Chapter 2 Flashcards
E-book 2 - What are the two key pieces of information you need to determine a client’s budget for spending on financial services?
The key information required is the income and expenditure, although to really understand the budget you will need a full breakdown on each.
E-book 2 - Why should particular care be taken when taking out a consolidating loan secured on the family home?
It is important to take care when consolidating loans as part of a mortgage to ensure that clients will not simply run up further debts and make their position worse. They may also have incurred extra charges and costs and ultimately could lose their home if they persistently fail to make repayments.
E-book 2 - Which type of loan would you expect to be more expensive in APR terms: a mortgage to buy a house or a structured loan to buy a car? Why?
A structured loan to buy a car is likely to be more expensive for three reasons:
it is the higher-risk loan and interest rates increase with the risk of default;
it is a structured loan and the interest on this type of loan tends to be higher; and
it is an unsecured loan, unlike a mortgage.
E-book 2 - At around what age is there the greatest need for protection products?
The greatest need for protection usually occurs between the mid-20s and early 40s as this is the age range when most clients have families that are dependent on their income.
E-book 2 - Why must existing cover be taken into account in assessing protection needs?
Not to do so is poor advice as it will provide more cover than required and increase costs and could breach FCA rules and the provisions relating to the fair treatment of customers.
E-book 2 - Janet has a £10,000 loan, which is repayable in one lump sum in ten years’ time. She needs a policy with a sum assured of £10,000 at the lowest cost to provide protection should she die before the loan is repaid. What is the most suitable policy for Janet?
A level term assurance will ensure that there is life cover in force for the whole amount of £10,000 should Janet die at any point in the ten-year term; also, as this product has no savings element all premiums charged are to fund the life cover, which results in a low premium.
There would be no point in effecting a decreasing term assurance because the sum assured needs to be constant throughout. A convertible term assurance would be a ‘luxury’ since Janet knows precisely what the debt will be at the end of the ten-year term. A low-cost whole life policy would be inappropriate because the premium would be geared to a contract running much longer than ten years, adding extra cost.
E-book 2 - What is the purpose for which payment protection is offered by insurance companies?
Protection for mortgages and loans.
E-book 2 - What is meant by the term ‘means-tested’?
An assessment of income and capital is made to ascertain whether or not State benefits are payable.
E-Book 2 - What does the payment of the new State Pension depend upon?
State pensions and, for that matter, State benefits (where appropriate) are determined by the payment (or crediting) of sufficient National Insurance Contributions.
E-Book 2 - David is age 30 and planning to retire at age 65. He wants advice on whether to start saving now or to leave this until he is age 50.
What advice would you give and why?
The advice would be to start saving now because this would give David 35 years in which to build up a pension fund. Consequently, the contribution level necessary is much lower than that for someone planning the same pension but who, at age 50, has only 15 years in which to make the necessary contributions.
E-Book 2 - How many qualifying years of National Insurance contributions are required for a full new State Pension?
35 qualifying years of National Insurance contributions are required for a full new State Pension.
E-Book 2 - What affect does having previously been contracted out have on the new State Pension?
A deduction will be made from an individual’s New State Pension for any time spent contracted out.
E-Book 2 - Under what circumstances are each of the following policies payable?
Family income benefit.
Personal accident insurance.
Income protection insurance.
Personal pension.
Family income benefit: payable on death.
Personal accident insurance or income protection insurance: payable in the event of ill-health preventing the individual from working.
Personal pension: appropriate for providing an income and possibly a tax-free PCLS at retirement.
E-Book 2 - If your client is looking for high investment returns and low risk, why is that a problem and what should you do about it?
It is not possible to have both high investment returns and low risk. It is the job of the financial adviser to explain the nature of the compromise required and to manage their client’s expectations.
E-Book 2 - What are the four main uses for deposit-based investments in investment portfolios?
The four main uses are as follows:
As an emergency fund.
To provide liquidity.
As a fund to be used for future investment opportunities (good deals and topping up tax-exempt schemes such as ISAs).
As an asset class in its own right for short, medium and long-term planning to balance the other asset classes in the portfolio.
E-Book 2 - Ken died on 17 April 2024. His estate was valued at £975,000 at the time of his death, but he did not own a property. In his will he left £325,000 of his estate to his spouse, £325,000 to his children and the remainder to his favourite UK charity. The assets left to the children are made up of both cash and shares.
Using the current thresholds, calculate how much IHT is payable and by whom.
No IHT is payable because both transfers between spouses (as long as they have a UK domicile) and to UK charities are exempt from IHT. As follows:
Estate = £975,000.
To spouse = £325,000 (no IHT as transfer between spouse).
To children = £325,000 (current NRB).
Balance of Estate = £325,000.
To UK charity = £325,000 (No IHT payable as transfers to UK charities are exempt).
E-Book 2 - Clive is single with no children of his own. He has total assets valued at around £550,000 which he wishes to leave to his two nephews.
He is advised that the potential IHT liability is £90,000 (£550,000 less the £325,000 NRB = £225,000 at 40% = £90,000 IHT). He wants to ensure that his nephews do not need to sell any of his assets to pay this IHT, not least because £500,000 of his assets are represented in the value of his home.
His financial planning adviser therefore recommends that Clive effects an own life policy with a sum insured of £90,000.
What basic type of policy would you recommend?
You could recommend any kind of whole of life policy which is suitable. However, a policy with increasing cover or a review of the policy at regular intervals might be most suitable to protect the estate against inflation.
It should be written in trust for the benefit of the nephews, to ensure that the death benefits do not get paid to Clive’s estate when he dies. Benefits paid to the estate will increase its value for IHT purposes.
E-Book 2 - Surita wishes to leave her estate, valued at £800,000, to her three children. How can she minimise the impact of the potential IHT liability?
Surita could effect an own life whole of life policy written under trust with her children as beneficiaries to enable them to pay the tax bill.
E-book 2 - Many tax exemptions and contribution limits for tax-efficient investments are renewed at the beginning of a new tax year and this presents an excellent financial planning opportunity. When does the tax year run from and to?
The tax (fiscal) year runs from 6 April to 5 April in the following year.
KC 2 - Robert and Mary own a large house that they wish to bequeath to their son, James. In order to meet a potential inheritance tax liability without the need for the house to be sold, which type of policy should they consider?
Select one:
a.
Two individual term assurance policies, in trust.
b.
Whole of life last survivor, in trust.
c.
Joint decreasing term assurance.
d.
Whole of life, joint life first death, in trust.
b
*KC 2 - Mario, a basic-rate taxpayer, has just retired and has bought a purchased life annuity [PLA] using the proceeds of a maturing investment. How would the income be taxed?
Select one:
a.
Part of every PLA income payment is treated as capital and is tax-free; the interest element is taxed at 20%.
b.
Part of every PLA income payment is treated as interest and is tax-free; the capital element is taxed at 20%.
c.
In the early years, the capital element of the PLA income payments is very low, and so the majority of the income is taxed at 20%.
d.
Half of every PLA income payment is treated as capital and is tax-free; the other half is taxed at 20%.
a
KC 2 - Peggy is looking for long-term capital growth. What asset class is likely to be most appropriate for her?
Select one:
a.
Bonds.
b.
Property.
c.
Shares.
d.
Cash.
c
*KC 2 - Barbara, aged 68, has recently suffered a stroke that has left her mentally incapacitated. As a result, which State benefit is she most likely to be eligible for?
Select one:
a.
Disability Living Allowance.
b.
Attendance Allowance.
c.
Pension Credit.
d.
Personal Independence Payment.
b
KC 2 - Linda needs to have the doors in her home widened, as she is permanently confined to a wheelchair following a stroke. Which type of insurance would have been of greatest assistance in financing the alterations to her home?
Select one:
a.
Income protection insurance.
b.
Private medical insurance.
c.
Permanent health insurance.
d.
Critical illness cover.
d
KC 2 - Michaela has seen a financial adviser about arranging life assurance. What is the LEAST important fact for the adviser to establish during their meeting?
Select one:
a.
Dependants.
b.
Employment history.
c.
Debts.
d.
Existing protection.
b
*KC 2 - Mustafa is in the process of arranging a home purchase plan to help him buy a house for himself and his family. He has been told that he will not own any part or portion of the property until the end of the agreement. Which type of home purchase plan is he applying for?
Select one:
a.
Home reversion plan.
b.
Diminishing musharaka.
c.
Lifetime mortgage.
d.
Ijara.
d
KC 2 - Where a member of a defined contribution occupational pension scheme can, at any time, have their share of the overall fund identified, this is known as what type of money purchase scheme?
Select one:
a.
Earmarked.
b.
Pooled.
c.
Group.
d.
Stakeholder.
a
KC 2 - ‘Equity release’ describes a range of products designed for borrowers who:
Select one:
a.
are older and wish to downsize but need funds in the short term until their property can be sold.
b.
already own their property and wish to release money for a variety of reasons by way of a sale, mortgage or remortgage.
c.
are permitted to stop making mortgage payments when they retire, with the property belonging to the lender on their death.
d.
apply to their existing mortgage lender for additional funds to be used for home improvement or debt consolidation.
b
KC 2 - Brian and Joan are making enquiries about sale and rent back agreements and they want to know under what circumstances, if any, they might have to move out of their house. What will you tell them?
Select one:
a.
Provided they keep up with their rental payments, the only reason would be if the buyer subsequently wanted to sell to a third party.
b.
They cannot be asked to move out of the house during their lifetimes.
c.
Only if they breach their tenancy agreement by not keeping up with rental payments.
d.
If their initial rental agreement is not renewed, if they breach their tenancy agreement, or if the buyer falls into financial difficulty and the house is repossessed.
d
KC 2 - Marcus and Philippa have a joint life assurance policy, which expires in 14 years when their youngest child is 21. The policy provides £200,000 life cover that in the event of a claim, would usually be paid to the surviving spouse in instalments for the remainder of the policy term. The type of policy they have is a:
Select one:
a.
family income benefit.
b.
convertible term assurance.
c.
level term assurance.
d.
whole of life.
a
*KC 2 - Suki is looking for a term assurance policy. For what reason might she opt for a renewable term assurance?
Select one:
a.
If the level of cover required is so low that the insurance company includes the renewal option free of charge.
b.
If, at the time of taking the policy, she is suffering from a medical condition that would prevent her taking a regular term assurance policy.
c.
If she is unsure as to how long she might require the selected level of cover, combined with a desire to keep initial costs low.
d.
If there is a possibility of her wanting to add another life assured to the policy at some point in the future, without the need for further medical evidence from her.
c
KC 2 - Wendy had treatment for deep vein thrombosis [DVT] three years ago. If she applied now for private medical insurance cover on a moratorium basis, how would the insurer respond to any claim she made in respect of this specific illness?
Select one:
a.
Cover would only be provided if Wendy’s DVT three years ago did not result in surgery.
b.
Claims relating to DVT would not be automatically excluded, she may be offered a cash benefit instead.
c.
Cover would only be provided to pay for out-patient treatment for DVT.
d.
Claims relating to DVT would automatically be initially excluded from cover as Wendy suffered from this condition within the last five years.
d
*KC 2 - Norman, a widower, intends to leave his £600,000 estate to his daughter. His main asset is the family home, and he does not want his daughter to have to sell the house in order to meet an inheritance tax [IHT] liability. Assuming he did not inherit any nil rate band or residence nil rate band from his deceased wife, what would be the most suitable life policy to meet the potential IHT liability on his estate?
Select one:
a.
£100,000 own-life whole of life policy with increasing cover, written in trust.
b.
£40,000 own-life whole of life policy with increasing cover, written in trust.
c.
£100,000 renewable term assurance policy, written in trust, with an initial term of seven years.
d.
£40,000 own-life renewable endowment policy, written in trust.
b
600,000-325,000 (NRB) - 175,000 (RNRB) = 100,000
100,000 * 40% = 40,000 IHT
*KC 2 - Which type of mortgage normally provides a no negative equity guarantee?
Select one:
a.
An offset mortgage.
b.
A home reversion plan.
c.
A lifetime mortgage.
d.
An Ijara mortgage.
c
KC 2 - Daniel is looking to invest £100,000 over the next four years, and has decided to place at least £95,000 in a range of equities. His attitude to risk can best be described as:
Select one:
a.
cautious.
b.
balanced.
c.
high.
d.
medium.
c
KC 2 - Terry is retiring after 32 years’ service in his employer’s defined benefit scheme. This provides a pension based on his basic salary and accrues on a 1/60th basis. In his final year, his salary was £37,000, his commission was £4,000 and his bonus was £3,500. In a typical scheme, how much pension can he expect to receive?
Select one:
a.
£21,600.
b.
£19,733.
c.
£23,733.
d.
£21,867.
b (32/60)*37000 = 19733
KC 2 - Javid has a mortgage where his mortgage payments are reduced because of money he holds in a current account with the same company. What type of mortgage does he have?
Select one:
a.
Deferred interest.
b.
Flexible reserve.
c.
Discount.
d.
Offset.
d
*KC 2 - Helen is an employee but is sick and has been off work for 14 weeks. Her employer pays a limited salary whilst she is sick and she is expected to be off work for a further six months. What State benefit[s] would she potentially receive?
Select one:
a.
Statutory Sick Pay followed by Personal Independence Payment.
b.
Employment and Support Allowance only.
c.
Statutory Sick Pay only.
d.
Statutory Sick Pay followed by Employment and Support Allowance.
d
*KC 2 - A key difference between a lifetime mortgage and a home reversion plan is that:
Select one:
a.
the providers of a home reversion plan offer a no-negative equity guarantee to the homeowner, whereas this is not offered on lifetime mortgages.
b.
with a lifetime mortgage, the homeowner will typically pay a nominal monthly or annual rent, whereas this is not payable with a home reversion plan.
c.
with a lifetime mortgage, the homeowner must take the capital released in the form of an income, whereas with a home reversion plan the capital can be used for any purpose.
d.
with a home reversion plan, the homeowner sells all or part of their property, whereas with a lifetime mortgage the property remains in the homeowner’s name.
d
KC 2 - When choosing an environmental, social and governance [ESG] investment, a fund manager only selects businesses that make a positive contribution to society and the environment. This approach is known as:
Select one:
a.
greenwashing.
b.
ESG integration.
c.
negative selection.
d.
positive selection.
d
KC 2 - Makena will shortly reach her State pension age and has an annual retirement income of £20,000. Assuming she has made sufficient National Insurance contributions, she will receive the:
Select one:
a.
Basic State Pension and Additional State Pension.
b.
new State Pension.
c.
new State Pension and Pension Credit.
d.
new State Pension and Basic State Pension.
b
KC 2 - Cecil has a defined contribution pension scheme. The amount of pension he will ultimately receive is primarily based on:
Select one:
a.
investment performance.
b.
his period of service.
c.
the scheme retirement age.
d.
his income at retirement.
a
KC 2 - John has collected details of numerous debts held by his client, William. Which of William’s debts would be considered a ‘priority debt’, in the context of his expenditure?
Select one:
a.
His £500 authorised overdraft.
b.
His £145,000 mortgage.
c.
His £1,800 credit card balance.
d.
His £10,000 personal loan.
b
GQ 2 - What is an annuity?
Provides a regular income in return for a capital payment. Most pensions are annuities payable for life.
GQ 2 - What is equity release?
Usually for older homeowners it enables them to take some of the value tied up in their home as readily available cash. It is a loan against the value of the property and must be repaid on sale or death. Equity release schemes are either lifetime mortgages or home reversion plans.
GQ 2 - What is Family income benefit?
A type of life assurance that pays a pre-agreed amount each month from the date of the policyholder’s death until the end of the term.
GQ 2 - What is Income protection?
The need an individual has to still have regular money coming in to meet their living costs should they be unable to work due to sickness or following an accident.
GQ 2 - What are Whole of life policies?
Whole of life policies offer permanent protection and pay out whenever the policyholder dies.
GQ 2 - What are these type of mortgages?:
Cap and collar
Capped
Discount
Euro (or other foreign currency)
Equity-Linked (shared appreciation mortgages)
Fixed Interest
Flexible
Green
Offset
Tracker
Cap and collar - interest rate won’t rise above the cap or fall below the collar (rates are guaranteed to be between an upper and lower limit for a given period of time, e.g. two years)
Capped - interest rate won’t rise above a given level
Discount - nterest rate charged for an initial period (frequently for 1, 2 or 3 years) is reduced by a set percentage below the standard rate charged by the lender
Euro (or other foreign currency) - interest and capital of the loan is designated in euros (or another currency), usually to take advantage of lower interest rates. This can result in gains or losses as the currency exchange rate moves relative to sterling
Equity-Linked (shared appreciation mortgages) - the borrower agrees to give a portion of the home’s appreciated value to the lender when the borrower sells the house, in addition to paying off the mortgage. The appreciated amount that’s paid to the bank is called the contingent interest because you’re giving the lender an interest in the appreciated value of the property. The contingent interest is agreed upon upfront and is due to the lender upon selling the property. The bank will usually offer a lower interest rate on a SAM. e.g. if the house appreciated from 300k to 360k and the mortage was a contingent clause of 25%, then the borrower must pay 25%*60k = 15k at the end.
Fixed Interest - The interest rate charged remains fixed for a given period. Often carry early redemption penalties.
Flexible - Monthly payments can be varied if required and lump-sum capital repayments made at any time. As capital is repaid, this creates a reserve from which the borrower can withdraw cash up to the initial mortgage amount at any time.
Green - rewards the borrower for buying an energy-efficient home by offering them more favourable terms than come as standard, such as a slightly lower interest rate, or cash back when they take out the mortgage, or both
Offset - a mortgage account and a current account are linked. Interest is charged on the net balance of the two accounts, so if money is kept in the current account the size of the mortgage is effectively reduced and therefore interest payments are reduced
Tracker - interest ‘tracks’ an index, usually the Bank of England base rate
GQ 2 - What are these lifetime mortgages?:
A roll-up mortgage
A fixed repayment lifetime mortgage
An interest-only mortgage
A home income plan
Roll up - Lump sum/drawdown or regular income. You don’t make monthly payments. Interest is added to the loan each year, increasing the debt. When you sell or die, the loan + interest is repaid
Fixed Repayment - Lump sum/drawdown but never pay interest. You agree upfront to repay the higher amount when you sell. The lender takes the agreed sum from the sale.
Interest-Only - Lump sum/drawdown but pay interest each month. Original Loan stays the same. When the home is sold, only the initial amount is repaid.
Home Income Plan - Lump sum/drawdown is used to buy an annuity (fixed income for life). Annuity covers the interest payments on the mortgage. Any leftover is yours to spend. Original loan is repaid when home is sold
Anything left from of the sale does to the client/beneficiaries.
GQ 2 - What is a no negative equity guarantee? What type of mortgages to they apply to?
Most lifetime mortgages offer a no negative equity guarantee which is where the lender promises that the client (or their beneficiaries) will never have to pay back more than the value of the home – even if the debt has become larger than this.
GQ 2 - What is a home reversion plan?
A home reversion plan allows a homeowner to sell all or part of their property in exchange for a lump sum, regular income, or both.
- The home reversion provider owns the sold portion, but the homeowner can continue living there under a lease until they die or move into care.
- Homeowners typically receive only 20%–60% of the home’s market value (as the provider must wait for to sell), with older individuals getting a higher percentage.
- Lease terms vary: some providers charge a nominal rent (e.g., £1/month), while others offer the option of paying higher rent for a larger payout.
GQ 2 - What is a Ijara home purchase plan?
Ijara is a ‘lease-to-own’ agreement. With an Ijara plan, your lender purchases the property outright. You’ll then make monthly payments that cover: the purchase price of the property, rent, any other charges.
At the end of the plan, you’ll have repaid the full amount for the property. This will mean you now own the property outright.
GQ 2 - Diminishing musharaka home purchase plan
Diminishing Musharaka means both you and the bank or building society own the property together, with separate stakes.
Each repayment is used to buy the bank’s shares in the property over time. The repayments cover rent, property purchase and any other charges.
As your stake grows, the bank’s stake shrinks. This reduces the amount of rent you have to pay.
GQ 2 - Examples of structured and unstructured loans?
Structured Loan: Mortgage, corporate bond, infrastructure loan (predifined terms, fixed schedule, large long-term financing, predictable payments, less flexible)
Unstructured Loan: Bank overdraft, payday loan, informal lending. (flexible terms & repayment, can be variable/negotiable over time, often used for short-term financing, higher risk)
GQ 2 - What is term assurance?
Term assurance pays a lump sum (or, in the case of family income benefit, a series of lump sums) on the death of the life assured.
A term assurance, therefore, is a policy that offers life assurance only, with no savings element whatsoever. This also means no surrender value if the policy is cancelled early.
GQ 2 - What are the two types of home purchase plans covered in this exam?
Ijara and Diminishing musharaka
GQ 2 - What is Level term assurance?
Offers a ‘level’ sum assured in return for a level premium (payments) throughout the term of the contract
GQ 2 - What is decreasing term assurance?
A life insurance policy where the payout reduces over time, matching a decreasing financial liability (like a loan or capital+interest mortgage).
The payout decreases over the policy term but the premium stays the same throughout. It’s cheaper than level term assurance as insurer’s risk reduces over time
GQ 2 - What are family income benefit policies?
These are a special form of decreasing term assurance whereby, on the death of the life assured, the life office will make a series of regular annual or monthly payments, instead of one lump-sum payment.
E.g. Consider a family income benefit policy for £10,000 benefit per annum over 20 years. If the life assured dies after 2 years, then this policy will pay £10,000 per annum for the remainder of the original policy term (that is, 18 years). If the life assured dies after 6 years, then the policy would still pay an annual benefit of £10,000 per annum, but this time only over 14 years.
GQ 2 - What is Increasable term assurance?
This provides for the sum assured to be increased regularly over the term of the contract (for example, by 5% per annum), without any evidence that the life assured is still in good health, or alternatively offers the option to the policyholder to make such increases.
For this variation on the basic term contract, the life office will charge higher premiums, which also increase as the sum assured increases.
Such policies enable clients to ensure that their life assurance maintains its value in real terms against inflation.
GQ 2 - What is Convertible term assurance?
Allows the policyholder to change the term policy into either an endowment policy or a whole of life policy with up to the same sum assured at any time before the end of the term of the original policy.
This is a valuable feature if the policyholder’s need is for additional savings (convert to endowment) or longer-term protection (convert to whole of life).
GQ 2 - What is Renewable term assurance?
A short-term life insurance policy (e.g., 3 or 5 years) that can be renewed without a health check.
Premiums start low but increase with age at each renewal.
GQ 2 - What is an endowment policy?
It provides a lump sum at the end of a fixed term (or upon death, if earlier).
It combines investment with life cover, ensuring that either the policyholder or their beneficiaries receive a benefit.
The bulk of the premium is directed towards the savings element of the contract, leaving relatively little to provide the life cover.
GQ 2 - What are Whole of Life policies? Non-Profit, With-Profit and Flexible
A life insurance policy that lasts for your entire life, not just a fixed term. It pays out a lump sum to beneficiaries when the policyholder dies. Some types also have an investment element. It can be a good for Inheritance tax repayment.
Non-Profit - Fixed payment amounts when you die, premiums remain the same, cheapest of the 3
With-Profit - Guaranteed minimum payout when you die plus yearly bonuses, more expensive than non-profit but offers growth potential
Flexible - an adjust your life cover over time, part of premiums used to buy investment units in a fund, every month units are deducted to cover cost of life insurance, can grow in value, cost of life cover is deducted investment value, over time cost of life cover increased because you’re aging, carries investment risks
GQ 2 - What are:
Attendance allowance
Disability Living Allowance
Personal Independence Payment (PIP)
Employment and Support Allowance (ESA)
Motability scheme
Statutory Sick Pay
Attendance allowance - A tax-free benefit to help with extra costs for those over State pension age with a disability severe enough that they need someone to help look after them.
Disability Living Allowance - A tax-free benefit for disabled people, including children, who have difficulty walking and who need somebody to look after them. This allowance is ending for those born after 8 April 1948 and are 16 or over.
Personal Independence Payment (PIP) - The Personal Independence Payment (PIP) is replacing the Disability Living Allowance (DLA) for those aged between 16 and State pension age.
Employment and Support Allowance (ESA) - Claimants can apply for ESA if they have a disability or health condition that affects how much they can work.
Motability scheme - The Motability scheme enables disabled people to lease a new car, scooter or powered wheelchair using their Government-funded mobility allowance.
Statutory Sick Pay - A standard rate per week, it is paid by employers for up to 28 weeks if somebody is unable to work because of illness.
GQ 2 - What is a Purchased Life Annuity (PLA)?
When withdrawing from a pension, it is generally advised to take the maximum tax-free Pension Commencement Lump Sum (PCLS) (unless guaranteed annuity rate of pension is really high e.g. 10%) —usually 25% of the pension pot because it’s tax-free unlike regular pension income which is taxable.
So 75% will go to the standard Compulsory Purchase Annuity (CPA) and income is taxable. 25% is given as a lump sum.
If someone wants the lump sum to still be regular income they can use it to buy a Purchase Life Annuity (PLA). Part of the income from the PLA is treated as return of capital and is not taxable.
KRO 2 - William is looking to borrow some money but has informed his financial adviser that he has little security to offer a lender. His adviser should inform him that:
a) he will not be able to borrow with no security
b) he will need a guarantor to be able to proceed with any borrowings
c) secured lending is likely to be more expensive than unsecured lending
d) unsecured lending is likely to be more expensive than secured lending
d
*KRO 2 - Stacey has recently arranged a standard repayment mortgage loan to assist her in the purchase of her first home. She has agreed a 5-year fixed rate mortgage deal. Each repayment that she makes will consist of:
a) amounts of capital and interest which vary throughout the mortgage term
b) amounts of capital and interest which are fixed throughout the mortgage term
c) capital only, with the interest due being paid separately at the end of the mortgage term
d) Interest only, with the capital repayment being paid separately at the end of the mortgage term
a
A bit of a trick Q:
It is a fixed overall rate, but it doesn’t mean that the rate is a fixed mix of capital & interest:
Interest payable reduces in line with the reducing capital outstanding and therefore a higher proportion of the ongoing payment will be repaying the outstanding capital.
KRO 2 - Carlos is concerned about the financial impact of his untimely death on his young family. He wants to ensure that they would be provided with sufficient income each year until reaching their own financial independence. If budget was tight, the most likely solution for Carlos would be to arrange:
a) A level term assurance policy
b) a critical illness plan with a short deferment period
c) an income protection policy
d) family income benefit plan
d
b and c are inappropriate as they only cover illness and accidents
He could get a level term assurance but that would be more expensive that a family income benefit plan because it’s level whereas family income benefit is a form of decreasing term assurance.
- KRO 2 - Cassandra’s recent application for a new policy is being underwritten by the insurance company on a morbidity basis. It is most likely that the plan applied for is (and why):
a) a family income benefit
b) a term assurance policy
c) an income protection policy
d) a whole of life policy
c
Morbidity risk is related to the chances of an individual developing a certain disease or disorder (illness). Policies appropriate to meet his risk include income protection, critical illness cover and personal accident & sickness.
MORTALITY risk is linked to the individual dying so is best met by life assurance policies including term, decreasing term (FIB) and/or whole of life plans.
*KRO 2 - Tania, a long-term employee of a large UK bank has recently become pregnant. She has been advised that she will qualify for Statutory Maternity Pay (SMP) but is unsure of the benefits she can claim. You correctly advise her that:
a) new mothers at a rate of 90% of their average earnings for 6 weeks and then a flat rate for the next 33 weeks
b) new mothers at a rate of 90% of their average earnings for 6 weeks and then a flat rate for the next 39 weeks
a) new mothers at a rate of 100% of their average earnings for 6 weeks and then a flat rate for the next 33 weeks
a) new mothers at a rate of 100% of their average earnings for 6 weeks and then a flat rate for the next 39 weeks
a
KRO 2 - Rami and Sami are twins, aged 47. They plan to retire at the same age, with the same financial target. They have both received financial advice from the same financial planner, yet Sami has been advised to contribute more than his brother. This is most likely because:
a) Rami is self-employed, whereas Sami is employed
b) Sami has more ethical investment stipulations than Rami
c) Sami has a more cautious attitude to risk
d) Rami will be eligible for his State Pension sooner than Sami
c
The higher the risk adopted, the higher the potential returns, therefore Sami may need to invest a little more over the long term to achieve the same financial target as his brother
*KRO 2 - Fabian and Stefan have both recently been widowed and have claimed for Bereavement Support Payments. Both have been accepted but Stefan’s payments are to be lower than Fabian’s. The most likely reason for this is that:
a) Fabians wife was over state pension age and Stefan’s wife was below state pension age
b) Fabian is in receipt of child benefit payments whereas Stefan is not
c) Fabian’s wife was self-employed whereas Stefan’s was not
d) Fabian’s wife has a complete National Insurance Contribution (NIC) record whereas Stefan’s wife has never paid NICs
b
NICs are to do with State Pensions only
Bereavement Support payments operate at two rates:
- Higher rate for those getting/entitled to Child Benefit (lump sum of £3.5k and £350 per month for man 18 months)
-Lower rate for those not getting child benefits (lump sum of £2.5k and £100 a month payable for max 18 months)
KRO 2 - Abuela, aged 21, has recently started a part-time job with a local manufacturer, earning £9,200 per annum. She is keen to join the company’s auto-enrolment pension scheme. If she does, her employer:
a) does not have to contribute to her scheme
b) does not have to contribute to her scheme until her 22nd birthday
c) has to contribute to her scheme, but at a reduced statutory rate until her 22nd birthday
d) has to contribute the minimum statutory rate to her scheme
d
She’s classified as a non-eligible jobholder based on her income being between the lower earnings limit and £10k. She doesn’t have to be auto-enrolled by her employer, but if she chooses to join her employer must contribute at the minimum statutory rate
KRO 2 - A client’s primary financial need has moved from being focused on protection to that of investment. The most likely reason for this is that the client:
a) Is an execution-only client
b) has received a promotion at work
c) has recently celebrated their 50th birthday
d) has become the life tenant of a trust with substantial assets
d
Protection needs would be dealt with before investment needs in the standard financial planning priority order, but there are exceptions! If the client becomes the life tenant (beneficiary) of substantial assets, it means their protection needs diminish due to their new-found wealth and the needs to invest the funds increases.
*KRO 2 - The government regularly issue index-linked gilts to help bridge the UK economic deficit. To which inflation index are they currently linked, and to what is this applied?
a) Retail Prices Index (RPI) for coupon only
b) Consumer Prices Index Housing (CPIH) for coupon only
c) Consumer Prices Index Housing (CPIH) for coupon and nominal value
d) Retail Prices Index (RPI) for coupon only and nominal value
d
This is changing from 2030, then the index with be CPIH
This makes index-linked gilts attractive for those who want a secure investment that keeps pace with the cost of living. However, they may offer lower initial returns compared to regular gilts, especially if inflation is low.
KRO 2 - Spencer and Marcus are civil partners and are meeting their financial adviser to discuss their inheritance tax concerns. Their adviser has informed them that they are likely to see a reduction in their Residence Nil Rate Band (RNRB). What circumstance has most likely led to that being a possibility?
(a) Their combined estate would be in excess of £2 million
(b) They entered into a civil partnership before the introduction of the RNRB and as a result it will be tapered
(c) The property is in joint names so the RNRB will need to be shared between them
(d) The property is their main residence
a
The residence nil rate provides a maximum potential addition NRB of £175k per deceased. However, if the gross death estate exceeds £2m, that RNRB is tapered down by £1 for every £2 of excess
E.g.
Let’s say someone dies with an estate worth £2.2 million.
Starting RNRB: £175,000
Excess Over £2M: £2.2M - £2M = £200,000
Tapering Calculation: £200,000 ÷ 2 = £100,000 (RNRB reduction)
Remaining RNRB: £175,000 - £100,000 = £75,000
So, instead of getting the full £175,000, this person’s estate can only use £75,000 as the RNRB.
*KRO 2 - Maud reached her State Pension Age in 2015. She had been self-employed all of her 38-year working life. As a result, her state pension entitlement consists of the
a) Basic State Pension only
b) Basic State Pension and State State Pension Scheme only
c) Basic State Pension, Second State Pension and State Earnings-Related Pension Scheme only
d) Basic State Pension and Single Tier Pension only
a
Maud reached her State Pension Age in 2015, which means she falls under the old State Pension system
Since Maud was self-employed for her entire 38-year working life, her NI contributions were made primarily through Class 2 and Class 4 National Insurance contributions.
Self-employed people were generally only entitled to the Basic State Pension because their NI contributions did not build up entitlement to the additional state pensions (State Earnings-Related Pension Scheme (SERPS) or Second State Pension (S2P)).
Additional state pensions (SERPS and S2P) were mainly for employed individuals who paid Class 1 NI contributions.
KRO 2 - Hannah is planning to purchase her first property in the next 18 months. She has built up a deposit of £22,000 and is seeking advice of how best to use it before it is needed. The most suitable approach would be to
a) ensure the capital remains secure
b) invest in equities with the possibility of capital growth
c) invest in government gilts to provide the security needed
d) always ensure she has fully utilised her ISA allowance above all other considerations
a
she needs a conservative, risk averse strategy to prevent loss.
This means in real terms (taking inflation into account) and suffering no capital loss from risky investments
KRO 2 - Raymond has been experiencing financial difficulties and is seeking the advice of a debt management officer. The payment of Raymond’s utility bills will generally be considered as
a) essential spending
b) everyday spending
c) occasional spending
d) non-essential spending
a
Utilities, housing costs, insurance, council tax etc are essential spending
*KRO 2 - Sarah is due to be made redundant and has been advised to ask her employer to pay some of the redundancy payment to her pension scheme. This is likely to be because
a) the redundancy payment is less than £30,000
b) the redundancy payment is more than £30,000
c) Sarah was not previously classed as an eligible jobholder
d) there would be a saving on Sarah’s National Insurance Liability
b
Redundancy payments up to £30k are tax free.
Over £30k they are subject to income tax & employer-only national insurance contributions
Agreeing for any possible excess of £30k to be paid into the pension scheme would provide her (and the employer) with tax relief
*KRO 2 - Alice is in the process of buying her first home and has been arranging finance from a Building Society. The process where she signs the property over to the lender in exchange for a mortgage is known as
a) a transfer of mortgage property
b) an assignment
c) a seal
d) a securitisation
b
Even though the loan is secured buy the property, the transfer of ownership is called ‘the assignment’ (this is a temporary assignment to the lender)
- KRO 2 - Hakim is 68 years old retired. He is a higher-rate taxpayer and is keen to generate as much tax efficient income as possible. His sole investments consist of corporate bonds, that generate income of £1,200 income per annum, and equities, that generate income of £400 per annum. When considering the use of his current year’s ISA allowance to achieve his objective
a) he would be best to place the corporate bonds in an ISA
b) he would be best to place the equities in an ISA
c) he would be best to place both investments in an ISA
d) he cannot place direct investments such as those owned in an ISA
a
He receives two categories of income:
- Savings income from the bonds, he has £500 personal savings allowance against this. Still leaves £700 to be taxed at 40%
- Dividend income from the equities, he can use £500 dividend allowance against this which covers the whole £400 dividend income. Therefore no tax.
Therefore, since the equities at tax free already, place the bonds in an ISA.
KRO 2 - Jason is single with no dependants. He plays a lot of sport and was worried when a teammate broke his leg playing football and had to take six months off work. He is keen to commence an affordable policy to provide him with replacement income should a similar event impact him. Based on this information alone, the most appropriate option would be
a) Critical Illness Cover
b) Income Protection Insurance
c) Personal Sickness & Accident
d) Private Medical Insurance
c
Out of the options listed, the two that provide replacement income are Income Protection Insurance and Personal Sickness & Accident.
As he’s looking for a short-term income replacement (~6months) and the most affordable PAS would be more appropriate.
GQ - what are the differences between Income Protection insurance, Personal Accident & Sickness and Critical Illness cover
IPI: Long term, protects self-employed, compliments any employed cover (sick pay can be restricted to a set period) so IPI can be taken out with a deferred period when the sick pay may end, paid as regular income
PAS: Often mirrors IPI but there’s a reduced level of underwriting therefore cheaper, Useful against fixed costs, may be good for single, no dependents, possible lump sum payments, good for professions with higher levels of danger (e.g. construction, bouncers, delivery drivers)
CIC: Lump sum to repay liabilities, alter home/vehicle if needed, could fund specific treatments/care, allows time to recover
KRO 2 - Zach is aged 56, is divorced and in good health. He is planning on gifting £200,000 to his son to enable him to purchase a property. It would be Zach’s first lifetime gift. The rest of Zach’s estate exceeds £800,000. The most appropriate protection policy to meet any Inheritance Tax liability linked to the gift alone would be:
a) a single whole-of-life policy with Zach as the life assured
b) a joint life second death whole-of-life policy with Zach and his son as the lives assured
c) a single 7-year level term assurance with Zach as the life assured
d) a single gift-inter-vivos policy with Zach as the life assured
c
A gift of £200k would be covered by the IHT Nil Rate Band (up to £325k) should Zach die within 7 years of making the gift, so no IHT would be due on the gift alone (therefore Gift Inter Vivos policy isn’t appropriate because this policy is taken out to cover the potential IHT liability on a gift above £325k)
Because the gift is using up a big chunk of the NRB for 7 years so more IFT is likely on the death estate. It would be good to protect the static loss of some of the NRB by a 7 year level term assurance.
The level term assurance policy ensures that the tax due on the gift is covered if Zach dies within 7 years of making the gift, so Zach’s son does not face a financial burden.
*KRO 2 - Amy, aged 59, is a basic-rate taxpayer with £7,000 of basic-rate tax headroom available before she would pay tax at the higher rate. She is looking to withdraw £40,000 from one of her investments and has been advised to access her onshore life assurance investment bond for the amount. That is likely to be because she
a) could benefit from top-slicing relief to minimise any immediate tax liability
b) is currently not old enough to withdraw any money from her personal pension plan
c) is going to immediately invest the full amount into a tax-free Individual Savings Account
d) could remove any taxable gain by carrying forward her unused capital gains tax exempt amounts
a
A unique potential benefit associated with life assurance investment bonds is the use of ‘top-slicing’:
Top-slicing relief helps to spread the tax impact of a large gain by averaging it over the number of years the bond has been held.
E.g. if Amy owned her onshore life assurance bond for 6 years, then £40k/6=£6.7k, which is below the £7k headroom she has, and therefore doesn’t mean she has to pay 40% tax on the higher rate amount, only 20%. However, if she withdrew 40k from her pension e.g. then 40-7k=33k would be taxed at 40%.
KRO 2 - Olivia, aged 32, is considering how she might fund private schooling fees for her son, Arun, aged 2. She would like Arun to be privately educated between the ages of 11 and 18, the increasing cost of which Olivia realises often exceeds inflation. Olivia’s best approach would be to contribute to
a) a Junior ISA in Arun’s name, invested in cash
b) a Junior ISA in Arun’s name, invested in stocks and shares
c) a Cash ISA in her own name
d) a Stocks & Shares ISA in her own name
d
Access to JISAs are restricted until age 18 so aren’t appropriate.
The S&S ISA would be more appropriate because there’s sufficient time for any volatility in prices to be overcome and the returns have far greater growth potential than just leaving money in cash
*KRO 2 - Following a full financial review, conducted in January, Robert was told that they should act on the recommendation before the end of March to fully benefit. The recommendation is most likely to have been to
a) a personal pension plan
b) a level term assurance policy
c) a joint life second death whole of life policy
d) a single premium whole of life assurance investment bond
a
In the UK, the tax year runs from 6 April to 5 April. Contributions made to a personal pension (such as a private pension plan) are eligible for tax relief based on the tax year in which they are made. If Robert contributes to his personal pension plan before the end of March, he can claim tax relief for that contribution against his income for the current tax year.
E.g. if he’s a basic tax payer and he contributes £1,000 to his pension, it effectively costs him only £800 (because the government adds £200 in tax relief).
The limit is £60k per year
Immediate Benefit: By contributing before the end of the current tax year, you can lower your taxable income for this year. This could be especially helpful if you are near the boundary of a tax threshold (e.g., close to the higher-rate tax band).
While you would still get tax relief next year, the timing of the contribution is what matters for immediate tax benefits.
By contributing before the end of the current tax year, you can reduce this year’s tax bill, avoid losing part of your annual allowance, and ensure that you take advantage of the current year’s tax rules.
Waiting until next year means you won’t have the same immediate benefit, and you could miss out on potential tax-saving opportunities based on your current year’s income.
It’s not necessarily “bad,” but delaying your contribution could be less efficient from a tax-planning perspective.
KRO 2 - A tax-exempt savings plan is provided by
a) a Friendly Society, with an individual limit on contributions of £25 a month
b) a Friendly Society, with an individual limit on contributions of £27 a month
c) any life office operating a with profits fund, with an individual limit on contributions of £25 a month
d) any life office operating a with profits fund, with an individual limit on contributions of £27 a month
a
£25 per individual if paying monthly
£270 per individual if paying by lump sum
*KRO 2 - Elena, aged 57, is self-employed. She is concerned as to how she would cope should she fall ill or suffer an accident and is considering Income Protection Insurance and Critical Illness Insurance policies. She should be aware that
a) both types of insurance pay benefits as income
b) both types of insurance pay benefits as lump sums
c) critical illness insurance is likely to cover a wider range of injuries
d) critical illness insurance is likely to be able to continue into Elena’s retirement
d
a is wrong - CIC can be paying the mortgage or home alterations etc
b is wrong, IPI can be regular payments
d is correct - IPI pays as tax free regular income, but with a term limited to the individual’s retirement date. With CIC the term can be unrelated to retirement but is more likely to be limited be a maximum age.
KRO 2 - Following a full financial review, Jo has been recommended to commence an Inter Vivos policy. This is most likely to be because she has
a) a total estate valued in excess of £1,100,000
b) a daughter who will remain financially dependent for at least the next 14 years
c) gifted her children a sum of money that exceeds the current Inheritance tax nil rate band
d) gifted her children a sum of money that does not exceed the current Inheritance tax nil rate band
c
If the donor dies in the next 7 years after they gift over £325k then the beneficiaries will have to pay inheritance tax on it.
IHT liability is reduced is the donor survives at least 7 years by ‘taper relief’:
Years Survived/ IHT Rate Reduction/IHT Rate
0 to 3 years No reduction 40%
3 to 4 years 20% reduction 32%
4 to 5 years 40% reduction 24%
5 to 6 years 60% reduction 16%
6 to 7 years 80% reduction 8%
7+ years 100% relief 0%
The gift inter vivos policy is a type of decreasing assurance that mirrors the reducing liability from years 3-7.
*KRO 2: Patrick, aged 78, now lives in a residential care home. He has an income source that generates £1,500 a month that is not subject to personal income tax for him. The most likely reason for this is that the income is generated from
a) a registered pension plan and paid in to Patrick’s own bank account
b) a registered pension plan and paid directly to the registered care home
c) an immediate needs annuity and paid in to Patrick’s own bank account
d) an immediate needs annuity and paid directly to the registered care home
d
An immediate needs annuity is a special kind of purchased life annuity (PLA) typically appropriate for those who need long term care
It is tax free if directly paid to a registered care home
KRO 2 - Lyndon, aged 25, is single with no dependants and in good health. He works as a delivery driver on a self-employed basis. He has recently purchased his first property, with the help of a capital and interest mortgage. Lyndon’s main financial priority is most likely to be arranging
a) a decreasing term assurance plan to cover the outstanding mortgage
b) a stocks and shares ISA to repay the mortgage debt
c) a critical illness plan to be able to repay the mortgage should he be diagnosed with a specific critical illness
d) an Income Protection Insurance policy to provide an income should he fall ill or suffer an accident
d
KRO 2 - Jonathan and Jennifer are twins who have both commenced Income Protection Insurance (IPI) policies for the same benefit amounts. They are both employed, and work doing the same administrative jobs for a large utilities company. They are both in good health. Jennifer’s premium for her IPI policy is higher than that for Jonathan. This is most likely to be because
a) premiums for female lives are generally higher for health related cover
b) Jennifer has selected the ‘family protection’ option
c) Jonathan has selected a longer deferred period
d) Jennifer has selected a reviewable premium
c
READ THE QUESTION. I read Jonathan as Jennifer
Longer deferred period mean that it’s less likely that the payments will have to be made therefore cheaper premiums
KRO 2 - Capstan Ltd employs four full time workers. Which of them will need to be auto-enrolled into a pension scheme at least every three years?
a) Stacey aged 17 earning £11,000 p.a. on an approved apprenticeship scheme
b) Rebecca aged 21 earning £17,500 p.a.
c) Kasper aged 37 earning £31,000 but on long-term sickness
d) Tony aged 68 earning £56,000 p.a. as the company director
c
Eligible jobholders (employees that must be auto enrolled onto a workplace pension scheme) are:
- Aged between 22 and state pension age (rules out a,b, and d)
-Earning over £10k per year
Maintained even if the individual is off work with long-term sickness.
KRO 2 - Romesh, a non-taxpayer, has £95,000 to invest. He is highly risk averse and wants to invest the money where he can receive an ongoing return but with minimum risk to his capital. The most suitable solution would appear to be
a) a Cash ISA with a major UK bank
b) a deposit account with a major UK bank
c) an Income Bond, purchased through National Savings & Investments
d) Premium Bonds, purchased through National Savings & Investments
c
NS&I products aren’t restricted by the FSCS limit for deposits = £85k as they are backed by the government so won’t lose any of his £95k, which could happen with major banks (though unlikely)
Premium bonds aren’t suitable for ongoing income because payments are random
He benefits from tax free returns on income bonds
