Practice Test 9 - Ryan & Mylene Flashcards
State the additional information an adviser would require in order to advise Ryan and Mylene on their aim to ensure they have sufficient income in retirement.
- Capital/income required in retirement.
- Date intending to take State Pension.
- Amount of State Pension accumulated.
- State of health.
- Intended retirement date/when does Ryan plan to reduce his hours/draw from self-invested personal pension plan (SIPP).
- Capacity for loss.
- Affordability.
- Any inheritances.
- Performance of Ryan’s SIPP.
- Use of other assets/income from investments/downsizing.
- Ethical preferences.
- Death benefit nomination on SIPP.
- Plans for the business/sale value of business/ongoing income/income from business.
Explain to Mylene how a Lasting Power of Attorney should be set up and how it would operate for Rita.
- Rita must have capacity to sign.
- Complete paperwork/solicitor to draw up documents/must be in writing/witnessed.
- Mylene is appointed as attorney.
- Power can be delayed while Rita retains mental capacity/usually comes into effect after mental capacity is lost/Mylene can use Power of Attorney to assist Rita.
- Health & welfare.
- Property & (financial) affairs.
- Register with Office of Public Guardian/fees paid.
- Mylene would not be able to make significant gifts/Inheritance Tax planning.
- Mylene cannot make/amend Rita’s Will.
List the factors Ryan should be aware of if he decides to use flexi-access drawdown to take his pension income in retirement.
- Higher risk strategy.
- Fund selection can match attitude to risk.
- Income is flexible.
- Can use tax-free cash/tax efficient income.
- Taxable lump sums/income can be taken at any time/uncrystallised fund pension lump sum may be available.
- Complex/ongoing administration/reviews.
- High charges/adviser charges.
- Income taken will restrict future contributions to £4k per annum/money purchase annual allowance.
- Potential for growth.
- If income is excessive funds will deplete/income not guaranteed/investment risk /fund performance not guaranteed.
- No tax on death before 75/improved death benefits/on death can pass to family/Inheritance Tax efficiency.
- Can purchase annuity at any time/annuity rates may fall/rise.
- Health may change/enhanced annuity rate.
Ryan’s employees requested that a salary sacrifice arrangement was set-up when the employer’s workplace pension was put in place.
State five benefits and five drawbacks of using a salary sacrifice pension arrangement. Your answers should include the position for both employer and employee.
Benefits
• Saves National Insurance contributions.
• Saves tax/may regain Child Benefit/personal allowance.
• Increases pension without affecting net pay.
• Employer National Insurance (NI) saving may be paid in.
• Employer may retain NI savings.
Drawbacks
• Salary reduction may affect borrowing capacity.
• Is complex/difficult to understand/increased admin.
• Death-in-service/maximum benefit on income protection insurance may be affected/redundancy.
• Is not binding on employer.
• May impact on future salary increases.
State Ryan’s auto-enrolment obligations as an employer, in setting up, and continuing to manage, a workplace pension scheme.
- Must assess workforce/determine eligible employees.
- Employer must have qualifying scheme/NEST in place;
- at staging date.
- Must have enrolled all eligible job holders at outset, and enrol any new employees joining the company within one month.
- Must pay the (minimum) contributions/must deduct from salary.
- Offer default fund/must offer suitable funds for work force.
- Process any opt-outs and re-enrol every three years.
- Record keeping.
- Communication with employees essential.
- Must complete declaration of compliance/inform The Pensions Regulator.
Recommend and justify the actions Ryan and Mylene could take to improve the tax-efficiency of their savings and investments.
- Mylene is a non-taxpayer/Ryan is a higher rate taxpayer.
- Invest in ISAs/tax-free National Savings & Investments.
- Tax-free returns/tax efficiency.
- Transfer deposits to Mylene;
- saves 20/40% tax on interest/£1,000 Personal Savings Allowance.
- Assign bond to Mylene;
- saves 20% Income Tax on gains.
- Take 5% /tax deferred withdrawal from bond.
- Transfer equity unit trusts to Mylene;
- saves 25%(32.5%) on dividends/10% Capital Gains tax (CGT).
- Utilise their available Dividend Allowance/£5,000 each.
- Inter-spousal transfer tax-free.
- Use CGT allowances/offset losses.
- Invest in pension/Venture capital trusts/Enterprise investment scheme for Ryan;
- tax relief/tax reducer/tax efficient.
Recommend and justify the actions that Ryan and Mylene could take now to reduce their potential Inheritance Tax liability.
- Use annual gifts/£3,000/small gifts/£250;
- make chargeable lifetime transfers/potentially exempt transfers/loan trust;
- gifts out of normal expenditure;
- political/charitable donations;
- removes from estate/these are exempt transfers.
- Discounted gift trust;
- immediate reduces estate/growth outside estate.
- Make pension contributions/invest in Enterprise investment scheme;
- fund passes Inheritance Tax-free/under trust/tax relief.
Assuming Ryan decides to use flexi-access drawdown to provide a pension income, identify six issues that an adviser should discuss at the next review meeting in respect of such an arrangement.
- Income/capital required/change in their tax status.
- Performance of funds/rebalancing/change in attitude to risk/capacity for loss.
- Changes in circumstances e.g. health, sale of business, inheritance, State Pension receipt/deferral.
- Change in legislation/taxation/new products in market/charges.
- Changes in economy/annuity rates.
- Review suitability of any death benefit nominations.
