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
Comment on Nick and Shirin’s protection arrangements and identify any weaknesses should either of them die or suffer long term illness (8)
- 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
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)
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
Recommend and justify a suitable protection policy to provide a lump sum in the event of Nick or Shirin suffering a serious illness (7)
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
Explain to Nick and Shirin the State Benefits they would be entitled to if they were unable to work through sickness (2)
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.
Explain how any Bereavement Support Payment may help in the event of Nick or Shirin’s death (7)
- 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
Recommend and justify why Nick and Shirin should keep their existing level term policy (8)
- 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
When considering a review, identify 8 key events relevant to Nick and Shirin when this should be conducted (13)
- 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
Explain briefly why Nick and Shirin should have regular review meetings with their adviser (4)
- 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
Describe how a cashflow model could be used to assist Nick and Shirin in planning their future income needs (11)
- 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
Identify and explain the key client specific factors that apply to Nick and Shirin that you should consider when assessing CFL (9)
- 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
Explain to Nick and Shirin importance of reviewing ATR on a regular basis (8)
- 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?
What are the duties of trustees? (9)
- 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
