Retirement Income/Standard Of Living

Question 1

Kathy’s Valnerability ways to handle

Answer 1

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

Question 2

Benefits of receiving advice

Answer 2

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

Question 3

Benefits of using a lifetime cash flow model

Answer 3

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

Question 4

What factors and assumptions are required for a cash flow model?

Answer 4

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

Question 5

Risks of relying on lifetime modelling

Answer 5

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

Question 6

What is the process an advisor should follow for advising Kathy on pensions?

Answer 6

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

Question 7

Explain the purpose of stochastic modeling

Answer 7

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

Question 8

What are the limitations of using asset allocation modelling?

Answer 8

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

Question 9

Sutability and tax efficiency of Kathy’s pension arrangements

Answer 9

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

Question 10

How does state pension increase?

Answer 10

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

Question 11

Benefits of differing state pension

Answer 11

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

Question 12

Drawbacks of differing state pension

Answer 12

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

Question 13

Explain bereavement support payment and why Kathy would not get it?

Answer 13

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

Question 14

What is important about holding an emergency fund and how would we decide a suitable level?

Answer 14

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

Question 15

Comment on the sutability of Kathy’s UK managed fund for her personal pension

Answer 15

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

Question 16

Explain flexi access drawdown

Answer 16

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

Question 17

Explain lifetime annuity

Answer 17

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

Question 18

Explain UFPLS

Answer 18

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

Question 19

Explain short term annuity

Answer 19

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

Question 20

Advantages of flexi-access drawdown

Answer 20

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

Question 21

Disadvantages for flexi-access drawdown

Answer 21

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

Question 22

Explain sequencing risk

Answer 22

-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

Question 23

What are the benefits of making additional pension contributions in retirement?

Answer 23

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

Question 24

Explain to Kathy how purchased life annuity works

Answer 24

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

Question 25

What is it important to do regular reviews on Kathy’s retirement?

Answer 25

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

Question 26

Recommend a justify the actions you can take to ensure Kathy has sufficient income through retirement

Answer 26

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

Question 27

Factors affecting Kathy’s Valnerability

Answer 27

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