Chapter 2 Flashcards
Know your customer?
- financial situation
- investment objectives
- customer’s knowledge/experience
- impact on customers of advice given
Assessing needs and circumstances
- areas of advice/needs
- risk profile
- changes in circumstances
Sustainability report
- provide background to an adviser’s recommendations
- written in plain English
- justified
- disadvantages
Hierarchy of needs
1) Budgeting
2) management debt
3) borrowing
4) protection
5) saving/investing
6) retirement planning
7) estate planning
8) tax planning
Options for individuals with debt problems
- debt repayment plans
- debt management plans
- debt consolidation
- individual voluntary arrangement IVAs
- bankruptcy
Individual voluntary arrangements IVAs
- avoids long term effects of bankruptcy
- negotiate the repayment of the loans with credits
- typically 5 year period
Bankruptcy
- typically discharged after 12 months
- debt must be £5000+
- official receiver/trustee takes control of assets
Bankruptcy
- typically discharged after 12 months
- debt must be £5000+
- official receiver/trustee takes control of assets
Capital and interest loan
- loan guaranteed to be repaid at the end of the term
- each monthly payment consists of an element of interest and capital reduction
- over time, interest element becomes less proportional
Interest only mortgage
- only the interest is paid each month
Fixed rate
- Rate of interest is fixed for a period of time
- Borrowers who require monthly costs are within their budget
Discounted rate
- Repayment vary but always at a rate this is a set % lower than the standard rate
- borrowers who are looking for a lower IR but also benefit from future rate cuts
Capped interest rate
- IRs are variable but will not exceed a pre-agreed rate
- borrowers who need costs to not exceed a certain amount
Cap and collar interest rates
- capped rate but will also not drop below an agreed figure
- borrowers who need monthly costs to not exceed their budget
Equity release
- appropriate for individuals aged 60+
- lifetime mortgage
- home reversion scheme
Lifetime mortgage
- lump sum up front/drawdown facility
- no negative equity = guarantee repayment of loan on sale of property
Home reversion scheme
- % of the property is sold to the lender
- typically between 20-60%
- owner can live in the property for life, under a lease agreement
- nominal rent is paid by owner
Sale and rent back agreement
- typically for younger individuals who has financial issues
- sell your home to the firm at a reduced price
Home purchase plans (Islamic law)
Ijara
- bank purchases property + lease is set up
- payment are fixed for 12 months
Murabaha
- bank purchases propriety + sells it to individual for a higher price
- individual pays bank this higher price in fixed instalments
Life assurance
- pays out a benefit on an individual’s death
Term assurance
- pay as you go insurance
- lump sum on death
- includes critical illness cover
Level term insurance
- set term and sum assured
- used for family protection + interested only mortgage
Decreasing term assurance
- has a set term
- sum reduces gradually
- used for mortgage protection (capital and interest)
Family income protection
- has a set term
- pays out regular income
- sum reduces in stages
- used for low cost family protection
Increasing term assurance
- sum to increase regularly
- as sum increases, so does premiums
- individuals concerned about possible future buying power (combat inflation)
Convertible term assurance
- convert policy into a more permanent one
- individuals concerned about future underwriting decisions
Renewable term assurance
- option to renew policy
- individuals concerned about future underwriting decisions
Endowment assurance
- a savings plan which aims to pay a lump sum
- pays out specified lump sum death benefit
- provides an investment element
Whole of life assurance
- pre agreed sum assured with no end date
- pays our (E.g. death or critical illness)
Income protection insurance (IP)
- replaces income if individual unable to work
- permanent cover
Personal accident and sickness protection (PAS)
- short term and cheaper version of income protection insurance
- pays our regular benefit for 12 or 24 months
- lump sum if significant event
Accident, sickness and unemployment cover ASU
- short term and cheaper than income protection insurance
- pays out regular benefits for 12 or 24 months
- if sick, accident or redundant
Critical illness cover CIC
- pays a pre agreed lump sum on diagnosis
- ease the financial burden
Private medical insurance PMI
- private medical attention
- treatment for short term medical conditions
Long term care insurance LTC
- pays towards the long term car
- payments based on individual’s inability to carry out day to day tasks
Payment protection insurance (PPI)
- packaged with short term loans
- inability to pay back their loans due to sickness/unemployment
Mortgage payment protection insurance (MPPI)
- cover mortgage if unable to work due to sickness/unemployment
Help to buy ISA/
- £200, government £50
- max saved £15,000 + £3000 bonus
- properties max £450,000 (LDN), £250,000 (other)
Lifetime ISA
- government adds 25% as you go along
- £4,000 per tax year
- aged 18-39
- first home or retirement
- stocks & shares
Personal Savings Allowance (PSA)
- low incomes = £5000
- basic rate tax payer = £1000 tax free
- higher rate = £500
- additional rate = £0
National savings & investment (NS&I)
- government raise money
- government backed savings and investment provider
E.g. income bonds
Investments (risk order)
1) cash
2) fixed interest
3) property
4) equities
Collective investments
- unit trusts
- OEICs
Held in tax efficient wrappers (such as ISAs)
Actively managed portfolio
- buys and sells investments to achieve the best return in line with the fund’s risk profile
Passively managed portfolio
- tracker funds
- aims to match the value of the client’s investment to the performance of the selected market/index
Discretionary fund management DFM
- client sets up an agreement with an investment manager
- risk and investment parameter agreed
- managed do not need client permission for each trade
Advisory fund management AFM
- client sets up an agreement with an investment manager
- risk and investment parameter agreed
- manager needs client permission for each trade
Derivatives
- an option to buy/sell an asset at a set price within set dates (option)
- an obligation to buy/sell an asset at a set price within set dates (future)
State pension
- pension age will rise to 67 by 2028
- based on individual’s national insurance contributions (NIC)
Private pensions
- contributions of 100% of salary or capped at £60,000
- lifetime limit £1,073,100
- tax free lump sum up to 25%
Annuities
- purchased with lump sum for guaranteed income for life
Single tier state pension
- £185.15 weekly
- 35 qualifying years of NIC for full amount
- At least 10+ years for proportion
Occupational schemes
- generally set up by the employer
Define benefit (DB) scheme:
- calculated as a proportion of salary at retirement
- employer must put in sufficient money to meet liabilities
Calculate a DB pension scheme entitlement
- take the number of years’ service, multiply that by the scheme accrual rate + apply the resulting fraction to the final pensionable salary
National Employment Savings Trust (NEST)
- government’s workplace pension schemes
- low cost
- encourage employer/employee contributions
- compulsory for employers to enrol eligible to holders into pension schemes
- min 8% contribution between employer/employee
Inheritance on estate
- first £325,000 is 0%
- max 40% on the excess
Main residence nil rate band = £175,000 (additional band to direct descendant)
Protecting against IHT
- organise the estate to reduce/remove the tax
- provide the money to pay the tax
Exempt transfers (IHT)
- transfers not included when calculating estate
- transfers between UK spouses and registered civil partners
- gifts out of normal expenditure
Potentially exempt transfers (IHT)
- outright gifts (individual or trust)
- donor must survive for 7 years
- taper relief available if donor dies within 7 years of gifting
Chargeable lifetime transfers (CLTs)
- transfers into most trusts
- if transfer is more than nil rate band = 20% tax + 20% (if donor dies within 7 years)
State (DWP) benefits
- provide bare minimum money to survive on
- means testing/qualify (eg NIC)
State (DWP) benefits
- provide bare minimum money to survive on
- means testing/qualify (eg NIC)
Universal credit
- creating an incentive to work
- benefits
Bring up children benefits
- children benefits
- child tax credits
- maternity allowance
- statutory maternity pay
- shared paternal pay
Benefits for unemployed/low income
- income support
- Jobseeker’s Allowance
- statutory redundancy pay
- working tax credit
Mortgage interest support
- Support for Mortgage Interest SMI
- a loan (repayable when sell home)
- unemployed for 39 weeks - eligible
- up to £200,000
Benefits for the sick/disabled
- attendance allowance
- carer’s allowance
- personal independence allowance
- employment & support allowance
- incapacity benefit
- statutory sick pay
Benefits for pensioners
- single tier state pension
- basic state pension
- additional state pensions
- guaranteed pension credits
Bereavement support payment BSP
- lump sum + weekly payments
Children aged under 20 + education
- £3,500
- 18 monthly payments £350
No children aged under 20 + education
- £2,500
- 18 months payments £100
Cold weather payments
- £25 daily for each day of a 7 day period of winter (freezing temp)
Winter fuel payment
- annual payment between £250-£600 to help with increased fuel bills
