Practice Test 4 - Mark & Judy

Question 1

In respect of Mark and Judy’s investments:
state the additional information you would need regarding their assets and investments to be able to advise them on their suitability;

Answer 1

• Who owns the investments/single or joint ownership?
• If assets are owned jointly, whether joint tenancy or tenancy in common.
• The purpose of the assets (income or growth).
• The underlying asset allocation of the investments.
• When were the assets acquired?
• Acquisition costs/original investment amount.
• Have there been any withdrawals from the assets?
• Do their investments match their attitude to risk?
• Value of endowment/is endowment on track to repay mortgage?

Question 2

In respect of Mark and Judy’s investments:

explain to them the benefits of their portfolio being divided between low risk and medium risk investments.

Answer 2

• Attitude to risk precludes high risk investments/matches attitude to risk.
• Low risk - provides accessibility and security.
• Therefore no need to sell a medium/long-term risk investment in adverse market conditions.
• Medium risk – potential for capital/income growth over long term to keep pace with/exceed inflation.
• Correlation.
• Diversification.

Question 3

In respect of Mark and Judy’s investments:

They have decided to invest 20% of their portfolio in property. State four methods they could use to invest in property.

Answer 3

• Investment in property company shares.
• Investment trusts/real estate investment trusts.
• Unit trusts/open-ended investment companies/investment bonds/ISAs/pensions/ collectives.
• Direct investment in property/bricks and mortar.

Question 4

Calculate, showing all your workings, Mark’s deferred pension at date of leaving.

Answer 4

Mark (18 ÷ 60) x £41,000 = £12,300

Question 5

Calculate, showing all your workings, Judy’s prospective pension at age 60.

Answer 5

Judy (23 ÷ 80) x £20,000 = £5,750
Lump sum will be:
(23 x 3 ÷ 80) x £20,000 = £17,250

Question 6

Mark realises he will have a pension shortfall and is considering a salary sacrifice arrangement to increase his pension contributions.

State four benefits and four drawbacks for Mark of using salary sacrifice.

Answer 6

Benefits
• He can reduce the amount of Income Tax;
• and National Insurance he pays.
• He can increase his pension contributions but keep his net salary the same/more pension without personal contribution.
• His employer could increase his pension contributions by adding the employer National Insurance savings to his pension.

Drawbacks
• State Second Pension/State benefits could be reduced.
• Entitlement to death in service/income protection benefits would be based on a lower salary.
• Possibly reduced salary for mortgage purposes/redundancy.
• Restricts maximum pension contributions available.

Question 7

Calculate, showing all your workings, the sum of money that Mark and Judy should invest now to meet Sarah’s expected university costs in four years’ time. Assume that the total of the three year costs are to be available at the beginning of the first year. Assume that university costs will increase by 4% per annum and the return on the capital is 3% per annum.

Answer 7

Year 1 = £6,000
Year 2 £6,000 x 1.04 = £6,240
Year 3 £6,000 x 1.04 x 1.04 = £6,490
Total = £18,730

£18,730 ÷ (1.03)power4 = £18,730 ÷ 1.1255 = £16,642

Question 8

Calculate, showing all your workings, and taking into account income from all sources:
the immediate income shortfall, if any, that Judy faces should Mark die now;

Answer 8

Her immediate income shortfall should Mark die now
• Income required by Judy on Mark’s death is 2/3 x £38,000 = £25,333.
• Judy will have continuing income of £15,500 per annum to age 60.
• Shortfall £25,333 - £15,500 = £9,833.
• Bereavement Support Payment will provide a lump sum of £3,500.
• Plus an income of £350 per month for a maximum of 18 months.

Question 9

Calculate, showing all your workings, and taking into account income from all sources:
the income shortfalls, if any, that Judy faces both before and after age 60 should Mark die before he reaches age 60. Assume net investment returns of 3% per annum after tax and charges. Income taken from the investments will not exceed investment returns.

Answer 9

Her income shortfall before age 60 if Mark die before he retires
• On death current cover on Mark is 2 x death-in-service = £102,000.
• Assets = £114,500 (plus £2,500 or £3,500 Bereavement Support Payment lump sum, depending on Sarah’s age at time of Mark’s death).
• Total assets available to Judy on Mark’s death = £102,000 + £114,500 = £216,500.
• Income from investments at 3% = £216,500 x 3% = £6,495 per annum.
• Judy’s total income to age 60 will be £15,500 + £6,495 = £21,995 per annum.
• Up to age 60, Judy will have an income shortfall of:
£25,333 - £21,995 = £3,338.
• Some of this shortfall may be met by the Bereavement Support Payment of £100/£350 per month for a maximum period of 18 months.

Her income shortfall at age 60 if Mark die before he retires
• Judy’s pension will be 23 ÷ 80 x £20,000 = £5,750.
• Mark’s pension will provide 50% widows pension of £6,150.
• Judy’s income will be:
£5,750 (Judy’s pension) + £6,150 (widow’s pension) + £6,495 = £18,395.
• She will have an income shortfall of:
£25,333 - £18,395 = £6,938.
• Some of this shortfall may be met by the Bereavement Support Payment of £100/£350 per month for a maximum period of 18 months.