Life and Other Investment Products

Question 1

In times of negative markets, what might happen to protect the interests of policy holders?

Answer 1

Market Value Adjustment (MVA) or Market Value Reduction (MVR) might be added to those surrending policies.

Question 2

How are most with-profit polices bonuses managed?

Answer 2

Profits added by either the unit price increase(variable priced unitised with profits) or more units are added (fixed price unitised with profits)

Question 3

What are the downsides of with profit contracts

Answer 3

Performance might be less due to holding back reserves

Lack of transparancy

Question 4

Given their opaqueness, what is the best measure of whether with-profit will be successful or not?

Answer 4

The success of the company themselves.

Question 5

How do you access a life companies success?

Answer 5

Look at their free-asset ratio. (FAR)
Fund performance
Asset allocation.

Question 6

How do unit linked policies operate?

Answer 6

Similar to unit trusts where policiy holder is given units linked to a fund.

Question 7

What are the most common fund types for unit linked?

Answer 7

Cash
Fixed interest
Property
UK equity
North America
Europe
Far east
Managed

Question 8

How are managed funds for unit linked characterised?

Answer 8

A ordinary to % equity they hold

Mixed investment 0-35%
Mixed investment 20-60% (cautious)
Mixed investment 40-85% (balanced)
Flexible investment upto 100% (active managed)

Question 9

What is a big advantage of unit linked ?

Answer 9

Some contracts allow investment in external funds. Moving from fund to fund does not incur tax.

Question 10

What is the disadvantage of unit linked policies?

Answer 10

Prices vary day to day. Use pound cost averaging.

Question 11

What forms of regular premium contracts are there?

Answer 11

Whole of life (death or early surender)
Endowment (specified term or death)

Question 12

What charges are levied on regular premium contracts?

Answer 12

One on life assurance element, annual management fee, and bid offer spread.

Older contracts
Initial units with higher management fee
Reduced aloction rate.

Question 13

What are the rules of regular premium contracts?

Answer 13

Regular premiums payable for at least 10 years or 3/4 the term if shorter.

Premiums in one year no more than twice the premiums of another or more than 1/8 the total premiums of the term

No more than £3600 per year to remain qualifying. Unless restricted relief qualifying policy.

Question 14

Describe guaranteed income bonds

Answer 14

Pays out guaranteed income with return capital on maturity.
Issued in tranches for a certain level of investment each and comes to an end when fully subscribed.

Question 15

Describe guaranteed growth bond

Answer 15

Same as guaranteed income but pays set capital return rather than income.

Question 16

Describe unit linked bond.

Answer 16

Investment into a range of life funds

Question 17

Describe distribution bonds

Answer 17

Separates income and capital allowing for income return to be paid annually and capital return to be retained in the fund. No encashments are required to produce income.

Question 18

Describe guaranteed/protected equity/high income income bonds

Answer 18

A combination of high interest deposit and derivatives

Large amount put into high interest cash product for capital return at end of term.

Remainder of investment buys derivative to secure percentage rise of an index

Question 19

What are the rules for guaranteed/protected equity/high income income bonds under and what are they reffered to?

Answer 19

Insurance Distribution directive 2018
Insurance based investment products IBIP

Question 20

How does taxation work inside life funds?

Answer 20

Manger of the fund liable to corporation tax on income and capital gains.

Dividends are tax-free, other income taxed, and gains at 20%. (Gilts/ corporate bonds exempt.)
Expenses to funds can be offset to unranked income. There is no ability for non-taxpayer to reclaim this.

Question 21

Delete this

Question 22

What are the rules for taxation on a qualifying life policy?

Answer 22

No tax if the rules are adheard to?

This means sticking to premiums
Charges to policy
Hold minimum level of life assurance to maintain the policy

Question 23

How is taxation handled for non-qualifying life policies?

Answer 23

First 20% deemed paid by fund manager.

No reclaim for non tax payer.
Any qain or subsequent tax on joint policies spread equally.

Question 24

How are partial withdrawals handled for tax purposes on non-qualifying policies?

Answer 24

Added up taxed at end of year.
5% of the initial investment can be withdrawn
5% is cumulative on full years
Charges applied on proportion above 5% cumulative.
Can apply for recalculation if to account for disproportion
5% is tax deffered, so it is brought back in for gain calculations.

Question 25

What is the purpose of people being able to apply for artificial gain?

Answer 25

To prevent people being taxed on loss, making bonds due to taxation on non segmented bonds

Question 26

When is capital gains tax paid on life policies?

Answer 26

Only for traded endowments.

Question 27

What are the primium limits on friendly society tax-free endowments

Answer 27

£270 annual
£25 month
£5 week

Question 28

Where are offshore bonds usually held?

Answer 28

Isle of Man
Luxembourg
Due to lack of tax

Question 29

What is time apportionment relief?

Answer 29

An allowance given to reduce the chargeable gain on offshore bonds.

Question 30

What are personal portfolio bonds?

Answer 30

Bonds where the policy holder controls the underlying investment.

Question 31

How are personal portfolio bonds taxed

Answer 31

Chargeable 15% deemed gain per year regardless of actual gain.
Other complex rules with this. Including tax charge from part surender, no top slicing but can be deducted from termination of bond.

Question 32

Why can bonds be bad for child tax benefit/credit/universal credit?

Answer 32

Because all gains need to be added adjusted net income without top slicing. More than £50000 leads to high income charge. More than £60000 cancels out the benefit.

Question 33

Why are bonds good for trust investments?

Answer 33

Because they don’t pay income and therefore prevent a yearly tax return for trustees.

Income tax is higher on trusts as no personal allowance.

Can be assigned to beneficiary without tax who then sell it themselves.

Question 34

Who does a taxable event on a bond in trust fall onto

Answer 34

The settlers, if they were alive, and UK resident before the event. Trustees can claim back tax.

On the trustee, if settlor is dead and trustee is uk resident

To the benificiary if trustees are not uk resident.

Question 35

What are the tax implications for if a trustee has to pay tax on a chargeable event?

Answer 35

No top slicing
Gain for discretionary trust subject to higher rates.
25% on income over £1000
No tax reclaim for beneficiaries.

Question 36

What are the tax implications if a beneficiary has to pay tax on a chargeable event.

Answer 36

Tax is on how much they benefit from the proceeds without top slicing.
No basic rate credit is given 20%

Question 37

Discribe ETFs

Answer 37

Index tracking funds sold on stock exchanges like shares.

Prices updated throughout the day
Standard share costs apply, but no stamp duty.

Management costs generally 0.5%
Can be held in ISAs

Question 38

What other forms of investment are similar to ETFs

Answer 38

Exchange traded commodities (ETC)

Exchange traded notes (ETN), basically a bond issued by a bank with maturity date but no interest.
(These don’t own anything but use derivatives to track indicies)