Generic Questions Flashcards
What are the potential benefits of receiving and acting upon advice from a qualified financial adviser?
Their financial problems, goals and priorities will be identified.
Benefit from adviser’s research.
Help with budgeting/cash flow.
Assessment of suitability of existing arrangements.
Tax planning, use of tax wrappers or tax efficiency.
Assessment of attitude to risk (ATR) and capacity for loss.
Receive recommendations/create a financial plan.
Dealing with professional/ knowledge/clarity of explanation.
Ongoing service/reviews.
Consumer protection/regulated advice.
List 4 benefits and 4 drawbacks of paying adviser fees for initial/ongoing service: On an hourly cost basis
Hourly cost - benefits
Familiar or same as other professions Easy to understand and compare Based on actual work undertaken, amount invested is irrelevant – cheaper for larger sums Fee cap can apply
Hourly cost - drawbacks
Can be seen as inefficient – or adviser ‘running up the clock’
May put clients off making contact or asking for advice
Paid from personal funds
Unknown total cost
List 4 benefits and 4 drawbacks of paying adviser fees for initial/ongoing service: As a fund-based fee
Fund based fee - benefits
Can negotiate lower fees for larger investments
Payment via provider if not from personal funds
Incentive to grow funds
Attractive for lower amounts /lower
fees for lower amounts
Fund based fee - drawbacks
Difficult to predict each year
May not be in line with service
provided, not reflecting time spent or larger portfolios not generally harder to administer.
Extra charges may apply for other services.
Reduces potential investment growth
List 4 benefits and 4 drawbacks of paying adviser fees for initial/ongoing service: On a fixed fee basis
Fixed fee basis - benefits
Familiar or same as other professions Known cost Easy to understand and compare Amount invested is irrelevant – cheaper for large sums
Fixed fee basis - drawbacks
Is fee justifiable? Paid from personal funds May put clients off making contact or asking for advice Exactly what is included?
State the process that a financial adviser should follow when providing appropriate financial advice
Establish/define relationship/confirm scope of service/fees
Fact find/determine goals and objectives/confirm capacity for loss/ATR
Analyse current situation/existing investments/identify shortfalls
Develop and present the financial plan/recommendations/discuss
Provide key information documents/suitability report
Implement plan/obtain client agreement
Monitor financial plan and review
Describe the process an adviser should follow when advising clients on investment planning
Establish the relationship, disclosure of status, adviser remuneration
Establish the client’s goals/expectations/objectives/fact-finding/ethical/affordability
Timescales for investment
Attitude to risk/capacity for loss
Amount of emergency fund
Analyse the client’s situation
Formulate recommendation/develop the financial plan
Take into account client’s tax status and use of tax wrappers
Asset allocation and fund selection
Recommend and implement
Review/rebalance/monitor
Explain how lifetime cash flow modelling is used
Lifetime cash flow projections are used to forecast clients’ income and expenditure profiles over the long term
They provide a year by year summary of cash paid to and paid out by the client, showing the years where there will be a surplus or a deficit.
The main variables are:
o The level of income and capital inputs
o The level of expenditure
o The assumptions made about future increases in income, capital values,
expenditure and inflation
o Projections can then be amended to include the effect of recommendations
Explain the benefits of a current cash flow statement when devising a financial plan
Shows difference between expenditure and income
Highlights areas for cost reduction
Identifies opportunities to fill gaps in planning/establish planning budget
Can be used for analysing future cash flows/retirements cash flows and contingent
cash flows/loss of income on clients’ ill health/death
Enables the client to understand the long-term impact of large expenditure.
What is meant by the term ‘risk profile’?
It is the level of fluctuation/volatility that clients are prepared to accept in their investment/pension portfolio
Holding investments that are higher risk than their risk profile may result in unacceptable losses in poor market conditions
If investments are lower risk than they are prepared to accept they may miss out on higher returns
State the main factors that might influence a client’s attitude towards investment risk
Timescale
Income/expenditure/disposable income/affordability
Assets/investments/level of wealth
Liabilities
Amount of investment available
Age of investor
Experience/understanding of market/investments
State of health
Objectives of investment/income or growth
Change in personal circumstances/marriage/death/job change
Outline the process that an adviser should follow to determine a client’s ATR by the use of a risk profiling tool
Each client completes a risk profile questionnaire.
This focuses on timescales/priorities/responses to circumstances.
Generates a risk score
Score provides further discussion with client/used to produce asset allocation
Ascertain capacity for loss
Adviser and client agree suitable risk profile
Why should an adviser not rely solely on a risk profiling tool?
Different results for each client would require further discussion
Different tools produce different results
Client(s) may not be able to relate to content of questionnaire
Potential for client to misinterpret/misunderstand question
Will be unsuitable if they have a zero capacity for loss
Different risk may be in evidence for different objectives/timescales
State the reasons why a client’s ATR may have changed from high to medium risk
Investment knowledge has increased/understands the risks of investments
They may have suffered losses/volatility with past choices
They might be near to retirement age/in retirement so want less risk/volatility
Client is looking for a secure income in retirement/their needs have changed
Why is diversification important?
Diversification can reduce risk in a portfolio
By holding a different range of assets
Each different investment can perform well in certain market conditions
The downside risk of one investment can be offset by the upside potential of another
investment
Diversification can reduce stock specific risk but not market risk
State the limitations of using an asset allocation model
Doesn’t recommend an appropriate tax wrapper/take account of client’s tax position
Charges are not considered
Questions asked aren’t always relevant
Different models produce different results
Underlying assumptions subject to change/based on historic data
Needs to be reviewed
Term Assurance, what does it provide?
Tax-free lump sum on death during term
(usually includes Terminal Illness benefit)
Critical Illness, what does it provide?
Tax-free lump sum upon diagnosis of critical illness after survival period of up to 30 days
Term assurance options
Waiver of Premium
Can include CIC
CIC options
Reviewable (every 5 or 10 years) or guaranteed premiums
Sum assured can be index linked (set % or in line with inflation - no further underwriting)
Waiver of premium
Life cover buy-back
Term assurance types in detail
Level
Fixed sum assured throughout term
Increasing
Sum assured increases throughout term
Either on fixed % or in line with index such as RPI
Term 100
Written to age 100 (can be used as alternative to whole of life)
Decreasing
Sum assured reduces each year in pre-determined way
Used to protect a capital and interest mortgage
Inter vivos to cover potential IHT liability on recipient of PETs –
sum assured reduces in line with effects of taper relief
Family income benefit - sum assured is an amount paid each
month/quarter/year from date of death until end of policy term
May be able to commute regular payments for a lump sum
Increasable
Sum assured can be increased without underwriting
Renewable
Usually for a 5-year term at outset
At end of term a new 5-year policy can be started without
underwriting (premium likely to be higher)
Premium will be based on age at renewal
Convertible
Policy can be converted into a whole of life or endowment with same or lower sum assured without underwriting
Premium for new policy will be based on age at conversion
Income protection features
Regular tax-free income when unable to work due to accident/ illness
Deferred period (4, 13, 26, 52 or 104 weeks)
Paid until return to work, retire, death or policy ends
Rehabilitation benefit - proportionately reduced benefit to top up earnings when someone returns to work but on a part time basis
Proportionate benefit - reduced benefit equivalent to reduction in earnings for those who return to work but in a lower paid job
No limit on claims
Benefit limited to 50-65% pre-claim income
Own occupation (widest cover) or any occupation
Guaranteed or reviewable premiums
Automatic waiver of premium
Personal Accident and Sickness Insurance (PAS) features
Tax-free income if insured has accident or can’t work due to sickness
Benefit limited to set % of earnings and a monthly max amount
Usually annual contract but can be for shorter periods – can be cancelled by the insurer
Shorter deferred period (1 to 14 days) but will only pay benefit for 1 or 2 years
Standalone or bolt on to household, motor or travel insurance
Other benefits:
Refund of medical expenses
Lump sum payments for loss of limb, loss of sight etc.
Accident Sickness & Unemployment Insurance (ASU) features
Tax-free income if insured has accident or can’t work due to sickness redundancy or unemployment
Usually annual contract but can be for shorter periods – can be cancelled by the insurer
Max benefit payment period 1 or 2 years
Deferred period - 30 or 60 days
Pre-existing medical conditions, voluntary redundancy and dismissal excluded
Benefit limited to set % of earnings and a monthly max amount
Lump sum payments for loss of limb, loss of sight etc.
Mortgage Payment Protection Insurance (MPPI) features
Amount to cover mortgage/loan payments and mortgage related policies if insured has an accident or unable to work due to sickness redundancy or unemployment
Usually restricted to the level of minimum payments and for a minimum period of 12 months
Deferred period no more than 60 days
Must cover self- employed and contract workers
MPPI cannot be sold until later of 7 days after the loan or at point a personal illustration is given
Minimum standards set by ABI & CML
Private Medical Insurance features
Covers costs of private treatment e.g. consultant fees, investigations, treatment, accommodation costs
Indemnity policy - can only claim back expenses incurred
For acute conditions (not chronic conditions that are incurable)
May need to pay excess or co-payment
Basic plan usually restricted to accommodation, drugs, dressings
and doctor’s fees
Mid-range covers more items, longer claim periods and higher
limits
Comprehensive plans have longer claim periods, higher limits
and often wider choice of hospital. Home nursing and private ambulance usually covered. May also include alternative medicine, dental treatment. Policies can cover whole family not just one person
Treated as a benefit in kind if premiums paid by employer.
List the advantages of a whole of life policy
Provides life cover but with an investment element as well
Flexibility to vary balance between protection and life cover
Life cover always in place – even if premiums have to increase
Choice of funds to match attitude to risk
List the disadvantages of a whole of life policy
Cannot access investment value without losing life cover
Premiums are not guaranteed – policy will be subject to reviews
May be more expensive way of providing required life cover
Possible income tax liability if policy is non-qualifying
Explain how a salary sacrifice arrangement might work.
Salary is reduced by the amount of pension contribution
In case study 1 Andrew’s pension contribution is 8% of £170,000 = £13,600
Salary reduces by this amount
Employer pays this into the pension scheme as an employer contribution
Employer might also add the NICs saved - 13.8% of £13,600 = £1,876.80
Benefits of salary sacrifice
Reduces employee’s and employer’s NICs
Increases pension benefit without affecting net pay
The employer may invest their NICs saving into employee’s pension
Can help some taxpayers with personal allowance reduction saving income tax
Drawbacks of salary sacrifice
Salary level is reduced which may affect borrowing capacity
Maximum benefits on income protection insurance may be reduced
The arrangement cannot be binding on the employer
May impact on future salary increase
May reduce level of employee benefits such as death in service benefits
May impact on entitlement to State benefits
Extra paperwork/administration
What are the benefits of Lifestyle funds?
Fund switches are automatic/no human error
Offers more balanced risk/range of asset classes as approach retirement
No action required by client
No charge/cost to transfer
What are the drawbacks of Lifestyle funds?
May not wish to retire at the normal retirement age May not match attitude to risk Market timing issues Assumes annuity purchase / not suitable for drawdown Reduced investment growth Lack of control
What are the benefits of using flexi-access drawdown rather than annuities?
Potential growth/stay invested
Flexible income
Tax efficient income
IHT free/outside of estate
Annuity rates may improve/no mortality drag
Choice of successor/flexible death benefits
What are the drawbacks of using flexi-access drawdown rather than annuities?
Increased fees/charges Investment risk/loss of mortality gain May fritter funds/deplete funds before death Need advice/complex/reviews Income not guaranteed Triggers MPAA
What are the benefits for a client of holding investments on a platform?
Easy access online at all times
Total wealth can be seen at the press of a button
Wide range of providers/asset classes/funds/investments/tax wrappers
Performance is easy to obtain
Full details of investments - online switching
Consolidated tax statements are automatic
Time and effort efficient for the client/their accountant for tax returns
Can promote good relationship with the adviser
Management of family assets – discounts of their charges
Unbundled charging/transparent
Funds can usually be bought without an initial charge
Large portfolios can attract volume discounts
Calculation tools
Reduced paperwork
Reports and valuations can be stored online
Automatic rebalancing
Phased Annuity Purchase Benifits
Can choose how much to crystallise to achieve required income
Income in early years is mostly PCLS so tax efficient
Annuity provides lifetime guaranteed income
Include options such as widow’s benefits, annuity protection etc.
Flexible annuity option can be used to decrease income if required
Uncrystallised funds can continue to
grow/potential
investment growth
Any remaining
uncrystallised funds available for beneficiaries
Tax free if death before 75/IHT free
Phased Annuity Purchase Benifits Drawbacks
Reviews needed in respect of any uncrystallised funds Any funds not taken remain subject to investment risk Widow’s benefits have to be selected at outset Annuity benefits cannot be passed on to children
Phased FAD benifits
Can choose how much to crystallise to achieve required income Tax‐efficient income and total control over level of taxable income taken 25% PCLS/75% to FAD The remainder of fund can remain invested Remaining funds invested to suit ATR Potential investment growth Decision about what to do with remaining funds can be deferred Not locking into an annuity/poor annuity rates/rates may improve. Tax free death benefits if death before 75/free of IHT/flexibility of beneficiary
Phased FAD drawbacks
Complexity/ongoing decisions/need for regular reviews Investment risk/fund could be depleted Income not guaranteed Annuity rates may fall further Legislation may change Charges
UFPLS benefits
Can access as much of pension fund as income needs require Up to 25% tax free/excess taxed as pension income Tax-efficient income Remainder of fund can remain invested Remaining funds invested to suit ATR Potential investment growth Decision about what to do with remaining funds can be deferred Not locking into an annuity/poor annuity rates/rates may improve. Simple to understand Useful for tax planning Tax free death benefits if death before 75/free IHT/flexibility of beneficiary
UFPLS drawbacks
Ongoing decisions/need for regular reviews Investment risk/fund could be depleted Income not guaranteed Annuity rates may fall further Legislation may change Will need to claim back tax paid on amount in excess of tax-free amount under PAYE Charges
Describe 6 benefits of ‘index-tracking’ funds
Low cost/cost effective Run by computer system/no human judgement Potential for growth Perform in line with the index Exposure to different asset classes Geographical diversification/global Can track any index/wide range of indices to track Simple to understand/ease of access to markets
Describe 6 drawbacks of ‘index-tracking’ funds
Will underperform the market due to charges
Tracking error/will never match market exactly
Perform poorly in falling market
No active management/no Alpha
Currency risk due to global index‐
trackers
Lack of control over underlying assets
VCTs
Investment, Dividends, Income tax relief, Holding Period, CGT, reinvestment relief, IHT
Investment: Minimum 80% in unquoted companies including AIM.
Maximum 15% in one company with a minimum of 10% in ordinary shares.
Dividends: Exempt from income tax from VCT investments of up to £200,000 per tax year
Income Tax Relief: 30% on first £200,000.
Holding period: 5 years
CGT: None
Reinvestment relief: No
IHT: Forms part of estate
EISs
Investment, Dividends, Income tax relief, Holding Period, CGT, reinvestment relief, IHT
Investment: Investment in unquoted trading companies including AIM companies.
Dividends: Liable to tax
Income Tax Relief: 30% up to a maximum of £2m - any amount over £1m must be invested in knowledge intensive companies.
Holding period: 3 years
CGT: Free after 3 years
Reinvestment relief: Yes
IHT: 100% Bis property relief after 2 years
SEISs
Investment, Dividends, Income tax relief, Holding Period, CGT, reinvestment relief, IHT
Investment: Designed to help small start-up unquoted companies raise finance.
Dividends: Liable to tax
Income Tax Relief: 50% on first £100,000.
Holding period: 3 years
CGT: Free after 3 years
Reinvestment relief: Yes 50% of reinvested amount
IHT: 100% Bis property relief after 2 years
Explain why it may be more suitable to make monthly contributions instead of lump sum contributions
Pound cost averaging
Benefit from investment volatility
Can stop and start contributions/flexibility/convenience
Limited affordability/assists with budgeting
Reduces risk of poor investment timing
What are the requirements for drawing up a Lasting Power of Attorney?
There are two types of LPA - Health and Welfare and Property and Financial Affairs
Individuals can set up one or the other or both
The donor must be over 18 and have capacity to contract
The attorney must be over 18 and not bankrupt
The deed must be signed by the donor, the attorney and a witness
Must be a certificate from a prescribed person confirming donor understands the LPA
and they have not been pressured into drawing up the document(s)
Must be registered with the Office of the Public Guardian as soon as possible
Pay fee to OPG to register
Must be arranged before they lose mental capacity
Appoint attorneys/each other
Choose replacement attorneys/appoint children in case both fall ill
What are the main features of the Residence Nil Rate Band?
Home must be inherited by direct descendants or lineal descendants e.g. grandchildren
RNRB for 2020/21 is £175,000 per person
Unused RNRB can be transferred to surviving spouse (even if 1st death was before
6/4/17)
If value of the home is less than the RNRB then it is reduced to the value of the home
Availability of the RNRB is protected where someone has downsized or stopped
owning their home after 7 July 2015 provided assets of an equivalent value are passed
to direct descendants on death
You should note that Dietmar and Clara in case study 2 have recently downsized their
main residence
RNRB is reduced if value of the estate exceeds £2m (£1 for every £2 over this limit)
What factors should an adviser consider when reviewing pension arrangements at an annual review?
Target income changes New requirements for lump sums Use of other allowances e.g. ISAs, CGT Change of personal circumstances including health Changes in external factors such as economy and political changes Fund valuations and performance Asset allocation and rebalancing State pension forecasts Changes to ATR
