Topic 15 (The main advice areas)

Question 1

Why is Budgeting important?

Answer 1

The need to budget underpins all other forms of financial planning and reflects the need to have enough money to pay for everyday living

Question 2

What are the consequences of the death of the main earner?

Answer 2

> surviving partner may become the main earner
children then need care
loan/mortgage payments can’t be met
property may have to be sold

Question 3

What are the consequences of the death of a dependant spouse or homemaker?

Answer 3

> normal earner may have to give up work or costs of full-time child care

Question 4

What are the 5 categories of protection against accident/sickness or unemployment?

Answer 4

1. Income protection
2. Income to pay for someone to carry out the tasks previously done by person whose fallen ill
3. Income to pay for medical attention
4. Lump sum to pay for medical treatment
5. Lump sum to pay for enforced changes in lifestyle

Question 5

What factors affect the amount and type of cover?

Answer 5

• 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

Question 6

What are examples of a key personnel?

Answer 6

• Managing director with a strong personality
• Research scientist with specified knowledge
• Skilled engineer with understanding about machinery
• Salesperson with a wide number of contacts

Question 7

What is the purpose of key person insurance?

Answer 7

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

Question 8

How do you establish the level of cover for a key person?

Answer 8

Multiply key persons salary 5 or 10 times or relate the cover to an estimate of their contribution to company’s profits

Question 9

How is the contribution calculated for a key person?

Answer 9

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

Question 10

What happens when a death of a business partner occurs?

Answer 10

A partnership is dissolved upon death and a solution is put in place on what happens to the persons share of the business

Question 11

What is automatic accrual method?

Answer 11

• 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

Question 12

What is the buy and sell method?

Answer 12

• 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

Question 13

What is the cross option method?

Answer 13

• 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

Question 14

What is shareholder protection?

Answer 14

Where surviving shareholders in a small company will want to buy the shares of a deceased shareholder

Question 15

What happens during sickness of an employee?

Answer 15

The company may need funds to recruit and pay the salary of a replacement when someone is lost through sickness

Question 16

What happens during sickness of a business partner?

Answer 16

• May be able to draw income from partnership for some time

- Will need to provide a replacement

Question 17

What happens during sickness of a self-employed sole trader?

Answer 17

• Their income could stop quick causing the business to collapse
• Income protection with a sort deferred period can ensure income is still received

Question 18

What is normally the largest financial transaction people have?

Answer 18

Home purchase - involves taking a loan from a bank, building society or other

Question 19

What is a consolidation loan?

Answer 19

• Takes on the form of a remortgage
• Advantage is overall payments are reduced
• Downside is that unsecured loans are now secured against property

Question 20

What options are available fro clients who are unable to maintain payments in respect of their liabilities?

Answer 20

• Debt relief orders (DRO’s)
• Individual voluntary arrangements (IVA)
• Bankruptcy (in extreme cases)

Question 21

What is ‘Citizens Advice’?

Answer 21

To provide advice that people need for the problems they face and improve policies/practices that affect peoples lives

Question 22

What are the 2 main reasons why people invest?

Answer 22

1. Provide income/capital sum

2. May need capital for purchases, fees, repayments or loans etc

Question 23

What are regular savings/lump sum investment products?

Answer 23

• peoples savings comprise small regular amounts from disposable income
• lump sum investment arises from receipt of a legacy, windfall or moving money from investments

Question 24

What are level of risk investment products?

Answer 24

• wide range of products offering a wide range of choice

- products with high risk offer greater potential for higher returns

Question 25

What is Accessibility in terms of investment products?

Answer 25

• 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)

Question 26

What is Taxation in terms of investment products?

Answer 26

• main UK taxes are income and CGT
• tax is charged on both income and CG (Shares/unit trusts)
• some taxed only on income (Gilts)

Question 27

What impact does inflation have on savings and investments?

Answer 27

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

Question 28

What are the 2 key points in terms of ‘money illusion’?

Answer 28

• 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

Question 29

Why is it important for an advisor to explore the clients retirement provision?

Answer 29

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

Question 30

What tax is charge on estates and what is the ‘nil rate band’ amount?

Answer 30

40%

£325,000

Question 31

What are the 2 ways of minimising the impact of inheritance tax?

Answer 31

1. Avoid having to pay it

2. Make provision for paying it

Question 32

To avoid IHT you have to reduce the value of the estate to below the nil-rate threshold, how can this be done?

Answer 32

• Using annual exemptions
• Making potentially exempt transfers (PETs)
• Placing assets in trusts

Question 33

Its important the advisor choses appropriate products that can complement and improve a clients position……

Answer 33

1. for tax-free income or growth, ISA’s or friendly society policies should be considered
2. clients who are non taxpayers may consider in investing in funds such as offshore bond (free from UK tax)

Question 34

What products have tax already deducted and cannot be reclaimed?

Answer 34

> Life insurance investment bonds
Endowment policies
Share Dividends

Question 35

What is an offshore consideration?

Answer 35

Where consideration should be given as to wether existing investments should be uncashed before or after someone leaves the UK/comes in.

Question 36

Why are regular reviews important?

Answer 36

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