Unit 2 - Serving the Retail Consumer

Question 1

What is net disposable income?

Answer 1

Income - outgoings = net disposable income

Question 2

Expenditure can be considered under 3 headings:

Answer 2

1) essential spending- mortgage, council tax etc
2) everyday spending- travel, food
3) occasional or non-essential spending - gifts, holidays

Question 3

What is debt consolidation?

Answer 3

Negotiating a new loan to repay an existing loan or loans; often with a lower interest rate and lower monthly payments

Question 4

What is an IVA?

Answer 4

Individual voluntary agreement

Question 5

What is the risk of property loans?

Answer 5

If clients fail to make the required repayments, this could result in them losing their home

Question 6

What are the two ways in which a mortgage can be repaid?

Answer 6

1) Capital and interest repayments

2) Interest only

Question 7

What are the different mortgage types?

Answer 7

Capped
Cap and collar
Discount
Euro (or other foreign currency)
Equity linked (Aka shared appreciation mortgages) 
Fixed interest
Flexible
Offset
Tracker

Question 8

What is equity release?

Answer 8

Describes a range of products available to older clients typically over the age of 60, allows them to release the equity tied up in their home

Question 9

Equity release schemes are either:

Answer 9

Lifetime mortgages

Or

Home reversion plans

Question 10

What is a lifetime mortgage?

Answer 10

Clients borrow money secured against their home. The home still belongs to them. Apart from roll-up schemes and fixed repayment lifetime mortgages, they will have to pay interest on the loan every month. When they die or move into a long term care facility the home is sold and the money from the sale is used to pay of the loan.

If there is not enough money from the sale to pay off the loan, the client or beneficiaries would have to repay any extra, to guard against this, most lifetime mortgages offer a no negative equity guarantee.

Question 11

What is a home reversion plan?

Answer 11

Client sells all or part of their home in return for a lump sum, regular income or both. The home then belongs to the reversion provider, but the client is allowed to carry on living in it under a lease until they die or move into along term care facility. Because of this the client will only receive between 20% and 60% of the value of their home.

Question 12

What are the 2 home purchase plans?

Answer 12

Ijara

Diminishing musharaka

Question 13

What are sale and rent back agreements?

Answer 13

Where companies offer to help clients with financial difficulties by buying their home and then renting it back to them for a fixed period. Sometimes called flash sales.

Question 14

What are the two types of loan?

Answer 14

Unstructured- mortgages, overdrafts

Structured- car / sofa

Question 15

Individual protection needs are influenced by:

Answer 15

Age
Dependants
Income
Financial liabilities
Employment status
Existing cover

Question 16

What is term assurance?

Answer 16

Pays a lump sum/series of lump sums on death of the life assured within a specified time frame.

Question 17

What are the different types of term assurance?

Answer 17

Level term assurance
Decreasing term assurance
Family income benefit 
Increasable term assurance
Convertible term assurance
Renewable term assurance

Question 18

What are endowment policies?

Answer 18

Pay a lump sum on the death of the life assured but primarily savings vehicles. Some offer the option of providing critical illness cover at extra cost.

Question 19

What are whole of life policies?

Answer 19

Primarily geared towards providing a substantial level of life cover but some have an investment elements. Provide cover for the lifetime of the assured.

Question 20

What is income protection?

Answer 20

Designed to replace lost income for an individual who due to illness or accident, is unable to work.

Once benefits start to be paid, they will continue until the insured returns to work, dies, or reaches the expiry date of contract. The benefits of the policy are exempt from income tax.

Question 21

What is personal accident and sickness insurance?

Answer 21

Like income protection, also pay a regular benefit while the insured is unable to work due to illness or an accident. However differences to income protection include:

• may also pay a one off lump sum if insured loses a limb or digit, the sight of one or both eyes or is permanently disabled
• this policy will only pay benefits for a maximum of one or two years and therefore the deferred period is short
• reduced number of health and occupational questions asked compared to income protection
• regular benefit is likely to be fixed sum rather than percentage of policy holders earnings

Question 22

What is critical illness cover?

Answer 22

Pays a lump sum on the diagnosis of a specified illness regardless of whether or not that prevents insured from working

Question 23

What are the factors affecting a clients pension requirements?

Answer 23

Age
Income
Dependents
Previous and current pension arrangements
State provision

Question 24

How is a CPA taxed?

Answer 24

Taxed as earned income on the whole of the income paid at 20% 40% and 45% tax rates

Question 25

How is a PLA taxed?

Answer 25

Separated into an interest and a capital element

Question 26

What are the conditions to qualify for the new state pensions and how much is it per week?

Answer 26

To receive a full pension individuals must have:

• Paid or been credited with 35 qualifying years National Insurance Contributions
• not been ‘contacted out’ of the state pension

Amount is 175.20 per week

Question 27

What are the 2 main types of pension schemes in the UK:

Answer 27

1) Occupational

2) Personal

Question 28

What are occupational pensions?

Answer 28

Set up by an employer and trustees are appointed to oversee the scheme for the members. Can provide benefits on a defined benefit basis or defined contribution basis or both

Question 29

What does defined benefits means?

Answer 29

Sets put to provide members with a pension related to their earnings close to retirement. Schemes rules define what salary is used.

In order to fund these an actuary advises how much money needs to be paid into the fund to pay the benefits promised. It is not possible to determine the share of the fund belonging to each member and it is therefore sometimes known as pooled funds

Question 30

What does defined contributions (money purchase) mean?

Answer 30

Rates of contribution tend to be expressed as percentages of earnings or sometimes as a fixed monetary amount.

In these schemes each member is given an identifiable pot; the contributions paid to the scheme for a member are added to their pot and invested for them. This is known as earmarked money purchase scheme.

Question 31

What are personal pensions?

Answer 31

Individuals have their own pension and the provider has a direct responsibility to them to pay the benefits promised in the contract.

The policyholder decides how much they can afford to save and this is then paid to the provisee to invest it for the policy holder

Question 32

What are stakeholder pensions?

Answer 32

These are personal pensions which meet the additional requirements with which all stakeholder products must comply

Question 33

What is auto-enrolment?

Answer 33

All employers must enrol eligible jobholdees those between the age 22 and state pension age and earning in excess of 10,000 a year) in a qualifying workplace pension scheme. Both employer and employee have to pay a minimum level of contribution; but employees can opt out

Question 34

What are the timescales for savings/investment?

Answer 34

• short term - upto 5 years
• medium term - 5 - 15 years
• long term - 15 years plus

Question 35

What is the Personal Savings Allowance?

Answer 35

Basic taxpayers can earn up to £1000 of interest tax free each year, once this amount is exceeded it is taxed at 20%

Those who pay tax at higher levels have a PSA of £500 and they pay tax on any further interest at 40%.

Additional rate tax payers do not benefit from PSA and pay tax on interest at 45%.

Question 36

What are the asset classes?

Answer 36

Shares (or equity) - a stake in a company
Bonds - loans to a company or Government
Property- either commercial or residential
Cash

Possible fifth class ‘alternatives’

Question 37

What is an ISA?

Answer 37

Individual savings account, not a product on it’s own but a tax wrapper protecting investors income and capital from being taxed.

Currently can invest in 4 separate ISAs in one tax year:

Cash ISA
Stocks and Shares ISA
Innovative finance ISA
Lifetime ISA

The current ISA limit is £20,000

Question 38

What are Junior ISAs?

Answer 38

Generally available to any child born before 1st September 2002 or after 2 January 2011

Can be invested in cash or stocks and shared
No withdrawals possible before age 18 except in limited circumstances
Annual limit is £9000

Question 39

What is Inheritance tax?

Answer 39

It is tax potentially payable by everyone who is UK domiciled. It is based on the value of an individuals worldwide assets and also on the UK assets of non-domiciles.

The first £325,000 of each estate is covered by the nil rate band.

No tax is payable if the estate is left to a UK domiciled spouse, but any amount exceeding nil rate and residence nil rate band (175000) is taxed at 40%