Chapter 2 Flashcards by Oliver Walls

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.)

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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

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What does cash flow modelling do?

Looks at clients needs throughout lifetime

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What should a suitability report contain?

1 - Personalised recommendation
2 - Plain English
3 - Justified
4 - Disadvantages

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Hierarchy of needs

1 - Budgeting
2 - Managing Debt
3 - Borrowing
4 - Protection
5 - Savings & Investing
6 - Retirement Planning
7 - Estate Planning
8 - Tax Planning

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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

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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.

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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

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Difference between mortgage and loan

Mortgage - secured on UK property

Loan - can be secured or unsecured - unsecured are riskier for loan so higher rates

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Methods of Mortgage Repayment

Capital and Interest

Interest-Only

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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

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What rules were introduced by the MCD?

Mortgage Credit Directive

1 - Initial Document Disclosure
2 - 7-day reflection period
3 - Further affordability checks

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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

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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

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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

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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

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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

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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)

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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