Practice Test 9 - Paul & Giselle

Question 1

Comment on the suitability of Paul and Giselle’s existing savings and investments.

Answer 1

• Existing ISAs provide tax-efficiency/not making any ISA contributions in current tax year.
• The OEIC fund does not match their attitude to risk (ATR)/pension fund doesn’t match ATR.
• Cash holdings match ATR.
• Lack of diversification/no fixed interest content/overweight in equities.
• They have an adequate emergency fund.
• Cash holdings are suitable/OEIC is unsuitable for house deposit.
• Low/no interest on cash deposits/cash ISA.
• Bank account/OEIC should be in Paul’s name/not tax efficient.

Question 2

Explain why a stocks and shares ISA, invested in a fixed-interest fund, could be a suitable investment for Giselle’s proposed monthly contribution.

Answer 2

• ISA provides tax-free fund growth.
• Tax-free withdrawals/no Capital Gains Tax implications.
• Can take benefits whenever required.
• Fund matches her attitude to risk (ATR).
• Growth potential/fund manager expertise.
• Can start/stop/vary/pay lump sum contributions at any point/pound cost averaging.
• Can switch providers/transfer to cash ISA.
• Inheritability for spouse.
• Adds diversification.
• ATR may change/can switch funds.
• Giselle is a higher rate taxpayer.

Question 3

State the reasons why Paul should remain a member of his employer’s workplace pension scheme.

Answer 3

• Builds up a fund for retirement/has no pension.
• Fund grows tax-free.
• Employer contributions will be made.
• Employer contributions will increase to at least 3% of earnings.
• Tax-free cash/pension commencement lump sum.
• Tax relief on personal contributions.
• Pension fund is protected if Paul’s company goes bust/bankrupt.
• Can choose a fund to match his attitude to risk.
• Death benefits for Giselle.

Question 4

With regard to their aim of providing financial security for the family:
State the benefits of Paul joining his employer’s death-in-service scheme.

Answer 4

• Employer meets cost/no cost to Paul/non contributory for Paul.
• Not a benefit-in-kind.
• Cover will increase as salary rises/if he goes full-time.
• Benefits payable outside estate/speedy payment.
• Not medically underwritten/free cover limit/no admin for Paul.
• Tax-free benefits.
• Provides valuable family protection/currently no cover.

Question 5

With regard to their aim of providing financial security for the family:
Identify the information you would require, in respect of Giselle’s existing critical illness policy, to assess its suitability.

Answer 5

• Sum assured/level of cover/benefit.
• Policy term.
• Conditions covered.
• Exclusions/rated.
• Premium amount/cost.
• Premiums guaranteed or reviewable.
• Waiting/survival period duration.
• Indexation included.
• Any investment element/surrender value.
• Does/can it include life cover e.g. waiver of premium, total and permanent disability.

Question 6

With regard to their aim of providing financial security for the family:
Recommend and justify a suitable product that meets the family’s protection needs to cover the death of either Paul or Giselle, whilst Charlie is financially dependent. Ignore the proposed house purchase in your recommendation.

Answer 6

• Family income benefit/term assurance.
• Joint life, first death/two single life policies.
• Sum assured to replace lost income/multiple of salary.
• To maintain standard of living/pay for childcare/rental costs.
• Indexation.
• Benefits keep pace with inflation/cost of living.
• Guaranteed premiums.
• Ongoing affordability/known from outset.
• Written in trust/life of another.
• Speedy payment/guaranteed destination/outside estate.
• Waiver of premium.
• To ensure premiums met if sick/disabled.

Question 7

Identify six benefits and four drawbacks of Giselle incorporating her business.

Answer 7

Benefits
• Limited liability/protection from creditors.
• Flexible remuneration/can pay dividends.
• Lower tax.
• Lower National Insurance contributions (NICs).
• Can receive low salary to regain child benefit.
• Company benefits could be available e.g. Private medical cover, death-in-service, pensions.

Drawbacks
• Profits in public domain/not kept private.
• Greater administration/complex/PAYE.
• Higher costs.
• Not all profits can be used for mortgage lending purposes/pension contributions.

Question 8

Explain briefly how her National Insurance contributions would need to change if Giselle incorporates her business.

Answer 8

• Giselle’s liability to classes 2/2% and 4/9% would cease.
• Giselle potentially liable to class 1/12% NICs.
• Company potentially liable to class 1/13.8% NICs.

Question 9

Identify the reasons why an adviser should not solely rely on a risk-profiling tool to clarify Giselle and Paul’s attitude to risk.

Answer 9

• Different results for Paul and Giselle require further discussion.
• Different programmes produce different results.
• Does not allow client to express their views/emotions/ethical/does not take into account past investment experiences.
• Potential for client to misinterpret/may not understand.
• Capacity for loss.
• Different risk may be required for different objectives/different timescales/imminent house purchase implies low risk approach.