Retirement Income/Standard Of Living Flashcards
Kathy’s Valnerability ways to handle
PATIENT-R
Present with a trusted friend
Allow more time in meetings
Tailored flexability (changing needs)
Information recording and update records with valnerabilty
Explain in writing
No jargon
Trusted confidentiality (but shared with other service providers)
Regular reviews
Benefits of receiving advice
Access Attitude for risk and capacity for loss
Advise against bad practice
Budget and cash flow modelling
Benefit from advisors’ research
Circumstances of client shape recommendations
Determine sutability of existing arrangements
Explain clearly
Find an effective tax plan
onGoing service
Higher consumer protection
Identify goals and objectives
Benefits of using a lifetime cash flow model
SWIG-RAS
Shortfalls in current/future cashflow
Withdrawls impact
Inflation impact
Growth rates based on ATR
Required returns identified
Adjustable to circumstance
Stress testing investments
What factors and assumptions are required for a cash flow model?
Lifetime-Loan-Haal
Lump sum requirements
Income changes
Future and current tax rates
Expenditure through retirement
Target amount now and in the future
Inflation expectations
Making use tax wrappers
Expected growth rate
Lump sums expected
Attitude for risk and capacity for loss
Other sources of income
Non-pension assets (financial/not)
Health, life expectancy, and LTC need
Affordability of lump sums
Assumption of charges
Lifetime gifts and will provisions
Risks of relying on lifetime modelling
FACT-R
Figures estimated and requires review
Assumptions can turn out to be wrong
Circumstances/objectives may change
Tax conditions and wrappers may change
Risk liquidity/market not taken into account
What is the process an advisor should follow for advising Kathy on pensions?
R-FRED-DAR
Relationship - cost/scope of practice
Fact-find (goals/objectives)
Risk and capacity for loss
-client agreement presented and signed
Evaluate current funds
-contributions recencent/in the future
-pension deferals
Develop and research plan
Discuss plan and documentation (KID/sutability)
Agree and implement
Review
Explain the purpose of stochastic modeling
Analyses potential risk and return
Compares ATR against portfolio
Suggests asset allocation to meet the objective
Forecast shows potential future values
In a range of market conditions
Indicates ontrack/under/over
What are the limitations of using asset allocation modelling?
Warmer
Wrappers - wrappers and tax position not taken into account/recommended
Assumptions- assumptions change/based on historic data
Relevant - Questions asked are not always relevant
Models - different models produce different results
Excludes- charges
Review- needs reviewing/only relevant at a specific time
Sutability and tax efficiency of Kathy’s pension arrangements
Causious to medium risk investor
There is no mention of capacity for loss, which could be established
New state pension
-is guaranteed
-Increase with triple lock
-Any protected increases with CPI
-With protected from inflation
State pension can be deffered
-if not already done so
-helpful boost to income later in retirment
-must have sufficient income for current needs
Spouse DB pension
-guaranteed
-protected by PFF at 100% if the employer goes insolvent
-if in PFF does not raise with CPI so inflation could be more of a problem
At 67 can continue to make contributions upto £3600 gross as a non-earner
Has PP
-valued at £200000 not yet touched
-Invested in UK managed funds
-may match causious to medium ATR
-does not align with ESG
-Could provide tax-free lumpsum of £50000
-And taxable income through an annuity/flexi access drawdown
How does state pension increase?
With triple lock
Which is the higher of the consumer price index, average national wages or 2.5%
Any protected amount will increase with CPI
Any deffered amount will increase with CPI
Benefits of differing state pension
Increases income later in retirement
Saves on income tax
When she restarts state pension the income will increase by 1% for every 9 weeks deffered
This is due to Kathy receiving pension after April 2016 meaning she is on the new state pension rather than basic state pension
Extra amount is paid with her regular state pension payment
Drawbacks of differing state pension
No option to take lump sum
Takes a long time to catch up on missed payments
Extra amounts increases with CPI rather than the triple lock
Only one defferal allowed
Explain bereavement support payment and why Kathy would not get it?
Pays a lump sum of £2500 to someone with no children under 20 in full-time education
Then, a maximum of 18 months at £100
Not taxable
Not means tested
Does rely on NIC contributions of deceased
Must be claimed within 3 months of death
And only if under state pension age
Kathy is over SP age, so she can’t receive
What is important about holding an emergency fund and how would we decide a suitable level?
CAN
Can meet unexpected expenditure
Able to meet needs in an emergency
No need to cash in less liquid investments
Identify
-current expenditure
-planned expenditure
-surplus income
-State benefit entitlement
-Inheritances due
-Financial support from family
Aim for 3-6 months expenditure
Comment on the sutability of Kathy’s UK managed fund for her personal pension
Diversification
-wide range of asset classes, which increases diversification
-adds diversification to overall portfolio as not all held in cash
-single geographic location lowers diversification
-asset diversification limits potential for rapid growth
Risk
-potential for inflation protection
-No currency risk as UK only
-No political/regualtory risk as UK only
-may not be in line with ATR
Tax
-Not included in estate for IHT, though, due to change in April 2027
-Income and capital gains tax-free as in the pension wrapper
Liquidity
-Potential to switch depending on fund choice availability
-Kathy over is over 55, so no restrictions on access
Explain flexi access drawdown
Take 25% PCLS
Enter into flexi access drawdown
Withdraw further funds either regularly or ad-hoc
Income tax under PAYE
Potential for tax-free income and gains on underlying funds
Fund currently outside estate
On death, tax treatment depends on age under 75 tax-free, over 75 taxable at recipients rate
Unlikely to suit cautious-medium ATR
Explain lifetime annuity
Take 25% pcls
Use the remaining funds to buy annuity
Income taxed under PAYE
Capital not included in estate, and any guarantee would be IHT free
Would likely suit causious to medium risk
Explain UFPLS
Take UFPLS when required
25% of each is lump sum tax-free
Remaining 75% income taxed under PAYE
Fund currently out of estate
Unlikely to suit causious to medium risk
Explain short term annuity
Provides guaranteed income
Retains some flexible income options with the pension
Can benefit if annuity rates rise in the future
Potential for capital growth remains on residual fund
IHT benefits currently remain on residual fund
Less administration
Can include value protection
Escalation to protect against inflation
No investment risk
May suit causious to medium ATR
Maximum term of 5 years
Advantages of flexi-access drawdown
GET-F(ing)-FAT
Growth potential
Estate not affected for IHT (currently)
Tax-efficient income is possible
Flexible income possible
Flexible death benefits
Annuity rates may change
Tax planning for thresholds
Disadvantages for flexi-access drawdown
TO MIFED
Triggers money purchase annual allowance
Ongoing advice and reviews are required
Mortality drag
Investment risk
Fund many run out
Extra/increased fees
Doesn’t guarantee income
Explain sequencing risk
-Funds being drawn down are exposed to sequencing risk
-It refers to the impact of a loss early on for a client’s capacity to take withdrawls over the long term
-Running down amounts to pound cost averaging in reverse
-when the price is low, more is sold. When the price is high, less is sold
-taking regular withdrawals of capital exaggerates the fluctuations doesn’t smooth them
What are the benefits of making additional pension contributions in retirement?
Tax relief up to £3600 non-earner limit
Boost PCLS
Boost tax efficient fund
Boost potential for growth
Greater retirement income
Disciplin/pound cost averaging
Flexible options later in retirement
Current IHT efficiency
Intended beneficiary can be nominated/flexible death benefits
Fund choice can match ATR and ESG preference
Explain to Kathy how purchased life annuity works
Bought with own funds
Income can be level or increasing
Can guaranteed term to payout if death happens within the term
Can add capital protection to payback any unspent capital element back to the estate on death
Split into interest and capital elements
Only interest elements are taxable as savings income, usually deducted at source
Capital content return of capital is fixed at outset based on purchase price
Calculated by dividing the purchase price by the number of years life expectancy at outset
What is it important to do regular reviews on Kathy’s retirement?
CLICR
Changes in personal circumstances/health/finance
Legislation changes on funds/tax wrappers/state benefits
Identify underperforming funds and monitor
Changes in fund costs or cheaper products available
Rebalance investments or change funds
Kathy crosses non-earner threshold
Her tax relievable contributions stop at 75
Recommend a justify the actions you can take to ensure Kathy has sufficient income through retirement
Lifetime cashflow modelling
-To determine the amount required
Claim any state benefit she is entitled to.
-To boost secure income
Claim any missed national insurance credits or pay national insurance contributions level 3
-To fill gaps in NIC record and boost new state pension
Deffer new state pension
-if affordability allows, and it hadn’t been done before.
-To benefit from higher income in the future and save income tax now.
Takeout purchased lifetime annuity
-to secure tax efficient income
-reduce estate for IHT purposes
Draw from non pension investments initially
-so pp cab stay within pension environment
-to benefit from further tax-free income and growth
-and retain IHT benefits
Review PP performance
-to ensure ongoing suitability
-allignment with ATR
-and ESG preference
-disatisfied with performance or fund choices, consider switching
Make contributions as non-earner
-if affordability allows
-up to £3600 gross/£2880 net
-To benefit from tax relief of 20% on contributions
-maximising potential for fund growth
Utilise funds from PP
-to purchase annuity or enter flexi access drawdown
-in line with Kathy’s ATR
-and depending on whether she needs a further source of secure income or not
Ensure completion of nomination for pensions
-ensure no delay on the funds being paid out on death
-and that they go to the intended beneficiary
Factors affecting Kathy’s Valnerability
Kathy is recently bereaved
Ongoing probate could cause stress
Circumstances have changed
Alan appears to have been more involved in investments
Kathy may have limited financial knowledge
May have to make important decisions with lots of money
May struggle with the sentimental ties to Alan’s investments
