R06 - Case Study 2 Flashcards
State the additional information that an adviser would require to advise Nick and Shirin on the suitability and tax-efficiency of their current financial arrangements (11)
- CFL
- What are objectives and timescale?
- Is interest being received on deposit accounts
- AA/Diversification within equity funds
- Use of allowances (ISA and Pension)
- Performance of S&S ISAs
- Charges on S&S ISAs
- Are you expecting inheritance
- Willingness to alter portfolio in line with ATR
- Awareness of PSA/Div Allow
- Awareness of CGT allowance unable to use
Comment on Nick & Shirin’s income tax position (7)
- Both higher rate taxpayers
- Both have £500 PSA to use against savings interest
- Both have £2,000 dividend allowance, currently not used
- Income from ISAs is tax free
- Higher rate tax relief on pension contributions
- Could pay more into pension for future fund growth and tax relief
- If they are receiving child benefit Shirin will pay high income child benefit charge
Comment on the suitability of Nick and Shirin’s current savings and investments (11)
- They have sufficient cash for emergency’s
- Is the interest on their savings account competitive
- They have ISAs for tax efficiency
- But neither can use dividend allowance of £2,000
- May not be using PSA in full
- Neither can use CGT
- Shirin’s employer would increase pension contributions to 8% if Shirin matches it
- Shirin’s pension fund doesn’t match ATR
- Overall insufficient diversification
- Both have UK equity funds only in their ISA and Nick’s pension which may match ATR but overweight in equity
- Lack of geographical diversification
Outline the key factors that a financial adviser should consider, when recommending a suitable strategy for Nick and Shirin’s exiting savings and investments (8)
- Objectives
- Use of savings and investments
- Diversification, correlation, AA
- Timescale
- Emergency fund
- CFL/ATR, experience
- Charges and performance
- Planned use of tax wrappers, use of allowances, higher rate tax status
Describe the process that an adviser should follow before giving investment advice to Nick and Shirin (12)
- Establish relationship, disclose status, adviser remuneration
- Establish goals, expectations, objectives, fact finding, affordability
- Timescales
- ATF/CFL
- Amount of emergency fund needed
- Analyse financial and personal situation
- Formulate recommendation
- Tax status
- Likely future tax position
- Fund selection and AA
- Implement recommendation
- Review
Comment on the suitability of Nick and Shirin continuing to hold UK equity funds within S&S ISAs (6)
- Not diversified (geographical or asset class)
- Vulnerable to UK economy
- Shares can be volatile
- Could provide income
- Tax free as in ISA wrapper
- Is there diversification across sectors
Identify and explain to Nick and Shirin the key investment risks of holding equities (5)
- Pricing, depends on supply and demand
- Share dividend volatility, dividends can fluctuate
- Liquidity risk, some shares difficult to sell
- Regulatory risk, misleading info
- Diversification, essential to spread risk associated with equities
Explain how diversification may be used to manage and reduce risk (4)
- Reduces risk by reducing concentration
- Some asset classes are not strongly correlated, loss with one asset class may not be a loss to another
- Geographical diversification spreads risk across number of economies, currencies and national markets
- Sector diversification reduces risk associated with specific areas of the economy or particular firms
Outline the process to review the performance of existing ISAs (12)
- LOA and obtain plan details
- Confirm date of purchase
- Base cost, further investments, withdrawals, fund switches
- Identify reinvestment income
- Calculate performance
- Asses AA
- Identify suitable benchmark
- Compare against the benchmark
- Review charges
- Compare with risk-free return
- Review volatility
- Asses funds against ATR
Identify the reasons why a range of collective investment funds might be suitable for Nick and Shirin (14)
- Improves diversification
- Reduces risk
- Professional management
- No CGT on internal changes (If in unit trust or OEIC)
- Funds can match ATR
- Wide choice of funds
- Can choose monthly/quatrly withdrawals~
- Simply tax reporting
- Less admin, can be held on platform
- Pound cost averaging on monthly contributions
- Reduces market timing risk
- Can use dividend allowance (If unit trust or OEIC)
- Flexible contributions
- Suitable for long term investments
Identify the key reasons why a global equity-based investment strategy might be appropriate for Nick and Shirin (8)
- Potential for growth
- Equities tend to out perform other assets
- Long investment timeframe
- If regular contributions, pound cost averaging
- Reduces risk
- Inflation protection
- Geographical / currency diversification
- Matches ATR
Nick & Shirin are considering making overpayments to their mortgage. State the benefits and drawbacks of them making such overpayments (7/4)
Benefits
- Reduces interest charges
- Reduces debt
- Can make payment up to 10% without penalty
- Peace of mind
- Could reduce mortgage term
- No investment risk
- Could improve credit rating
Drawbacks
- Interest rate is low
- Do they have sufficient surplus income to make overpayment?
- Potential for higher growth if invested elsewhere in line with ATR
- Retaining debt increases flexibility
Identify the additional information that you would need to advise Nick and Shirin on their aim of retiring when Nick reaches age 60 (13)
- Income and capital required for intended travel plans
- Income from savings and investments
- Downsizing, willing to use other assets, expected inheritance
- Lifestyle / smoking status
- Pension contributions history / carry forward available
- State benefit entitlement
- AA on pension, charges, statement, fund choice, projections
- Any other pensions
- Affordability / budget
- Prepared to maximize allowances? Will budget allow?
- Cannot use CGT allowance as only have S&S ISAs
- CFL
- Nomination form done on pension schemes
Identify reasonable assumptions you might make in relation to Nick and Shirin’s retirement planning (5)
- That they continue working full time until Nick reaches age 60
- They they both receive full state pension at SPA
- That they will continue contributing into workplace pension to maximize employer contributions
- Stay in good health
- Willing to use other assets to generate income at retirement
List the factors that a financial adviser would need to consider when advising Nick and Shirin on funding their retirement planning strategy (12)
- Longevity
- Current, planned and future expenditure and capital needs
- Budget / affordability
- State pension age
- AA of funds
- Use of ISA and Pension allowances
-Charges - Priority of objective
- CFL / ATR
- Market conditions
- Expected rate of return on investments
- Impact of death or serious illness of either of them
Describe the process an adviser could use to ensure there are sufficient funds under existing pension scheme to provide necessary level of target benefits at required retirement date (7)
- Establish income required, allowing for inflation
- Calculate fund required based on assumed annuity rate
- Allow for PCLS
- Calculate existing benefits at NRD using growth rates
- Include ongoing funding
- Calculate shortfall and increased contribution required
- Ongoing reviews needed
Outline the factors an adviser should consider and the process they should follow when recommending a fund switch for Shirin (11)
- Fact find
- ATR/CFL
- Timescale
- Charges
- Performance
- Available funds
- AA / diversification
- Select new fund to match ATR
- Present Shirin with documentation
- Obtain permission / implement
- Suitability letter
Recommend and justify ways to help with retirement planning objective (5)
Both maximise pension contribution
- Employer matches contribution
- Maximise tax relief @ 40%
- Help pension fund grow
Utilise ISA allowances for tax free growth
- to add to income in retirement
Both to get State pension forcasts
- Ensure they know what and when they will receive
Review fund choices
- Shirin’s pension fund doesn’t match ATR
- Ensure funds are diversified
Review expenditure
- Make savings where possible
Explain to Nick and Shirin the advantages of maximising their contributions into their workplace pensions to provide and improved income rather than using ISA (4)
- 40% income tax relief
- Higher contributions
- Employer contributions to match upto 8%
- Cannot withdraw before minimum retirement age, saving commitment
Recommend and justify a suitable and tax efficient investment for regular savings for retirement provision for Nick and Shirin (8)
- As aged below 40, can both invest in a LISA
- Annual investment limit of £4,000 (Part of £20K allowance)
- 25% government bonus
- £1,000 for every £4,000 saved
- Until age 50
- Fund can be withdrawn tax free from 60
- If withdraw funds for any other purpose, penalty is charged
- LISAs contain mixture of cash and S&S to match ATR
Compare a LISA and a Pension (9 each)
Retirement Income
- Both can be used for retirement income
Eligibility
- LISA, UK res, 18-40
- Pension, UK res
Contributions
- LISA, £4,000
- Pension, 100% of relevant earnings up to £40,000
Government contribution
- LISA, 25%
- Pension, 40% income tax relief
Withdrawals
- LISA, tax free after 60
- Pension, 25% tax free, rest taxed as income
When can money be taken out?
- LISA, at any time (if before 60, 25% penalty)
- Pension, 10 years before SPA
Tax benefits
- LISA, 25% bonus on contributions under age 50, tax free growth and income, tax free withdrawals after 60
- Pension, up to 40% income tax relief, tax free growth and income, up to 25% tax free
Employer contributions
- LISA, potentially but subject to tax and NIC
- Pension, yes if workplace pension, current employers match up to 8%
Available investments
- Both, funds, shares and cash
Explain the benefits of them being members of their workplace pension schemes (12)
- Tax relief on contributions
- No admin
- Matched employer contributions
- Can use salary sacrifice to save NICs
- Employer may rebate NICs into plan
- Benefit from death in service
- IHT efficient fund
- Tax efficient growth
- Range of income option in retirement
- Wide range of investment funds to meet ATR
- Normally lower costs
- Increased pension in retirement / PCLS
Identify the benefits for Shirin and her employer if her employer pension contributions are increased (6/4)
Benefits to Shirin:
- Builds up pension savings / PCLS
- Tax efficient growth
- Income tax efficient death benefits
- IHT efficient
- Can put in place a nomination for Nick
- Not a P11D benefit
Benefits to employer:
- Reduced corporation tax
- NIC saving
- Employer contributions not limited by income
- In trust so protected against bankruptcy
State the additional information you would require in order to advise Nick and Shirin on their protection needs (14)
- Smoker status / family health
- Details of level term policy already in place
- Affordability
- How much of a priority this objective is compared to others
- Are they planning more children?
- Likely age children will become independent
- Any inheritance due
- ATR
- Expression of wish
- Any planned change in employment
- How much income and capital would they need and for how long?
- Entitlement to State Benefits
- CFL
- Any redemption policy on mortgage
