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
What is a fib and when is it used? (10)
-Suits families with young children
Often used to cover the financial dependancy of children
Indexed to keep pace with inflation
Cheap so good for tight budget
Term decided at outset
Pays out until the end of the term
Can be level, decreasing or increasing payments
Decreasing-If claim made later in term payout will be less
monthly, quarterly, annual LS instalments after death of assured within terms
Tax free income
Simple underwriting
Can be placed in trust
Known cost/affordability
What is the pension increase exchange? (7)
Where member is offered higher initial pension
In return for giving up future guaranteed increases
Good if want to enjoy higher income whilst they are active and healthy in early years of retirement
May receive a higher pcls
If in poor health they may want to have a higher initial
If live linger than expected may be impacted
May impact entitlement to means tested state benefits as higher in omr
What happens when a scheme enters the ppf? (5)
PPf instructs scheme to carry out valuation
Valuation is theoretical cost of buying out the schemes benefits with an insurance company
scheme trustees develop recovery plan
Increase member /employer contributions/reduce/stop all future accruals/revise investment strategy/extend nra
If significant changes it must consult with employees
What are the three types of guarantee and how are they taxed?
Guarantee on a scheme pension-income taxed as recipients pension
Guarantee on lifetime annuity-received free of income tax
Guarantee on lifetime annuity above age 75-taxable on recipient
What is a survivors annuity (3)
Where an annuity is setup as joint life with the contingent interest paid to dependant or nominee
Free of income tax before 75
Taxable on beneficiary after
Features of Guarantee periods on a scheme pension (4)
Can be guaranteed for no more than 10 years
Can be set over a certain period where if a member dies in that period the recipient can continue to get benefits
Hmrc do allow a scheme to cease payments if recipients Remarriage/reach 18
Possible to commute to trival commutation lump sum instead of income
Features of Statuatory maternity pay and how does that work with work maternity pay? (11)
Max 39 weeks or when return to work in that period
Must inform employer of pregnancy
Confirm with a form from your doctor/midwife
Min 28 days notice of when taking maternity
Starts on day of maternity leave start
£172.48 pw or 90% of weekly rate (whatever is lower)
Employer may top up to full pay/half pay through contractual maternity pay
Taxable and NI
Nothing after 39 weeks (9 months)
Could take annual leave accrued
To qualify-must earn at least £123 a week for min 26 weeks prior
State the additional information fin adviser would need in order to review sam and kerry investments in light of their esg preferences (12)
How the couple would define ethical investing.
Their understanding of environmental, social and governance practices.
The measures of ethics that are acceptable to Sam and Kerry.
Knowledge and acceptability of positive, negative or neutral screening to the couple.
Their experience of assessing investments for ethical practices.
Ability to carry out ethical screening personally.
Views on trusting ethical screening to a fund manager.
Depth to which they want their investments to be screened, such as:
-just the companies they invest in.
-the banks that the company uses.
-the practices of the company’s customers.
The customers that Sam and Kelly’s deposit-holders deal with, and the companies that they finance.
Which companies are held within their ISA funds and the extent to which they apply ethical / ESG practices.
Companies invested in by the funds held within the couple’s workplace pension schemes.
The couple’s views on restricting investment choice to companies that meet their criteria.
Whether they expect ethical funds to have a positive or negative effect on fund performance.
Past performance of alternative investments that meet their criteria.
Reasons for holding these views: is it moral, religious, social, or environmental values?
Declan and Carmen wish to ensure they have sufficient income throughout their retirement. Comment on the couple’s current pension situation in relation to their State Pensions and Declan’s DB scheme pension (20)
The couple are both currently retired, and both are past State Pension Age.
We do not know their required income levels and capital requirements.
They have a medium attitude to risk
.
They have two adult children and four grandchildren.
They have a mortgage-free property valued at £570,000, no apparent debts, as well as other savings and investments.
Both Declan and Carmen are in receipt of their Single Tier State Pension.
Declan is currently in receipt of £10,300 per annum gross from his State Pension, which appears to be more than the current maximum.
He could have a protected payment which will escalate only in line with CPI.
Carmen is in receipt of £6,200 state pension as she has an incomplete NI record due to extended periods of no paid employment, although we don’t know the reasons why.
Both protect the couple from longevity risk as they are paid for life.
State pensions are paid gross but are taxable.
The state pension is usually escalated in line with the Triple Lock; so the higher of 2.5%, CPI and NAEI changes, giving the couple valuable inflation proofing.
State Pension deferral is an option for both, even though payments have started.
There is the option to top up Carmen’s NICs to obtain her maximum entitlement even though she has passed SPA and is already receiving payments. The deadline to buy back extra years has been extended to April 2025, allowing Carmen to pick up years from as far back as 2006.
Declan has an annual £45,000 scheme pension in payment.
He will be entitled to statutory escalation / indexation. We have no idea if the scheme add any discretionary increases, or its funding status.
This income is guaranteed to be paid for as log as Declan lives which, as he is in good health, could be along time!
We do not know if the scheme provides any death benefits for Carmen, the amount or in what form.
We don’t know Declan’s views on this guaranteed income stream versus taking a CETV and accessing flexible benefits.
Unlikely to be anything built in for the children, as they would not be classed as dependents, whereas Carmen would be as Declan’s spouse.
Outline the main benefits of using cash flow modelling to analyse whether Declan and Carmen are likely to have sufficient income throughout their retirement.(8)
Highlights periods where income or capital is in deficit / surplus.
Allowing Declan and Carmen to take any required actions now to either prevent a deficit or to maximise opportunities.
Can help our couple achieve their aim of obtaining a sufficient income throughout their retirement.
Analyses different scenarios such as living too long, running out of monies, not having enough for a comfortable retirement.
Can demonstrate the impact of increased inflation on income and capital.
-And the effects different scenarios have on levels and requirements.
Pinpoints areas of finance where costs can be cut, or additional investments made.
Identifies potential issues or opportunities.
Gives Declan and Carmen the opportunity to discuss with an adviser how to plan for and / or overcome potential shortfalls.
State the reasons for not solely relying on cash flow modelling to ensure Declan and Carmen have sufficient income throughout their retirement.(11)
The couple may live longer than expected.
The process uses many assumptions; it is an estimate only.
Inflation assumptions may be incorrect.
The investment growth assumptions may not be met; these are not guaranteed and there may be adverse market conditions.
The couple’s personal circumstances may change.
Taxation rules / legislation may change.
Government’s attitude to underwriting public-sector pension schemes may change.
ATR / CFL may change.
Charges and fees may be higher than expected.
The process provides a snapshot at one point in time; in practice, regular reviews will be required.
There could be input errors / human error / misunderstanding of information by Declan and Carmen or by their adviser.
What is Statuatory minimum escalation for db schemes? (2)
Typically cpi to a max of 2.5% >2005
Different escalation rate for different years
What is protected payments in relation to the state pension? (3)
The difference between someone starting amount (the excess over the state pension at 2016 eg/ £155.65) is the protected payment
Paid on top of state pension
Protected payment increases in line with CPI each year in April
What is pound cost ravaging (4)
When markets are falling
Effect of having to cash in more amounts than usual to achieve same amount
In order to support a regular amount of income
Eg. Declans/carmens isa/unit trusts
What is sequencing risk?
That the order and timings of your clients investment returns are unfavourable leading to less money for retirement
Benefits of taking natural income over fixed? (5)
Natural doesnt erode capital
Eroding capital= less natural income
Natural isn’t a disposal for Cgt. Fixed could trigger a disposal for CGT as selling capital
Its what dividends do naturally,
Doesnt affect capital element
CGT allowance in decreasing leading to higher potential charges in 2023/24
Benefits of taking fixed income (selling) or natural (divs) (4)
Could use previous losses against any chargeable gain
Amount is defined in line with budget so know what receiving at each interval
Natural income can fluctuate eg dividends
If just take natural, the cgt allowance remains unused, cannot carry forward
Describe the cash flow modeller process
Income v outgoings
Outgoings in the future
When events will take place
Impacts of Ltci
Impacts on death/death benefits
Big capital expenditures/uni costs
Impact of IHT planning
Impact of inflation
Investment returns/performance
Life expectancy
Costs/charges
Put into software
Generate what if scenarios
Highlight problems
Put plans in place for surplus/deficit
What is a cetv and who can do it?(4)
Cash equivalent transfer value
If they’d prefer flexibility over guaranteed payments
Unfunded public sector schemes dont have automatic right
Cash lump sum that is then invested in a new pension arrangement
Explain how these investments could help Declan and Carmen with their aims to have sufficient income in retirement and improve the tax efficiency of their financial arrangements. (11)
The couple are using equity income funds predominantly, with the aim of generating income.
S&s
Isa
Asset allocation would be geared to a rising income stream.
Yields would be income tax free, and therefore higher
Yields would not need to go on the couple’s annual tax returns.
Capital growth would be tax-free, saving Declan and Carmen 20%/ 10% capital gains tax respectively above their annual CGT exemptions.
ISA are liquid assets so could be used for any ad hoc capital needs.
Unit trust
The couple have their unit trust held jointly, meaning income would be tax-free up to each of their annual £2,000 dividend allowance; £4,000 between them.
They could realise gains of up to £12,300 each; £24,600 combined without a CGT liability.
They could gradually bed and ISA their unit trust investment into the more income and capital gains tax efficient ISAs.
This could boost the couple’s retirement income, maximise more of their allowances and help with their objective of sufficient income in retirement.
Both ISAs and the unit trust would form part of their estate for inheritance tax.
Declan and Carmen have noticed a decline their ISA fund values.
Explain what pound cost ravaging (or reverse pound cost averaging) and sequencing risk are, and how these may have played a part in the decline of the fund value. (10)
Pound cost ravaging
opposite to pound cost averaging.
When withdrawals are taken from a fund during market downturns:
more units will need to be sold to provide the money for Declan and Carmen’s £500 a month fixed withdrawals from their ISAs;
-this can lead to a rapid reduction in the value of the fund;
-exaggerates the effect of volatility.
Sequencing risk
where higher fund withdrawals are taken in the early years of taking income from a fund, such as in retirement, in an environment of poor market returns
the fund value will struggle to recover due to the drag created
If good growth within fund in early years theres sufficient build up to not be as impacted by withdrawals
With the market volatility over the last few years and their retirement this will have contributed to their withdrawals having an impact on the fund values.
The concern over this could have lead to them wanting to ensure that they will have sufficient income throughout retirement.
Declan and Carmen have been taking a fixed amount of income from their ISAs, but only the ongoing dividend income from their unit trust portfolio.
Explain to Declan and Carmen what they should take into consideration if they were also looking to start taking a fixed level of withdrawals from their unit trust portfolio, rather than continuing to take the ongoing dividend income from the funds.(12)
When a fixed level of income is taken, its not always taken from returns from the fund.
Part of the withdrawal may be from the capital
Pound cost ravaging or sequencing risk can apply if the withdrawals are made during market downturns. Adversely affecting the fund growth.
This would lead to capital erosion of the fund value.
Capital withdrawals on the unit trust portfolio would lead to Capital Gains Tax calculations which, as the portfolio is currently showing a £140,000 gain, could lead to a CGT tax charge.
They do not appear to be making use of their capital gains tax exemptions currently, and as a joint portfolio, they could use both of their exemptions.
They would have a known level of income that could support their expenditure in retirement.
If they kept to the current ‘ongoing dividend income’ this would fluctuate each year and not provide them with a guaranteed amount.
Capital withdrawals from the portfolio would reduce the future fund growth.
It would also reduce the level of natural dividend income received by the fund.
If they continued to take the ongoing dividend income then they would not be taking capital withdrawals from the fund, leaving their CGT exemptions unused.
The CGT exempt amount is reducing from £12,300 in the 22/23 tax year, to £6,000 next tax year, and £3,000 the year after.
Declan and Carmen have a number of different investments and savings.
Outline how the couple can use their existing ISA and unit trust investments to help maintain their retirement standard of living whilst maximising tax-efficiency and suitability.(8)
The couple currently have between them stocks and shares ISAs and a jointly held unit trust.
All these investments are all relatively liquid.
They can access the ISA investments without CGT implications, currently saving 10% or 20% in CGT above their annual exemptions.
They are over the IHT thresholds currently. Using their investments for income and capital needs can help to reduce any IHT due on second death, as they will be depleting these assets.
Some of their ISA and unit trust investments could be in funds that do not align with the couple’s medium ATR (we need more info on asset allocation of UK, European and Global Equity and UK Equity Income funds).
As a result, using these will start to balance their overall portfolio to the medium ATR they are more comfortable with.
They could move the funds in Carmen’s S&S ISA and the couple’s joint unit trust to ones that distribute income by switching to distributing funds.
By encashing the unit trust over a few years, the couple can use each tax year’s CGT exemption, although the exemption amount is reducing in future tax years.
Benefits of state pension deferral for declan and carmen (6)
Both increased payments helping with retirement aim
1% for every 9 weeks/5.78% for each year
Guaranteed for life and avoid longevity risk
Income escalated in line with triple lock-beating inflation risk
Investment risk avoided
Greater peace of mind knowing it will be higher and guaranteed
Features of employment and support allowance (esa) (11)
Money help with living costs if unable to work
Support to get back into work
Pay class 1 nics-means tested
Counts towards ni credits for state pension etc
Means tested on nics in assessment phase/not after
2 rates (1 for those those in work related group/1 for support group)
Paid every 2 weeks
Administered by dwp
Can claim whilst working less than 16 hours a week/do not earn over £167 pw
Stop at state retirement age
Taxable
Describe the cash flow modeller process (8)
-Establish likely expenditure required (broke down by fixed v discretionary and capital requirements)
NEED
-Consider health/longevity
-potential ltc costs (regular or lump sum)
HAVE
Consider what they have -list
Assumptions made (health, inflation, costs/charges/risks)
Computer software
What if scenarios
Surplus/deficits
Plans in place
Considerations for taking a fixed income over continuation of dividend payouts for carmen and declan (10)
Fixed withdrawals aren’t always covered by natural distribution/returns
That means some of each withdrawals must come from capital
If made during a downturn, pound cost ravaging or sequencing risk could adversely affect the funds growth
Capital erosion of fund value
Could lead to capital gains tax charge-already showing a large gain
They dont appear to be using their cgt allowance and could as joint £12,300 eaxh
Capital withdrawals will reduce future fund growth
Would also reduce natural dividend
If they didnt take capital then their cgt allowance would go unused
The cgt amount is reducing from £12.3 to £6k next year and further to 3k after
What can affect the viability of a db scheme? (8)
Funding status-the scheme trustees have to do a valuation every three years
Done by comparing its assets to its liabilities
If scheme in deficit it must produce a recovery plan
Agreed with employer and pension regulator
TPR sets out advice on how trustees should track financial strength
If employer becomes in solvent it will transfer to PPF to determine if over or underfunded.
90%/100% 50% spouse same with death ben
Maximum cpi cap on escalation which will see the fund erode over time eg max 2.5/5% dependent on when accrued
What is longevity risk and what does it apply to
The risk benefits wont last. Not a problem with state pension or db scheme
Ppf protection in place for declans db pension and when could this be available? (10)
-Been available to db schemes that start winding up from 6th April
-where the scheme is underfunded and employer suffers and insolvency event
-must be insufficient scheme assets to provide member benefits equal to ppf min levels
-assessment period can be 12m-3years
-no further benefits can be built up and no cetv paid
-100% of declans £45k protected
-no cap
-as he is a pension member (took benefits from scheme nrd and not earlier)
-stat inf proof capped at 2.5%
-50% spouse pension would be built in
What could affect carmens/declans atr/cfl/tolerance? (12)
Timescales
Personal investment experiences
Existence of dependents/spouse
Emergency fund requirements
Economic/legislative environment
Influence of family/friends
Change of requirements in cost of living
Levels of savings and investments
Guaranteed income via deca db and carmens annuity
Fact their home is owned mortgage free
Having inflation lined benefites
Ability to increase carmens sp via class 3’s
Isa’s on death and Additional permitted subscriptions (12)
-Must be living together at death
-Can be made to a cash, s&s, innovative isa, lisa (max payment limit applies)
-Will increase survivors to £40k
-Can inherit the allowance regardless of whether in receipt of the benefits through the will
-Value is value of isa on death or date of probate (whatever is highest)
-3 years after death or 180 days after estate administered
-Can keep in original isa, transfer to own, open up new (you can have more than one isa type)
-Counts as previous years subscriptions
-Surviving spouse must liaise with the isa manager, completing an application to facilitate providing various info name etc.
-or executor can close account or sellf investments/release fund to beneficiaries
-admin of estate complete
-can then invest in line with own atr
What is a home reversion plan? (9)
Keeps lifetime tenancy
Sells part or all @crap price=gets lump sum eg1/3 of market price
Can still gain from future appreciation on part not sold
Can release in tranche
Cannot make change
Improvements expected
>65’s
Older you are the more money you’ll be able to release
Retain share for iht purposes
What is equity release? (8)
-Lump sum or drawdown
-for over 55’s
-rate dictated on length of tie in/age
-loan against property/repaid when sold
-interest applied at fixed rate and rolled up and compounds
-benefits might be affected
-reduces estate
-very expensive in current market
Deferring state pension considerations (9)
Can defer at any point (only once)
Min 9 weeks to get 1% increase 5.8pa
No death benefits so lose if dont use (estate can claim 3 months in arrears)
If HR tax payer may be beneficial to defer until BR
if in good heath you coudl defer for a higher income later
No lump sum/income only
Can defer at point of payment or when in payment
Longevity risk avoided
Investment risk avoided
Describe the features of an annuity (9)
Can take it with money remaining after taking pcls
-not a trigger for mpaa
-level set at outset
-guaranteed for life
-underwritten to determine persons life expectancy/longevity
-annuity rates are linked to interest rates so likely to be high currently
-guarantees can be built in so spouse benefits but no good if they also die
-annuity is taxed only on the interest element, not the return of capital
-indexed to keep up with inflation
Benefits of using a platform (8)
-Convenience-all investments in one place
-Execution only
-Wide range if investment funds and choice of managers
-access to different asset classes that align to their medium atr
-One simplified report for tax return purposes
-Online access can give our couple up to date values easily
-Automatic rebalancing is available
-a platform can help simplify things for our couple
How do you setup a poa (6)
Lasting power of attorney health and welfare should be setup
Lasting power of attorney property and
Financial affairs
Attorneys setup (normally spouse and children)
Must register with office of public guardian/pay fee
Person must be consulted on all matters if has capasity
Can manage spouses bills/accounts /financial affairs
4 benefits and 4 dbs of lpa
-Can document their wishes in relation to welfare/financials
-Peace of mind for family
-Avoids delays in court of protection if dont have one
-ensure trusted attorneys are in place
Iht planning is restrictred
Lpa cannot be revoked ince capasity lost
Charges involved
Delays in setting up
Describe the up and downs of pound cost averaging (6,4)
-Rather than buying shares with a ls you regular buy shares so over the average it works out better
-share prices rise and fall
-can be favoured during volatile markets
-an investor who buys as lump sum may miss out on buying cheaper shares
-this could impact their returns
-if an investor is nervous about the stock market they can invest gradually giving peace of mind
Downside
If the market goes up that means you could have bought all your shares at a cheaper price=higher return
Anything not invested is likely liquid cash and has inflation risk
The market will still go down and impact returns
Delaying gives it less time to grow
What responsibilities does a trustee have? (15)
Managing the money/assets in the trust for the benefit of the beneficiaries
-exercise their discretion over the income/capital of the trust between potential beneficiaries
-can assign own or have an independant professional trustee
-consideration should be given into who
-avoid losses
Ensure they are registered as the legal owners/hold the title deeds to property
Act in the best interests of the beneficiaries with due diligence and integrity
Avoid conflicts of interest
Treat property as if it were their own
Protect trust property
Keep proper accounts, report to hmrc
Review investments, invest cash immediately
Ensure investments are suitable/diversified (standard investment criteria)
Obtain professional advice if appropriate
Invest cash appropriately
How would investing deposit account monies in an PLA help with retirement income (8)
-Additional source of income for retirement
-Good health so normal life expectancy
-Tax as savings income psa of £500/£1000 available
-Indexation can be built in
-Can be setup on joint life, passing to the survivor on first death, greater peace of mind
-Cash sitting in deposit is eroded by inflation, interest likely to be low
-Deposit acc will not be providing a real return (above inflation)
-Annuity income will be higher than conventional income due to return of capital
What are the different types of annuity (4)
Level annuity-pays same income over time. Vulnerable to inflation over time. Higher starting income
Escalating annuity-rise each year at fixed rate
Impaired/enhanced annuity-pay out if health/lifestyle may shorten your lifespan. Requires eligibility
Lifetime annuity-income for life
What is a purchased life annuity?
-Immediate needs annuity
-
Features of NS&I premium
Bonds (10)
Exempt for IT and CGT on prizes
£25-£50,000 input
Can be held in beneficiaries name
Can setup for other persons children eg. Grandparent of grandchildren
Parent must provide identification documents/hold investments
Winning scan be reinvested to increase the value held in plans
Can buy when over 16
Will be treated as a gift (pet/clt)
Backed by government
Can access when you wants
Interest rate funds prizes
In line with obj
Downsides of ns&i premium bonds 2)
Not inflation proof which might not suit dec and carmen with uni costs bound to increase
Fully available at 18-no good for objectives
What is a money market investment (3)
When banks building societies need to meet sudden cash demands
Like a bond-for a fixed period at a fixed rate
Treasury bills, commercia bills, cert of depositis
What is a friendly society policies (6)
-£25pm or £300 as monthyl installment
-or £270 as lump sum
-can be held in the beneficiaries name
-no tax on income or gains if held for 7.5 years
-funds grow tax free
-deposit, managed/mixed funds and with profit
-fairly high degree of security
How would carmen and declan setup a trust (5)
As settlors they select trustees (at least two in case in dies. Themselves so retain control over distribution of assets//if uncomfortable couldnasign profession trustee)
Define pot beneficiaries (can include classes of beneficiairies to capture unborn grandchildren//avoid themselves to not further iht)
Settlors decide how assets in trust should be used via trust deed
Create letter of wishes-tells trustees how to deal with assets
Register with hmrc
What is the difference between a dgt and loan trust (6)
With a loan trust there is no transfer of value, there is no gift
Whereas with a dgt there is, discounted the the value of the future retained payments
For both the growth is outside of the estate
Gift exemptions can be applied so loan doesnt have to be fully repaid
Both use the 5% withdrawals
Dgt is an immediate reduction in estate for iht, loan trust is not
Benefits of a loan trust (9)
-Being in a bond reduces admin duties of trustees
-iht saving over time-growth
-Regular payments
-Payments not subject to tax
-if keep to 5% repayments it will stop the trust paying income tax on withdrawals
-dec and carmen could be trustees retaining control
-loan payments could be used for grandchildrens uni fees
-within annual iht amount
-5% withdrawals would mean repaid in 20 years
Iht process (11)
Clts/pets in last 7 yrars
Apply exemptions £3k
Determine if any clts have been paid at 20%
Timeline all the transfers in order
Determine available nrb (own and inherited)
Apply failed pets
Taper relief
Lifetime iht 20%
Calc value of estate
Apply nrb/rnrb
Excess at 40% or 36%
Simplified iht (6)
Calculate nrb availability on death
Timeline all transfers
Apply each transfer in last 7 years against nrb
If below nrb no tax
If above nrb 40%
Apply remaining nrb to estate and tax at 40%
Benefits of collectives (8)
-professional investment management
-peace of mond
-greater diversification
-liquid
-costs and charges less than going direct
-no stamp duty in collective
-wide choice of funds/sectors
-gains and divs/savings income use allowances
Process for bed and isa some inv (5)
Encash inv
Up to cgt allowance
Buy back shares in isa with proceeds
No stamp duty
As quick as possible so less time out of market
Cgt process (11)
Cgt on unit trust calculated-overall sale costs v original inv
Find out all original investment amounts and add all up
Calc amount being sold
Minus acquisition/base cost from sale proceed
Minus acquisition and disposal cost
Split gain 50/50
Minus losses in current year
Minus registered losses
Minus available cgt exemption
Taxed at 20/10
Payable by jan 31st after
Additional info for tax efficiency and suitabilty for sam and kerry
Views on inflation
Intention to return to work
Cost of childcare
Financial dependance of children
Bonus variability
Job security/increases
Pension nomination forms
Use ofTrusts
Willingness to increase pension contrib
Guardianship details for children
Mortgage repayment key factors
Term
Amount outstanding
Mortgage payments basis
Interest rate
Monthly repayments
Budget/affordability
Personal preferences
View on interest rates at end of term
Lender charges
Overpayment facility
Level term assurance
Protection needs
Atr
Desire for early repayment
Inheritances
How do you calculate max pension contributions (6)
Pension input amount
(Employer and employee input-calculate how much total)
Over the tax year
Minus annual allowance
Equals current remaining for this year
Carry forward from three previous tax years (current then earliest one applied first)
Restricted to 100% of gross earnings (85k minus £4250 5% contribution) £80,750
Annual allowance is he exceeds aa in this year and cumulative three years
How would salary sacrifice work for Sams bonus (9)
-Agreement
-Employer contribution
-No tax or Ni as comes out of gross pay
-Employer saving-further ni into sams pension
-bigger pension to help with retiring early
-pension grows free of it and cgt
-passes iht free
-low cost-employer subsidises
-admin done by employer
How would lisa operate for sam/kerry (7)
-£4k per year
-Part of £20k allowance
-Under 40 to start a plan/contribute until 50/access at 60
-25% bonus £1k top up
-for pension use as already have first home
-can invest in cash/s&s/wide range of funds
-25% claw back if taken early or not for this reason
-could be part of retireing early plans
Improve tax efficiency for sam and kerry (9)
Emergency fund-use psa on savings income
Isa allowances
Jisa
ns&i
Salary sacrifice bonus
Pension contributions up to annual allowance
Oeics or similar collectives to use div allowance and cgt exemptions not currently used
Eis/vct
Pension nomination forms/wills/guardians for children
How does Bereavement support payments work (8)
Dwp benefit payable when one person dies pre state pension age
Need sufficient nic record
Young dependents=higher payment
Monthly payment for max 18 months
Plus one off LS
£350 ls and £350 monthly
Tax free
Claimed within three months of deceaseds death
9 features of impaired life annuity
Lump sum Premium amount based on health
Tax free if paid to care home/taxable if not
Qualify for ILA if cannot complete 1 ADL
Based on mortality risk
Guarantees can be built in if die soon
Can be level or Index linked
More expensive than deferred
Poorer health=bigger annuity
Quids in if live longer than provider estimates
What is LTC
-Long term care fees for those who cannot complete daily task
-Can be immediate or pre funded
Ltci Features premiums benefits 5.4, 2
Required when can no longer do ADL (eg. Keep safe, clean)
Your contribution to long term care is means tested by the gov
Features
Pays an income until death
Deffered care-own care for x years
Immediate needs-ls paid based on perceived life span
Pre-funded policies-paid for before care needed
equity release-Lifetime mortgages (paid back when die) or home reversion plan (sell part/all of home)
Premiums
As lump sum-for immediate of future
By regular premiums (pre funded build up)
Whole life-policies pay out on need
Equity release-money from
House
Benefits
Paid for all/part of period policyholder cannot live without assistance
Annuity pays for life
How does an immediate needs policy work? (7)
Lump sum premium
Impaired life annuity
Based on health and life expectancy/mortality risk
Guaranteed income for life
Used in home or care home
Income tax free if paid to care provider
Or taxed as purchased life annuity if paid to settlor
What are the five ltc options?
Immediate needs
Pre-funded
Equity release and lifetime mortgages
WOL-sum assured pays out on care
Fund with own investments
Features of attendance allowance (8)
-Help with extra costs if have a disability so severe you need someone to help look after you
-if pay for own care you can claim
-Pays for care for those at SPA or physically/mentally disabled
-Not means tested against income or savings
-2 rates (lower rate for night//higher rate day and night or <6 months to live)
-Paid weekly
-Tax free
-Can use for anything (taxis, bills, cleaner etc)
Personal independence payment (5!
-For long term mentally/physical disabilities or those who find daily tasks hard
-2 elements (part 1 daily living-help with everyday tasks//part 2-mobility part-help getting round)
-Youre assessed by dwp as to what ones needed
-Tax free
-Paid to individual to spend as they wish
How does an immediate needs policy work? (8)
Taken out when needed
Lump sum premium
Impaired life annuity
Based on health and life expectancy/mortality risk
Guaranteed income for life
Used in home or care home
Income tax free if paid to care provider
Or taxed as purchased life annuity if paid to settlor
Why might employer sponsored DIS not be suitable for protection needs? (8)
-When changes employer benefit will be lost
-He has no way to affect the policy
-Employer could adjust the policy to make it less appealing
-only provides cover for death/not ci/long term illness
-leaves sam and kerry on stat sick pay
-Dis could reduce if reduce working hours
-complete lack of control for sam
-insufficient cover-not enough to cover sams salary long term
What things can affect cfl/tolerance of risk (8)
Family/friend influence
Timescales
Things that give them security
Change of requirements
Having assets
Having experience
Security in economy
Having time until death/retirement
Process for iht settlement (13)
Hmrc notified of death
Iht ref number obtained
Value calculated
Plus Any pets/clts added
Plus Loans
Minus Debts
Minus funeral costs
Minus transfers to charities
Deduct nrb/rnrb
Plus any transferred nrb
40% on estate
Paid within 6 months of death
Then apply for probate
How could carmen/declan lower the amount of cgt on unit trust (5)
-holdover the gain into trust-payable at lower rate when dispose of trust
Instaspousal transfer-pay at lower rate of 10%
Progressively dispose of units under allowance
Invest in eis
Invest in seis
