Practice Test 8 - Kate divorced Flashcards
State the key additional information that you would require to advise Kate on how to achieve the following financial aims.
Provide adequate financial protection until her children finish university.
- Nomination of beneficiary on pension.
- Costs.
- Duration of university fees/period of dependency.
- State of health/family health/smoker/hazardous hobbies/lifestyle.
- Affordability/budget/current expenditure.
- Kate’s willingness to write a new Will.
- Any assistance from family members/student loans/use of savings.
- Any debts/liabilities.
State the key additional information that you would require to advise Kate on how to achieve the following financial aims.
Ensure she has adequate income throughout her lifetime.
- How much income does Kate need/current expenditure/future expenditure.
- Kate’s planned retirement age/when does she need the income/projection of pension.
- BR19/State Pension entitlement.
- Hours Kate has worked/entitlement to State benefits e.g. Child Tax Credit/Working Tax Credit.
- Kate’s willingness/will she work full time?
- Kate’s willingness to make pension contributions.
- Interest rate on savings account/use of savings.
- Expected rental income from buy-to-let property/cost of buy-to-let.
- Capacity for Loss.
Explain briefly to Kate, based on her current working arrangements, if she has any entitlement to State benefits at present to provide her with additional income. No calculation is required.
- Child benefit as Kate earns less than £50,000/she only earns £15,000.
- If Kate works less than 16 hours a week;
- she may be entitled to Child Tax Credit.
- If Kate works more than 16 hours a week;
- she may be entitled to Working Tax Credit.
State five advantages and five disadvantages of Kate using a buy-to-let mortgage to purchase a rental property rather than buying a property outright.
Advantages
• Low interest rates currently available.
• Rental income can be used to cover mortgage payments.
• Reduction in the initial capital outlay/liquidity/funds can be used for other objectives.
• Interest payments are tax deductible/allowable expense.
• Gearing/may provide superior returns..
Disadvantages
• Monthly mortgage costs/interest rates may rise in future.
• Void periods.
• Fees and costs e.g. upfront fees, early repayment charges, protection costs.
• Rebroking mortgage/mortgage admin.
• High risk strategy/borrowing to invest/may not match attitude to risk.
• Higher returns could be available from other investments.
State six drawbacks of Kate’s stakeholder pension remaining invested in a lifestyle fund.
- Kate may not wish to retire at the normal retirement date.
- Fund may not match Kate’s attitude to risk.
- Fund switches are automatic/market timing issues.
- Assumes annuity purchase/not suitable for drawdown.
- Reduced investment growth.
- Lack of control/no investment flexibility.
Explain to Kate why it may be beneficial to transfer the value from her ex-husband’s pension plan into a self-invested personal pension plan (SIPP).
- Wider investment choice/can hold cash/diversification.
- A choice of benefit options e.g. flexi-access drawdown, phased.
- Lower charges.
- Online access/ease of admin/can monitor performance.
- Easier to match attitude to risk.
- Potential for higher returns.
Explain to Kate why the holding in her existing cash deposit account may be unsuitable for her circumstances.
- Lack of diversification.
- Kate needs income/growth.
- Low interest rate/poor rate of return from cash.
- Not tax-efficient/interest is taxable/not using her ISA allowances/JISA for children.
- Not in line with Kate’s attitude to risk/too low risk.
- Default risk as exceeds Financial Services Compensation Scheme (FSCS) limit of £85,000.
- Six months temporary additional FSCS protection up to £1,000,000/proceeds of divorce.
- Lack of potential for growth/better growth potential may be available elsewhere.
- Inflation risk.
- Interest rate risk.
Recommend and justify one suitable protection policy to protect Kate and the children both in the event of Kate’s death as well as serious illness.
- Life cover/lifetime allowance/whole of life/family income benefit/decreasing term assurance.
- Critical illness (CI) cover included.
- Total permanent disability included.
- Term to end of university/children financially independent/normal retirement date.
- Sum assured to cover university fees/childcare costs/normal living costs.
- Waiver of premium, to ensure premiums are paid in the event of illness/disability.
- Indexation to keep pace with inflation.
- Guaranteed Premiums to ensure affordability throughout term/known premium.
- In trust for benefit of children/not in estate/speedy payment.
- Split trust (for CI).
Explain what effect Kate’s divorce will have on her existing Will and Lasting Power of Attorney.
Existing Will
• Former spouse treated as though they were omitted from the Will/treated as though deceased unless Will made in anticipation of divorce.
• Ex-husband cannot be an executor/new executors may need to be appointed.
• The rest of the Will remains valid/Will not revoked by divorce.
Lasting Power of Attorney (LPA)
• Kate’s ex-husband can no longer act as attorney/existing LPA may still be valid unless LPA written in anticipation of divorce.
Both
• Kate should prepare a new LPA/Will.
State six actions Kate could take to reduce or mitigate the potential Inheritance Tax liability on her estate.
- Whole of life policy in trust.
- Update/check pension nominations.
- Make gifts/potentially exempt transfers (PET)/JISA for children/discounted gift trust.
- Utilise annual allowances/£3,000/£250/gifts out of normal expenditure/wedding.
- Pension contributions.
- Enterprise investment scheme (EIS)/AIM/invest in assets that qualify for business property relief.
- Charitable/political party donations.
