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R01 Study > Chapter Two: Serving the Retail Customer > Flashcards

Chapter Two: Serving the Retail Customer Flashcards

1
Q

List the 3 types of expenditure

A
  1. Essential Spending
  2. Everyday Spending
  3. Occasional or Non-Essential Spending
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2
Q

What is the definition of a mortgage?

A

A security offered in exchange for a loan on a property

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3
Q

What is debt consolidation?

A

Negotiating a new loan to repay existing debts, theoretically with lower interest rates.

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4
Q

When it comes to mortgages, what is an assignment?

A

The transfer of ownership of a mortgage security.

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5
Q

What are the two main ways in which a mortgage can be repaid?

A
  1. Capital and Interest

2. Interest only

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6
Q

How do the payments on a Capital and Interest mortgage work?

A

Monthly repayments to the lender include a sum to cover a contribution towards the repayment of the capital, plus a sum to cover the interest.

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7
Q

How do the payments on an Interest Only mortgage work?

A

Only the interest accruing on the loan is paid and the outstanding capital remains the same.

In this method the debt is usually paid via another source such as savings or inheritance or the property may be re-mortgaged or sold on as the mortgage comes to an end.

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8
Q

What is Equity Release?

A

Equity Release describes a range of products only available to older clients (55+) that allow them to release the equity tied up in their home, thereby allowing them to stay in their home for the rest of their life or until they move into a long-term care facility.

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9
Q

What are the 2 types of Equity Release?

A
  1. Lifetime Mortgage

2. Home Reversion Plan

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10
Q

What is a Lifetime Mortgage?

A

Like a conventional mortgage, clients borrow money secured against their home. The home still belongs to the client, and they’re responsible for maintaining it. Interest is charged on the amount borrowed and can either be paid off monthly or added to the total loan value which can lead to a compounding effect.

When the client dies or moves into long-term care, the property is sold and the funds raised are used to pay off the loan. Excess is paid to the clients/beneficiaries. Likewise, if the home raises insufficient funds then the debt will fall to the client/beneficiaries although most providers now offer a ‘No negative equity’ guarantee.

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11
Q

What is No-Negative Equity Guarantee

A

A guarantee made by the lender that the client will never have to pay back more than the value of the home.

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12
Q

What is a Home Reversion Plan?

A

The client sells all or part of the home in return for a cash lump sum, regular income, or both. The lender then owns part or all of the property but allows the client to carry on living there under a lease until they die or move into a long-term care facility.

The client usually only gets between 20-60% of the market value of their home. The older they are, the higher percentage they will get.

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13
Q

What are Buy-to-let Mortgages?

A

A long-term investment which aims to generate an income from rents and a capital gain when selling the property.

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14
Q

What are the potential negatives to debt consolidation?

A
  1. Debt Consolidation Companies typically charge high fees.
  2. While monthly costs may be lower, the cost will likely be higher overall.
  3. If the debt is secured on their property, they may lose their home.
  4. If the client fails to meet their debt obligations, high charges may be applied.
  5. If the client has a history of taking out debt may continue to do so.
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15
Q

What is the lending criteria on interest only mortgages?

A

Lenders now have to check that there is a credible form of repayment strategy in place.

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16
Q

What is a shared appreciation mortgage?

A

The lender takes a stake in the equity of the property in exchange for charging interest on a lower proportion of the loan. It may be possible for the borrower to acquire the lenders stake over time.

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17
Q

Outside of loan repayments, why else might a client require Critical Illness cover?

A
  1. To provide treatment for private healthcare.
  2. To pay for home alterations in the event of new physical requirements.
  3. Income replacement.
  4. Purchase of specialist medical equipment.
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18
Q

How does a longer deferral period impact an Income Protection Plan?

A

It typically results in a lower premium.

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19
Q

What is the personal savings allowance?

A

£1,000 dropping to £500 for a higher rate (40%) tax payer.

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20
Q

What is the difference between how life insurance and income protection are assessed by the provider?

A

Life insurance looks at the potential mortality factor.

Income protection looks at the potential morbidity factor.

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21
Q

Why do insurers restrict the level of cover on Income Protection to no more than 60% of earnings.

A
  1. To incentivise claimants to return to work.
  2. Because the client will pay Income Tax, NI and other benefits from their earnings and so the payments will not be greater than the clients net earnings.
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22
Q

What are the two types of Islamic Mortgage?

A

Ijara - where payments are made to a company and these payments are stored up and used to ‘purchase’ the property at the end of the term.
Diminishing Musharaka - where the owner buys part of the property, a slice at a time. Rent is charged on the outstanding slices.

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23
Q

What is personal accident and sickness insurance?

A
  1. May pay a one off lump sum in addition to regular sums.
  2. The term is limited to 1,2 or 3 years with a short period of deferral
  3. A greater range of occupations will be accepted.
  4. Premium is likely to be a fixed rather than a % of earnings.
  5. Lower cost.
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24
Q

What are the 3 types of Whole of Life policies?

A
  1. Non-profit
  2. With-profit
  3. Flexible
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25
Q

What are the two main types of loan?

A

Structured & Unstructured

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26
Q

What is an unstructured loan?

A

Loans with the possibility to increase loan repayments, reducing the capital outstanding and also, the interest. The loans can be repaid at any time to save more interest.

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27
Q

What is a structured loan?

A

A loan with a fixed rate of interest payable over the term of the loan and a fixed repayment structure. The payments do not change if the base rates alter.

28
Q

What is term assurance?

A

Term assurance pays a lump sum upon death of the life assured. There is no investment underpin.

29
Q

What is an endowment policy?

A

A life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term.

30
Q

What is a Whole of Life policy?

A

This is insurance you buy for the length of your life. Unlike term insurance, whole life policies don’t expire. The policy will stay in effect until you pass or until it is cancelled. The initial cost of premiums is higher than it is with term insurance because of the length of the policy.

31
Q

What is a non-profit Whole of Life policy?

A

The non-profit whole of life policy guarantees to pay a fixed amount of life cover on the death of the life insured irrespective of the length of time since the policy was taken out.

32
Q

What is a with-profit Whole of Life policy?

A

The with-profit whole of life contract guarantees to pay a minimum level of life cover on the death of the life assured.
This amount increases by the addition of annual (reversionary) bonuses. These bonuses permanently increase the basic guaranteed sum insured.
Further, a final (terminal) bonus is usually paid on death which can increase the level of pay-out substantially.

33
Q

What is a flexible Whole of Life policy?

A

The policy holder chooses between a minimum and maximum level of life cover.

The policy allocates the policyholder’s premiums to buy units in one of the funds offered by the life office. Then, every month, the life office calculates the cost of life cover for the next month and deducts this charge ‘by ‘cancelling’ a portion of the PH’s units to pay for it.

In this way, the policy grows in value as the number of units held in the policy accumulates and the value of each unit increases.

34
Q

What is the alternative name for a flexible Whole of Life policy?

A

Unit-linked

35
Q

What is Income Protection Insurance?

A

IPI policies are designed to replace lost income for an individual who, due to sickness or injury, is unable to work (Benefits are exempt from Income Tax).

36
Q

What is a Personal Accident and Sickness policy?

A

Policies that pay a regular benefit while the insured person is unable to work due to sickness/injury.

37
Q

What are the key differences between IPI and Personal Accident and Sickness policy?

A
  1. A&S may also pay a lump sum
  2. A&S pays an income over a much shorter period, typically no more than 2 years. IPI can pay up until retirement.
  3. A&S will pay a fixed income rather than a percentage of earnings.
38
Q

What is Critical Illness Cover?

A

CIC pays out an agreed upon lump sum at the outset of diagnosis. This can be incorporated with term assurance or a Whole of Life policy.

39
Q

What is Payment Protection Insurance?

A

An insurance policies which pay benefits if an insured person is made redundant - usually only in connection with mortgages and loans.

Benefits are used to meet the debt’s regular monthly payments.

40
Q

How does the provision of State benefits affect the need for private, voluntary financial planning?

A

Receipt of State benefits may reduce the necessary private financial provision for illness, retirement or death; but the low level of State benefits frequently emphasises the need for private financial provision

41
Q

What are Child Benefits?

A

A universal non-means-tested benefit for parents to claim for their children, but a tax charge is payable if the parent or their spouse/cohabiting partner has an income over £50,000

42
Q

What are Child Tax Credits?

A

Child tax credit is paid to families with children regardless of whether the parents work. it is integrated within the tax system and administered by HMRC.

New claims can only now be made by those entitled to the severe disability premium. It has been replaced by Universal Credit for the other new claimants.

43
Q

What is Income Support?

A

Financial support for those on low incomes with severe disabilities who are not eligible for Jobseeker’s Allowance or Employment Support Allowance.

N.B. Others on low support must now apply for Universal Credit.

44
Q

What is working Tax Credit?

A

Working Tax Credit is paid to people on low incomes and can, in certain cases, include ‘childcare element’ to help with up to 70% of childcare costs.

N.B. Similar to Child TC, this is administered by HMRC and has been replaced by the Universal Credit for new claimants, unless they are entitled to the severe disability premium. If aged 25+ must work at least 30 hours per week

45
Q

What are the three types of Job Seekers Allowance?

A
  1. New Style
  2. Contribution based
  3. Income based
46
Q

What is Support for Mortgage Interest?

A

A paid loan which needs to be repaid with interest when the home is either sold or its ownership transferred to someone else (e.g. on death).

Qualifying claimants (homeowners with either mortgages or home improvement loans, who are in receipt of a qualifying benefit) get help paying the interest portion of their mortgage or loan repayments on up to £200,000 of their mortgage or loan in the form of payments.

The payments are made directly to the lender after a waiting period of 39 weeks after claiming the income-related benefit.

47
Q

What is Attendance Allowance?

A

A tax-free benefit for those over State pension age who are physically or mentally disabled and need help with personal care and/or their mobility.

48
Q

What is a Budgeting Loan?

A

An interest-free loan for those on a low income who need help with certain important costs, such as clothing, furniture and travel.

49
Q

What is Carer’s Allowance?

A

A taxable benefit for those who look after someone who is disabled. They do not have to be related to, or live with, the person they care for.

50
Q

What is Disability Living Allowance?

A

A tax-free benefit for disabled people, including children, who have difficult walking and who need somebody to look after them.

This is being replaced by Personal Independence Payments.

51
Q

What is Employment and Support Allowance?

A

The successor of incapacity benefit, ESA is paid to those with an illness or disability but aims to get them into some kind of work.

52
Q

What is Statutory Sick Pay?

A

A standard rate per week, it is paid by employers for up to 28 weeks if somebody is unable to work because of illness.

53
Q

What is the State Pension Credit?

A

This guarantees a minimum income to those of State pension age by topping up the weekly income.

54
Q

What is the New State Pension?

A

The pension available to all those who have reached State pension age. As of October 2020 this is 66 years.

55
Q

What are the basic factors affecting a client’s pension requirements?

A
  • Age
  • Income
  • Dependents
  • Previous and current pension arrangements
  • State provision
56
Q

What are the significant differences between a Compulsory Purchase Annuity (CPA) (bought from the proceeds of a pension fund) and a Purchased Lifetime Annuity (PLA) (purchased from other capital)?

A

A CPA is taxed as earned income on the whole of the income paid at 20%, 40% and 45% rates.

The income from a PLA is separated into an interest and a capital element.

PLA annuity rates tend to be better than the equivalent rates for CPAs. (The former have to compete for business where as the latter have a ready-made market.

57
Q

What are the two types of Private Pension?

A

Occupational & Personal

58
Q

What is an Occupational pension scheme?

A

Occupational Pension schemes are set up by an employer and trustees are appointed to over see them. There are two types; defined benefit and defined contribution.

59
Q

What is a Defined Benefit Pension scheme?

A

Sometimes known as pooled funds, this type of scheme sets out to provide members with a pension that is related to their earnings. The schemes rules define exactly, what salary is paid during retirement.

An actuary advises the trustees how much money needs to be paid into the fund to pay the promised benefits.

60
Q

What is a Define Contribution or Money Purchase Pension scheme?

A

In these schemes, rates of contributions tend to be expressed as percentages of earnings, but sometimes they can be expressed as a fixed monetary amount.

Each member of the scheme is given an identifiable ‘pot’. The contributions are paid to the scheme for a member and added to their pot and invested for them.

61
Q

What is a Personal Pension?

A

The individual has their own pension and the provider has a direct responsibility to them to pay the benefits promised in the contract.

A stakeholder pension is a type of personal pension that meets specific stakeholder pension requirements.

62
Q

What are Self-Administered Pension schemes?

A

Schemes that manage their own investment contributions to provide future benefits.

63
Q

Define Short-Term Investment

A

Shortest timescale of investment. Refers to a readily available ‘pot of money’ or an ‘emergency fund’. For those earning, 3-6 months expenditure should be used as a guide, or 10% of total investments.

64
Q

Define Medium-Term Investment

A

Investments which cover the 5-15-year period. Some overlap with short term investments. Savings for large purchases/events over a longer period than an individual would save for on their own.

65
Q

Define Long-Term Investment

A

Investments of 15 years or longer. For longer term savings it is important to maintain and build on their value. Fortunately, there are a wider range of potential investment choices for long term investments.

66
Q

What are the different asset classes of investments?

A
  1. Shares - A stake in a company. (Most volatile)
  2. Bonds - Loans to a company or the Government
  3. Property - either commercial or residential
  4. Cash
  5. “Alternatives” - encompasses a range of further investment types such as absolute return funds, hedge funds, derivatives, commodities and other tangibles (e.g. antiques, fine art and wine etc.)
67
Q

How can investment risks be reduced?

A

Diversification - purchasing multiple investments.

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