Practice Test 10 - Alan & Kim Flashcards
State the additional information that you would require in order to advise Alan and Kim on their financial aim of ensuring they have adequate income in retirement.
- Income/capital needed in retirement.
- Intended retirement date.
- Pension plan charges.
- Fund choices available/asset allocation.
- Nomination of beneficiary.
- BR19/State Pension forecast.
- Auto-enrolment contributions for Kim/contribution history.
- Further inheritances expected/use of other assets/savings/downsize.
- Capacity for loss.
- Affordability/budget.
- Ethical/religious preferences.
- Pension projections.
- Will the employer redirect National Insurance saving back to Alan’s pension.
Explain how Alan’s maximum tax-relievable pension contribution for the current tax year is determined. No calculations are required.
- Take current annual allowance/£40,000.
- Calculate current employer contribution/£62,000 x 8% = £4,960.
- Calculate personal contribution for the tax year/£4,960.
- Deduct both employer and employee contribution from annual allowance/ £40,000.
- This gives remaining allowance for current tax year.
- Must use current years allowance first.
- Can use any carry forward allowance from previous three tax years.
- Unused carry forward cannot exceed earned income in current tax year/ £62,000.
State five benefits and five drawbacks to Alan of using his employer’s salary sacrifice arrangement to increase his pension benefits.
Benefits:
• Income Tax saving/tax relief.
• Saves employee National Insurance (NI).
• Saves employer NI.
• Employer may pay NI saving to Alan’s pension.
• Regain Child Benefit.
• Increased pension with same net salary.
Drawbacks
• Lower earned income so death-in-service may be reduced/may affect employer sick pay/redundancy/income protection.
• May affect ability to borrow mortgage/due to lower earnings.
• May affect State benefits.
• Extra paperwork/administration.
• May impact on future pay increases.
Explain to Alan the advantages of continuing to fund his defined contribution group personal pension scheme to provide an improved income in retirement, rather than using a stocks and shares ISA.
- 40% tax relief.
- Higher contributions.
- Employer contributions.
- Cannot withdraw before age 55/57.
- Improved death benefits.
Explain to Alan and Kim how the income and capital gains on their existing OEICs are likely to be treated for tax purposes.
- Tax/income is split 50:50 on emerging markets fund.
- Open-ended investment company (OEIC) income taxed as dividend.
- First £5,000/£10,000 of dividend free of tax/dividend allowance;
- thereafter 7.5% Income Tax for Kim;
- 32.5% Income Tax for Alan.
- Capital Gains Tax (CGT) on disposal/sale.
- Gains up to £11,300 exempt/annual CGT exemption.
- CGT of 10% for Kim.
- CGT of 20% for Alan.
- Losses can be set against gain.
Recommend and justify how Alan and Kim could improve the tax-efficiency of their existing savings and investment portfolio.
- Use ISA allowances.
- National Savings Certificates/Premium bonds.
- Tax efficiency.
- Transfer cash accounts to Kim.
- All interest is tax free/tax free savings allowance available either Kim or Alan/could save 40% tax.
- Transfer sufficient OEIC’s to Kim.
- Interspousal transfer/no loss/no gain/utilises Kim’s dividend allowance/utilise Alan’s dividend allowance.
- Saves 10% CGT/25% Income Tax.
- Use annual CGT exemptions/£11,300.
- Register carried forward losses with HM Revenue & Customs/to reduce CGT.
- Pension contributions/Enterprise Investment Scheme.
- Tax relief/tax reducer/tax free growth.
Recommend and justify a suitable financial protection policy to ensure that any childcare costs can be met in the event of Kim’s death.
- Family Income Benefit (FIB)/decreasing/level term.
- Single Life.
- Sum assured is sufficient to meet childcare costs.
- Term to Oliver’s 18th birthday/children no longer financially dependant/13 year term.
- Guaranteed premiums;
- to ensure affordability/known cost.
- Indexation;
- to keep pace with inflation.
- Waiver of premium;
- to maintain premiums in event of illness/incapacity.
- Written in trust/life of another;
- to ensure speedy payment/outside estate/guaranteed destination.
Alan and Kim would like to invest a regular sum to fund future deposits for their children’s first homes.
State five advantages of using a stocks and shares ISA, rather than a Junior ISA for this purpose.
Advantages
• Higher contribution limits/£20,000.
• Larger range of providers/greater fund choice.
• Unlimited access if needs change/can be used for other purposes.
• Continued control at age 18/no guaranteed access by child.
• Can leave existing Child Trust Funds invested/no need to transfer to Junior ISA.
Alan and Kim wish to invest the inheritance from Alan’s aunt for their long-term financial security.
- Reduces volatility/risk.
- Non-correlated assets.
- Can match attitude to risk.
- Can be rebalanced.
- Potential for higher returns.
State the main benefits of investing the inheritance in a diversified investment portfolio.
- Disclose status/fees/client agreement.
- Fact-finding / goals / expectations/objectives/affordability/timescales.
- Attitude to risk/capacity for loss.
- Analysing the client’s situation.
- Conduct product research.
- Formulating recommendation/develop the financial plan.
- Make a recommendation/presentation to client.
- Implementation/suitability letter.
- Annually review/rebalance/monitor.
