1) Analysing the client’s financial situation - Retirement provision Flashcards
State the factors an adviser would need to consider before advising Andrea on a strategy to meet her retirement objectives? (19 points)
- Potential vulnerability status.
- Longevity/she is currently in good health.
- Precise retirement date/plans for retirement - full, phased, working part-time?
- Age/less than 2 years from State Pension age/option to defer if she wishes to carry on working.
- State Pension entitlement/BR19.
- Views on/need for secured or flexible income.
- Capital and income requirements now and in retirement.
- Surplus income/ability to fund increased pension contributions/pension contribution history/regular or single premiums
- ATR/CFL
- Fund choice available/active vs passive/asset allocation/need to align to vesting plans.
- Tax position/she is a higher-rate taxpayer currently, likely to be basic-rate taxpayer in retirement.
- Other possible inheritances/capital sums.
- Purpose of other assets/will they be used for retirement income.
- Amount held in cash/above FSCS limit.
- Cash flow analysis.
- Existing pension provision.
- Growth assumptions and stress tests.
- Inflation assumptions.
- She is in good health/family longevity/how long will income be needed?
Identify the factors that an adviser would need to consider before advising Andrea on whether to increase her pension contributions to her workplace scheme. (8 points)
- Current level of contributions.
- Level of income required now and in retirement.
- 40% tax relief on contributions within higher-rate band/tax-free fund growth.
- Contributions will be immediately outside of the estate for IHT.
- 25% tax free PCLS/may not be a higher-rate taxpayer in retirement so income taxed at basic-rate.
- Andrea has access to significant other investments which are not as tax efficient.
- Can access pension funds at any time/flexible benefits.
- Will employer match any increased contributions?
Outline the key issues that Andrea should take into consideration before making any changes to the underlying investments in her pension plan. (8 points)
- ATR (cautious)/CFL.
- Andrea’s funds are 100% equity (adventurous).
- Vesting plans – annuity or flexible income.
- More caution is required for annuities/for taking maximum PCLS.
- Timescales for vesting/retirement plans.
- Past performance/benchmark performance/management style/fund choice.
- Charges for switches/charges on funds/fund options.
- Diversification (asset and geographical).
Explain why Andrea’s cash holdings may be unsuitable for her retirement needs. (11 points)
- Too much held in cash even for cautious investor.
- Lack of diversification.
- Rate of return from cash will not keep pace with inflation.
- Interest rates likely to reduce in the future.
- Current account may be earning no interest.
- Appears to be an instant access deposit account (as no mention of term) could achieve higher interest in a fixed rate account over longer term.
- Likely to be paying tax at 40% above her £500 PSA/can use cash ISAs, these are more tax efficient.
- Default risk as exceeds FSCS limit of £85,000.
- Six months temporary additional FSCS protection up to £1,000,000 for proceeds of divorce unlikely to apply as the cash funds were not part of the assets from Carl.
- Lack of potential for growth/better growth potential may be available elsewhere.
- Inflation risk/interest rate risk.
Explain to Andrea why her current pension funds may or may not be suitable. (9 points)
- 100% equities does not match her cautious ATR.
- High volatility/may experience a downturn as approach retirement so unlikely to be suitable if looking to purchase an annuity.
- Will not offer protection against falling annuity rates if annuity is required.
- Lack of asset diversification.
- Currency risk on global equity funds.
- Will offer little protection against falling market as she approaches retirement.
- Good growth potential.
- Potential to outperform inflation over longer term.
- Offers global diversification
Explain to Andrea why her current savings and investment portfolio (excluding pensions) may or may not be suitable for her long-term retirement planning needs. (17 points)
Cash
* Too much held in cash even for her cautious ATR/inflation risk/interest rate risk.
* Too much held in current account likely earning no interest.
* Appears to be an instant access deposit account, could achieve higher interest in a fixed rate account.
* Can use cash ISAs - more tax efficient.
* Default risk as exceeds FSCS limit of £85,000.
Fixed Interest
* Underweight in fixed interest holding.
* Only investment grade bonds suitable for her cautious ATR.
* Good potential for income.
* Lack of global diversification/all UK based.
Equities and shares
* Lack of global diversification/predominantly UK based.
* Individual shares unlikely to be suitable for Andrea’s ATR.
* Over exposure to pharmaceutical industry sector.
* Good potential for income and growth.
* Lack of actively managed funds/no alpha.
* Tracker funds are low cost and easy to follow/active managers do not always outperform.
* Tracker funds will underperform the market due to charges/tracking error/will never match the market exactly.
* Lack of control over underlying assets/perform poorly in falling market.
Explain to Andrea how her State Pension entitlement will work. (9 points)
- Andrea will receive her State Pension at age 66.
- Minimum of 10 years needed to receive any State Pension.
- Full rate in 2023/24 = £203.85.
- For a full new State Pension – 35 qualifying years are needed.
- Qualifying years can be met through contributions or credits.
- Starting amount calculated as at 5/4/2016.
- Triple lock/State Pension increased by higher of earnings, prices and 2.5%.
- Taxed as earned income.
- Option to defer
Explain to Andrea the process for claiming her State Pension and the rules should she consider deferring. (8 points)
- Andrea will need to actively claim the pension.
- This can be done by post, phone or online.
- If not claimed then deferral is automatic.
- Increased by 1% for each 9 weeks of deferral/minimum 9 weeks deferral.
- Equivalent to 5.8% per annum.
- In addition to annual increases.
- This can also be done once the pension is in payment.
- No lump sum option available.
