TOPIC 15 - The main advice areas

Question 1

Which of the following is not a usual method of setting up a partnership agreement?

a) Automatic accrual.

b) Buy-and-sell agreement.

c) Cross-option agreement.

d) Automatic aggregation agreement.

Answer 1

d) Automatic aggregation agreement.

Question 2

An investment product’s tax treatment is the most important factor when deciding suitability.

a) True
b) False

Answer 2

b) False

Question 3

Which of the following statements is incorrect in relation to the effect of a breadwinner’s death on their family?

a) State benefits are designed to ensure a good standard of living for the surviving family.

b) There may be a need for the survivor to fund childcare.

c) The surviving partner may need to work to maintain the family.

d) The survivor may struggle to maintain mortgage payments.

Answer 3

a) State benefits are designed to ensure a good standard of living for the surviving family.

Question 4

Bland Plc has taken out a key employee assurance policy on Jim, the sales director. In order to qualify as a business expense for corporation tax purposes, the policy would need to be:

a) a whole-of-life policy.

b) a non-qualifying life assurance policy.

c) a term assurance policy with a term of at least ten years.

d) a term assurance policy with a term of five years or less.

Answer 4

d) a term assurance policy with a term of five years or less.

Question 5

Which of the following would be of least concern in later life planning?

a) Long‑term care insurance.

b) Power of attorney.

c) Income protection.

d) Estate planning.

Answer 5

c) Income protection.

Question 6

What is the purpose of the mortgage stress test?

a) To ensure the mortgage is suitable in view of the borrower’s circumstances.

b) To confirm the borrower’s income and expenditure.

c) To ensure the mortgage will be affordable if interest rates increase.

d) To assess the strength and service standards of the lender

Answer 6

c) To ensure the mortgage will be affordable if interest rates increase.

Question 7

There are no negative aspects to consolidating a credit card debt into a mortgage.

a) True
b) False

Answer 7

b) False

Question 8

Which calculation is used to determine the ‘real’ rate of return on a savings account?

a) Rate of inflation divided by the nominal interest rate.

b) Rate of inflation plus the nominal interest rate.

c) Nominal interest rate minus the rate of inflation.

d) Nominal interest rate divided by the rate of inflation.

Answer 8

c) Nominal interest rate minus the rate of inflation.

Question 9

What percentage of national average earnings is the state pension intended to provide?

a) 20%.

b) 25%.

c) 40%.

d) 50%.

Answer 9

b) 25%.

Question 10

Shareholder protection is appropriate for:

a) private limited companies and large corporations.

b) private limited companies.

c) limited liability partnerships.

d) public limited companies and large corporations.

Answer 10

b) private limited companies.

Question 11

What main factors affect the calculation of the level of sickness cover needed by a working parent with children?

Answer 11

The extent of any sickness benefit from an employer; the nature and
amount of available state benefits; the number and ages of the children;
and the availability of any help from family and friends with childcare and
housekeeping

Question 12

What is the purpose of key person insurance?

Answer 12

To mitigate the adverse impact on a business’s profits caused by the death
or long term illness of an important member of staff.

Question 13

Hegley Surveying Services wants to take out key person
insurance on their senior surveyor, Simone. Her annual salary is £47,000. The company’s total annual salary bill is £400,000
and its latest published gross profit was £1.5m. Calculate the appropriate sum assured, assuming the estimated time to recover from the loss of Simone would be five years.

Answer 13

(47,000 ÷ 400,000) × 1,500,000 × 5 = £881,250

Question 14

How does the cross option method differ from the buy and sell method of partnership protection?

Answer 14

It comprises an option to purchase the deceased partner’s share rather
than a binding contract; as a consequence, the deceased’s family or heirs
are deemed to receive business assets rather than cash, so business relief
from inheritance tax can be claimed

Question 15

For which of the following borrowers might a fixed rate
mortgage be most suitable?
a) Ruth, who feels that interest rates will stay the same for the next few years.
b) Sean, who feels that lenders should never charge
arrangement fees.
c) Aditya, who is convinced that interest rates will fall sharply in the short term.
d) Nigel, who believes that interest rates will rise significantly in the near future.

Answer 15

d) Nigel, who believes that interest rates will rise significantly in the near future.

Question 16

Which one of the following repayment vehicles would be suitable for a client who wants an interest only mortgage, but insists that the product must guarantee to pay off the mortgage
at the end of the term?
a) Full with profits endowment.
b) Low cost endowment.
c) ISA.
d) Unit linked endowment.

Answer 16

a) Full with profits endowment.

Question 17

If the cost of living is rising, what is likely to be the main
priority of a customer making an investment?
a) To avoid incurring any further income tax liability.
b) To protect money against the effects of inflation.
c) To be able to access it immediately.
d) To invest money securely.

Answer 17

b) To protect money against the effects of inflation.

Question 18

If the rate of inflation is 2.5 per cent, what yield must an
investor obtain on their deposit account in order to achieve a
real return of 3 per cent?

a) 0.5 per cent.
b) 2.5 per cent.
c) 5.5 per cent.

Answer 18

c) 5.5 per cent. (5.5 – 2.5 = 3%)

Question 19

Nina is a basic rate taxpayer. She pays £162 pm by direct debit
into her personal pension plan. How much is actually invested
in her plan each month including tax relief?

a) £194.40.
b) £202.50.
c) £283.50.
d) £270.00.

Answer 19

b) £202.50. The £162 is the ‘net’ contribution. To work out the ‘gross’
contribution, divide the net contribution by 80 and multiply by 100 (do
not add 20 per cent to the net contribution).
£162 ÷ 80 × 100 = £202.50

Question 20

What rule does HMRC apply in relation to gifts with reservation?

Answer 20

If a donor receives any benefit from a gifted asset, the asset is treated for
IHT purposes as remaining in the donor’s estate.