Topic 15 Flashcards
Explain the importance of budgeting
Budgeting for families and individuals is very essential in order to visualise their essential costs so they are able to understand what is available to them once these are covered. With this information they will be able to spend on leisure and holidays without guilt or stress of over spending and not being able to cover their bills.
Budgeting also allows families and individuals to plan for big purchases that are important and other financial goals such as buying a house or a car or retirement allowing them to understand where to save and cut costs. Finally they can be less reliant of financial tools with high interest such as a credit cards to avoid unwanted debts or to control debt in order to make early payments or to avoid higher costs for late payments.
Explain family protection needs
The family can be reliant on a primary earner therefore term insurance should be invested in early as the premium payments are lower with higher payments for those of younger ages therefore the investment into the insurance is encouraged as well as for the primary caregiver if they were to pass away the expenditure on caregiving and other services will increase therefore a insurance with regular payments is an encouraged investment for those at younger ages. This will also affect any loan or mortgage payments therefore cover should be invested in from an early age to cover this financial burden.
Along with this if for any reason income is affected due to illness or unemployment then the families or individual should look at cover to invest in either a lump sum or regular payments for the duration of the illness or for the duration of unemployment.
Explain business protection needs
If a business is to lose a key employee such as a lead engineer or a managing director then the assurance policy can cover the damages that will be seen to profits for the business as well as fund training for the replacement. This can be calculated from the profit generated which can be seen from that employee and the duration of their replacement e.g. 500,000 profit generated and absent for 5 years then the policy will pay out 2.5 million.
If a business partner dies and the business will go into administration due to this then protection is needed as then options can be presented such as buying out the shares from the other partner or to redistribute the shares to the remaining partners or other written agreements.
Explain the impact of sickness on a sole trader
Usually a sole trader has a single individual who is in charge of major decisions and responsibility lies upon them as they are commonly a smaller operation therefore illness is much more impactful as this can cause a loss in customers and reputation as well as the increase in financial burdens and mental health deterioration due to this therefore policies put in place will aid the sole trader in their financial burdens which they can use in order to hire a replacement or cover debt relieving their financial worries.
What advise should be given to clients
Clients should be advised to budget properly with their essential payments and debts accounted for first and then their short term and long term emergency funds with policies then adjust and monitor throughout the year.
They should then look at life assurance and other policies suited for their life style just in case of any emergencies and other safeguards.
For the individuals and families with a business these policies and safeguards are needed to be looked at and adjusted in order to get the most out of their policies and plans .
They should always be advised to consult a financial consultant and to schedule meetings annual to adjust their budget, plans and goals.
What effect does the sickness of an employee and a business partner have on a business
The effect the employee can have on a business is that the skills which are required from that employee are missing slowing down production and quality of the product which will harm the reputation due to slower production or lower quality as well as a decrease in profits. The insurance companies can help by funding the training of a new employee and cover the loss as well as the hiring of temp workers for the duration of the loss.
The loss of a business partner can be more server as it can cause conflict between the partners due to the higher workload as well as the financial constraints on the other partner as they are ill. This can be resolved through either the buyout of shares if the illness is consistent or through the policies in place offering financial support to the business until the illness is resolved.
what are the key consideration in borrowing
The stress and affordability has to a major consideration for the borrowing as the financial stress and potential of repossession can cause the long term downfall of their financial situations which would not be a good move but if they are able to afford is a good suit for the client then it should be considered as a viable way of funding.
The type of borrowing which it is either interest rate type with a fixed rate of interest creating predictability but can have a higher initial and slightly higher rate. The loan to value ratio also needs to be considered as this can be used to assess the true value and benefit of the loan.
The protection of the loan also needs to be considered as the loan if unsecured by any insurance product can be very detrimental as repossessions of property and even more debt is never good thats why products such as job loss protection and mortgage protection is advised.
what are the key consideration in investing
The reason for the investment needs to be looked at first if it is income generating such as for income or for living expenses then bonds and stocks can be looked at. If the investment is for capital accumulation to either fund education or other purchases in the future.
The type of investment needs to be looked at if the payment used is regular savings then it will be appropriate for steady wealth with flexibility or a lump sum which can be generating greater returns but will not be readily available. Along with the risk that needs to be looked at of the investor.
Other considerations that need to assessed are inflation so the investment would need to be in line or greater than this rate predicting the market as well as the tax of the investment and ways to maximise the usage of tax vehicles such as an ISA account.
What is the impact of inflation and the money illusion
The impact of inflation can be detrimental to the investment as the real rate may be way lower than the nominal rate due to inflation therefore advisors must highlight the real rates which the investment will yield in order for the client to have a better understanding.
This will tie into the money illusion as a individual may look at the nominal rate instead of the real rate over inflating the confidence of the client therefore advisors must educate the client on the real rate to give a greater understanding of their wealth and assets to avoid over spending or reliance on this.
what is saver and risk appetite as well as borrower and debt management
The saver and risk appetite is the impact of low interest rate which will encourage the saver to look to risky investments in order to gain their interest rates back, this can be deadly to the client as chasing high interest rates through volatile investments can cause long term loss therefore they should be advised to diversify or to aim for a little lower returns in an attempt to gain stability.
The borrower and debt management is the overextension of ones financial situation leading to high interest loans such as a mortgage to be taken out as the monthly payments look affordable however in the long term the fluctuation in interest can make the debt crippling therefore advisors must educate the client on the impact of the inflation and advise fixed rate loans to avoid the fluctuations.
explain retirement planning and estate planning with inheritance tax
The retirement plan is crucial to start early to avoid the financial burden when older as well as better rates with compounding longevity. There are many challenges with pensions as they aren’t enough through the state also clients could have a lack of sufficient savings and now employee baring more risk. The advisors should be be able to help through tax reliefs as well as state pensions used to its full extent, making sure contributions into private and state pensions are to the optimal amount.
The estate planning and inheritance tax is a plan which should be discussed firstly with the will along with expert help in order to construct it along with any tax mitigations which can be done and taken advantage of with the idea to move more into trusts to avoid the tax and finally to make full use of the nil rate band and any unused nil rate to gain the max amount. The advisor should make sure that all tax benefits are used with a plan in place in order to retain as much as possible.
explain life assurance policies for inheritance tax
life assurance can be taken out ot cover the inheritance tax for a client which the tax is unavoidable and is still seen to be too much making a negative impact of the wealth transfer therefore a life assurance policy can be taken out in order to cover the tax.
The type of policies can be the whole of life assurance which is the most common and will pay out at the point of death cover all the cost however there is also term assurance if the tax is seen to be higher at different times. This must be written in the trust with the advisor helping to pick the right plan for the client as well as making a trust and exploiting all possible tax reliefs and the management of the plan.
what is the role of a advisor in tax planning
The advisors role i to make the more tax efficient plan for the client with a holistic view of their financial goals allowing them to be the most efficient on their road to their goals as not all tax efficient vehicles are suitable for all plans.
The advisor should look at all recommended tax efficient vehicles such as an ISA account as well as the capital gains tax management to help navigate where the allowance is used up and gilt and other tools are used to help minimise the liability.
They should also recommend the right life assurance plans to avoid tax but may not be suitable for all clients therefore all the tools need to judged and assessed in order to benefit the goals of the client first then stop liabilities.
explain offshoring considerations in tax panning
Offshore accounts and ties to offshore bonds and income needs to be considered and looked at when planning for tax as it can be a very useful tool in order to maximise income. When a client is either emigrating or immigrating the considerations can be different.
A client which is emigrating would have to look at the new tax laws of the country which they are moving to as well as any reliefs that are beneficial to them in the uk compared to the country being moved to therefore they are able to exploit the tax systems when planning especially when a business is considered with capital gains tax and allowances.
If a client is immigrating then they would have to compare their countries tax laws to the uks tax laws to see where they can be taking advantage especially with allowances being granted and the business laws to avoid being taxed twice from both countries.
explain the importance of regular reviews for financial planning
Regular reviews are very important for both the client as well as the advisors as this can make sure that both parties when planning are on the same page and can communicate any problems or any changes to the plan or goals in order to fit their financial goals.
Some reasons why they are necessary is because of real life events which could change the plans such as financial increase or decrease or a life threatening illness which will stop the flow of income. Another reason would be the change in financial goals therefore there will need to use of new tools and vehicles in order to achieve those goals and finally for changes in the market or economy which would force the goals to change or the investment therefore if left unchecked can be a loss of their profits and can deviate from the goals set in place.
