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R06 - April 2023 > R06 - Case Study 2 > Flashcards

R06 - Case Study 2 Flashcards

1
Q

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)

A
  • 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
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2
Q

Comment on Nick & Shirin’s income tax position (7)

A
  • 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
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3
Q

Comment on the suitability of Nick and Shirin’s current savings and investments (11)

A
  • 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
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4
Q

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)

A
  • 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
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5
Q

Describe the process that an adviser should follow before giving investment advice to Nick and Shirin (12)

A
  • 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
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6
Q

Comment on the suitability of Nick and Shirin continuing to hold UK equity funds within S&S ISAs (6)

A
  • 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
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7
Q

Identify and explain to Nick and Shirin the key investment risks of holding equities (5)

A
  • 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
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8
Q

Explain how diversification may be used to manage and reduce risk (4)

A
  • 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
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9
Q

Outline the process to review the performance of existing ISAs (12)

A
  • 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
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10
Q

Identify the reasons why a range of collective investment funds might be suitable for Nick and Shirin (14)

A
  • 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
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11
Q

Identify the key reasons why a global equity-based investment strategy might be appropriate for Nick and Shirin (8)

A
  • 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
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12
Q

Nick & Shirin are considering making overpayments to their mortgage. State the benefits and drawbacks of them making such overpayments (7/4)

A

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

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13
Q

Identify the additional information that you would need to advise Nick and Shirin on their aim of retiring when Nick reaches age 60 (13)

A
  • 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
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14
Q

Identify reasonable assumptions you might make in relation to Nick and Shirin’s retirement planning (5)

A
  • 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
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15
Q

List the factors that a financial adviser would need to consider when advising Nick and Shirin on funding their retirement planning strategy (12)

A
  • 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
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16
Q

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)

A
  • 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
17
Q

Outline the factors an adviser should consider and the process they should follow when recommending a fund switch for Shirin (11)

A
  • 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
18
Q

Recommend and justify ways to help with retirement planning objective (5)

A

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

19
Q

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)

A
  • 40% income tax relief
  • Higher contributions
  • Employer contributions to match upto 8%
  • Cannot withdraw before minimum retirement age, saving commitment
20
Q

Recommend and justify a suitable and tax efficient investment for regular savings for retirement provision for Nick and Shirin (8)

A
  • 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
21
Q

Compare a LISA and a Pension (9 each)

A

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

22
Q

Explain the benefits of them being members of their workplace pension schemes (12)

A
  • 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
23
Q

Identify the benefits for Shirin and her employer if her employer pension contributions are increased (6/4)

A

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

24
Q

State the additional information you would require in order to advise Nick and Shirin on their protection needs (14)

A
  • 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
25
Q

Comment on Nick and Shirin’s protection arrangements and identify any weaknesses should either of them die or suffer long term illness (8)

A
  • Both have death in service cover, will stop if they leave current employment
  • No cover for long term illness
  • Neither has critical illness cover or income protection
  • Level term assurance is not designed to cover repayment mortgage
  • Neither has private medical insurance
  • Unclear if nomination form has been completed for their pension plans
  • Mortgage term is for another 20 years, would they prefer to pay this off sooner?
  • Where property is left to discretionary trust on second death the residence nil rate bands will not be available
26
Q

Recommend and justify recommendations you would make in respect of providing financial security for the family of either Nick or Shirin were to suffer a serious illness or long-term disability? (8)

A

Income protection for both
- Pays out a tax free income in the event of long-term illness or disability

Maximum benefit allowable (50-65% of earnings)

Term
- To selected retirement age / when Nick is 60

Deferred Period
- To fit with statutory sick pay provision as no employer benefits

Own occupation definition
- Best possible cover

Indexation option
- Benefits keep pace with inflation

Guaranteed premium
- For known cost

House person’s cover
- Pays out a tax free income in the event of long term illness or disability

27
Q

Recommend and justify a suitable protection policy to provide a lump sum in the event of Nick or Shirin suffering a serious illness (7)

A

Level term stand-alone critical illness policies for both
- Tax free lump sum / income in the event of diagnosis of a serious illness

Single life policies x 2
- Amount needed in the event of serious illness may differ

Sum assured
- To be agreed, sufficient to provide for family / modify property / pay for treatment

Term
- To be agreed, retirement or mortgage

Guaranteed premiums
- Certainty of cost throughout term

Waiver of premium
- Maintain policies in the event of long-term illness or disability

Policies should at least meet Association of British Insurers best practice guidance for CIC cover
- Best level of protection available

28
Q

Explain to Nick and Shirin the State Benefits they would be entitled to if they were unable to work through sickness (2)

A

Statutory Sick Pay
- Both entitled as earning over £123 per week
- Not taxable or means tested
- £99.35 per week
- Only payable up to 28 weeks, paid by employer.

Employment and Support Allowance (ESA)
- After 28 weeks
- £77 per week during 13 week assessment phase
- From week 14, if assessed as unable to work, £117.60 per week, if assessed as able to work, enter work related activity group and continue to receive £77 per week.
- New style ESA is taxable but not means tested.

29
Q

Explain how any Bereavement Support Payment may help in the event of Nick or Shirin’s death (7)

A
  • Initial payment followed by up to 18 monthly payments
  • £3,500 and 18 x £350 p/m where claimant pregnant at time of partner’s death or is entitled to receive child benefit
  • All other claimants £2,500 and 18 x £100 per month#
  • When spouse dies survivor must be under SPA
  • Not means tested
  • Deceased must have paid class 1 or 2 for at least 25 weeks in any tax year prior to death or job-related accident or illness
  • All payments will be made if claim within 3 month of partners death
30
Q

Recommend and justify why Nick and Shirin should keep their existing level term policy (8)

A
  • No other personal life cover in place
  • Can be put in trust to provide IHT cover / outside estate
  • No surrender value
  • Replacement cover may be more expensive
  • May pay out on terminal illness
  • Guaranteed cover if help deteriorates until maturity
  • No adviser cost for setting up new policy
  • No inconvenience
31
Q

When considering a review, identify 8 key events relevant to Nick and Shirin when this should be conducted (13)

A
  • Change in ATR or CFL
  • Changes in either tax positions
  • Changes in health of either of them
  • Death of one of them
  • Birth of a third child
  • Seperation
  • End of tax year (use of allowances)
  • Change in employment
  • Review progress against objectives
  • Legislation or economic changes
  • Review of fund performance of inv and pens
  • Repaying the mortgage
  • Inheritance received
32
Q

Explain briefly why Nick and Shirin should have regular review meetings with their adviser (4)

A
  • Can react to changes in circumstances, ATR, tax position, new product, use of allowances
  • Reinforces client relationship
  • Ensures plans are on track
  • Check AA and performance and recommend any changes necessary
33
Q

Describe how a cashflow model could be used to assist Nick and Shirin in planning their future income needs (11)

A
  • Identifies objectives
  • Helps identify surplus income
  • Quantifies capital/income required to meet objective of retiring when Nick is 60
  • Identifies required / expected rate of return
  • Inflation assumptions
  • Likelihood of achieving objectives
  • Identifies when clients will run out of money
  • Can stress test loss or change in income
  • Helps establish CFL
  • Structures finances
  • Use of tax efficient wrappers
34
Q

Identify and explain the key client specific factors that apply to Nick and Shirin that you should consider when assessing CFL (9)

A
  • They have emergency fund and £93,000 invested in S&S ISAs so able to tolerate some loss
  • Both earn good salaries
  • High ATR
  • Surplus income of £1,500 per month each
  • No liabilities beyond mortgage
  • Two young children
  • Potential inheritance
  • Long time frame until retirement
  • Currently in good health
35
Q

Explain to Nick and Shirin importance of reviewing ATR on a regular basis (8)

A
  • ATR differs for different objective
  • Changes based on experience
  • Changes based on personal circumstances or health
  • Changes based on income / inheritances
  • Changes as clients get older
  • Children’s needs may change
  • Fund performance, market performance and ensure investments match ATR
  • How much risk do they need to take or afford to take, what if target achieved?
36
Q

What are the duties of trustees? (9)

A
  • To hold property and administer for benefit of beneficiaries
  • Hold title document to any trust property
  • Everything must be for the benefit of the beneficiaries
  • Invest any cash wisely or pay it out to beneficiaries immediately
  • Take account of the standard investment criteria
  • Monitor investments
  • Avoid conflicts of interest
  • Use utmost diligence
  • Keep proper accounts

R06 - April 2023 (4 decks)

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