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AF5 > Client-Specific Questions > Flashcards

Client-Specific Questions Flashcards

1
Q

What additional information do you need to establish a strategy for using their inheritance and pensions to fund early retirement? (12)

A

(1) Their intended retirement age
(2) Their income and capital requirements
(3) Their preference for guaranteed or flexible income
(3) Their state pension entitlement
(4) Their plans for Linda’s inheritance
(5) Their willingness to pay off their mortgage early
(6) Their willingness to use investments for retirement income
(7) Their willingness to use their ISA allowances
(8) Details on their existing pensions
(9) Their pension contribution history
(10) Their employer’s willingness to operate SS
(11) Whether they have made pension nominations
(12) Whether they expect further inheritance

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2
Q

Describe the process you would follow when assessing whether their existing assets are adequate to provide a target retirement income (9)

A

(1) Establish their objectives and priorities
(2) Calculate the fund needed to provide their target income
(3) Project their existing pensions to their retirement age
(4) Incorporate their state pensions
(5) Incorporate their other assets
(6) Allow for PCLS withdrawals in case they are required
(7) Incorporate ongoing charges
(8) Calculate the shortfall
(9) Review the financial plan regularly

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3
Q

What steps should they take to meet their retirement objectives (7)

A

(1) Maximise pension contributions
(2) Use SS to reduce income subject to HR tax
(3) Order state pension forecasts
(4) Review the funds within their existing pensions
(5) Diversify their existing pension portfolio
(6) Consolidate their pensions within their workplace schemes
(7) Review their pension arrangements regularly

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4
Q

Justify a recommendation to increase their pension contributions and use SS (9)

A

(1) They have surplus income
(2) They will achieve a larger retirement income
(3) They will benefit from pound-cost averaging
(4) The will benefit from tax-free growth
(5) The survivor will receive tax-free income if they die before 75
(6) Their income will be flexible via drawdown
(7) They will receive tax relief at their highest marginal rate
(8) They will reduce their income subject to HR tax
(9) They will reduce their income tax and NIC liability

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5
Q

Explain why Steve’s UK Mixed Bond fund may or may not be suitable as he approaches retirement (7)

A

(1) It offers limited capital growth potential
(2) It is not diversified
(3) It is exposed to inflation risk
(4) It is exposed to default risk
(5) Interest rates will affect bond prices
(6) It offers protection against falling annuity rates
(7) A high-yield bond may match his ATR

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6
Q

Explain why Linda’s UK Cautious Managed fund may or may not be suitable as she approaches retirement (10)

A

(1) It offers limited capital growth potential
(2) It is not diversified
(3) It does not match her ATR
(4) Its bond content is exposed to inflation risk
(5) Its bond content is exposed to default risk
(6) Its bond content offers protection against falling annuity rates
(7) Interest rates will affect its bond content
(8) Its cautious mandate offers protection against market downturn
(9) It benefits from active management
(10) She is already invested in UK equities

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7
Q

Explain why Steve’s default managed fund may or may not be suitable as he approaches retirement (4)

A

(1) It is likely to match his ATR
(2) It likely offers good growth potential
(3) It benefits from active management
(4) It is likely to be inexpensive

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8
Q

Explain why Linda’s UK equity fund may or may not be suitable as she approaches retirement (5)

A

(1) It does not match her ATR
(2) It is not diversified
(3) It will not offer protection against falling annuity rates
(4) It will not offer protection against a market downturn
(5) She is already invested in UK equities

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9
Q

Explain the benefits of diversifying their portfolio (3)

A

(1) It will reduce volatility
(2) It will increase capital growth potential
(3) It will align their portfolio with their ATR

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10
Q

Explain why they should increase their regular contributions and not simply invest lump sums (8)

A

(1) It will encourage savings discipline
(2) They have surplus income
(3) They will benefit from pound-cost averaging
(4) They will not have to consider market timing
(5) It will offset the risk of their growth funds
(6) They can reduce or cease their contributions if they need to
(7) SS is tax-efficient
(8) SS requires less administration

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11
Q

Explain the factors they should consider when deciding their retirement age (9)

A

(1) The income and capital required in retirement
(2) Their preference for flexible or guaranteed income
(3) Their health and longevity
(4) Their existing assets and liabilities
(5) Their ATR
(6) Their state pension entitlement
(7) The effects of inflation
(8) The age restrictions of pension freedoms
(9) The outcome of their adviser’s cashflow analysis

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12
Q

Justify a recommendation to invest lump sums into Lisa’s pension and use carry forward to fully utilise her AA (7)

A

(1) Her current provision is insufficient
(2) It will increase her income in retirement
(3) It will secure tax relief at her highest marginal rate
(4) It will increase the fund benefitting from tax-free growth
(5) Lump sums will allow for precise tax planning
(6) Steve’s income will be tax-free if she dies before 75
(7) Her income will be flexible via drawdown

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13
Q

Justify a recommendation to utilise their ISA allowances, investing in funds suitable for the ATR (5)

A

(1) ISAs can be used to supplement retirement income
(2) Capital growth and income will be tax-free
(3) It will reduce volatility through diversification
(4) It will increase capital growth potential through diversification
(5) It will allow them to invest in acc units now and inc units later

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14
Q

Justify a recommendation to use Linda’s inheritance to pay off their mortgage in November 2026 (5)

A

(1) It will simplify their retirement planning
(2) Their current interest rate is competitive
(3) They will secure a better interest rate on savings
(4) Their interest rate may rise after November 2026
(5) The early repayment penalty will be lifted in November 2026

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15
Q

Justify a recommendation to use Linda’s inheritance to hold fixed-term accounts (< £85,000) to utilise future allowances and pay off their mortgage in November 2026 (5)

A

(1) It will allow for funds to be accessed easily
(2) It will secure the nominal value of their capital until they need it
(3) It will allow them to secure competitive interest rates
(4) It will allow them to protect their capital through FSCS or NS&I
(5) Utilise PSAs

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16
Q

List the factors you should consider when advising them to fund their retirement by purchasing onshore bonds with Linda’s inheritance (11)

A

(1) Their tax status
(2) Their requirement for tax-deferred withdrawals
(3) Their requirement for tax planning through segmentation
(4) The internal tax of 20% paid on the funds
(5) The chargeable gains subject to income tax rather than CGT
(6) The use of their PSAs
(7) The availability of top-slicing to reduce chargeable gains
(8) The possibility that the investments will not be subject to LTC
(9) The charges for the investments
(10) The funds available for the investments
(11) The timeframe of the investments

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17
Q

Describe how their maximum pension contributions are determined (9)

A

(1) Take the current AA
(2) Determine their pension input amount for the tax year
(3) Include both EE and ER contributions
(4) Deduct the pension input amount from the current AA
(5) This indicates their remaining AA
(6) Use this tax year’s AA first
(7) Calculate the carry-forward from the previous 3 years
(8) Start with the AA from the earliest year carried forward
(9) Their total contribution cannot exceed their total earned income in the tax year

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18
Q

Explain to them why they should not pay off their mortgage immediately using Linda’s inheritance (5)

A

(1) Their current interest rate is competitive
(2) They can secure a better interest rate on the savings market
(3) An early repayment penalty applies
(4) They can afford their current repayments
(5) They can change their mind should their circumstances change

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19
Q

State the factors to consider when reviewing their pensions at their next review (10)

A

(1) When they intend to retire
(2) Their income and capital requirements in retirement
(3) Their current shortfall
(4) Their state of health and personal circumstances
(5) Their state pension forecasts
(6) The performance of their investments
(7) Their use of their allowances
(8) Economic climate and market conditions
(9) Their ATR
(10) Whether they have made nominations

20
Q

Identify the additional information you would require to advise them on the suitability of their savings and investments (9)

A

(1) What level of emergency fund they require
(2) Whether they have plans to repay their mortgage
(3) Whether they have utilised their CGT exemptions
(4) Their willingness to utilise their ISA allowances
(5) Their willingness to transfer assets between them
(6) Their willingness to rely on their investments in retirement
(7) The interest rates on their deposits
(8) Further details on their investments
(9) Their willingness to diversify their portfolio

21
Q

Evaluate the suitability of their current savings and investments (9)

A

(1) Steve is not using his PSA
(2) Linda is not using her dividend allowance
(3) They have not used their ISA allowances
(4) Their overall portfolio may match their ATR
(5) They are overweight in UK equity
(6) They hold too much in a small number of funds
(7) Linda’s inheritance will be insecure (£1m for 6 months)
(8) £25,000 is suitable for an emergency fund
(9) They hold too much in cash (inflation risk)

22
Q

Justify a recommendation to review and diversify their investments (5)

A

(1) They hold too much in a small number of funds
(2) They are overweight in UK equity
(3) It will reduce volatility
(4) It will increase capital growth potential
(5) It will align their portfolio with their ATR

23
Q

Justify a recommendation to invest in multi-asset funds (9)

A

(1) It will diversify their portfolio
(2) It will reduce volatility
(3) It will increase capital growth potential
(4) It will allow them to benefit from active management
(5) It will allow them to benefit from internal rebalancing
(6) It may match their ATR
(7) It will allow them to benefit from specialist securities
(8) It may offer protection from a market downturn
(9) It may offer protection from falling annuity rates

24
Q

Justify a recommendation to switch Linda’s deposits to joint names and transfer half of Steve’s unit trust to Linda (4)

A

(1) It will utilise both of their PSAs
(2) It will utilise both of their dividend allowances
(3) It will utilise both of their CGT exemptions
(4) It will not attract CGT

25
Q

Explain how Steve’s CGT liability would be calculated on disposal of his unit trust (7)

A

(1) Take the unit trust’s current value of £125,000
(2) Deduct the acquisition cost of £60,000
(3) Deduct any reinvested income
(4) Deduct any losses from the current tax year
(5) Deduct any losses from previous tax years
(6) Deduct the CGT exemption
(7) Tax the balance at 20% (or 10% if BR taxpayer)

26
Q

Explain to them how A and I units work and why they should switch to I units in retirement (7)

A

(1) They are taxed in the same way
(2) A units increase the price of units instead of paying dividends
(3) A units are suitable for the accumulation stage of retirement
(4) I units pay dividends as cash
(5) I units pay a variable income that must be manually reinvested
(6) I units are suitable for the decumulation stage of retirement
(7) I units mean you do not have to track notional income for CGT purposes

27
Q

Explain to Steve why he might want to encash some of his unit trust and invest in an EIS (7)

A

(1) Significant capital growth potential
(2) Any capital growth would be tax-free
(3) He can defer CGT by reinvesting in an EIS
(4) Any gains are CGT-free if the EIS is held for 3 years
(5) The reinvestment must take place 1 year before to 3 years after
(6) Income tax relief of 30% is available if the EIS is held for 3 years
(7) An EIS may match his ATR if it is balanced with low-risk assets

28
Q

Explain what would happen if Steve died and Linda inherited his ISA (6)

A

(1) The ISA would continue to belong to Steve until it is transferred
(2) No additional contributions could be made in Steve’s name
(3) Any growth or income on the ISA would continue until the estate is administered, the ISA is closed or 3 years
(4) Linda would inherit a one-off APS
(5) The APS would equal the higher of the ISA’s value on death or on the date of transfer
(6) Linda could use her own ISA allowance in addition to the APS

29
Q

Identify the additional information required to advise on the suitability of their protection now and in retirement (6)

A

(1) How long they will remain in work
(2) Their intended retirement age
(3) Further details on their existing policies
(4) Whether their current premiums are competitive
(5) Whether they require PMI in retirement
(6) Whether they are interested in IHT planning

30
Q

Justify a recommendation to continue with Steve’s income protection but cancel it when he retires (6)

A

(1) The premiums are currently affordable
(2) The policy will replace his income if he falls ill
(3) There would be no benefit to the policy in retirement
(4) His retirement income would continue if he fell ill
(5) His income should be sufficient in retirement
(6) He can invest the money he saves on premiums

31
Q

Justify a recommendation to rebroke their level term assurance for mortgage protection insurance, including critical illness cover (3)

A

(1) It ensures their protection aligns with their mortgage
(2) It should provide low premiums since they are in good health
(3) CIC would provider cheap cover in the event of serious illness

32
Q

Justify a recommendation to maintain their existing PMI into retirement whilst ensuring its ongoing competitiveness (6)

A

(1) The policy will be funded by their employer until they retire
(2) It ensures timely treatment in a climate of long waiting times
(3) It ensures a higher level of service
(4) It allows for securing better terms after retirement
(5) It should provide low premiums since they are in good health
(6) It gives them access to international PMI for exotic travel

33
Q

What factors should be considered when advising them on their protection planning? (9)

A

(1) Whether they have a protection gap
(2) That their DIS will cease on retirement
(3) That their term assurance does not cover the mortgage
(4) That their inheritance reduces their protection need
(5) Their current assets and liabilities
(6) Their health and longevity
(7) Their intended retirement age
(8) Their willingness to consider IHT planning
(9) Their current income and expenditure

34
Q

Explain to them how their taxable income and allowances are likely to change when they retire (6)

A

(1) They are likely to become BR taxpayers
(2) Their PSAs will increase to £1,000
(3) Their dividends will be taxed at the BR
(4) Their gains will be taxed at the BR
(5) Their dividend allowances will remain the same
(6) Their CGT exemptions will remain the same

35
Q

State the issues they should consider when deciding if they should access their pensions flexibly (13)

A

(1) The income will be flexible
(2) Natural income is not guaranteed
(3) They will not be locked into an annuity
(4) The death benefits will be flexible
(5) The death benefits will be tax-free if they die before 75
(6) The balance will be left invested
(7) There will need to be ongoing management
(8) They will trigger the MPAA
(9) The balance will be exposed to investment risk
(10) Annuity rates may continue to fall
(11) Pension freedoms legislation may change
(12) There will be ongoing charges
(13) It would suit their ATR

36
Q

Explain the main factors you should consider when formulating a cashflow model for them (10)

A

(1) Their target income
(2) The fund required to meet their target income
(3) Their health and longevity
(4) Their existing assets
(5) The expected growth rates of their existing assets
(6) Charges
(7) Inflation
(8) Their ATR
(9) Their tax status
(10) Stress testing

37
Q

Justify a recommendation to use a purchase-life annuity to meet their retirement needs (7)

A

(1) It could match their ATR as part of a diversified portfolio
(2) It would allow them to take income before 55
(3) It would provide a guaranteed income for life
(4) Only the capital element would be taxed
(5) They do not have any dependants that need death benefits
(6) It allows for guaranteed periods and premium protection
(7) It allows for escalation

38
Q

Identify the factors they should consider when establishing a reasonable withdrawal rate from a drawdown pension (9)

A

(1) Their income requirements
(2) Their income from other sources
(3) Their tax position
(4) Their investment strategy and growth assumptions
(5) The economic climate and market conditions
(6) The effects of pound-cost ravaging
(7) Charges
(8) Their health and longevity
(9) The death benefits required

39
Q

Outline the factors they should consider when building a diversified retirement portfolio to meet their income needs (10)

A

(1) Diversification
(2) Their ATR
(3) Health and longevity
(4) Their income and capital requirements
(5) Economic climate and market conditions
(6) Charges
(7) Liquidity
(8) Currency risk
(9) Their preference for active or passive management
(10) The level of administration involved

40
Q

Explain how their state pension entitlement works (8)

A

(1) They will receive their state pensions at 67/68
(2) They must have a minimum of 10 qualifying years
(3) They must have 35 qualifying years for the full pension
(4) The full pension is currently £185.15 per week
(5) Additional entitlement can be purchased through class 3 NICs
(6) There is a triple lock, raising benefits by earnings, prices or 2.5%
(7) The state pension is taxable as pension income
(8) The state pension can be deferred (1% per 9 weeks)

41
Q

What are the conditions of a deed of variation and why might they want to pursue one? (8)

A

(1) It must be drawn up within 2 years of the donor’s death
(2) All beneficiaries must agree to the deed
(3) It must refer specifically to the will
(4) It must state its purpose of IHT planning
(5) It must be in writing
(6) It is treated as taking place on the donor’s death
(7) It should not be consideration for money or money’s worth
(8) It passes an inheritance directly to the beneficiary

42
Q

Recommend and justify a suitable life assurance policy to cover their IHT liability (8)

A

(1) A WOL policy
(2) The policy should be on a joint life/second death basis because IHT is paid on the second death
(3) Their nephews should be the beneficiaries
(4) The sum assured will fall outside of their estate and cover the IHT bill
(5) They are good health so premiums should be low
(6) The sum assured can escalate but this may not be required
(7) The premiums count as gifts out of normal expenditure
(8) The premiums can be guaranteed or reviewable

43
Q

Explain how the use of a spousal bypass trust could reduce their HT bill (4)

A

(1) Uncrystallised pensions can bypass the survivor and pass straight to their nephews
(2) The survivor can still be a trustee
(3) The funds fall out of the survivor’s estate
(4) There is no IHT to pay

44
Q

Identify the process of winding up their estate and explain how their assets will be treated for IHT purposes on second death (10)

A

(1) The estate will be valued on second death
(2) Two NRBs will be deducted from this
(3) Gifts made in the last 7 years will be readded
(4) IHT is paid before the estate is distributed
(5) All relevant parties are notified
(6) Probate is applied for
(7) The net estate is distributed to beneficiaries
(8) Pensions pass to nominee without probate
(9) Pensions remain outside of the estate
(10) State pensions cease on death

45
Q

Explain why their wills may be unsuitable (3)

A

(1) Mirror wills leave all assets to the survivor and then subsequent beneficiaries
(2) The survivor may remarry and leave those assets to the new spouse
(3) The survivor may disinherit subsequent beneficiaries

46
Q

Outline the factors that should be considered when planning to meet long-term care fees (6)

A

(1) Their health and longevity
(2) The level of care they require
(3) The current cost of care
(4) Their care budget
(5) Inflation
(6) Their entitlement to state benefits

AF5 (3 decks)

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