Chapter 2 Flashcards
What client information do you require to know your customer?
1 - Financial Situation
2 - Investment Objectives
3 - Knowledge and experience
4 - Impact of advice (tax, DWP etc.)
Stages of Advice
1 - Know your customer
2 - Recommend within risk profile
3 - Consider affordability, debt and tax consequences
4 - Provide level of service upfront
What does cash flow modelling do?
Looks at clients needs throughout lifetime
What should a suitability report contain?
1 - Personalised recommendation
2 - Plain English
3 - Justified
4 - Disadvantages
Hierarchy of needs
1 - Budgeting
2 - Managing Debt
3 - Borrowing
4 - Protection
5 - Savings & Investing
6 - Retirement Planning
7 - Estate Planning
8 - Tax Planning
What is MaPS?
The Money and Pensions Service offers free and impartial information anyone can access to help improve finances and keep track on plan
Is now MoneyHelper
What’s required to manage debt?
Income and expenditure analysis
Essential - Mortgage, rent, utilities etc. (Priority debts)
Day to day - Groceries, travel etc.
Non-essential - Clothing, holidays etc.
5 Options for Debt Management
1 - Debt Repayment Plan - informal and self managed arrangement
2 - Debt Management Plan - involved licensed advisor - one monthly payment made to advisor
3 - Debt Consolidation - longer repayment terms
4 - Individual Voluntary Arrangements - insolvency practitioner negotiated - accepts lower payment over 5 years with review every year
5 - Bankruptcy- at least £5,000 but discharged after 12-months
Difference between mortgage and loan
Mortgage - secured on UK property
Loan - can be secured or unsecured - unsecured are riskier for loan so higher rates
Methods of Mortgage Repayment
Capital and Interest
Interest-Only
What is the MMR and why was it introduced?
Mortgage Market Review requires a more careful assessment of affordability
Borrowing were mortgaging to ridiculous levels they couldn’t afford as well as borrowing with no means of repayment
What rules were introduced by the MCD?
Mortgage Credit Directive
1 - Initial Document Disclosure
2 - 7-day reflection period
3 - Further affordability checks
What are the 9 different types of mortgage and who are they best suited to?
1 - Fixed - ensure fixed monthly costs
2 - Discounted - Varied repayment but lower than standard rate - benefit from lower rates
3 - Capped - variable but have upper limit - require capped cost
4 - Cap and Collar - between certain amounts - willing to accept they won’t go below an amount
5 - Foreign Currency - working abroad and wishes to avoid currency fluctuations
6 - Equity Linked - lender also has stake in property - can’t afford mortgage but get on property ladder
7 - Flexible reserve - varied amounts as can draw down again - require more for building or renovations
8 - Equity Release - takes out loan on property or sells part - over 60 and require more funds
9 - Offset - Linked to bank account - from same account as wages so benefit from lower interest
Types of Equity Release Mortgage
1 - Lifetime Mortgage
Provide lump sum or drawdown - loan repaid for fixed amount on sale
2 - Home Reversion
Percentage sold to lender
3 - Sale and Rent back
Younger individuals who don’t want home repossessed
Schemes under Islamic Law and reason for them
1 - Ijara
Monthly repayments held by firm and used to buy house at end
2 - Diminishing Musharaka
Buys property and each repayment transfers share of property to purchaser
Must not involve payment of interest
Different between structured and unstructured loan
1 - Unstructured
Common - mortgages, loans etc.
Flexible in repayment
2 - Structured
Car Loans
Interest required upfront
No early repayment advantage
More expensive
Describe the 3 Life Cycles
1 - Vulnerable Years
Early marriage - young children
Financial Protection
Mortality Protection
Often low cost due to low income
2 - Relaxed
40+
Increased income - sophisticated products
Investments and pensions more important
3 - Anxious Years
50+
Earnings reached peak
Inheritance tax planning
Long-term care
Policy costs increase
What is a life assurance?
Contract between assured (policy owner) and life office (provider) to pay out on death of life assured (does not have to be the same as assured)
Types of term assurance policies and who they best suit
Level - for family protection and suit interest only as outstanding remains same
Decreasing - reduces over term - capital and interest as reduces over term
Family Income Benefit - pays regular income for remaining term of policy - reduces over term - low cost (young) family protection
Increasing - increase without health advice - guaranteed insurability - combat effects of inflation
Convertible - convert to endowments WoL however higher premiums likely - guaranteed insurability - worried about underwriting decisions
Renewable - renew without health advice - guaranteed insurability - worried about underwriting decisions
What is an endowment assurance?
Provides life assurance in similar way to term but with an investment element - both sections require monthly premiums
What is a WoL assurance policy?
Higher premiums as always paid out
Can have investment element
Can choose level of cover throughout policy
Which life assurances are likely to include critical illness cover?
Term and WoL
Describe the 6 types of morbidity assurance and who they best suit
1 - Income Protection Insurance
If unable to work
Pays during pre determined term (usually NRA) after deferred period - the shorter the higher the premiums
Influenced by age, occupation and health
2 - Personal Accident and Sickness Protection
Shorter and cheaper - usually 1/2 years
Can pay lump sum
Not dependent on age, health and occupation
Can be cancelled by insurer
3 - Accident, Sickness and Unemployment
Same as PAS for term, expense, cancellation and dependence
4 - Critical Illness Cover
Pays out on pre-determined lump sum on diagnosis of specified critical illness
Survival period of around 14-30 days
5 - Private Medical Insurance
Provides treatment for short-term treatment
6 - Long-Term Care Insurance
Pay when individuals can’t carry out daily living
Which debts should be repaid first?
High interest debts always paid off first
Main features of Lifetime ISA
Replaced Help to Buy ISA
£4,000 per tax year
Aged - 18-39
25% bonus paid at end of month till age 50
Max £450,00 property
Purchase first home till 60
Stocks and shares as well as cash
Main features of Help to Buy ISA
Max of £1,200 initial and £200 per month - £15,000 max including bonus
Age 16+
£50 for every £200 saved
Max £450,000 in London and £250,000 elsewhere
House purchase to earn bonus
Only cash savings
What is the PSA?
Personal Savings Allowance - earn £5,000 of savings interest tax-free if income below £17,500
Basic rate - £1,000 tax-free
Higher rate - £500 tax-free
Tax paid at standard rates if above PSA via self-assessment
Why would someone invest?
Grow capital, produce additional income or obtain a bit of both
Features of cash investment
Savings, Cash ISA, fixed rate bonds Longer you agree to keep in deposit - the higher the interest rate
Risk of inflation and default (low)
Income Tax at marginal rate
No capital gains tax liability
Features of Fixed-interest investment
Gilts, Corporate Bonds, PIBs and PSBs
Loans in effect
Usually low risk
Riskier when corporate
Beat inflation and income - not for short- term
Income Tax at marginal rate
Usually free from capital gains tax
Features of property investment
Provide capital growth or monthly income
Risk with liquidity or ancillary (property not maintained)
Beat inflation
Income tax paid at marginal rate
Capital gains tax at 18% and/or 28% (with 8% surcharge on gains made on residential buy to let)
Features of Equity Investment
Grow capital
Value can vary significantly
Beat inflation - long- term planning such as pensions
Dividend income at 0%, 7.5%, 32.5% or 38.1%
Capital Gains tax at 10% or 20%
What is an actively managed fund and what are the advantages and disadvantages?
Fund appoints manager who buys and sell investments - best return in line with risk profile
Advantages
Diversifies for client as wide range of funds
Lower initial cost with expert management
Disadvantage
Higher fund management costs
No or little control
What is passively managed funds and what are the advantages and disadvantages?
Often called tracker funds - linked to FTSE100 for example
Advantages
Easier to understand
Follows index
Lower costs
Disadvantages
Riskier due to lack of management control
Always underperform index due to costs
What is DFM and what are the advantages and disadvantages?
Sets up arrangement with investment manager - do not need permission to trade
Advantages
Maximise investment opportunities
Disadvantages
Requires trust
Pressure to set out preferences
What is AFM and what are the advantages and disadvantages?
Same as DFM but needs permission to trade
Advantages
More control
Disadvantages
Opportunities missed
What are the contribution Limit and minimum ages for ISAs, Cash ISAs and JISAs?
ISA - 18+ - £20,000
Cash ISA - 16+ - £20,000
JISA - Get access at 18 - 9,000
What is the maximum amount that a pension can qualify for tax relief?
100% of relevant earnings subject to £40,000 cap
What are the dates for the different state pensions?
Graduated Pension Scheme - 1961 - 1975
SERPS - 1978 - 2002
S2P - 2002 - 2016
Single Tier - 2016 onwards
How do you calculate DB pensions?
Years of service x accrual rate x final salary
What is the NRB and what is the IHT free band?
Nil Rate Band is £325,000
IHT free band is £175,000
Above is subject to 40% IHT
What are the 2 ways to reduce IHT?
1 - Organise the estate to reduce IHT - gift within 7 years of death
2 - Provide the money to pay the tax - WoL
What are the 3 types of transfers in relation to IHT?
1 - Exempt Transfers - left by spouse
2 - Potentially exempt Transfers - outright gifts - 7 year rule applies here
3 - Chargeable Lifetime Transfers - transfers into trust and the 7 year rule applies here
What does Universal Credit involve and why was it introduced?
1 - Job Seekers Allowance
2 - ESA
3 - Income Support
4 - Child Tax Credit
5 - Working Tax Credit
6 - House Benefit
Simplify benefits but also ensure a working family does not receive less than a non working family
What are the DWP benefits for those raising children?
Child Benefit - not means tested and not taxable unless income over £50,000
Child Tax Credits - Always paid regardless of work - means tested on income and non taxable
Maternity Allowance - lower of 90% of average weekly wage or £151.97 - NI based and non taxable
Statutory Maternity Pay - 90% of average wage for 39 weeks - LEL of £120 a week for eligibility. NI based and taxable
Statutory Paternity - new fathers get 1-2 weeks of lower of 90% weekly wage or £151.97 - must be employed for 26 weeks - NI based and taxable
What level of redundancy payment is tax-free and how can you reduce this?
£30,000
Make pension contributions
What is the SMI?
Support Mortgage Interest
Unemployed for more than 39 weeks - receive payments to cover mortgage interest up to £200,000
Payments made to lender and need to repaid when you sell your home
