Question Types, Acronyms & Relevant Info. Flashcards
Simple question types
State
Outline
Explain
Identify & explain
Recommend & justify
Calculate
State - List and comment on
Outline - link to case study and detail
Explain - detailed explanation using marks as guide
Identify & explain - identify then give detailed explanation using marks as guide
Recommend & justify - give a recommendation and justify each recommendation. E.g. if 8 marks then 4 recommendations and 4 justifications
Calculate - calculate and show workings
Additional information (3)
What do you need to happen or to have?
What have they got that can contribute to the solution?
How can we fill in the gaps between what you’ve got and what you need?
Financial advice process - 7 steps
- Discuss fees/IDD
- Fact find
- Establish views e.g. inflation, goals, risk
- Analyse
- Formulate advice
- Present advice
- Review and service
Discounted gift trust
Arrangement to put a lump sum into a trust for beneficiaries which is then invested, whilst settlor(s) keeps right to receive regular payments.
The gift is split in to two parts:
- The lump sum needed for the income.
the balance of the gift.
- The lump sum needed for the income is ‘discounted’, which simply means it immediately falls outside David and Ruby’s estate.
CLT IHT only on total gift - income lump sum
Loan gift trust
settlor(s) would set up a *discretionary trust
They would then lend the trust an amount of capital, interest-free
The funds loaned are then invested into an investment bond.
The loan would be repayable on demand
The settlor(s) could ask for repayment at any time, so would not lose access to their monies
Can have 5% of loan amount back each year tax free
Advisory fund management
Discretionary fund management
Advisory:
- The adviser makes recommendations based on the client’s circumstances needs and objectives, and attitude to risk.
- If any changes to the portfolio are appropriate, such as a change in asset allocation or a purchase / sale of an asset, the adviser must obtain express permission from the client before making the changes.
Discretionary:
- The adviser makes recommendations based on the client’s circumstances needs and objectives, and attitude to risk.
- The client and adviser agree boundaries for the types of changes that can be made without express permission for each specific change.
Key acronym for factfind and review questions:
PATHETIC WINE
Pension death benefits
Affordability or budget
Taxation: income tax, CGT, IHT
Health
Emergency fund
Trusts
ISAs and National Savings
Capacity for loss and attitude to risk
Wills and guardianship
Inheritances
Nomination forms for pensions
Ethical considerations
Key acronym for review and advice process questions:
RAPPORT RAKI
Recommendations
Analyse suitability of existing circumstances
Peace of mind/clarity of information
Protection
On-going service
Research
Tax planning
Risk - Attitude and capacity for loss
Affordability - budgeting
Knowledge - expert & professional
Identify - objectives, goals, shortfalls, problems
Active fund management (4)
Passive fund management (5)
Active:
- individual portfolio manager(s) actively making investment decisions for the fund
- Success depends on combining in-depth research, market forecasting, and the experience and expertise of the portfolio manager(s) pay close attention to market.
- Aim is to ‘beat the market’ the fund manager has to take on additional risk over and above the market risk.
- Securities will be traded frequently, which means that they incur higher expense ratios than passively managed funds
Passive:
- A portfolio is created that aims to track the returns of a particular market index or benchmark as closely as possible:
- full replication - all the shares within the index are bought
- stratified sampling - a sample of the shares are bought
- synthetically - no shares are bought but derivatives are used
- Can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust
- Management fees of passive portfolios or funds are often far lower than active management strategies.
- Eliminates risk of human error in selecting stocks
- Index funds are traded less frequently, so they incur lower expense ratios and are more tax-efficient than actively managed funds
JISA
- Max age
- Annual limit
- Contribution calculation dates
- Pay tax?
- Can put money away ready for 18th birthday. Child can take control at 16 but cannot withdraw until age 18
- Max. age 18
- £9k annual limit
- Contributions per tax yr
- Free of tax
CTF
- Max age
- Annual limit
- Contribution calculation dates
- Pay tax?
- Gov. sent £250 vouchers out to parents as opening payments for the funds, which created a CTF account for the child.
- Max. age 18
- £9k annual limit
- Contributions per birth yr
- Free of tax
Benefits of JISA over a CTF (4)
Interest rates are often higher in JISAs
There is a wider choice of JISA providers
Many CTFs don’t allow new investments
CTF charges are often higher
Renewable term assurance
Renewable option on plan expiry date
No health evidence thus guaranteed insurability Premium increases due to age
Convertable term assurance
Level term with convertibility option
During or at end of current plan term
To whole of life or endowment plan
No health evidence thus guaranteed insurability
Term 100 assurance
Life assurance upto age 100
Return of premiums assurance
Usual term assurance plan terms but repays premiums paid if life assured survives to maturity
Family income benefit
Provides an income if person dies or has terminal illness
Whole of life policy types:
- non-profit
- with-profit
- low-cost
- unit- linked
- non-profit - level premium with fixed sum assured on death and receive no investment return
- with-profit - sum assured is linked to life office performance by receiving revisionary or terminal bonuses
- low-cost - decreasing term assurance with a with-profit base. Cheaper options to usual with-profit WOL
- unit- linked - policy premiums but units in life office unit-linked fund
Income Protection:
- Advantages (5)
Long term sickness cover. Tax free lump sum upto 50/60% of income if suffer from illness or injury.
+ paid to return to work, retirement or death
+ 50/60% of income
+ paid to retirement
+ ammend deferred period accordingly
+ no limit on number of claims
Critical illness cover:
- Advantages (3)
Tax free lump sum paid on diagnosis of CI/TPD
+ One off lump sum
+ Buy back facility without UW
+ Tax free
Mortgage payment protection insurance:
- Advantages (3)
Short term sickness cover. Protects mortgage payments in events of sickness or injury.
+ 2yr max. coverage
+ Monthly benefit upto 125% of mortgage payment
+ benefit paid directly to lender tax free
Accident, sickness & unemployment:
- Advantages (2)
Short term sickness cover for if suffer from accident, sickness or unemployment with cover linked to earnings.
+ Paid tax free
+ can vary deferred period
Long term care cover:
Advantages (2)
Covers chronic conditions. Pre-funded or immediate needs.
+ pay regular benefit meeting all or part of care costs
+ tax free of paid directly to care home
Private medical insurance:
- Advantages (2)
Short term, acute care cover with an annual contract to cover medical needs.
+ pays directly to provider of care
+ paid tax free
Acronym to remember when completing protection recommendation questions
PASTE
TWIG
Product
Assured
Sum assured
Term
Extras
Trusts
Waiver of contribution
Indexation
Guarantees
Attitude to risk & capacity for loss subjective or objective?
ATR - Subjective - Amount of risk willing to take
CFL - Objective - Amount could lose before becomes detrimental
Acronym to use for review questions
HALF PAST NINE
Health
ATR & CFL
Legislation
Fund performance
Portfolio rebalance
Altered personal circumstances
State benefits
Tax rules
Need for capital
Income needs
New products
Extra monies to invest
Types of fee structure advantages and disadvantages:
- Time based (2&2)
- Fixed fees (2&3)
- Fund based charge (2&2)
TB:
+ easy to understand
+ removes product bias
- rewards inefficiency
- difficult to estimate final cost
FF:
+ simple as total cost known
+ encourages client interaction
- may be poor value for work involved
- little negotiating possible
- advisor could cut corners
FBC:
+ incentive to grow wealth
+ more room for negotiation
- may not reflect work involved
- investment directly reduced by charges
advantages and disadvantages for:
- Discretionary management (4&3)
- Advisory management (3&3)
DM:
+ more personalised service
+ respond quicker to market changes
+ risks can be limited within agreed limits
+ more regular reporting from advisor
- higher costs and charges
- usually min. level of investment at entry
- requires high level of trust in advisor
AM:
+ lower charges
+ greater clients demand for service so wide range of products
+ lower entry level costs
- less specialised and less bespoke
- investment opportunities may be missed
- one size fits all approach
Types of job holders:
- Eligible
- Non-eligible
- Entitled
eligible
- auto enrolment
- employees age from 22 to SPA earning over £10k
Non eligible
- opting in
- not auto enrolled but have right to opt-in
- Age between 16 and 24 or SPA and 74 earning over £10k
entitled
- right to join
- entitled workers who can choose to join the scheme but are not auto enrolled or opted-in
- age between 16 and 74 earning less than LEL of £6,396
Minimum contribution for workplace pension? How much of this must be from employee?
Min. contributions is 8%.
Atleast 3% must come from employer.
EIS & SITR, SEIS, VCT
IT:
EIS & SITR
- 30%
- £1m/£2m
- 3yr min. holding period for relief
- Carry back contributions allowed
- Further income and div. fully taxable
SEIS
- 50%
- £100k
- 3yr min. holding period for relief
- Carry back contributions allowed
- Further income and div. fully taxable
VCT
- 30%
- £200k
- 5yr min. holding period for relief
- Carry back contributions NOT allowed
- Further income and div. are not taxed
CGT
EIS & SITR
- Exempt on disposal
- 3yr min. holding period
- Ability to offset losses - Yes
- Re-Investment relief - Yes
- CGT - Deferred until sale
SEIS
- Exempt on disposal
- 3yr min. holding period
- Ability to offset losses - Yes
- Re-Investment relief - Yes
- CGT - 50% exempt, 50% subject to CGT
VCT
- Exempt on disposal
- No min. holding period
- Ability to offset losses - No
- Re-Investment relief - No
- CGT - Exempt immediately
IHT
EIS & SITR
- Only not subject to IHT if written in trust
SEIS
- Only not subject to IHT if written in trust
VCT
- None
Cash flow modelling
- 5 main stages
Assessing current and forecasted wealth to build a picture of their finances
- What couple want and need in terms of income and capital e.g. what are essential living costs, what gifts would like to give to children, etc.
- What will they have e.g. PCLS, rental income, etc.
- Agree assumptions
- Plays out scenarios e.g. what if annuity rates fall, gilt yields fall, etc.
- Compare the 2 identify shortfalls and what can be done
Deferred state pension
The Single Tier State Pension can only be deferred once / either on reaching SPA or once in payment.
The minimum deferral period is nine weeks / no maximum.
Since 6th April 2016, only an increased income in payment is available / no lump sum option.
Their income will be increased by 1% for each whole 9 week deferral period / capped at 5.8% per whole deferral year.
How many days to pay CGT on sale of a property?
60 days
