R01 Chapter 2 Part 1 Flashcards
What’s a simple exercise to gain better control of finances
Budgeting
Essential spending
Housing costs
Insurance
Council tax utilities
Everyday spending
Food
Cleaning
Travel
Occasional/Non-essential spending
Clothing
Entertainment
Birthdays
Holidays
Ways to reduce spending
Cut back on non essential spending
Check APR on credit cards and loans
You client may have a debt problem if:
-Using credit cards/loans to pay everyday bills
-Considering taking out consolidation loan
-Paying no more than the minimum amount on credit cards
-Using credit card to take out cash
-borrowing money without knowing how they will pay it back
Who can help with debt?
Debt management companies
Consolidation loans
High fees
May continue to a history of loans
May lead to penalties if don’t pay back loans
Risk of property loans
Could lose home
What is a mortgage
The security offered in exchange for a residential home loan
What are the two main mortgage types
Capital and interest
Interest only
Cap and collar mortgage
Interest rate will not rise above a certain level, but it won’t go below a certain level too
Capped
Interest rate won’t rise above a certain level for a certain period of time
Discount mortgage
The interest rate is reduced to a set percentage below the standard rate for a period of time
Euro mortgage
Ideal for those earning abroad. Usually lower interest rates.
This can result in gains or losses due to currency fluctuation
Equity linked mortgage
Lender takes a stake in the home. When home is sold, lender takes a percentage back
Fixed interest
Interest rate remains fixed for a given period
Flexible mortgage
Monthly payments can be varied.
If borrower experiences financial difficulties they can use the reserve.
Green mortgage
Rewards borrower for buying an energy efficient home
Offset mortgage
Where the mortgage account and current account are linked,
Home revision plan
Sells house to company that in return lets them live there for rent till their end of life or go into long term care
A roll up mortgage
Client gets a lump sum or regular income, charged a monthly or yearly interest.
Fixed Repayment mortgage payment
Client gets a lump sum, but doesn’t have to pay interest
When home is sold, the pay the lender a higher amount than was lent to them.
Home income plan
Money borrowed is used to buy a fixed income for life (annuity)
Home purchase plans
Ways to purchase a home with no interest.
This is of particular use to Muslims
Ijara
Monthly payments are held by the firm, then used to buy the home at the end of the agreement
Diminishing Musharka
Each payment buys a slice of the firms share. We the clients share increases, the rent paid gets smaller
Sale and rent
Some company’s buy their home and rent it back to them for a fixed period of time.
Consumer buy to let
Unintentionally acquired for the purpose of letting it out.
E.G inheriting an unpaid off property and needing to let it out to cover the costs.
Business buy to let
Borrowers are entering a contract to be a professional landlord.
Purchasing property with the sole purpose of being used to rent out.
Un-structured loan
Mortgages, loans on commercial property.
You can increase loan repayments and reduce outstanding capital.
Can be related at any time.
Structured loan
Smaller purchases like a car or a sofa.
Fixed rate of interest .
Higher risk end of the market.
Costs can be higher
What Influences protection needs?
Age, dependants, income, financial liabilities, employment status, existing cover
How does age affect protection needs?
Young/single - unlikely
Young/couple/child - very likely
Older couple/financially independent child - unlikely
Inheritance tax
A tax imposed on people who have inherited an estate worth more than £325,000.
Emergency fund
There as a safety net for unexpected bills. Such as, car repair, money to live on in the event of a few weeks unemployment
Term assurance
Pays a lump sum on the death of the life assured.
Client decides how long they require cover.
The older the life assured is or the longer the term, the higher the premium will be
Level term assurance
Offers a level sum in return for a level premium
Decreasing term assurance
As the amount of loan is reduced, the sum assured also reduces.
Increasing term assurance
Allows the sum assured to increase over the term of the contract without evidence that the life assured is in good health.
Life office will charge higher premiums as the sum assured increases
Convertible term assurance
Can change the policy to either endowment or whole of life policy.
Renewable term assurance
Allows a client to affect a term assurance for three or five years. At the end, the can affect a similar policy without having to give the life office evidence of good health
Endowment policies
Pay a lump sum on the death of the life assured, but the policies are primarily for saving.
Bulk of premium is directed to savings element of the contract.
Little to no surrender values.
If client does within the term, a lump sum gets payed out to the heirs.
If the client survives the term, they get a large lump sum.
Whole of life policies
Provide substantial life cover, some provide investment element.
Cover for the lifetime of the assured.
Non-profit whole of life
Guarantees to pay a fixed amount of life cover upon death.
With profit whole of life
Guarantees to pay a minimum level of life cover on death. Amount increases annually by addition of bonuses.
Bonuses are permanent but not guaranteed
Flexible life insurance
The policy holder chooses between a minimum and maximum level of cover. It can be changed within these limits at any time.
Income protection
Replace lost income due to illness or injury and unable to work
Personal accident and sickness insurance
Pay a regular benefit when people are unable to work due to illness or following accident.
Accident, sickness and unemployment cover
As well as if you’re sick or had an accident, it’s pays out if you’re made unemployed by no fault of your own
Critical illness cover
Pays a lump sum
Typically covers
- heart attack
- stroke
- cancer
- surgery for coronary artery disease
- major organ transplant
- kidney failure/transplant
Private medical insurance
Uses private hospitals to take treatments and usually has the benefit of a quicker and more reliable service.
Long term care insurance
What a client needs for the foreseeable future as a result of an illness or old age
Provides some of the cost of care
Payment protection insurance
Pays benefits is an insured person is made redundant.
Usually only available in connection to mortgages and loans m
Mortgage payment protection insurance
Similar to PPI, but for mortgages only
Universal credit
Began in 2013
Aims to simplify and streamline the benefit system by bringing together a range of benefits and credits into a single system
Child benefit
Non taxable - £24pw 1st child
- £15.90pw per extra child
Tax payable if parter earns over £50k
Child tax benefit
Replaced by universal credit for new claimants.
Integrated into HMRC tax system
Statutory adoption pay
Helps parents take time off work when adopting.
Statutory maternity pay
First 6 weeks at 90% earned income before tax.
No upper limit to pay.
33 weeks at 90% or standard rate.
Statutory Paternity pay
1/2 weeks at 90% pay of income before tax
Must worked at same employed for at least 26 weeks by 15th week before baby is due
Income support
Non taxable
£67.20pw (single) £133.30pw (couple)
New claims can’t be made anymore
Universal credit has replaced
Jobseeker’s Allowance
Contribution based.
Taxable.
£67.20 (under 25)
£84.80 (over 25)
New claims can only use ‘new style’
Statutory redundancy payments
Non taxable
Based on number of years service with employer
There is a maximum payment of £19,290pa
£30k plus payments are subject to income tax and employer NI
Working tax credit
Non taxable
Up to £2,340 pa
Administered by HMRC
Replaced by universal credit for new claimants
Support for mortgage interest
It’s a paid loan, must be repaid with interest
No limit on how long it can be claimed
Sickness and disability benefit
Non taxable
£101.75pw (higher)
£68.10pw (lower)
Help pay extra costs of state pensioners that have a disability and need someone to look after them
Careers allowance
Taxable
£76.75pw
For those who look after someone disabled
Don’t have to be related to the person you’re looking after
Disability living allowance
Non taxable
Contains a core component and a mobility component
Core:
£101.75pw
£68.10pw
£26.90pw
Mobility:
£71.00pw
£26.90pw
For disabled people who have difficulty walking and need someone to look after them
Replaced by Personal Independence Payment
Personal independence payment
For those aged between 16 and 64
Based on assessment of individual need
Face to face consultation upon application
£26.90 - £172.75
Employment and support allowance
Income related/contribution based
Assessment phase: £84.80pw
Main phase: up to £118.50pw
Mobility scheme
Disabled people can lease a new car, scooter or powered wheelchair
Statutory sick pay
Up to £109.40pw
Paid by employers up to 28 weeks
New state pension
For those who retire on or after 6th April 2016
Taxable, contributions based.
Up to £208.75 pw
Basic state pension
For those who retired before 6th April 2016
Contributions based, taxable
Up to £156.20pw
Additional state pension
Before 6th April 2016
Paid in addition to basic state pension
State pension credit
Up to £201.05pw (single)
Up to £306.85pw (couple)
Guarantees minimum income to those of state pension age by topping up weekly income.
Bereavement support payment
First payment of £3500
18 months at £350
Claim must be made within 3 months of persons death
Cold weather payment
Paid to those with SMI to help with extra heating costs.
Must be 7 consecutive days of freezing or below between November and 31st march
Council tax reduction
Financial help for low income to pay council tax bill
Funeral expenses payment
Help low income families pay for a family funeral
Paid back from the estate of the deceased
Health care travel cost scheme
Travel costs for those on low incomes who need NHS treatment at hospitals. NHS centres, private clinics that have been referred by NHS hospitals
Health costs
For you old and low incomes for health costs
Healthy start scheme
For pregnant women on low incomes
Get a ‘healthy start’ card to buy fruit, veg, milk + vitamins
Local housing allowance
Paid to private tenant on low income who is renting property or room from a private landlord
Winter fuel payment
For those born on or before 1966
Annually £250-£600 to help pay increasing heating bills
Annual pension allowance
£60,000 current tax year
For every £2 above £260,000 income, £1 is deducted from allowance up to a minimum of £10,000
Other methods of finding retirement
ISAs
Any investment
Cash reserve
Purchased life annuity
Separated into income and capital elements.
Interest element is taxed at 20% and then 20-25% by self assessment
Compulsory purchase annuity
Taxed as earned income
So taxable at 20%, 40% and 45%
What are the two main pension types
Occupational and Personal
Occupational pension
Set up by employer
Trustees appointed to oversee
Defined benefit
Pension is related to their earnings.
Doesn’t usually include earnings from bonuses or commissions.
Usual accrual rates are 1/60th or 1/80th of earnings for each year of pension scheme service.
I.E - if you worked 40 years, and your last salary was 30k, you would do 40 60ths X 30k = £20k per annum
Group personal pensions
Like a personal pension but done with a group of people
Stakeholder pensions
Personal pensions which meet additional stake holder product requirements
