Exam Flashcards
Describe discretionary fund management (11)
-Where a clients buy and sell decisions are made by a portfolion manager
-Adviser makes changes without input from client
-React quicker to market to maximise returns
-Fees/costs are involved
-investments returns are not guaranteed
-income payments are practical for using for gifts (annual exemptions)
-Specialist or general
-Handles the active management of funds if little experience in investments
-Reviewed regularly to maximise opportunities
-Reviewed regularly to maximise tax efficiency
-Wider range of investments available/potentials saving costs
-Consolidated report of all and tax statement
Advantages/disadvantages of advisory fund management (3,2)
-Less transactions=lower cost compared to discretionary
-larger range of products (lower minimum spend compared to disc)
-Lower min invest=lower costs
-Less specialist/bespoke
-Missed opportunities as have to check with client
Factors to consider at next annual review (10)
-Objectives/personal circumstances
-State of health
-Use of allowances
-Economic/market changes
-Legislation changes
-New products launched
-Any inheritances
-Use of nomination forms (pensions pass tax free)
-Change in tax status (reliefs)
-Investment performance of schem
Purpose of a nomination of wishes and how can it be changed? (3,1)
Helps trustees decide who death benefits should be paid to
Can be changed by completing a new one
Makes sure lump sump and relevant drawdown is available to beneficiary
Reviewing at 75 worthwhile to ensure pass tax efficiently
What is the pension protection fund? (4)
For if employer becomes insolvent
90% of db scheme accrual
100% if in payment/ill health/survivors
No cap
50% spouse pension on death
Reason to stay in a db scheme (9)
Pension is guaranteed for life-no longevity risk
Spouse pension benefit
Inflation proofed. Min statuatory rates of escalation or higher if schemes chooses to
Death in service eg 3x ls
Simple-less admin
No charge in initial and ongoing basis
No investment risk
Pension protection fund is employer becomes insolvent
100% if in payment/50% spouse pension/90% if not/no cap
You know what your pension
Employers contribution is deductible as business expense
What is a discounted gift trust? (8)
-Invest capital into
-Immediately reduces estate
-For if you don’t want your beneficiaries accessing your money whilst alive but want to reduce estate
-Typically into an investment bond that pays out 5% pa
-Can do relative to atr
-Settlor fund are the Regular payments for remainder of lifetime (usually 5%)
-The beneficiaries fund-determined by the performance of the investment
-defer payment and entire trust and growth could be iht free in 7 years
-Typically setup under a discretionary (trustees can appoint any beneficiary within the class of potential) or bare trust (fixed from the outset)
-Transfer of value is discounted by any future payments the settlor might receive during their lifetime
-CLT if discounted above nrb//pet if bare
-must be registered with hmrc
Disadvantages of a discounted gift trust (5)
Inflexible-withdrawal payments cannot be altered. You cannot affect when you draw income
Cant be in adverse health
Liquid capital required
Iht periodic (10 year) and exit charge can be applied if discretionary. But discounted by future retained payments
Could produce a clt if settlor has gone over the nrb-as into discretionary trust-charged at 20%
Why is underwriting required for a discounted gift trust (4)
The discount is the value of the potential future payments back to the settlor eg 5% per year
This is discounted from the transfer of value for iht purposes
If into a discretionary trust its a clt//bare is a pet
Medical underwriting determines life expectancy therefore the amount of payments the settlor may expect before dying
Can a discounted gift trust change is assets?
If the trust provision determines it is possible
A surrender of an investment bond may give rise to a chargeable gain
Trustees need to ensure the retained payments can still be paid to the settlor regardless
What happens if the settlor dies after taking out a DGT? (4)
Outside of estate
Settlor cannot take anymore payments
If survived 7 years no iht due
If dies within 7 years it will be a failed pet or clt. the transfer of value can be discounted by retained payments
Benefits of doing Class 3 nics rules, mechanics, process (7)
-
-Provides guaranteed income (not reliant on investments
-inflation proofed (triple locked)
-In line w/couple financial aims
-Needs to be done before 6 years after
-extended to 2025 for period 2006-2016
-Weekly rate paid (if within 2 years, rate of what it was, >2 years rate of how it is now)
-Paid through direct debit or online at gov.uk
What is state pension triple lock
Guarantee that sp will not lose value in real terms
It included 3 separate measures of inflation to ensure
How do i pay class 3 nics (9)
Check for NI credits (ext periods of unemployment)
-If registered for child benefit, there may be previous years she can claim credits for
-Check with the pension service re. How many missing years, how many years missing, what cost
-Pay class 3’s 2006-2016 up to 2025
-6 years gap after
-She can pay this even though already taking pension
-carmen should make a lump sum contribution to buy back as many years as she can up to full entitlement
-paid to hmrc
-each week bought back will cost £15.85
How do you defer the state pension (7)
-can only do once
-you have to claim state pension-simply defer claiming it
-get increased payment for every 9 weeks of defferal
-1% increase
-no LS
-taxable
-can opt at point of payment or anytime
-good if currently higher tax payer-tax efficient
Why would you defer your state pension (2)
If youre gonna drop a tax bracket
If you dont need the income now
How do you defer the state pension if already in payment
Notify the pension service in writing or by telephone
What are the qualifications for a discounted gift trust? (4)
Have a net estate that exceeds £325k
Have capital to invest
Require access to capital but happy to restrict this to fixed regular payments
To be aged between 18-89
Child benefit rules (9)
-means tested on income
-charge over £50k joint
-not taxable
-paid monthly
-benefit for first child then second et
-highest earner pays the tax charge
-paid via self assessment each year
-1% reduction of child benefit for every £100 over
-once hit £60k benefit is wiped out
Benefit of tracker fund v actively managed (passive v active) (6)
-Higher charges for actively managed (1%pa vs 0.2)-difference compounds each year
-Performance depends on the specialism of the fund manager
-Managed funds tend to buy and sell more frequently meaning charges which reduces returns and increases costs
-Trackers offer diversified exposure
-determined by share price of lots of different companies
-one fall in certain company will not affect performance overall
What are the two types of screening for esg? And describe
-positive screening-specifically selecting companies which pro-actively protect environment/value match with client. Could include controversial sectors if they fulfill strong Esg. commitments.
Adviser would identify an issue where investors want to have a positive impact. Environmental may not score good but good governance may mean potential to improve through governance.
-negative screening/count out certain types of company eg tobacco.
Benefits of global equity tracker funds (9)
-Diversification across broad financial markets
-mimics performance of the markets
-capital growth and dividends
-low charges compared to actively managed
-less chance of human error choosing funds
-difficult to outperform markets with active stock selection
-simple
-No geography risk-geographical diversification-mitigates single country risk-ensure funds are better protected for retirement needs
-All world or global include emerging markets//world often just covers develloped not china/india
Implementing ESG investments (6)
Explain ESG/explain screening-the impact of negative screening on diversification on returns
Establish their ESG position/areas of concern. Must be measurable and clear
Research info on ESG-can be done by fund manager or by external research providers
Assess clients current position re esg equities
Realign portfolio
Document the Esg position and any changes made. Update the exclusion list and regularly review
Downsides of negative screening (4)
-impact on potential returns compared to traditional allocation
-determining exclusion criteria can be subjective. Different people have different values
-data availability-some companies may not disclose relevant info or provide inconsistent reporting
-greenwashing-companies may engage in presenting themselves as green when they are not
Positives of esg negative screening (4)
You can count out whole sectors or industries based on client preferences
Identify and exclude companies that are deemed unacceptable by investors
Can be used to be socially responsible or to avoid high risk industries with regulatory challenges
Can chose environmental, social, governance dependent on preference
Positives and Drawbacks of emerging market funds? (2/4)
-potential for high growth
-offer diversification so if one country has an economic downturn you have other available
-Tolerance of risk required
political risk
-economic risk
-currency risk
-investment risk
What key info does the cash flow model show? (11)
Current income needs/current expenditure
Further income needs/future capital expenditur
Inflation assumptions
Growth assumptions
Timeframe/longevity
Atr/cfl
Current assets/income from all sources
Downsizing/inheritance
Charges
Use of tax wrapper
Income changes on first death
Describe how salary sacrifice works (9)
-Reduces salary for pension contribution
-employee saves money-reduction in nic’s and employer nic’s
-employer saves on nics
-take home pay can be slightly higher
-Employer pays into ps for employee-higher contributions at no cost to employer/employee
-Employee must agree in writing
-Cannot be retrospective
-Cannot fall below minimum wage
-greater standard of living in retirement
Benefits of investing bonus into salary sacrifice for Sam (10)
-Tax relief @40%
-Tax free growth in tax wrapper
-Increased retirement income
-Improve tax efficiency of current arrangements
-Will benefit from income tax and ni savings
-Employer will contribute further ni increasing retirement fund
-pension is iht free in death
-admin arranged by employer
-higher pcls in retirement
-charges met by employer
Additional information may need in order to advice on sam/kerrys on the suitability of their current financial arrangements
What income coming from isa’s
What interest rate deposit accounts/competitive?
Any salary increases expected?
Is kerry retunring to full time work or phasing?
Claiming ni credits whilst on maternity
What level will employer match for both pensions?
Fees/charges
Performance of s&s isa
What is their state pension accrual? Any missing years? BR19
Pension early retirement charges
Any inheritances due?
Any poa in place?
Any other employee benefits for Sam?
When would they like to screen their investments for esg? Fund options within Sam/kerrys pension
Affordability-define limited surplus
Any private pension provisions
Improve tax efficiency of Sam and Kerrys current arrangements
Maximise pension contributions for Sam 40% tax relief/tax free growth/income
Sacrifice bonus into pension fund
Maximise isa when have surplus
Utilise full psa £500 Sam/£1000 Kerry
Improve tax efficiency of Declan and Carmens financial arrangements
£140k Capital gains-sell units to utilise CGT allowance
-Utilise dividend allowance on the £6375 income. £1000 @0% and £5375 @8.75%
-Bed and isa unit trust
-Transfer of deposit accounts into Carmens name-Potential utilisation of starting rate of savings for Carmen. First £5000 after personal allowance
-Utilise gift allowance
-Utilise outright gifts (pets)
-Consider realising some of the unit trust gains and putting into a discounted gift trust with children as beneficiaries-immediate reduction to estate. Transfer of value as a pet-7 years-reduced by amount of retained payments based on underwriting
Pension input
Dwp benefits for low earners
Consider ns&i
Consider paying into jisa if parent setup
Use of cgt exemptions
Carry forward losses-registered anytime within four years after end of tax year and carried forward indefinately
How does the carry forward of losses work?
Losses from current tax year must be applied against gains first
Losses from previous years can be carried forward indefinitely if registered with hmrc within four years of the end of the tax year in which they are made
The six stages of the financial planning process
Establish the relationship
Determine goals and expectation
Analyse their financial status
Develop plan
Implement the plan
Present the plan
11 stages of determining a savings/investments strategy
Establish relationship
Provide initial disclosure
Fact find
Determine ATR/CFL etc
Determine affordability
Analyse current savings/investments
Research/formulate recommendations
Make recommendations
Suitability report
Implementation
Review
Describe a discretionary trust (10)
CLT if over NRB @20%
Flexible
Assets can be protected if circumstances change
No named beneficiary
At discretion of trustees (settlor can be one)
Long list of potential beneficiaries
Taxed on the trustees (£1000 srb @20
Beneficiaries get tax credit
Periodic (10 years)/exit charges
CGT in trust-has half the srb of £6150 then taxed at top rate of 20/28%
How does a clt occur (6)
When transferring value into trust over nrb
Chargeable at 20%
Paid by trustees
Or grossed up if settlor pays
If settlor survive 7 years no further tax will be due but no refund of the 20% either
Paid directly to hmrc
Describe the 3 parties of a trust (3/5/5)
Settlor
Original owner
Can be trustee (to retain control)
Can be beneficiary (no tax advantageous)
Trustees
Legal owners
Control asset for term of trust
Hold instructions to pass to beneficiary in the future
Or just income
18+ of sound mind and good character
Governed by trust law
Beneficiary
Intended recipients
Some entitlement to income only
At age 18
May have no right to benefit
Can take legal action against trustees
Downsides of salary sacrifice? (3)
Employer benefits dependent on salary eg death in service, sick pay, redundancy may be affected
Dwp benefits dependant on income may be affected
Future mortgages and loans could be affected if calculated using salary multiples
What assumptions can you make before using the cash flow modeller (10)
That salary will increase with inflation
University fees may be requires
Pension pot will grow welp
Debts may increase
Health may deteriorate
Either could die
Future expenditure
Interest rates will change
Inflation will happen
Investment/asset growth will happen
Types of NS&I (7)
Guaranteed by the government
Premium bonds
Direct saver
Investment accounts
Income bonds
Direct isa
Jisa
Features of NS&I premium bonds (7)
Exempt for IT and CGT on prizes
£25-£50,000 input
Can setup for other persons children eg. Grandparent of grandchildren
Parent must provide identification documents
Will be treated as a gift (pet/clt)
Backed by government
Fun way to save-can be gifted
What is a loan trust? (7)
Established if have IHT issues
Settlor loans money to trust repayable at any point
Dont lose control
Trustees invest into investment bond
Growth is immediately outside of estate
Loan repayments funded through withdrawals from investment bond
Regular repayments must not exceed 5%
Loan rejoins settlors estate on death
Outline the process that an adviser should follow when using a risk profiling tool to identify a clients attitude to risk
1.identify the task/set financial aim eg. Plan for retirment
2.Questionnaire (each client completes q’s on priorities, time scales and responses to certain circumstances. And capacity for loss
3. Feed into computer (software produces risk score
4.Results are discussed with client to ensure they match individual perception of their risk profile. Adviser and client agree suitable ATR.
5. Asset allocation-score produced to recommend an asset allocation in line with the efficient frontier theory
Downsides of the ATR process (6)
Different programmes produce different results
Closed questions only-clients cannot express their views or cater for ethical
Can misinterpret
Ignore CFL/need to take risk
Different profile may apply for each financial aim
Results should be discussed to check the clients perception of their profile
Difference of using a discretionary trust over a discounted gift trust
Won’t feature the 5% investment bond Withdrawals eroding the fund
Both outside of estate for IHT after 7 years
Discount is value of retained future benefits this reducing IHT liability
Growth in investment bond is immediately outside of estate
Over Nrb is Clt on both
Taxed same in fund if discretionary trust. Discounted can be setup under a bare trust for different tax treatment
No investment risk
Benefits of carmen and declan using a discretionary trust to fund their grandchildrens university fees (6)
They can be trustees and have discretion over income/capital to the beneficiaries
They can change the outcome at any
Point should they wisj
Not automatically entitled to trust assets at 18 (like bare trust)
When an income distribution is made to a beneficiary it will be taxed at 20/8.75% below £1000 and 45/38.1% over £1k. Beneficiary distribution will come with a tax credit and taxed accordingly-they can claim back. Must be included on their self assessment
Outside of estate after 7 years-they have a IHT issue
Can drip feed income or ls into trust over time
What is the 10 yearly charge in relation to a discretionary trust? (4)
Periodic charge on 10 year anniversa
Paid by trustees by filling out IHT100
Based on value of the trust fund in excess of nrb
6% charge
Sam/Kerry protection arrangements
No sick pay arrangements in place-would have to rely on statutory which only covers a max of 28 weeks. Far less than is needed to cover Sams salary
No sick pay benefits for Kerry. Statuatory only
No income protection for either
Sam is the breadwinner and the family would be impacted through his loss of ability to earn. No family income benefit in place.
No pension death benefits for Kerry although sum accrued in pension pot will pass directly to surviving spouse
They have financial dependant children
No critical illness
Limited surplus cash to spend on protection policies
No Pmi
No Poa in place
They have a 75% ltv mortgage. Only 55% of the loan is covered by the life cover
No cover on second death/no cover if Kerry dies
Some emergency fund-deposit/isa
Would have to rely on limited savings in deposit account and Isa’s
No nomination of wishes to ensure pension passes to correct beneficiaries on death
