The Customer Flashcards
What are the stages in the personal financial lifecycle (7)?
- childhood
- young single
- young partnered
- starting a family
- family with older children
- post family/pre-retirement
- retirement
Who meets the financial needs of a child and what are those needs?
the parents
food, shelter, clothing and education, school fees (higher education costs), saving pocket money, allowance
What are a young single persons primary protection needs (2)?
- emergency fund
- protect their earnings
What is the purpose of an emergency fund?
provide a lump sum to meet urgent or unexpected costs (e.g. car repair or unemployment)
can also be supplemented by short-term savings
What are the consequences if you don’t have an emergency fund?
not continue contributing to long-term investment plans or protection policies
What is a positive of having sufficient emergency funds?
provide longer term investment plans - fund pensions
What does the term standard of living mean?
to describe how well a family lives in terms of having their needs and wants met
Which of the following needs should a family with young children tackle first:
a) building emergency fund
b) saving for a pension
building emergency fund
Do kids need to get protection for the financial consequences of their parents ill health or death when in the post-family/pre retirement phase?
no - if they are financially independent
What is inheritance tax?
tax payable when someone dies
When is inheritance tax payable?
at date of someone’s death, if their estate is worth more than £325,000 (£500,000 if they leave their home to their kids/gkids)
To maintain the same standard of living in retirement as when you worked, what is the annual retirement income you need?
2/3 of the final years employment income
What are the three retirement income categories?
- low pension, little capital
- relatively low pension, some capital
- sufficient pension income, substantial capital
What are the options available for those with low pension income and little capital?
seek financial assistance - state benefits and charities, help from relatives
What are the options available for those with a relatively low pension and some capital (2)?
1.where a customer has capital - this can supplement relatively low income
2.risk averse customers - capital can buy a lifetime annuity (pays out secure, lowish income to customer for rest of life)
What are the options available for those with a sufficient pension plus substantial capital (3)?
- protect income and investment from inflation risk
- skilful investment
- comprehensive plans to minimise taxation
What is inflation risk?
customers who save with banks and building societies receive interest - interest is quite low but can be at risk of inflation
inflation is the rate at which general prices are rising - as prices rise the purchasing power of money falls
What is investment risk?
possibility for customer to lose some or all of money used to buy a specific investment
How are shareholders exposed to investment risk?
the company runs into financial difficulty and cant pay the dividend payment to shareholders, or the company goes bust
How are bonds exposed to investment risk?
if a company does not make enough money to pay its interest payments or to return the bondholders capital on maturity
What is an asset?
what a person owns
What is a liability?
what a person owes
What does it mean when an asset exceeds a liability?
surplus capital available to invest - can be arranged to produce a better return, disposed of or help fund a pension plan which attracts tax concessions
What is a liquid asset?
an asset which can be turned into cash quickly without loss
What does it mean when liabilities exceed assets?
action is required to ensure the liabilities are met at their sue date or earlier than the death of the borrower
e.g. savings plan to repay
What questions should a person ask themselves if they have an investment portfolio? (4)
- what is the purpose of the investments
- does this portfolio meet future financial needs
- are the investments performing well
- does risk profile of investments match risk profile of their investment objectives
What are the limitations to the personal financial lifecycle model? (2)
- some peoples do nor fit into the lifecycle pattern - e.g. those who remain single
- some peoples incomes do not fit into the lifecycle pattern
A socially responsible fund is another name for what type of investment ?
ethical fund
What customer information do life and pension providers need when a customer is ready to buy a financial product? (3)
- personal details
- information relating to the policy
- customer need and objectives
What is the name given to the document a financial adviser uses to gather customer information?
a fact find
What are examples of tax? (3)
- income tax
- capital gains tax (CGT)
- inheritance tax (IHT)
What is the purpose of tax?
raise money for the government - then pays for services needed by the country
What is income tax?
tax deducted from salaries before they are paid out
from self-employed it is deducted from profits
What is capital gains tax (CGT)?
tax payable when a profit is male on a sale of an asset
What is a tax concession? (2)
- the return from a product will be tax free - such as interest on a cash individual savings accounts (an ISA)
- customer receive tax relief on the money they put into a product - pension schemes
In order of priority, what are the hierarchy of financial needs?
1. emergency fund
2. protection
3. pension
4. saving and investments
5. IHT planning
**predictable future events
unpredictable future events
At what stage of the personal financial lifecycle is preserving income and wealth likely to become a priority?
retirement
What are the barriers to accurately recording customer information? (4)
- failure to listen and accurately record what customer says
- not clarifying precisely
- failure to establish early if the customer needs extra help or time to give accurate information
- if customer is getting impatient with process = information not disclosed
