Practice Test 7 - Horace & Sarah

Question 1

Comment on the suitability of Horace and Sarah’s current savings and investments.

Answer 1

• Horace has £200,000 plus in savings which does not meet his attitude to risk (ATR).
• Sufficient/excessive cash/emergency fund.
• Their savings account will not be earning high interest/savings would be eroded by inflation/not fully covered by Financial Services Compensation Scheme.
• More holdings should be in Sarah’s name/less holdings in Horace’s name.
• Mix of equities in capped drawdown fund matches ATR.
• Horace’s holding single company shares is high risk/this does not match his ATR.
• They have ISAs for tax efficiency.
• Overall there is insufficient diversification.

Question 2

State the additional information that an adviser would require to advise Horace and Sarah on their savings and investments.

Answer 2

• Capacity for loss.
• Income or growth required/client objectives/timescale.
• Interest being received on all savings accounts.
• Asset allocation.
• Use of tax allowances/Capital Gains Tax/ISA/pension contributions/uncrystallised losses.
• Performance.
• Charges.
• Single company shares date purchased.
• Original price paid for single company shares.
• Level of dividends on shares/are they Alternative Investment Market (AIM) shares/business property relief.
• Are they expecting any inheritances?
• Are they willing to transfer ownership of their savings or investments/plans to make gifts?
• Any ethical preferences.

Question 3

State six advantages and six disadvantages of Horace using flexi-access drawdown rather than purchasing a lifetime annuity to continue to take his retirement benefits.

Answer 3

Advantage
• Improved death benefits.
• Can take lump sum.
• Flexible income/tax efficient income;
• at whatever level he requires.
• Potential for investment growth.
• Can delay decisions e.g. spouse pension.
• Annuity rates may improve in the future.

Disadvantage
• Higher charges.
• Complex/difficult to understand.
• Fund may deplete/investment risk/income not guaranteed.
• Need for regular reviews.
• Annuity rates may go down.
• Legislation may change.
• Mortality drag/loss of mortality gain.

Question 4

Recommend and justify the actions that could be taken on Horace and Sarah’s savings and investments to maximise tax efficiency.

Answer 4

• Use ISA/ISA allowances;
• annually.
• Use National Savings Certificate (NSC)/Premium Bond.
• Tax efficiency.
• Sell (some) single company shares/bed and ISA/ISA/inter-spousal transfer/crystallise any loss.
• To utilise Capital Gains Tax exemption.
• Place investments/savings in Sarah’s name.
• Saves tax.
• Utilise enterprise investment schemes/venture capital trusts for Horace.
• Tax relief/tax reducer.
• Make pension contributions/vary income from drawdown.
• Tax relief/reduce Income Tax.
• Use of gifts;
• to save Inheritance Tax.

Question 5

Horace and Sarah are considering loaning Simon a deposit to help him get on to the property ladder.
Outline the factors they should take into account before making such an arrangement.

Answer 5

• They should consider drawing up a loan contract.
• Stating repayment terms/interest payable/timescale.
• Who should make loans.
• Simon’s/their affordability/may default.
• Needs to protect loans on death.
• In trust for parents.
• Should they just gift outright instead of loan.
• Take charge on property.
• The value of the loan/deposit.
• Source of funds.
• Impact on death.
• Amend Wills.

Question 6

List the areas that an adviser would need to discuss with Emily before any recommendation for a potential equity release scheme can be made.

Answer 6

• They should consider drawing up a loan contract.
• Stating repayment terms/interest payable/timescale.
• Who should make loans.
• Simon’s/their affordability/may default.
• Needs to protect loans on death.
• In trust for parents.
• Should they just gift outright instead of loan.
• Take charge on property.
• The value of the loan/deposit.
• Source of funds.
• Impact on death.
• Amend Wills.

Question 7

Describe how using a lifetime mortgage with the interest rolled-up would help Emily maintain her standard of living.

Answer 7

• Provides capital/income.
• Amount released depends on age and health.
• Lump sum can be used to purchase an annuity/invest to produce income/lump sum may be used to fund care fees/as she wishes.
• Interest allowed to accrue/no interest payments needed.
• Loan repaid when house sold;
• or owner dies/goes into care.
• Usually no negative equity guarantee.

Question 8

State the factors an adviser should take into account when reviewing Horace and Sarah’s investments at their next annual review.

Answer 8

• Investment performance/benchmarking/on track.
• Asset allocation/rebalance.
• Income requirement/expenditure change/income change/change in their tax status.
• Change in attitude to risk/capacity for loss.
• Legislative/tax changes/new products on market.
• Changes in economy.
• Use of tax allowances.
• Change in circumstances/objectives/lifestyle/health /receipt of any inheritances.