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.
