Generic Questions

Question 1

What are the potential benefits of receiving and acting upon advice from a qualified financial adviser?

Answer 1

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.

Question 2

List 4 benefits and 4 drawbacks of paying adviser fees for initial/ongoing service: On an hourly cost basis

Answer 2

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

Question 3

List 4 benefits and 4 drawbacks of paying adviser fees for initial/ongoing service: As a fund-based fee

Answer 3

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

Question 4

List 4 benefits and 4 drawbacks of paying adviser fees for initial/ongoing service: On a fixed fee basis

Answer 4

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?

Question 5

State the process that a financial adviser should follow when providing appropriate financial advice

Answer 5

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

Question 6

Describe the process an adviser should follow when advising clients on investment planning

Answer 6

 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

Question 7

Explain how lifetime cash flow modelling is used

Answer 7

 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

Question 8

Explain the benefits of a current cash flow statement when devising a financial plan

Answer 8

 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.

Question 9

What is meant by the term ‘risk profile’?

Answer 9

 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

Question 10

State the main factors that might influence a client’s attitude towards investment risk

Answer 10

 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

Question 11

Outline the process that an adviser should follow to determine a client’s ATR by the use of a risk profiling tool

Answer 11

 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

Question 12

Why should an adviser not rely solely on a risk profiling tool?

Answer 12

 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

Question 13

State the reasons why a client’s ATR may have changed from high to medium risk

Answer 13

 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

Question 14

Why is diversification important?

Answer 14

 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

Question 15

State the limitations of using an asset allocation model

Answer 15

 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

Question 16

Term Assurance, what does it provide?

Answer 16

 Tax-free lump sum on death during term

 (usually includes Terminal Illness benefit)

Question 17

Critical Illness, what does it provide?

Answer 17

 Tax-free lump sum upon diagnosis of critical illness after survival period of up to 30 days

Question 18

Term assurance options

Answer 18

 Waiver of Premium

 Can include CIC

Question 19

CIC options

Answer 19

 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

Question 20

Term assurance types in detail

Answer 20

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

Question 21

Income protection features

Answer 21

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

Question 22

Personal Accident and Sickness Insurance (PAS) features

Answer 22

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.

Question 23

Accident Sickness & Unemployment Insurance (ASU) features

Answer 23

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.

Question 24

Mortgage Payment Protection Insurance (MPPI) features

Answer 24

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

Question 25

Private Medical Insurance features

Answer 25

 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.

Question 26

List the advantages of a whole of life policy

Answer 26

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

Question 27

List the disadvantages of a whole of life policy

Answer 27

 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

Question 28

Explain how a salary sacrifice arrangement might work.

Answer 28

 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

Question 29

Benefits of salary sacrifice

Answer 29

 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

Question 30

Drawbacks of salary sacrifice

Answer 30

 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

Question 31

What are the benefits of Lifestyle funds?

Answer 31

 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

Question 32

What are the drawbacks of Lifestyle funds?

Answer 32

 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

Question 33

What are the benefits of using flexi-access drawdown rather than annuities?

Answer 33

 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

Question 34

What are the drawbacks of using flexi-access drawdown rather than annuities?

Answer 34

 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

Question 35

What are the benefits for a client of holding investments on a platform?

Answer 35

 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

Question 36

Phased Annuity Purchase Benifits

Answer 36

 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

Question 37

Phased Annuity Purchase Benifits Drawbacks

Answer 37

 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

Question 38

Phased FAD benifits

Answer 38

 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

Question 39

Phased FAD drawbacks

Answer 39

 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

Question 40

UFPLS benefits

Answer 40

 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

Question 41

UFPLS drawbacks

Answer 41

 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

Question 42

Describe 6 benefits of ‘index-tracking’ funds

Answer 42

 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

Question 43

Describe 6 drawbacks of ‘index-tracking’ funds

Answer 43

 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

Question 44

VCTs

Investment, Dividends, Income tax relief, Holding Period, CGT, reinvestment relief, IHT

Answer 44

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

Question 45

EISs

Investment, Dividends, Income tax relief, Holding Period, CGT, reinvestment relief, IHT

Answer 45

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

Question 46

SEISs

Investment, Dividends, Income tax relief, Holding Period, CGT, reinvestment relief, IHT

Answer 46

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

Question 47

Explain why it may be more suitable to make monthly contributions instead of lump sum contributions

Answer 47

 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

Question 48

What are the requirements for drawing up a Lasting Power of Attorney?

Answer 48

 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

Question 49

What are the main features of the Residence Nil Rate Band?

Answer 49

 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)

Question 50

What factors should an adviser consider when reviewing pension arrangements at an annual review?

Answer 50

 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