Topic 15 (The main advice areas) Flashcards
Why is Budgeting important?
The need to budget underpins all other forms of financial planning and reflects the need to have enough money to pay for everyday living
What are the consequences of the death of the main earner?
> surviving partner may become the main earner
children then need care
loan/mortgage payments can’t be met
property may have to be sold
What are the consequences of the death of a dependant spouse or homemaker?
> normal earner may have to give up work or costs of full-time child care
What are the 5 categories of protection against accident/sickness or unemployment?
- Income protection
- Income to pay for someone to carry out the tasks previously done by person whose fallen ill
- Income to pay for medical attention
- Lump sum to pay for medical treatment
- Lump sum to pay for enforced changes in lifestyle
What factors affect the amount and type of cover?
- ability to adapt to other types of work
- how long an employer will continue to pay salary
- number of children and ages
- help from friends/family
- state benefits available
What are examples of a key personnel?
- Managing director with a strong personality
- Research scientist with specified knowledge
- Skilled engineer with understanding about machinery
- Salesperson with a wide number of contacts
What is the purpose of key person insurance?
To mitigate the adverse impact on a business profits caused by the death or long-term illness of an important member of staff
How do you establish the level of cover for a key person?
Multiply key persons salary 5 or 10 times or relate the cover to an estimate of their contribution to company’s profits
How is the contribution calculated for a key person?
Multiply the current annual profit by the ratio of the key persons salary then x by the length of time that the business would take to recover from loss
What happens when a death of a business partner occurs?
A partnership is dissolved upon death and a solution is put in place on what happens to the persons share of the business
What is automatic accrual method?
- Where all partners enter agreement where the share is divided between remaining partners
- Deceased’s family is compensated by proceeds of a life policy
- Normally 100% business property relief for inheritance tax
What is the buy and sell method?
- Legal representatives must sell the share to the surviving partners who are obliged to buy it
- There is potential tax liability because its a binding agreement
What is the cross option method?
- The estate has the option of selling the partnership share they have inherited and serving partners have the option to buy it
- There is no legal obligation
- Business relief against IHT may be available
What is shareholder protection?
Where surviving shareholders in a small company will want to buy the shares of a deceased shareholder
What happens during sickness of an employee?
The company may need funds to recruit and pay the salary of a replacement when someone is lost through sickness
What happens during sickness of a business partner?
- May be able to draw income from partnership for some time
- Will need to provide a replacement
What happens during sickness of a self-employed sole trader?
- Their income could stop quick causing the business to collapse
- Income protection with a sort deferred period can ensure income is still received
What is normally the largest financial transaction people have?
Home purchase - involves taking a loan from a bank, building society or other
What is a consolidation loan?
- Takes on the form of a remortgage
- Advantage is overall payments are reduced
- Downside is that unsecured loans are now secured against property
What options are available fro clients who are unable to maintain payments in respect of their liabilities?
- Debt relief orders (DRO’s)
- Individual voluntary arrangements (IVA)
- Bankruptcy (in extreme cases)
What is ‘Citizens Advice’?
To provide advice that people need for the problems they face and improve policies/practices that affect peoples lives
What are the 2 main reasons why people invest?
- Provide income/capital sum
2. May need capital for purchases, fees, repayments or loans etc
What are regular savings/lump sum investment products?
- peoples savings comprise small regular amounts from disposable income
- lump sum investment arises from receipt of a legacy, windfall or moving money from investments
What are level of risk investment products?
- wide range of products offering a wide range of choice
- products with high risk offer greater potential for higher returns
What is Accessibility in terms of investment products?
- many deposit accounts- instant access or short notice of withdrawal
- some investments not directly accessible until maturity (gilts)
- some investments are irredeemable (shares and undated gilts)
What is Taxation in terms of investment products?
- main UK taxes are income and CGT
- tax is charged on both income and CG (Shares/unit trusts)
- some taxed only on income (Gilts)
What impact does inflation have on savings and investments?
Can affect the purchasing power of the amount saved or invested and for an investment to grow in real terms it must provide a return that is higher than inflation
What are the 2 key points in terms of ‘money illusion’?
- savers feel that low interest currently being paid on savings are a poor return for their money and may be tempted to invest in riskier assets
- borrowers may feel that they’re gaining from lower interest payments and may be tempted to take out larger mortgages
Why is it important for an advisor to explore the clients retirement provision?
With a wide choice of pension benefits comes a greater need for advice. Advisors also help them understand the prospects of achieving income in retirement
What tax is charge on estates and what is the ‘nil rate band’ amount?
40%
£325,000
What are the 2 ways of minimising the impact of inheritance tax?
- Avoid having to pay it
2. Make provision for paying it
To avoid IHT you have to reduce the value of the estate to below the nil-rate threshold, how can this be done?
- Using annual exemptions
- Making potentially exempt transfers (PETs)
- Placing assets in trusts
Its important the advisor choses appropriate products that can complement and improve a clients position……
- for tax-free income or growth, ISA’s or friendly society policies should be considered
- clients who are non taxpayers may consider in investing in funds such as offshore bond (free from UK tax)
What products have tax already deducted and cannot be reclaimed?
> Life insurance investment bonds
Endowment policies
Share Dividends
What is an offshore consideration?
Where consideration should be given as to wether existing investments should be uncashed before or after someone leaves the UK/comes in.
Why are regular reviews important?
Advisors need to be aware if clients changing circumstances, this is done by:
- allowing for change by building in flexibility into products recommended
- reviewing the clients situation at regular intervals
