Ensure that they can retire when Nick reaches age 60 Flashcards
Identify the additional information that you would need to advise Nick and Shirin on their aim of retiring when Nick is age 60
- What are your objectives
- Willingness to defer retirement past age 60
- Views on inflation and willingness to take risk in this respect
- Any intention to phase retirement
- willingness of their companies to provide SS or higher contributions
- likely tax position in retirement
- Willingness to downsize
- CFL?
- Fund performance to date
- Income / capital required for their travel plans
- Income from savings /investments
- Attitude to downsizing
- Expected inheritance
- Lifestyle / smoking status
- Pension contribution history / carry forward history
- State benefit entitlement
- Asset allocation on pensions / charges / statements / fund choices
- Any other pensions
- Budget
- Current expenditure need / ability to maximise pension contributions
- CFL
- Nominations done on pension scheme
Identify any reasonable assumptions you might make in relation to Nick and Shirin’s retirement planning
- They continue working full time until Nick is 60
- They both receive full state pensions at 68
- They continue contributing to pensions and these contributions increase
- They stay in good health
- They are willing to use other assets to generate an income
- They have no more children
List the key factors that a financial adviser would need to consider when advising Nick and Shirin on funding their retirement planning strategy
- How long will income be needed for
- current expenditure and planned expenditure
- Budget
- State pension age
- Capital needs
- Asset allocation of funds
- use of pension annual allowance and carry forward
- use of tax allowance/ISA
- charges
- Priority of objectives
- CFL / ATR - may differ from goals
- market conditions / inflation assumptions
- required / expected rate of return on investments
- predicted income sustainability
- impact of death / serious illness on plans
Describe the process an adviser could use to ensure there are sufficient funds under an existing pension scheme to provide the necessary level of target benefits at the required retirement date.
- Establish the income required, allowing for inflation
- Calculate the fund required based on assumed/agreed annuity rate
- Allow for pension commencement lump sum requirement
- Calculate existing benefits at NRD using assumed or agreed growth rate
- Include ongoing funding
- Calculate the shortfall and increased contributions required
- calculate sustainable withdrawal rate for FAD
- Allow for any PCLS to be taken at outset
- Obtain state pension forecast
- Ongoing reviews needed
Outline the factors an adviser should consider and the process they should follow when recommending a fund switch for Shirin.
- Fact finding / know your client
- Assess ATR / CFL
- Timescale
- Charges
- Performance
- Fund choice available
- Asset allocation
- Select fund to match ATR
- Present Shirin with documentation
- Obtain permission to implement
- Suitability letter
Recommend and justify ways to help with their retirement planning objectives / ways to enable Nick and Shirin can retire when Nick is 60
Max pension contributions:
- Employer matches
- 40% tax relief
- help pension fund growth
- funds sit outside of NHS
- use of carry forward if affordable
WPP:
- if affordable investigate use of SS
- saving on NI
- companies may add NI savings to their pensions
- may reduce high income child benefit tax charge
- review fund choices to ensure aligned to ATR - especially Shirin
Utilise annual ISA allowance:
- tax free growth
- add to income in retirement
- review funds and performance
Both to get State pension forecasts:
- Ensure they know what they will receive
- obtain state pension forecast, plug any gaps with NIC 3
Review fund choices:
- Shirin’s pension fund choice does not match her ATR
- Ensure funds are sufficiently diversified
Review expenditure:
- Make savings where possible
Explain to Nick and Shirin the advantages of maximising their workplace pension contributions to provide an improved income in retirement rather than using a S&S ISA.
- 40% income tax relief
- Higher contributions
- Employer contributions match up to 8%
- Cannot withdraw before NRA
- creased funds increase pension size and benefit form compound interest
- SS means reduction in NI paid
- Increases size of pension and PCLS
- pension contributions extend basic rate tax band, meaning they benefit from £1,000 not £500
- enables Shirin to reduce high income child benefit tax charge
- pension sit outside IHT
Recommend and justify a suitable and tax-efficient investment for regular savings for retirement provision for Nick and Shirin
- As they are aged below 40, they can both invest in a lifetime ISA
- Annual investment limit is £4k, part of total ISA limit of £20k
- Will receive 25% government bonus
- £1,000 for every £4,000 saved
- Until they are aged 50
- Funds can be withdrawn tax free from age 60
- If they withdraw funds for purpose than there is a 25% charge, unless over 60.
Explain the benefits of them being members of their workplace pension scheme
- Tax relief on contributions
- No admin
- Employer matched contributions
- Can use salary sacrifice to save NICs
- Employer may rebate NICs
- Benefit from DIS is valuable as no other life cover
- IHT efficient fund
- Tax efficient fund
- tax efficient growth
- Range of income options at retirement
- Wide range of investment funds to meet ATR
- normally lower cost
- Increased pension in retirement / PCLS
Identify the benefits to Shirin and her employer if her employer pension contributions are increased
Benefits to Shirin:
- build up pension / PCLS
- tax free growth within pension
- income tax efficient death benefits
- IHT efficient
- Can put in place death nomination for Nick
- Not a P11D benefit
Benefits to Employer:
- Reduced corp tax / allowable business expense
- NIC savings
- Employer contributions not limited by income
- In trust so protected against bankruptcy
Explain the factors Shirin and Nick should consider when deciding whether to increase their contributions to their workplace pensions rather than investing in a Stocks and Shares ISA.
- Tax relief on contribution for pension/no tax relief for ISA.
- Employer contribution.
- Lower contribution levels for pension (£18,000).
- Pension outside estate for Inheritance Tax.
- No administration/no advice costs.
- Only 25% tax free/remainder taxable.
- ISA can be withdrawn all tax free.
- Carry forward.
- Cannot access until 55/no temptation to spend.
- Fund can be passed to anyone Inheritance Tax free/ISA can only be passed to spouse or Inheritance Tax free/pension can be Inheritance Tax free.
- Protected from creditors
State the benefits and drawbacks for Nick and Shirin of taking up the option of salary sacrifice in respect of their employer’s qualifying workplace pension scheme.
Benefits:
- Reduced employee National Insurance (NI) and reduced Income Tax.
- Employer may share NI saving.
- Reduced administration/no need to reclaim HRT via Self-Assessment
- Can help taxpayers with PA problems
- Will reduce Shirin high income child tax charge
- companies pay lower NIC and may give difference to them
Drawbacks:
- Reduced salary for death in service purposes.
- Reduced bonus if linked to salary.
- Lower salary for mortgage purposes/state benefits.
- Lack of liquidity/cannot access until 55/57.
- sacrifice needs to be irrevocable to be effective
- Income reduced for protection and mortgage purposes
- Income reduced for lending purposes
- Income reduced for limited state benefits purposes
Explain briefly to Nick and Shirin the option of a lifetime annuity to provide them with an income in retirement.
- Take 25% PCLS
- use remaining funds to buy annuity
- income taxed under PAYE
- capital would not be included in estate but any capital guarantee would be liable to IHT unless under trust
Explain briefly to Nick and Shirin the option of a FAD to provide them with an income in retirement.
- take 25% PCLS
- enter into flexi access drawdown
- withdraw funds as monthly income or ad hoc - any flexibility
- Drawing funds triggers MPAA - £4k rising to £10k
- Taking an UFPLS will trigger MPAA
- potential for tax free gains on underlying funds
- funds outside of estate
- death benefit is tax free income on death before 75
- funds can remain outside of estate on second death if income not drawn
Explain briefly to Nick and Shirin the option of a UFPLS to provide them with an income in retirement.
- take when required
- 25% of each UFPLS is tax free, 75% taxed at marginal rate
- taking UFPLS triggers MPAA - 4k now rising to 10k
- potential for growth in funds not accessed
- funds are outside of estate
- same death treatment as FAD
