1 mark per minute. 160 total marks and 180 mins
