Chapter 2 (12 exam questions): How The Retail Consumer Is Served By The Financial Services Industry

Question 1

2.1.2: Assessing needs and circumstances

2.1.1: Obtaining client information

2.1.3: Client advice

READ AGAIN. MORE COMMENSENSE SO NO FLASHCARDS

Question 2

Before making a recommendation to a customer it is important to ‘know your customer’

What does this mean?

Answer 2

Where the advisors finds out all relevant information about their client in order to give a suitable recommendation. This is done via a fact find where both hard/soft facts are asked

Question 3

Cash flow modelling is commonly used by financial advisers

What is this?

Answer 3

A computer-based process that produces an analysis of the client’s situation throughout their lifetime.

An effective way to highlight any problem areas and to ‘stress-test’ the client’s current and proposed arrangements.

Question 4

Client communications must be fair, WHAT and not WHAT. It must serve its purpose and be informative to the customer.

Answer 4

It must be fair, clear and not misleading

Question 5

What are suitability reports?

What are their requirements?

Answer 5

Suitability reports provide a background to an adviser’s recommendation, and help a customer understand why a course of action is being recommended.

Suitability reports must meet several clear requirements:

Personalised to the customer.

Written in Plain English, avoiding jargon.

Recommendations must be justified and show how they meet customer aims.

Any disadvantages (as well as advantages) of all recommendations made must be explained (so, a balanced approach must be taken).

Any needs not addressed must be highlighted

Question 6

Cash flow modelling looks at the customers needs for a period of 10 years

True or false

Answer 6

False

It is throughout their lifetime

Question 7

A suitability report must give a balanced view on a recommendation given. What does this mean?

Answer 7

It shows both the advantages and the disadvantages of a recommendation

Question 8

Retirement Planning, Managing Debt,
Saving & investing,
Borrowing, including house purchase, tax planning, protection, budgeting, estate planning

Tell me the correct order from most important to least important as stated by the ‘hierarchy of needs’

Answer 8

MOST IMPORTANT:
Budgeting

Managing debt

Borrowing, including house purchase

Protection

Savings & Investing

Retirement planning

Estate planning

Tax planning
LEAST IMPORTANT

Remember this as a tower block where tax budgeting is the building blocks at the bottom. If you take it away the who building will come crashing down.

Question 9

What is a budgeting assessment?

Answer 9

Where an advisor completes a detailed income and expenditure analysis

It is important to do this so the advisor gains a full understanding of the clients income and expenditure position which is obviously very important before making a recommendation

Question 10

Before making a recommendation an advisor will analyse their clients income and expenditure in detail. What is this process called?

Answer 10

A budgeting assessment

Question 11

Who is the Money and Pensions Service (MaPS)?

Answer 11

Set up by government and is the responsibility of the FCA. It’s funded through levies on the financial services industry. Now called MoneyHelper!!!

It offers ‘free & impartial’ information and guidance

It replaced 3 guidance bodies:
-The money advise service
-The Pension Advisory service
-Pension wise

It replaced and consolidated them in this way due to it being difficult for consumers to find the correct service with there being so many options

Question 12

What is the Money and Pensions Service now known as ?

Answer 12

MoneyHelper

Question 13

What was MoneyHelper previous known as?

Answer 13

The Money and Pensions Service

Question 14

Managing debt is the second most important aspect in the hierarchy or needs.

Answer 14

Essential spending:

Day to day spending: .

Non-essential

Question 15

When an advisor helps their client manage their debts they will help them establish their priority debts

What are the priority debts?

Answer 15

Priority debts are: Mortgages, utilities and council tax.

Ie the 3 that will have a significant, immediate impact on the customers life if not serviced

Credit cards, overdrafts are deemed as less important….

Question 16

Who is a debtor ?

What is a creditor?

Answer 16

Debtor = Who owe the money

Creditor = Who are owned the money

Question 17

For individuals, there are typically five options available to those in debt difficulty.

What are they. Tell me about each:

Answer 17

Debt repayment plans

Debt management plans

Debt consolidation

Individual Voluntary Arrangements (IVA’s)

Bankruptcy

Question 18

What is a debt repayment plan

Answer 18

Normally the first option for an individual

Its an informal, self-managed arrangement negotiated with each creditor. It is handled by the debtor themselves.

Debt charities can assist in this process

Question 19

What is a debt management plan?

Answer 19

Involves an adviser who is licensed under the Consumer Credit Act.

The adviser negotiates with all the creditors on behalf of the debtor, and establishes acceptable repayment plans with each.

One monthly payment is then made to the adviser who then makes payments on behalf of the debtor as per the plan.

Question 20

What is debt consolidation?

Answer 20

The process of negotiating a new loan or mortgage extension to repay all debts, reducing the overall monthly expense.

Will lead to longer repayment terms. An if securing unsecured debt against a mortgage this will result in higher interest and more severe consequences if the borrower defaults

Question 21

When should IVA’s or Bankruptcy be considered as a way of repaying creditors?

Where can advise about these two options be found

Answer 21

They should be considered ONLY when other options have been discounted, such as a debt management plan, debt consolidation and so on.

Organisations such as the Citizen’s Advice Bureau (CAB), the National Debtline and the StepChange Debt Charity can help advise individuals about these two options

Question 22

How do IVA’s work?

Why are the advantages of this compared to bankruptcy?

Answer 22

An insolvency practitioner negotiates the repayment of loans with creditors (usually means they accept the fact that they will get less back)

It is legally binding once accepted

Repayments are typically made over a 5-year period to repay the new, lower, negotiated debts.

The practitioner then reviews this each year and provides a report to creditors to show progress.

Advantages over bankruptcy:
The debtor may avoid losing their home. They do not suffer the restrictions attached to bankruptcy. For the creditors they will receive some of their monies back rather than lose it all

Question 23

Tell me about bankruptcy

Answer 23

The most serious and impactful way to manage debts

A creditor files a petition for bankruptcy of the debtor (debt must be at least £5000)

Lasts 12 months

An official receiver takes ownership of assets and calculates value of assets/liabilities etc. They then appoint an insolvency practitioner who becomes a trustee in bankruptcy who then sells the assets to recoup the debts

The bankrupt individual could lose their home and other fundamental possessions

Question 24

READ 2.2.1c: Borrowing

Question 25

What are payday loans?

Answer 25

very short-term unsecured loans, often with eye-wateringly high interest costs (96%) that are then repaid once payday comes around

Question 26

In relation to mortgages, what is assignment and ‘equity of redemption’?

Answer 26

A ‘mortgage’ is the security offered to the lender in exchange for the loan, rather than the loan itself.

When the security is signed over to the lender in exchange for monies, the transfer of ownership is called an assignment.

In most cases, the security offered is the deeds to the property, but recently many lenders are happy just to register a charge on the property with the Land Registry

The borrower has what is known as ‘equity of redemption’. This means that; when the mortgage is repaid, the assignment will cease so the lender no longer has the deeds to property or holds a charge

Question 27

READ 2.2.2b: Method of interest repayment

2.2.2d: Interest rate options

2.2.2c: Buy to let mortgages

ABOUT MORTGAGES SO NO FLASHCARDS MADE

Question 28

What type of customer is most suited to the following types of mortgages:

Fixed rate

Discounted Rate

Capped

Capped & Collar

Foreign Currency

Equity Linked or shared appreciation mortgages

Flexible Reserve

Equity Release

Offset

Answer 28

Fixed rate = Borrowers who need monthly costs to remain within budget

Discounted Rate = For borrowers who want a lower rate than the lenders SVR and want to benefit from further cuts in the SVR. And obs are okay with the rates increasing

Capped = For those who do not want repayments to exceed a certain amount but would like to try to benefit from future drops in rates

Capped & Collar = Same as above but they also accept there is a lower limit so will not benefit as much from drops in rates but in return they may receive a better rate than just taking out a capped mortgage. Lenders also offer this to protect themselves

Foreign Currency (ie the interest and capital is denominated in a currency other than Stirling) = For investors happy to take risk for high reward. Also can be used for those working abroad and can only pay in a different currency

Equity Linked or shared appreciation mortgages = to help those who cant afford a property even with help from a mortgage

Flexible Reserve -

Equity Release - For older hoke owners looking to release cash from their home

Offet - Where the mortgage is linked to either a current acc or savings acc. For example, 100k mortgage with 20k savings = 80k mortgage. Good for those who will accrue savings. And useful for those who are having income paid into current account, w

Question 29

What is an Equity Linked or shared appreciation mortgages

Answer 29

Where the borrower can not afford the property outright even with a mortgage. The lender has a stake in a part of the property’s equity.

Question 30

What typically has a higher rate. A mortgage or an unsecured loan?

Answer 30

An unsecured loan because it presents greater risk to the lender

Question 31

There are two types of equity release schemes, a lifetime mortgage and a home reversion scheme

Tell me about both

Answer 31

Lifetime mortgage

Question 32

2.2.2e: Alternative home finance options
KNEW AT TIME SO IGNORED

ITS EQUITY RELEASE

Question 33

What is the difference between a sale and rent back agreement and a home reversion plan and lifetime mortgage?

Answer 33

Sale and rent back agreement - allows you to sell your home to a company, a broker or a private individual, and then rent it back from them, as a tenant, over a fixed period. You would normally sell your home to them at a reduced price. It is for those in financial difficulty. Typically used by younger individuals.

Home reversion scheme - Sell all or part of home to reversion provider. You live in on a life time lease rent free (you pay a pepporcorn rent to satisfy the lease). Property is then sold when you move into care, die etc and funds are returned to provider. For older individuals with high equity in their home

Lifetime mortgage - Allows you to release funds whilst retaining ownership. The loan, plus accrued interest, is repaid when propoerty is sold which happens when cust moves into care, dies etc. Many interest options such as roll up, interest only, etc. No capital is repaid until property is sold. Again for older individuals

Question 34

What are home purchase plans?

Answer 34

suitable for those who cannot use interest-bearing repayment schemes, for religious reasons. These comply with Islamic law. Two types:

Ijara = Bank purchased the property and leases it to client. Client makes fixed rent payments to provider for 12months. At 12 months the rent payment amounts are reassessed for the following year

Murabaha = Bank purchases property and sells back at higher price to client. The client then makes fixed capital instalments until fully paid off

Question 35

Following the MCD what two types of BTL mortgages were introduced?

Answer 35

Consumer BTL (Accidental) - Regulated by the FCA

Business BTL - NOT regulated by the FCA

Question 36

What is the difference between an unstructured and structed loan?

Answer 36

Unstructured loans - Examples include:
Mortgages, loans for commercial property, overdrafts and most personal loans are all examples of unstructured loans.

These loans offer flexibility in repayment. Over-payments, term reductions, etc. can be negotiated and help to reduce interest.

Structured loans - Examples include car loans and hire purchase agreements

These add the interest to the loan up-front, and therefore the term and interest payable are fixed. No advantage in early repayment. In fact, penalties usually apply.
Structured loans tend to be more expensive than unstructured loans.

Question 37

What is life assurance?

Answer 37

A contract between the policyholder (known as the ‘assured’) and the ‘life office’ (life company), where the life company takes on the risk paying out a sum on the death of the life assured, in exchange for premiums.

NOTE: The ‘assured’ and the ‘life assured’ are often the same person, but can be different people too

Question 38

In relation to life assurance, who is the ‘assured’ and who is the life assured?

Answer 38

Assured = policyholder (the person who owns the policy and pays the premiums)

Life assured = the persons who’s life is protected under the policy. If they die a payout occurres

The above two are often the same person but they can be different people too

Question 39

How do life companies calculate the premium they charge with the level of sum assured they are providing

Answer 39

Life assurance is based on an individual’s statistical risk of death

Specialists, called ‘actuaries’, study statistics in relation to death, and produce ‘mortality tables’ as a result.

(Remember we are all ‘mortal’ which means at some point we will die; therefore, mortality risk is the risk of death.)

Viewed another way, mortality can be looked at as the length of time you are expected to live for.

Therefore the premiums charged is based on statistics produced by actuaries . High risk = higher premiums

Question 40

What is mortality risk

Answer 40

The risk of death

Question 41

What is Term Assurance?

Answer 41

Pays out sum assured on death within the term

Term assurance is a ‘pay-as-you-go’ insurance - ie, if you stop making payments = no protection

Multiple types:
Level-term, decreasing term, Increasing term, family income benefit, convertible term, renewable term

Question 42

The different types of term assurance are:

Level-term, decreasing term, Increasing term, family income benefit, convertible term, renewable term

Tell me the characteristics of each and what they are typically used for

Answer 42

Level term:
Fixed sum assured. Sum assured paid if death occurs within the term. Used for family protection and interest-only mortgages

Decreasing term:
Set term. Sum assured decreases throughout term. Used for repayment mortgages, because the sum assured stays in line with outstanding interest and capital amount and repayments are made. Cheaper than level term.

Increasing term: Sum assured increases without any health evidence. It is a form of guaranteed insurability. Premiums increase as sum assured increase. Good for those who want to combat the effects of inflation.

Family income benefit:
Set term. Pays out a regular income for the remaining term after death. Form of decreasing term assurance because the sum assured decreases the longer you survive. Used for low cost family protection. Good for young family’s (Young families typically have the highest protection needs but lowest disposable income when looking at the different life stages). Terms typically run until children reach 18 (ie independence)

Convertible: Allows policyholder to convert policy into a more permanent policy, whole of life or an endowment policy, without the need of health evidence.(Hence, it’s a form of guaranteed insurability. Good for those concerned with future underwriting decisions.

Renewable: Allows the policyholder to renew the policy at the end of its original term without any health evidence. (hence It’s a form of guaranteed insurability). Good for those with concerns about future underwriting decisions.

Question 43

Tell me about Endowments:

Tell me whole of life assurance:

Answer 43

ENDOWMENTS: Combines savings/investments (where a lump sum is paid at the end of the term) with life assurance (where a sum assured is paid out if death occurs within the term)

Historically, endowments were often used to repay interest-only mortgages

WHOLE OF LIFE ASSURANCE: Whilst term assurances only pay out if the ‘insured event’ occurs during the term of the policy, whole of life policies provide a pre-agreed sum assured with no end date. (ie, it will pay out eventually as long as you maintain premiums)

Question 44

Question 45

Tell me about whole of life assurance:

Answer 45

Costs tend to be higher than term assurance for the same level of cover, as the plan has no set term.

The policy is guaranteed to pay out at some point and can provide some investment as well as life cover.

Possible to pay higher premiums, in order to include critical illness cover.

The policies can be non-profit, with-profit, or unit-linked.

Policies with an investment element tend to use the customer’s premiums to buy investments, then cash some of them in, to pay for mortality risk and other costs.

Customers can opt for a type of policy called a ‘flexible whole of life policy’, commonly known as a universal or unit-linked whole of life plan, where:
The individual can choose the life cover amount from a range, between a minimum and a maximum amount, depending on their needs. The level of cover can be changed throughout the policy term.
This allows them, for example, to opt for higher cover if protection needs are paramount (maximum cover), or a higher investment element if this is more important (standard cover).

Other features are available to help tailor cover to changing needs, such as ‘special-events’ options, which allow cover to be increased within set limits in the event of major life events.

WOL policies are often used to pay for funeral expenses and inheritance tax planning.

Question 46

Critical illness can be added onto most whole of life and term assurance policies?

True or false?

Answer 46

True

Question 47

What is mortality risk?

What is mobility risk?

Answer 47

What is mortality risk? Risk of death

What is mobility risk? Risk of illness

Question 48

Sickness and health policies such as income Protection Insurance, Critical Illness Cover etc can have reviewable premiums or guaranteed premiums. Tell me the difference between the two

Answer 48

Premiums can be guaranteed or reviewable.

Guaranteed premiums are higher from the start, but less likely to increase during the policy’s life, whereas reviewable premiums are cheaper to start with, but very likely to increase after the first policy review.

Question 49

Tell me about income protection insurance:

Specifically, What it does, it is long term or short term? can insurers cancel the policy?

Answer 49

Provides income if individual is unable to work, after a specified amount of time (the deferred period)

Shorter deferred period = more expensive

It is a long term policy, because benefits are paid after the deferral period until the earlier of: return to work, policy expiring, or death.

Benefits have an upper limit, for example 60 or 70% of earnings; this is so the policy holder is encouraged to go back to work. Benefits are dependent on age, health, occupation etc (NOTE, other policies like PAS or ASU are not because they tend to pay far less benefits due to being short term polices)

This policy is known as ‘Permanent Health Insurance’ because insurers cannot cancel once accepted (as long as premiums are maintained)..The insurer cannot cancel the policy due to multiple claims

Question 50

Tell me about Personal Accident & Sickness (PAS) protection

Tell me about its benefits

It is classed as ‘annual contract’. Why is this and why does this contrast with IPI?

It is typically a rider benefit. What does this mean?

Answer 50

Provides income if your unable to work due to accident or sickness

Like ASU, it is short term and therefore a cheaper version of IPI

benefits are paid for 12months or 24 months

Benefits are not dependent on age, occupation etc. (With IPI these factors do change benefit amount. This is because IPI typically pays far more benefits since it’s a long term policy)

They are classed as ‘annual contract’ because they can be cancelled by insurers. This contrasts to IPI which is classed as ‘Permanent Health Insurance’ because insurers cannot cancel once accepted (as long as premiums are maintained).

These policies are typically a rider benefit for buildings insurance, contents insurance, travel

Question 51

Tell me about Accident, Sickness & Unemployment cover (ASU)

Tell me about its benefits, what it does, and what type of insurance it is classed as (annual contract or permanent health insurance)

Answer 51

Provides income if your unable to work due to sickness, an accident or redundancy

Like PAS it is a short term and therefore cheaper version of IPI

Benefits are paid for 12months or 24months

Unlike IPI and similar to PAS, Benefits and premiums are not dependent on age, heath, occupation

Unlike IPI which is classed as ‘Permanent Health Insurance’ and the same as PAS, it is classed as ‘annual contract’ (the insurer can cancel the policy

Question 52

Tell me about Critical Illness Cover:

What does it do? Can it be a standalone policy or does it have to be a rider benefit? Does it have any investment value? What is the survival period and when can ‘accelerated’ claims be allowed?

Answer 52

Pays a pre-determined lump sum on diagnosis of a specified serious illness, permanent total disability or terminal illness

No investment value

The insured often need to survive after diagnosis for a certain time period for a claim to be valid. Called the ‘Survival Period’ ( often between 14-30days). IE, being diagnosed with terminal cancer and dying 6 days later will be an invalid claim. BECAUSE OF THIS IT IS OFTEN ADDED TO TERM ASSURANCE & WHOLE OF LIFE POLICIES meaning an ‘accelerated claim’ can be made meaning that dying 6 days after diagnosis of cancer or dying instantly of a heart WOULD lead to a claim

It can be taken as a standalone policy

Question 53

What is Private Medical Insurance (PMI)?

Answer 53

Gives people the option to private medical insurance

For acute, short term medical conditions (ie, heart attacks, strokes etc) . Not for conditions that require long term, regular treatment

NOTE: Acute conditions are ones with sudden onset or injury requiring immediate medical attention. E.g, heart attacks, strokes etc

Usually excludes dental care, routine health checks, accident & emergencies and PRE-EXISITING CONDITIONS

PRE EXISITING CONDITIONS NOT COVERED

It can be issued with a moratorium which means any conditions suffered in the last 5 years will be will be excluded from cover for the first 2 years (READ UP ON THIS MORE)

Question 54

What is Long-Term Care (LTC) insurance?

Answer 54

Pays toward the long term care of individuals (therefore most commonly used by elderly, but note its not exclusive to older people!)

Two types of cover available:

Immediate Care:
Where the policy is taken out when the treatment is requirement. Paid by lump sum where the money is invested and the resulting income is used to fund the care costs

Pre-funded: Similar to most other types of insurance. Bought for just incase needed. This product is highly regulated

Question 55

What is Payment Protection Insurance (PPI)?

Answer 55

PPI provides protection for the client from an inability to pay back their loan because of accident, sickness and, in some cases, unemployment. Therefore, they are often packaged with short-term loans.

Premiums must be paid monthly.

The benefit payable is equal to the loan repayments, and will continue to be paid until the assured returns to work.

Benefits usually payable for a maximum of two years

Question 56

What is Mortgage Payment Protection Insurance (MPPI)

Answer 56

Similar to PPI but they cover mortgages.

If you are unable to work due to accident, sickness and, in some cases, unemployment, then your mortgage payment will be covered.

Often ancillary costs, such as insurance and endowment premiums, are also protected

Where it differs to PPI. Certain minimum standards apply, such as; the deferred period is 30 and 180 days, and cover must be for at least 12 months in duration.

Likewise with PPI the maximum payment period is two years so this policy type provides short-term cover only.

Policies can be cancelled by the provider with a minimum 90 days’ notice, or amended with 30 days’ notice.

Question 57

What is the difference between ‘investing’ and ‘saving’?

Answer 57

The term ‘saving’ is broadly aligned to regular contributions, into either cash-based or investment-based products, with a view to building wealth out of income.

‘Investing’, on the other hand, relates to the placement of a lump sum of money, with a view to this either growing in value or providing additional income

Question 58

What is a customer’s risk profile?

Answer 58

This is the level of risk customers are prepared to take with their savings and investments.

As well as ‘level of comfort with volatile markets’, this will include elements such as; How much are they prepared to potentially lose? How could their financial plans cope with any losses?

Different customers have different risk profiles.

An individual’s profile can also vary across different need areas. For example, a customer may be ultra-cautious with their mortgage repayments but prepared to take more of a gamble with their savings and investment plans.

Question 59

‘Time horizon’ is a very important aspect to account of when recommending investment products to clients.

Tell me about this

Answer 59

Literally what timescales is the client happy with. ie, when are the funds will be needed by?

3 time frames:

Short term (up to 5 years)

Medium term (5-15years)

Long (15years +) -

Question 60

What are ‘rainy day’ funds?

Answer 60

A client’s ‘emergency fund’. This should be the equivalent of 3 to 6 months’ worth of income, readily available, with no notice required for access

Question 61

Why should an advisor always recommend a client pays off high- cost debts first?

Answer 61

Some debts, such as hire-purchase agreements and credit cards, have interest rates that are at a level that would be almost impossible to match by savings or investments.

For example if £10,000 of debt charged interest at 25%, but £10,000 of deposits received interest at 5% then it makes little sense to invest. Using the £10,000 to pay off the debt rather than to invest could save money, particularly for credit cards, which tend not to have early repayment penalties

Question 62

What is the difference between Fixed-notice accounts and Fixed Bonds?

Answer 62

Fixed-notice accounts: pay a higher interest than savings accounts in exchange for customers having to give notice of withdrawals, for example 30, 60 or 90 days. Accessing funds early usually incurs an interest penalty. LIKE THE TSB FRCI

Fixed-rate bonds: Provide a fixed return, but usually have a minimum deposit level and are subject to a set term, typically 12 or 24 months. Accessing funds early usually incurs an interest penalty

Question 63

What is NS&I and why are they a thing?

Answer 63

NS&I = National Savings & Investments. They are saving and investment products offered by the government

Why they were introduced: Governments always need to raise money. There is almost always a deficit between revenue generated, predominantly through taxation, and monies spent in areas like DWP benefits. This is known as the Public-Sector Net Cash Requirement (PSNCR).

Governments can raise monies in a variety of ways. Issuing NS&I products is one of these ways

Question 64

What are the 4 asset classes?

What asset is generally most risky and what is least risky?

Answer 64

Cash (deposits in banks) -least risky

Fixed-interest (Gilts, Corporate Bonds)

Property (Residential, commercial)

Equity (Shares, ie a stake or ownership in a company) -most risky

Most investments will contain at least one of these asset classes. In fact, most medium-risk funds invest in all of them

NOTE: Some cash investments, for example offshore deposits, may be riskier than Gilts (which are at the lower end of the risk category for fixed-interest). Also, investing in commercial property in Russia is likely to be riskier than buying Marks & Spencer shares, even tho shares are considered riskier

Question 65

You have the 4 main assets classes (cash, fixed interest, property and equities) which people typically invest in, but there is now an another type of asset that is growing in popularity that people invest in. What is it

Answer 65

They are called: Alternatives

They include commodities like gold etc, as well as hedge funds and crypto currency, derivatives, so on

Question 66

An issue investors used to face was diversifying their investment. For example, how many people can buy 10 houses or shares in 100 different companies

What was introduced to help investors with this issue?

Answer 66

Collective investments.

It does the diversification for the investor and can be entered into for as little as £50

They are a type of pooled investment because they bring together all investors’ monies which means they can now buy into 10 houses or 100 different companies’ shares.

The most common types of collective investments are unit trusts and OEICs

Question 67

What are Platforms and Wraps

Answer 67

Now common

They allow online access for investors, who can bring all their investments together into one easy-to-access and view ‘platform’. Ie the platform allows you to see your investments

You can also ‘wrap’ your investments in tax-efficient wrappers, such as ISAs.

Question 68

Tell me the different product types offered, the risks, the uses and the tax treatment, of cash as an investment

Answer 68

Different product types: Instant-access savings
Notice accounts / Fixed-rate bonds
Cash ISAs

RISKS: Interest rates for above products are generally lower than inflation, so buying power reduces over time, especially over the long term.

Deposits over £85000 are generally not protected

USES: Emergency fund, provides income and growth (due to paying interest). In the short term (5 years) capital value will be preserved because inflation will not have enough time to kick in. (Over a longer term the same cannot be said however)

Tax treatment: Interest can be subject to income tax (if above PSA). No CGT liability

Question 69

Tell me the different product types offered, the risks, the uses and the tax treatment, of fixed interest securities being used as an investment

Answer 69

Products:
Gilts: Loans to the government.
Corporate Bonds: Loans to companies.
Permanent Interest-Bearing Shares (PIBs): Loans to building societies.
Perpetual Subordinated Bonds (PSBs): PIBs become PSBs if a building society demutualises

They are effectively ‘loans’. The investor receives interest from the body that they have lent the money to and will receive the monies back if they keep the investment until the end of the loan term

Question 70

What does ‘Treasury Stock 4.5% 2035’ mean?

Answer 70

This is how fixed interest securities are denoted

This is a loan to the Treasury (therefore it is a Gilt) paying a fixed-interest rate of 4.5% per year (known as a coupon) and the capital will be repaid in 2035.

Question 71

In terms of Gilts or other fixed interest securities what is ‘Par’ value or ‘nominal value’

Answer 71

‘Par’ (price at redemption) value & nominal value mean the same thing

The par value or nominal value or issue value, is what an investor will receive if they keep the bond until redemption.

For example, if a Gilt has a par value of £100 it means on redemption they will receive £100 (+ any interest or coupon they received)

Question 72

Fixed interest securities like GILTs do not typically provide any capital growth, just income in the form of interest. However, they can provide capital growth as well as interest. How does this work?

Answer 72

Fixed interest securities are tradable

This means that they can be bought and sold between their start and end dates. (Many people do not keep them to maturity)

For example: If the base rate is 2% a Gilt with par value £100 that pays 4.5% for the next 10 years is precious. This means another investor will pay more than its par value to receive it (giving the seller capital growth)

If the base rate is 2% a Gilt with par value of £100 that pays 1% for the next 10 years is NOT desirable. In this case an investor may buy the GILT less than par value and then wait until redemption where they will receive the full par value back, making a gain

Question 73

Loans to companies, or ‘corporate bonds’ as they are known, are riskier than GILTS. Why?

Answer 73

Companies can, and do, default on their repayments whereas the UK government has never failed to repay a loan made to them

NOTES: GILTS ARE NOT 0 RISK HOWEVER. GILT holders in Greece lost all their monies due to economic difficulties

Question 74

Do PIBS have a maturity date?

Are they riskier than GILTS and Corporate Bonds?

Why were they introduced

What are PSB’s?

Answer 74

Loans to building societies (PIBS) are a form of fixed interest security with no maturity date.

Introduced to give building societies a another way to raise funds beside just saving deposits (banks can raise via shares which BS cannot, thus disadvantaging them)

Basically corporate bonds with no maturity date and the building society can miss interest payments with no obligation to make them up later which makes them more risky than corporate bonds.

Because of the above, they were higher risk so they offered much higher interest returns, to encourage people to invest, despite their disadvantages of no guarantees on interest payments and no maturity date

PSB = What PIBS turn into if the building society de-mutualises

Question 75

Why are fixed interest securities deemed a low risk investment type?

Answer 75

If a company or government gets into financial difficulties, they must repay their loans before repaying any shareholders, this means that fixed-interests are repaid before equities.

Secondly, they are often sold together in a ‘collective investment’ so tend to benefit from diversification

Question 76

What are ‘junk bonds’?

Answer 76

Junk bonds are corporate bonds offered by companies who are at high risk of defaulting on the bond, meaning the investor will not receive their monies

IE, basically they are very high risk corporate bonds

Question 77

Tell me about property being used as an investment.

What are the different types, what do they offer, what are its risks, what is its tax treatment

Answer 77

Types:

-Residential property
-Commercial property
-Collective investments in property

Property is hard for individuals to diversify in so collective investment schemes are a common form of property investment.

Investments in property can provide capital growth, and/or income, by way of a rental income from tenants.

RISKs:
Liquidity risk

Ancillary (additional) risks: Tenants not paying on time,
damage and maintenance costs, stamp duty, and insurance costs, are all big issues that face direct investors. In terms of indirect investors this also effects them too because the collective investment scheme will be more expensive.

Taxation: Rental income is subject to income tax

Gains on the sale of the property can be subject to CGT with an 8% surcharge for residential property so 18% and/or 28% instead of 10% and 20% like it is for other assets like equities for instance

Question 78

Tell me about equities being used as an investment.

What are the different types of equity investment, what is its risks, what is its tax treatment

Answer 78

Types of equity investment:
- Individual company shares (Where you own the shares directly) - difficult to diversify.

• Collective investment schemes
  Where you own units or shares in a collective scheme, and the scheme itself owns the shares such as unit trust.

They offer the potential for capital growth, by increases in share price, and can provide a regular income, via dividends

Risks:

Their value can fluctuate significantly

Shareholders are last in order for repayment, should a company be liquidated. This is ONE of the reasons why equities are deemed riskier than corporate bonds

Uses: Better as medium to long term investments

Tax treatment: Dividend income is subject to income tax in the form of dividend income. 0%, 8.75%, 33.75%, or 39.95%

Gains are subject to CGT 10% and/or 20%

Question 79

If an individual invests into a pooled investment scheme (collective investment) do they own the assets them self?

Answer 79

No the collective investment owns the underlying assets

The individual owns shares (for OEIC’s) or units (for Unit Trusts) in the collective investment scheme

Question 80

What are the main benefits of collective investment schemes

Answer 80

Investment expertise: The investment company’s expertise is being used by the client.

Diversification:
The client’s money is spread across different assets, aligning this to their risk profile.

Reduced dealing costs: Because a company can buy ‘in bulk’, associated costs are reduced.

Wide choice of options: Most collective investments have several investment options available. You could choose to focus on capital growth, income or both.

Question 81

The funds within a pooled investment product can be ‘actively’ or ‘passively managed’.

Different investor fund management options are also available such as ‘discretionary’ and ‘advisory’

Tell me the difference between ‘actively’ or ‘passively and the advantages/disadvantages of each

Answer 81

Actively Managed:
A fund manager buys and sells investments in line with the fund’s risk profile.

Advantages: Expert manages fund for you. Investor has more time in their life

Disadvantage: Higher costs and no control over the funds investment choices

Passively Managed:
The fund aims to match the performance of a chosen market or index and invests accordingly. Often called ‘tracker funds’

Advantages: Lower costs than an actively managed fund. Easier to understand as the fund is linked to FTSE 100 for instance

Disadvantages: When costs are taken off the fund will always underperform compared to the underlying market or index it is tracking

Question 82

The funds within a pooled investment product can be ‘actively’ or ‘passively managed’.

Different investor fund management options are also available such as ‘discretionary’ and ‘advisory’

Tell me the difference between ‘discretionary’ and ‘advisory’ and the advantages/disadvantages of each

Answer 82

Discretionary Fund Management:
Client sets up an agreement with an investment manager. The manager DOES NOT need to clients permission to make a trade.

Advantages:
The investment manager can act quickly to maximise investment opportunities and therefore it could receive higher returns
Saves the investor time when compared to discretionary

Disadvantages: There must be a high degree of trust between the investment manager and the investor

Advisory Fund Management: Client sets up an agreement with an investment manager. The manager DOES need to clients permission to make a trade

Advantages/disadvantages : opposite to discretionary

Question 83

If a pooled investment scheme is open-ended what does this mean and what are the two most common types of open ended investment fund?

Answer 83

They are funds that are not restricted on the number of shares or units they can issue

Open-end funds also buy back shares or units when investors wish to sell.

The two most common open-ended investments are unit trusts and OEICs

Question 84

Two types of pooled investment schemes are life assurance and pensions

Tell me how life assurance uses collective investment schemes

Answer 84

Life assurance products such as unit linked endowments use collective investment schemes

Life assurance and pension funds will invest in similar assets to an open-ended investment with the same risk level. So, if you chose a balanced fund OEIC and a balanced fund life assurance investment or pension, its contents are likely to be similar

Question 85

Certain life assurance products are often termed ‘bonds’. True or false

Answer 85

True

Unit linked endowment policies are called bonds or investment bonds, for instance. These are investments.
Do not confuse with corporate bonds, which are loans.

REMEMBER, the word bond has multiple meanings

Common variations include Guaranteed Bonds, With-Profit Bonds and Unit-Linked bonds

Question 86

What are With-Profit Bonds and Unit-Linked Bonds

Answer 86

These are common forms of pooled investments which include a life assurance element

For example, unit linked whole of life polices, or a with-profit endowment policy

The amount of life protection varies depending on the type of investment you choose.

Question 87

What are investment trusts?

Are they open or close ended?

What can investment trusts do which open ended investments can’t

Shares purchased in the investment trust can trade at a premium or a discount. What does this mean?

Answer 87

Another variation of pooled investments.

Unlike ‘open-ended’ OEICS and unit trusts, these are ‘closed-ended’, which means that there is a limit to the number of shares or units issued per fund.

Once issued, these can then be traded (bought and sold) in the same way that normal shares are.

Rules allow such funds to borrow money to invest (leveraging) . Leveraging is something that is restricted in open-ended funds. This adds risk but improves investment opportunity

Shares can trade at a premium (where shares/units cost more to buy than the underlying assets are actually worth) or at a discount (where it costs less to buy shares/units than the assets are actually worth)

Question 88

Alternative investments are seen as a 5th asset class

They include: Derivatives, Cryptocurrencies, Structured Deposits

Tell me about each

Answer 88

A derivative is either an option to buy or sell an asset, such as a share, at a set price within set dates (known as an option), or an obligation to buy or sell an asset, such as a share, at a set price within set dates (known as a future). Futures and options are often used to buy commodities like oil or coffee

A structured product is made up of two different components:

A note: This is the capital protection. Part of your investment is used to ‘buy’ the note of guarantee.
A derivative: This is the option to buy shares at a price in the future, set now. This should provide the capital growth

Cryptocurrencies are a digital alternative to notes and coins. One of the driving factors behind crypto is that it isn’t managed by any of the banks. Cryptocurrencies are highly volatile.

Question 89

What are insurance bonds?

Answer 89

A collective investment with a protection element. Offered by life companies

Common investment bonds are unit linked bonds or with-profit bonds. The protection element might be an endowment or a whole of life assurance policy

Question 90

Are ISA’s a product in themselves or no?

Answer 90

ISAs are not a product in their own right. They are simply a tax shelter for other investments (a tax wrapper)

Question 91

With ISAs, there is no capital gains tax on gains made, nor income tax on income received

True or false

Answer 91

True

Question 92

For Child Trust Funds does the underlying investment need to be cash or shares?

Answer 92

Investment could be in cash or shares or a combination of the two

Question 93

Investment bonds can only be onshore. True or false

Answer 93

False

They can be onshore and offshore

Question 94

What is the Single Tier State Pension?

Answer 94

The Single Tier State Pension replaced the old Basic State Pension in April 2016.

It introduced a flat-rate state pension scheme for those who reach state pension age from April 2016. For those who retired before April 2016, their pension could have been made up of the basic state pension, plus various ‘top-ups’.

Eligibility for the single-tier state pension is calculated by reference to an individual’s national insurance contribution (NICs) record. The benefit is paid to the retired from the contributions of the working

Question 95

State pension age will rise to WHAT by 2028, with further increases planned

Answer 95

67

Question 96

What is the annual and lifetime allowance for occupational/private pensions in the current tax year?

What happens if you exceed these allowances?

What are the two types of occupational pension?

What is the benefit structure of private/occupational pensions?

Answer 96

Annual allowance: The higher of 100% of ‘relevant earnings’ or £3,600 gross, subject to a £60,000 cap.

Lifetime allowance: £1,073,100 for the current tax year

If you exceed either of the respective allowances you will have a tax charge

There are two types of employer-sponsored pensions: defined benefit (DB) and defined contribution (DC).

Individual/private pensions and employer-sponsored pensions, provide two components:

A tax-free lump sum of up to 25% of the total fund value (pension commencement lump sum)

An income or cash from the remaining fund.

Question 97

What is an annuity?

What is the difference between a purchased life annuity (PLA) and a compulsory purchase annuity (CPA)?

Is income from annuities taxed?

Answer 97

An annuity is purchased with a lump sum or defined contribution fund value, for a guaranteed lifetime income.

A compulsory purchase annuity (CPA), also known as a lifetime annuity, is bought using a pension fund.

A purchased life annuity (PLA) bought from savings, not a pension fund. They typically pay higher rates than their CPA alternative and have more favourable tax treatment

Question 98

Person A: Has a purchased life annuity (PLA)

Person B: Has a compulsory purchase annuity (CPA)

Both have the exact same fund value but the PLA has higher net returns. Why is this

Answer 98

PLA has better tax treatment than CPA

This is because the benefits of a PLA are split into two parts: A return of capital element and income element. The return on capital element is tax-free..

However, for CPA all of the benefits are taxed at saving rates meaning you pay more tax meaning less net teturn

Question 99

To be eligible for the single tier state pension, the state pension for those reaching state pension age on or after 6th April 2016, what number of NIC contributions must you make for full entitlement. What is the minimum number of contributions to receive any proportion of the state pension

Answer 99

35 years of National Insurance Contributions (NICs) for full entitlement

Or at least 10 years’ contributions to receive a proportion of the Single Tier state pension. Any less than 10 years = no state pension entitlement

Question 100

What is the eligibility criteria for the basic state pension and the single tier state pension?

Answer 100

Basic State Pension:
Reached state pension age before 6th April 2016. 30 years NIC contributions for full entitlement. 12months NIC is minimum amount to receive a proportion

Single Tier State Pension:
For those reaching state pension age on or after 6th April 2016. 35 years contributions for full entitlement. 10 years NIC is minimum

Question 101

What are the earning-related state pension schemes?

LOOK AT EXAM QUESTION: 2.17

Answer 101

These were top ups of the basic state pension

Multiple versions which are the following:

• State Second Pension (S2P) 2002-2016
  -State Earnings-Related Pension Scheme (SERPS) -1978-2002
  -Graduated Pension Scheme (GPS) 1961-1975

To be eligible for any of these schemes you must be employed (they were not available for the self-employed)

Question 102

SERPS and S2P, allowed the individual to ‘contract-out’

What is SERPS & S2P and what does ‘to contract-out’ mean and why would someone do this?

Answer 102

S2P = State Second Pension (2002-2016)

SERPS = State Earnings-Related Pension Scheme (1978-2002)

They are two versions of the earning related state pension schemes (ERSPS) (no longer available). All ERSPS were designed to top up the Basic State Pension and were only available to the employed (NOT THE SELF EMPLOYED)

SERPS and S2P allowed an individual to ‘contract-out’ meaning that benefits were provided by an insurance company instead of the state. The reason people would do this is is because it resulted in lower NICs being paid

NOTE: The Single-Tier pension replaced the BSP and earnings-related state pensions with one simple weekly payment

Question 103

What did the Single-Tier pension scheme replace?

Answer 103

It replaced the Basic State Pension and the earnings-related state pension schemes (ie SERPS, S2S, GPS)

Question 104

Tell me about defined benefit pension schemes

What are they known as?

What type of pension is it?

How are benefits calculated and give an example?

Are they used today?

Answer 104

A private pension. Specifically, an occupational pension.

Known as ‘Final Salary’ schemes

Great for employee. Bad for employer (expensive)

Benefits are paid entirely by the employer and are a proportion of the employees final salary at retirement.

To calculate benefits you use: ‘accrual rate’ (AR) (expressed as a fraction); 1/60th and 1/80th accrual rates are most common. Multiple AR by the final years of service. Multiple that by final pensionable salary.

Example:
The DB scheme has 1/60th accrual rate and employee has 20 years service and salary is £30,000 retirement.

20/60 X £30000 = £10,000

This means the retiree will receive £10000 per year in retirement.

Because costs and funding levels of this scheme are difficult to predict (ie, because you don’t know what an employees final salary will be and when they will retire), and because any shortfall is the responsibility of the employer, it is often very expensive for employers. Therefore, not popular nowadays

Question 105

Tell me about defined contribution pension schemes

What is it also known as?

What type of pension is it?

How are benefits calculated?

Are they used today?

What are ‘earmarked’ money purchase schemes?

Answer 105

It is a form of private pension. Specifically, an occupational pension

Known as ‘Money Purchase Schemes’

Type of occupational pension

Benefits are based on investment performance and market factors, such as annuity rates.

Employers are better able to predict the costs involved, as there is no ‘defined benefit’ guarantee involved, so they are popular today

‘earmarked’ money purchase schemes are defined contribution schemes where the member has their own ‘pot’ and can choose the level of risk taken. This contrasts with defined benefit schemes where there is no individual investment ‘pot’, as pension funds for all members of the scheme are ‘pooled’

Question 106

What are Personal Pensions?

What type of occupational pension scheme are they similar to?

Answer 106

Set up by individuals with an insurance company.

Everyone has their own ‘pot’,

The policyholder decides how much to save each month and has a choice of funds where the money is invested, typically selected in line with their risk profile.

Personal pensions are similar to DC schemes in many respects because of the above and because the return dependent upon investment performance

Question 107

Since what year have employers been able to contribute to personal plans for their employees?

Answer 107

1988

This led to an increase in popularity of group personal pension schemes

Question 108

What are group personal pension schemes?

Answer 108

Where an employer organises a group scheme for their employees, made up of the employees personal pensions

It is an alternative to a DC or DB schemes

With group personal schemes, there is less requirement for trustees or scheme governance, which save employers both time and hassle which is why it has gained popularity

Question 109

Occupational pension schemes fall into two groups:

Private Sector Schemes

Public Sector Schemes

Answer 109

Tell me the difference between the 2?

Private-sector schemes are offered by large companies, such as M&S, Tesco, large banks, and were usually set up as either ‘self-administered’ or ‘insured’ schemes.

Public-sector schemes are provided by the government to sectors such as the NHS, armed forces etc.

To sum up:
Private Sector = offered by big private companies. Often self-administered. The big company is the employer

Public Sector = Offered by the government to public sectors. Government is employer.

Both Private and Public Sectors are a form of occupational pension.

Question 110

If a pension is classed as an ‘Insured scheme’ what does this mean?

Answer 110

A scheme provided by life companies and pension providers. For example Aviva offering an occupational pension to its employees

FOR CONTEXT:
Private-sector schemes (a form of occupational pension) were offered by large companies, such as M&S, Tesco, large banks, and were usually set up as either ‘self-administered’ or ‘insured’ schemes.

Question 111

If a pension scheme is classed as a Self-administered scheme, what does this mean?

Answer 111

The scheme provider manages its own investments and administration internally. For example, Tesco offers an occupational pension for its employees and Tesco itself deals with the investments

FOR CONTEXT:
Public-sector schemes (a form of occupational pension) were offered by large companies, such as M&S, Tesco, large banks, and were usually set up as either ‘self-administered’ or ‘insured’ schemes.

Question 112

What is NEST?

Answer 112

NEST = National Employment Savings Trust

An occupational pension scheme Introduced by the government due to a worry that too many low-income workers were not paying enough into their pension, and instead relying solely on the state pension.

Designed to be low cost to encourage employer and employee contributions.

Question 113

Eligible jobholders.

Non eligible jobholders.

Entitled workers

Question 114

What is auto-enrolment?

Answer 114

Makes it compulsory for employers to enrol eligible jobholders into pension schemes and make contributions for them

Question 115

In relation to pensions, every employer must meet minimum set criteria in relation to how much they contribute. What are these requirements?

Answer 115

Employers must make set minimum contributions of 8%, shared between the employer, employee and HMRC

The minimum the employer must contribute is 3%

Employers must also auto enrol ‘eligible job holders’ (anyone above age of 22 and who earns £10000+)

Question 116

DC pensions offer no guarantee in benefits. Why is this?

Answer 116

Like personal pensions, the level of benefit is determined by the performance of underlying investments and market conditions

Question 117

What is the governments recent workplace pension scheme?

Answer 117

NEST

It was cheap so tried to encourage pension contributions from employers and employees

Question 118

inheritance Tax (IHT) is based on an individual’s worldwide assets. True or false

Answer 118

True

If you have a holiday home in Spain and you are UK domiciled you could pay inheritance tax on it

Question 119

Inheritance tax is a form of cumulative tax. Why is this?

Answer 119

Inheritance Tax is levied on an individual’s estate on death AND the value of any transfer in the previous seven years

Question 120

What is inheritance tax?

What is the nil rate band?

What happens if it is exceeded?

What is the main residence nil rate band?

Answer 120

Inheritance Tax is levied on death on an individual’s estate plus the value of any transfer in the previous seven years

Nil rate band = Every estate is covered up to £325,000 where no tax is due

If exceed, inheritance tax up to 40% can charged on the excess.

Main residence nil-rate band = An additional nil-rate band of 175000 when a main residence is passed to a direct descendant

Question 121

In relation to inheritance tax, what happens if an estate is valued over £2million?

Answer 121

Estates that are valued at over £2,000,000 lose the main residence nil rate band, at a rate of £1 for every £2 over the £2,000,000 threshold.

Question 122

What are potentially exempt transfers

What is taper relief?

What type of insurance can be used to protect against inheritance tax being due on a gift?

Answer 122

PET’s are outright gifts to another that may or may not be subject to inheritance tax on death of the donor.

Donor = Gift Giver
Donee = Receiver

If the donor survives more than 7 years after making the gift, no tax on the gift is due. The PET is excluded from the estate.

If the donor dies less than 7 years after making the gift, IHT may be due, but at a ‘tapered rate’. If donor dies within 3 years after making gift tax is due in full.

0-3 years = 40% (no relief)
3-4 years = 32%
4-5 years = 24%
5-6 years = 16%
6-7 years = 8%
7 years + = 0%
(Don’t worry about memorising this)

Gift inter vivos cover can be used

Question 123

What are Chargeable Lifetime Transfers?

Answer 123

These are usually transfers into most types of trust, such as a ‘discretionary’ trust.

If the value of a CLT, when added to other CLTs in the last 7 years, is less than the nil rate band, then no lifetime IHT is due

However, if the transfer is more than this amount, lifetime IHT at a 20% rate will be due on the excess

If donor then dies within 7 years, full inheritance tax could be due (another 20%)

Question 124

Inheritance tax must be paid to HMRC before the estate can be distributed

True or false

What issues can this cause?

Answer 124

True

If large inheritance tax is due this can lead to catch 22 situation:

HMRC require IHT before the estate can be distributed

Beneficiaries often need the estate to pay the IHT (Most beneficiarys dont have huge sums of cash sitting around that they could use to pay the IHT bill)

Therefore, people in this position take out loans to pay the bill and then pay off the bill once they have the funds from the estate

Question 125

Has can life assurance plans be used to pay for an IHT bill?

Answer 125

A life assurance plan, written under trust (to remove it from the estate), payable to the beneficiary’s

The sum assured will be equal to the IHT liability

Whole of life policies written on a single or joint-life second death basis placed in trust, are commonly used for this (because people do not know when death will occur)

Question 126

Whole of life policies written on a single or joint-life second death basis placed in trust, is a common way to protect an estate from an IHT bill

What implications could occur if it is not written in trust?

What is a downside of this arrangement? If it is expensive, premiums will also be high. What is a secondary issue with this?

Answer 126

Without writing this in trust, it would simply add to the estate, compounding the IHT bill further

These plans can be expensive, especially because you don’t know when someone will die

If paid monthly, the premiums may be classified as ‘gifts from normal expenditure’, but a lump sum premium into such a plan would be classed as a PET, resulting in further potential issues.

Question 127

What are exempt transfers?

Answer 127

These are transfers that are not included when calculating the value of an individual’s estate, and therefore no IHT is due

Transfers between UK-domiciled spouses and registered civil partners are exempt

Gifts out of normal expenditure’ where the individual’s normal standard of living is not adversely affected as a result of making the gift, are also exempt as an example

A gift of up to £3,000 (this can be split between a number of people) known as the annual exemption.

OR

Small gifts of up to £250

PET’s where donor has survived longer than seven years after making the gift.

There are many other exempt transfers

Question 128

Transfers between UK-domiciled spouses and registered civil partners are exempt from inheritance tax. What about transfers between un married couples or non civil partnered individuals?

Answer 128

Transfers between un-married couples or non civil partnered individuals, are NOT classed as an exempt transfer so MAY be subject to IHT

ONE OF THE BENEFITS OF BEING MARRIED!

Question 129

Potentially exempt transfers are irrevocable gifts. What does this mean?

Answer 129

the donor must give up the asset completely, without reservation

If they benefit from the gift in any way it will no longer class as a gift

Question 130

What is the difference between tax avoidance and tax evasion?

Answer 130

Tax avoidance is legal – Provided the scheme is registered with HMRC e.g. ISAs

Tax evasion is illegal – The deliberate failure to provide full and accurate information.

Question 131

Who makes state benefit payments?

Answer 131

The Department for Work & Pensions

Question 132

What is Support for Mortgage Interest (SMI)?

Answer 132

It is a loan from the government repayable when you sell your home or pass ownership to someone else.

For mortgagors who are unemployed for 39 weeks. Helps pay the interest on mortgages (up to £200,000.)

It’s Means tested

£100,000 cap for individuals receiving Pension Credit payments and no 39-week deferred period. Also only covers mortgages that are for home purchases, not home improvements.

Interest payments are made direct to the lender, NOT the individual.

Question 133

Client A is concerned with mortality risk, Client B morbidity risk. Which of the following products may be appropriate?

Critical illness cover and a life assurance policy.

Level term assurance and an income protection insurance policy.

Income protection insurance and family income benefit.

An accident, sickness and unemployment policy and a pension plan.

Answer 133

Level term assurance and an income protection insurance policy.

Level term assurance is a life assurance policy, so this concerns mortality protection (risk of death).An income protection policy covers a client for long term sickness, so this concerns morbidity risk.

Question 134

Janine has been informed that she does not qualify for Statutory Maternity Pay. This is MOST likely to be because…

she has less than six months service with her current employer

she is earning £105 as a weekly gross wage

she has a poor national insurance contribution record

her partner is earning above the £50,000 threshold

Answer 134

she is earning £105 as a weekly gross wage

To qualify for Statutory Maternity Pay Janine must have had earnings of at least £123 gross weekly (LEL).

Question 135

A financial adviser has completed some cash flow modelling with a client. What are the MAIN benefits of this process?

Making only long-term decisions

Making decisions around affordability

Making only short-term decisions

Making decisions throughout a lifetime

Answer 135

Making decisions throughout a lifetime

Cash flow modelling is a process that looks at client needs and arrangements throughout their lifetime, not just in the short, medium or long term

Question 136

An insurance policy that includes accident and sickness cover would most likely be recommended to someone whose is currently…

trying to reduce their inheritance tax bill.

looking to plan for their retirement.

purchasing a house.

looking for private medical insurance

Answer 136

An accident and sickness policy is a type of income protection policy, designed to provide income in the event of accident or sickness. This would be most beneficial to ensure mortgage payments were maintained on a property purchase

Question 137

Which of the following should an adviser assess where a client prefers to use an investment bond, rather than saving deposits?

Short term fund requirements.

Client requirements for income versus growth

Medium term fund requirements

Client requirements for growth versus income

Answer 137

Short term fund requirements

An investment bond is a medium to long term product. The financial adviser should ensure that the client has enough short-term fund requirements. This means the bond is left to grow, and there is less chance of an investment loss

Question 138

Harry has opted for increasing term assurance, and Harriet for renewable term assurance. The most likely reason for this is

Harriet is in poorer health than Harry

Harry is in poorer health than Harriet

Harry wants to combat inflation

Harry is unconcerned with his health going forward

Answer 138

Increasing term assurance means that the sum assured will increase each year to keep up with inflation and protect its buying power

Question 139

Jack and Mollie are parents with four children: Annie 22, Sammy 20, Ellie 17 and Sophie 15. What is the total annual contribution that this family can make to ISAs in the current tax year?

£60,368

£80,368

£101,736

£118,000

Answer 139

£118,000

Jack, Mollie, Annie and Sammy can each contribute £20,000 into either stocks and shares and/or a cash ISA. Through a legislation quirk, Ellie can contribute both £20,000 into a cash ISA and £9,000 into a Junior ISA. Sophie can contribute £9,000 into a Junior ISA as well.

£20,000 + £20,000 + £20,000 + £20,000 + £20,000 + £9,000 + £9,000 = £118,000.

Question 140

Peter and Paul are twin brothers, aged 50. Both have the same protection needs and requirements. Why are Peter’s premiums more expensive than Paul’s?

Peter has grandchildren and Paul doesn’t

Paul is more risk adverse

Peter is a risk taker

Paul is in good health and Peter is not

Answer 140

Paul is in good health and Peter is not

The risk of ill health (morbidity) and risk of death (mortality) influence the costs of protection policies

Wont be B/C because they mean the same thing
Not A because they have the same protection needs

Question 141

Jack is a financial adviser. His client, Tom, requires a regular monthly income with minimum risk involved. Which of the following products should Jack recommend?

NS&I income bond.

Medium term Gilts.

An investment bond.

A managed unit trust.

Answer 141

NS&I income bond.

An investment bond and unit trust both carry investment risk, so these can be discounted immediately. The only product of those given that pays a monthly income is an NS&I income bond. This has minimal/no risk, as it is a loan to the UK government. A gilt pays a coupon twice a year so this would not satisfy Tom’s requirement for monthly income.

Question 142

Keith wishes to set up a policy with his wife for their three grown up children. They decide to go for a whole of life, second death policy in trust. What is the MAIN reason for doing this?

To ensure the couple have enough family protection

To reduce their estate for capital gains tax purposes

To take monies out of the estate for inheritance tax purposes

To maximise tax allowances and exemptions

Answer 142

To take monies out of the estate for inheritance tax purposes

NOTE : This is a good example of having to pick the best from a ‘dubious’ set of options.

The couple’s children are adults, so they are unlikely to have financial protection needs. This policy does nothing to help with capital gains tax, tax allowances or exemptions.

So, option C is the correct answer – but not a perfect answer! A whole of life policy in trust provides monies for the children to pay any inheritance tax bill, rather than take monies out of the estate.

Question 143

Do this for:
Child Benefit
Child Tax Credits
Maternity Allowance
Statutory Maturity Pay/Shared Parental Pay
Statutory Paternity Pay

Answer 143

Question 144

Tell me about income support, Jobseeker’s Allowance, Statutory Redundancy Payment & Working Tax Credits

Answer 144

Question 145

Answer 145

Question 146

Benefits for the sick and disabled

Answer 146

Question 147

Tell me about Bereavement Support Payment

Answer 147

Question 148

Answer 148

Question 149

Tell me how you would calculate the IHT nil rate threshold for a surviving spouse where their late spouse used part of their nil rate band when they died where the nil rate band had a different threshold at the time

Answer 149