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

Question

What are payday loans?

Answer 1

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

Answer 2

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

Answer 3

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

Answer 4

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.

Answer 5

An unsecured loan because it presents greater risk to the lender

Answer 6

Lifetime mortgage

Answer 7

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

Answer 8

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

Answer 9

Consumer BTL (Accidental) - Regulated by the FCA Business BTL - NOT regulated by the FCA

Answer 10

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.

Answer 11

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

Answer 12

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

Answer 13

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

Answer 14

The risk of death

Answer 15

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

Answer 16

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.

Answer 17

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)

Answer 18

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.

Answer 19

What is mortality risk? Risk of death What is mobility risk? Risk of illness

Answer 20

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.

Answer 21

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

Answer 22

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

Answer 23

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

Answer 24

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

Answer 25

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)

Answer 26

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

Answer 27

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

Answer 28

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.

Answer 29

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

Answer 30

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.

Answer 31

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 +) -

Answer 32

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

Answer 33

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

Answer 34

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

Answer 35

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

Answer 36

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

Answer 37

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

Answer 38

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

Answer 39

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.

Answer 40

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

Answer 41

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

Answer 42

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.

Answer 43

'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)

Answer 44

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

Answer 45

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

Answer 46

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

Answer 47

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

Answer 48

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

Answer 49

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

Answer 50

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%

Answer 51

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

Answer 52

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.

Answer 53

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

Answer 54

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

Answer 55

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

Answer 56

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

Answer 57

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

Answer 58

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.

Answer 59

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)

Answer 60

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.

Answer 61

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

Answer 62

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

Answer 63

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

Answer 64

False They can be onshore and offshore

Answer 65

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

Answer 66

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.

Answer 67

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

Answer 68

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

Answer 69

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

Answer 70

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

Answer 71

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)

Answer 72

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

Answer 73

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

Answer 74

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

Answer 75

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'

Answer 76

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

Answer 77

1988 This led to an increase in popularity of group personal pension schemes

Answer 78

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

Answer 79

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.

Answer 80

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.

Answer 81

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.

Answer 82

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.

Answer 83

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

Answer 84

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+)

Answer 85

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

Answer 86

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

Answer 87

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

Answer 88

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

Answer 89

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

Answer 90

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.

Answer 91

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

Answer 92

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%)

Answer 93

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

Answer 94

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)

Answer 95

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.

Answer 96

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

Answer 97

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!

Answer 98

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

Answer 99

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.

Answer 100

The Department for Work & Pensions

Answer 101

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.

Answer 102

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.

Answer 103

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).

Answer 104

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

Answer 105

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

Answer 106

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

Answer 107

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

Answer 108

£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.

Answer 109

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

Answer 110

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.

Answer 111

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.

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

(149 cards)