R06 - Case Study 1 Flashcards
State additional information adviser would need to advise Ken & Mary (18)
- How long does Ken intend to work?
- Income and capital requirement in short & long term
- Details of Mary’s pension (breakdown between NHS & State & Any other pension
- Death benefit on Mary’s pension scheme
- Details of Ken’s SIPP (Charges, funds)
- Details of new employer workplace pension (funds, charges, contribution amount, is salary sacrifice available?)
- Plans to use other assets to top up inc, when do you plan on using ISAs/ are you happy to use OEICs and cash to top up inc?
- Views / needs for secure income
- What is investment experience and knowledge
- Why are you holding £220K in cash?
- Use of tax allowances
- Affordability / budget for pension contributions now Ken has returned to work/ willingness to max contributions
- Other debts / liabilities
- Any inheritance due / gifts planned
- What income is generated from other savings
- Have you used ISA allowances?
- CFL
- Has SIPP pension nomination form been completed?
Explain how Ken & Mary’s state pension and Mary’s NHS pension will provide inflation proof income in retirement? (3)
- State pension & NHS pension will provide guaranteed income for life
- Both provide protection against inflation
State Pension = triple lock guarantee, increase by greater of CPI, average earning or 2.5%
NHS pension = increases in line with CPI - Mary’s NHS Pension will provide dependant pension on death
Recommend and justify actions Ken & Mary could take to ensure they have sufficient sustainable income in retirement (7)
Workplace Pension
- Ken should opt into employer’s pension scheme
- Increases pension provision
- Employer contribute at least 3%
- Low cost / employer does admin
Pension contributions
- Maximize contributions whilst Ken is working
- Mary £3,600 - Ken £4,000 (£10,000 2023/24)
- Basic tax relief
- Tax free growth
- Flexible beneifts
- PCLS
- IHT Free
- Can use other assets that aren’t as tax efficient
- Benefit from pound cost averaging on regular contributions
- Funds can be selected to match ATR
SIPP (FAD)
- Stop / reduce income whilst Ken works
- Use safe withdrawal rate when stop work
- Regularly review fund choice and AA to ensure diversified and matches growth / income objectives
- Gives time for SIPP to recover from market downturn
- Ensures fund less likely to run out
OEIC
- Use OEIC to top up pension income when Ken stops work
- Less tax efficient than pension and ISA
S&S ISA
- Switch to multi asset growth funds whilst no income
- Use distribution funds when income is needed
- Ensures funds are diversified, matches ATR and meets income or growth needs.
Cash Holdings
- Maintain £60,000 in emergency fund but more to savings account with appropriate level of access as savings account will offer higher interest.
- Deposit account holds more than £85,000, default risk. Inflation and interest risk, not held in ISA, not tax eff.
- Move some of deposit to cash & S&S ISAs as amount in cash doesn’t match ATR.
- Increase exposure to FI and Property via S&S ISA to offer potential capital growth over medium/long term.
- Property offers further diversification which matches ATR and not directly correlated to equities.
Regular Ongoing Reviews
- Monitor performance, diversification and any changes in needs, objectives or personal circumstances.
- Monitor legislation, tax and market changes
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Explain in detail why their S&S ISA funds may or may not be suitable to meet their long-term objectives and why shouldn’t just consider short term performance (7)
UK Equity Funds
- Match ATR
- Lack of geographical diversification
- Lack of asset diversification
Multi-Asset distribution funds
- Offer AA expertise, wider range of assets, investment strat
- Actively and professionally managed
- Regular rebalances
- Increases diversification and reduces volatility within 1 fund
- Can access specialist investments
- Potential for positive real return over long term
- Can match ATR
- Distribution fund not currently suitable as income not required
- Should switch to multi-asset until income required
- All S&S ISA funds seem to be actively managed, consider split as will reduce cost and not all actively managed funds out perform index
- Identify and understand reason for poor performance, may be market rather than fund choices
- Consider medium / long term performance
- Need ongoing reviews of individual funds to fully asses suitability (charges, volatility, performance)
- Consider AA of funds as overall investment strategy
Explain to Ken in detail how his auto-enrolment pension scheme works? (9)
- As past SPA & earns above £10K, non-eligible job holder
- Not auto enrolled buy employer must provide info and choice to opt in or out
- If Ken opts in, Employer must arrange contribution
- Total minimum contribution 8% (Emp 3%)
- Employer can pay whole 8%
- Qualifying earnings £6,240 - £50,270
- Earnings are income, salary, bonus, overtime, commission and some stat pay (not P11D)
- Employer could have scheme with contributions above minimum level
- Scheme could use alternative definition of earnings
Identify factors that FA should consider when determining suitable level of income from FAD? (9)
- Income and capital needs
- Amount guaranteed income / other pension benefits
- Other assets to provide income, gifts planed, inheritance due
- Safe withdrawal rate / sustainability
- Tax status in retirement, use of allowances, ISA allowance, tax efficiency
- Economic conditions, inflation, markets, annuity rates
- Longevity, family health, how long income required?, Mary’s income needs, surviving spouse
- Requited rate of return on investments
- ATR/ fund growth / inflation / cash flow
What is the safe withdrawal rate? (4)
- Strategy to establish how much can be withdrawn to ensure fund doesn’t run out
- Rule of thumb is 4% withdrawal rate over 30 years
- Sensitive to AA
- Rate should be adapted to ATR
Explain benefits of cash flow modelling? (9)
- Shows difference between expenditure and income
- Paints a picture of finances now and future
- Highlights areas for cost reduction
- Identifies opportunities to fill in gaps whilst Ken is employed
- Helps identify when Ken can retire
- Can be used for analyzing future cash flows
- Particularly important for Ken who has FAD
- Enables clients to understand long-term impact of large expenditure
- Helps establish CFL
Explain to Ken why cash flow model should be stress tested (3)
- Considers how a portfolio might perform if Ken lives longer, future retirement earlier than expected, inflation is higher, income or withdrawal higher than expected, market downturn
- Could clients cope if SIPP ran out?
- Could clients cope on lower income if investment performed poorly?
Advantages & disadvantages of Ken purchasing an annuity with his pension fund when he retires (9/8)
Advantages
- Guaranteed income for life
- No investment risk
- Can income dependent benefit
- If death before 75, tax free
- Can have an income guarantee period
- Can include annuity protection
- Can include indexation
- Simple, no need for ongoing advice
- Benefit from mortality drag
Disadvantages
- Can’t benefit if annuity rates increase
- Death benefit chosen at outset, only passed once
- May not get moneys worth if die young
- Escalation can be expensive
- Annuity doesn’t match ATR
- Lack of flexibility
- Already in receipt of guaranteed income from State & NHS, could take more risk with private pension
Why £60,000 holding in NS&I may or may not be suitable to meet their longer term objectives? (8)
- Hold excess cash
- Capital guaranteed
- No interest or income paid
- Potential large tax free prize
- No capital growth potential
- Unknown return, may never win
- Inflation risk
- Suitable short term
State factors adviser should consider at next review (10)
- Ken’s planned retirement age
- Income requirement now Ken is employed
- Total income received
- Use of allowances
- Change of circumstances including health
- Change in economy, politics & state benefits
- Legislation and tax changes
- Fund value & performance
- AA & Rebalance
- Change to ATR/CFL
What are the benefits or Ken and Mary receiving advice from FA? (11)
- Objectives identified and prioritized
- Benefit from adviser research
- Help with budgeting
- Asses suitability of existing arrangements
- Review and monitor funds
- Tax planning
- Use of financial planning tools
- Receive recommendations
- Dealing with professional
- Ongoing service
- Consumer protection and regulated
What factors would you need to consider when constructing a suitable investment portfolio for Ken’s SIPP? (10)
- Age, health, life expectancy
- AA
- Liquidity
- Volatility
- ATR/CFL
- Income / Cap (Now & Future)
- Other assets and investments
- Other pensions
- Cash flow & stress testing
- Market, inflation, interest
Recommend and justify actions to ensure Ken has suitable investment strategy in SIPP now returned to work and his income needs change throughout retirement (5)
Review existing funds
- Performance, charges, asses if funds suitable now Ken has returned to work as has more growth potential.
Ongoing reviews
- Rebalance AA, match ATR/CFL and monitor performance, charges & volatility
Maintain higher level or diversified UK & global equities
- ATR, good health so likely to live for longer (equity is real return over longer period). Diversification. Ensure mixture of passive and active funds.
Passive = low cost, easy to follow performance, active doesn’t always out perform.
Active = can outperform, expertise, research
Invest cash to meet future income needs
- no growth, eroded by inflation, doesn’t match ATR
Vary amount held in FI as required to meet income need or Ken’s ATR may reduce with age.
- Diversification, choose FI to match ATR, lower % in accumulation stage as lower growth potential than equities.
Gilts and corp bonds are safer in volatile market, guaranteed level of income.
Advantages and disadvantages of Ken using provider investment pathway for SIPP? (3/4)
Advantages
- Easy to understand
- Matches goals
- Reduces need for advice and reviews
Disadvantages
- Not personal
- Doesn’t consider ATR or CFL
- Works over 5 year period, Ken may want to retire sooner
- No reviews to monitor funds or change in needs
Benefits & Drawbacks of using DFM (8/4)
Benefits
- Professional active management
- Diversification
- Potential higher returns
- Can target objectives
- Bespoke service to match ATR
- No requirement for ongoing involvement
- May ensure ISA and CGT allowances are used
- Should provide regular reviews
Drawbacks
- Higher charges
- No guarantee of performance
- Lack of control
- May invest in unacceptable sectors
Benefits of holing investments on a platform (13)
- Easy access
- View total wealth
- Wide range of funds
- Easy to view performance
- Easy to switch funds
- Automatic tax statements
- Transparent charges
- Can usually switch funds without a charge
- Large portfolios attract discounts
- Calculation tools
- Reduced paperwork
- Reports stored online
- Automatic rebalance option
Factors to consider before advising Ken if he should maximize regular contribution into workplace pension (12)
- Restricted to MPAA £4,000 as taken payment from FAD
- Can’t carry forward MPAA
- Basic rate tax relief
- 25% PCLS
- Tax free fund growth
- Surp income when return to work
- Increase pension income and PCLS
- Salary sacrifice may be available, reduce NICs
- Immediate access to funds
- No admin
- Flexible death benefits
- Low charges
- Pound cost averaging
- Use other assets that are not as tax efficient to fund contributions
What factors should an adviser consider when reviewing Ken’s pension following return to work? (9)
- How long does he intend to work for
- Tax status
- Income requirement
- Has outgoings changed?
- Details of employer pension scheme
- Fund review / performance
- Changes to ATR/CFL
- Market & economic condition
- Legislation & tax changes
State additional info required to advise Ken and Mary of improving the tax efficiency of arrangements following Ken’s return to work (9)
- Investment objectives
- Investment experience
- Level of emergency fund required
- Interest received
- Acquisition date & costs of OEIC, any income taken?
- CGT used? Any carry forward losses?
- Use of other tax allowances
- Willing to transfer ownership of deposit account or OEIC?
- Confirm ATR/CFL
Comment on the tax efficiency or current arrangements (7)
- S&S ISA, tax free growth and income
- May not have used ISA allowance
- Have not used Cash ISAs for tax efficiency of cash holdings
- Premium bonds may pay tax free prizes
- Income from deposit account likely higher than Mary’s PSA of £1,000, excess @ BR
- Ken’s OEIC less tax efficient, potential CGT liability on disposal, tax on dividends @ 8.75% above £2,000 dividend allowance
- Pensions are tax efficient, tax free growth
Recommend and justify actions to improve tax efficiency or financial arrangements now Ken works (4)
Maximize pension contributions
- £3,600 (Mary) and £4,000 (Ken)
- BR Tax relief
- PCLS
- IHT Free
- Tax free growth
Interspousal transfer of OEIC & Deposit accounts
- OEIC = CGT Allowance, DA saves 8.75% excess
- Deposit = Both PSA’s of £1,000 used, save 20% excess
Use full ISA allowance using deposit money or Bed & ISA
- No tax on cash ISA interest
- Growth & income tax free
- Bed & ISA = lock in gains, no CGT, make use of CGT allowance
Consider VCTs, EIS and SEIS’
- Tax relief on amount invested
- Small investment could match ATR
- Tax efficient vehicle (inc tax & CGT)
Explain to Ken how income and capital gains from OEIC are likely to be treated for tax purposes? (5)
- Dividends taxed P.A. (£2,000 but reduce £1,000 23/24)
- Excess over D.A. = 8.75% basic rate
- Potential for CGT on disposal (£12,300, £6,000 23/24)
- CGT @ 10% if gains fall within BR
- Losses can be offset against gains
Factors advisers take into account when reviewing tax efficiency @ next reviews (7)
- Change in circumstances
- Income, outgoings, surplus cash, tax status
- New money / inheritance
- Use of allowances
- Review products
- New products, legislation, taxation
- Use of tax allowances
Benefits of using computer risk profiling (6)
- Will help clients consider their objectives and prioritize
- Help understanding of risk
- Help adviser develop a plan and suitable AA
- No bias
- May prompt further discussion
- Help asses CFL
State & explain risk with current portfolio (6)
- Market risk, market may fall
- Inflation risk, funds on deposit may be eroded by inflation
- Legislation / tax risks, rules and allowances may change
- Interest, interest on cash may fall
- Diversification, no FI or property exposure
- Default risk, FSCS limit is £85,000
State why Ken & Mary should arrange LPA and how this should be set up? (8)
- Incase poor health affairs can be managed
- Property and finance
- Health and welfare
- Paperwork, signed, witnessed and dated
- Register with office of public guardian
- Must be arranged whilst mental capacity
- Appoint attorneys
- Must be certified to confirm donor has capacity and client has not been pressured into decision
