Suitability Flashcards
To review the suitability and tax efficiency of their current savings and investments
Comment on Alan and Lydia’s current income tax and capital gains tax position (8)
• They are both basic rate taxpayers for the current tax year
• Their income tax status is not known for the next tax year, but they are likely to remain
basic rate taxpayers, depending on income levels drawn from the business
• The ISA holdings are free from income tax and capital gains tax and so are fully tax
efficient
• Interest earned from their deposit account
• Will be subject to income tax if in excess of their Personal Savings Allowance(s) / PSA
£1,000 each
• They are not fully utilising their PSAs
• It is not known if they have fully utilised their ISA allowances for the current tax year
• Neither of them are using their Dividend Allowance / £2,000
• Neither of them appears to have any assets that would be subject to Capital Gains Tax /
they are not using the Capital Gains Tax annual exemptions
Alan and Lydia are concerned that some of their investments may not suit their needs in light of their recent change in employment. Comment on the ongoing suitability of Alan and Lydia’s Stocks and Shares ISA holdings (7)
• In a tax-free wrapper / ISA provides tax free growth and income
• Alan’s funds do not appear to match his adventurous attitude to risk
• Although do / likely to meet his ethical preferences
• Lydia’s funds would appear to match her adventurous attitude to risk
• Although does not / likely not to match her ethical preferences
• Both ISA funds are held in accumulation units
• They need income at the present time whilst they are not drawing any income from the
new business
• Switching to income distribution will improve their income situation
• Funds can be reviewed and switched within the ISA wrapper
Outline the factors that you would take into account in determining Alan and Lydia’s capacity for loss (7)
• They have adequate emergency funds / assets held in cash
• They both have an adventurous ATR
• So could tolerate some volatility
• They have no non-savings income at present
• And are reliant upon their cash assets to meet their monthly expenditure requirements
• They have two young children who will be financially dependent on them for at least 13
years
• They have a mortgage debt which is protected in the event of death, but not serious
illness
• They have no protection policies in place to cover them in the event of death, serious
illness or long-term illness
• They have only recently started their business
Identify the factors that Alan and Lydia should consider when selecting ethical investments
- Their level of engagement / commitment
- Negative / positive screening / ESG / what do they want to exclude / shades of green
- Higher risk / more volatile / smaller companies
- Which suits their ATR
- Limited fund choice
- Difficult to assess for large companies / opaque
- Limited diversification
- Potentially lower returns / higher charges
5.
Describe six benefits and six drawbacks of Alan and Lydia considering investing in tracker funds within their Stocks and Shares ISAs (12)
Benefits
Benefits
• Low cost / cost effective
• Run by computer system / no human judgement
• Potential for growth
• Perform in line with the index
• Exposure to different asset classes
• Geographical diversification / wide range of indices to track
• Simple to understand / ease of access to markets
Describe six benefits and six drawbacks of Alan and Lydia considering investing in tracker funds within their Stocks and Shares ISAs (12)
Drawbacks
Drawbacks
• Will underperform the market due to charges
• Tracking error / will never match the market exactly
• Perform poorly in a falling market
• No active management / no Alpha
• Currency risk due to global trackers
• Lack of control over underlying assets
• Index can be over exposed to single sector / company stock
• Could be exposed to Counterparty risk depending upon replication method
• Difficult to incorporate ethical preferences
Explain to Alan and Lydia why Multi-Asset funds may be suitable for investing their surplus cash, once the company has a stable positive cashflow (8)
- Diversification across all asset classes / geographical spread
- Potential for growth
- Correlation of assets controlled / non correlation
- Reduces volatility / risk
- Actively managed / professional management
- Rebalances regularly
- Risk rated to match attitude to risk
- Access to specialist investments e.g. exchange traded funds (ETF), derivatives etc.
Alan and Lydia are concerned about their overall investment strategy. Identify five benefits and five drawbacks of them appointing a discretionary fund manager to look after their investments (10)
Benefits
Benefits
• Professional / active management / bespoke / rebalancing
• Potential for improved returns/potential for growth
• Regular reviews.
• Will target objectives / bespoke service.
• No requirement for ongoing involvement / reduces personal involvement
• Consolidated tax statements / information / reporting provided
• Wider investment options / access to larger range of investments / can incorporate
ethical preferences
• Can utilise tax efficient allowances / automatic use of tax allowances / exemptions
• Can incorporate GPPP funds
Alan and Lydia are concerned about their overall investment strategy. Identify five benefits and five drawbacks of them appointing a discretionary fund manager to look after their investments (10)
Drawbacks
Drawbacks • Higher charges. • No guarantee of performance. • May not provide regular service. • Lack of control. • May invest in unacceptable sectors • May not provide tax advice / tax efficiency not always considered.
Explain to Alan and Lydia, in brief terms, the features of a platform (8)
• The core purpose of a platform is to offer access to a wide range of investment funds or collective investments
• Different platforms offer access to different types of collective investments
• Open architecture wrap platforms tend to offer unfettered access to OEICS, investment
trusts and ETFs
• The wrappers can include ISAs, UT/OEICs, investment trusts, pension contracts and
investment bonds
• The investor’s holdings are all shown in a single account
• Which is usually accessed online
• Which enables investors to view their total assets and asset allocations
• And the up-to-date value of their investments in one place
State six benefits of Alan and Lydia using a platform for their investments (7)
- Greater fund choice / managers
- Access to different asset classes e.g. ETFs, individual shares etc.
- Automatic rebalancing available / ease of fund switching
- Ease of administration / investments held in one place / online access
- Possible cost savings
- Re-registration / no CGT / not out of market
- Easier to use CGT exemption / ISA allowances
- Can use discretionary fund managers / model portfolios / specialist funds
