Joshua & Aminas Questions

Question 1

Outline to Joshua and Amina the key issues that may result in them failing to meet their plan to improve their current retirement savings provision.

Answer 1

• For questions such as this we can use the threats and weaknesses highlighted above to help us answer this question:
• Deterioration in health/unable to work due to ill health/no income protection.
• Death of either of them/Joshua has no non-mortgage personal life cover.
• Underperformance of UK market/significant exposure to UK market.
• Joshua is paying the minimum required pension contribution only/Amina is also paying a relatively low amount.
• State Pensions unlikely to be payable until 68/potential for future SPA increases.
• Joshua’s personal contributions are not tax efficient.
• Switch to self-employment would reduce scope for tax efficiency/NICs saving.
• Economic/market downturn.
• Potential further changes to legislation/political risk
• Three dependent children/mortgage/existing financial commitments.
• Mortgage interest rates spiking in 3 years.
• Periods of high inflation/rising cost of living.
• Significant cash holdings/inflation risk
• Unexpected costs/school fees or university fees they may not have accounted for.

Question 2

State the additional information that a financial adviser would require to allow them to advise Joshua and Amina on their financial situation.

Answer 2

• Current expenditure/childcare costs/surplus income/are they claiming tax-free childcare/willingness, ability to economise.
• What age they expect the children to be dependent for/desire to financially assist them.
• Any further children planned.
Intended retirement date/expected income and capital needs in retirement.
• Views on inflation.
• Any inheritances/capital sums expected?
• Priority of objectives.
• State pension entitlement/BR19s.
• Any scope for further matched contributions for Amina.
• Details of their pension schemes/normal retirement date and target date on fund/asset allocation/charges/fund choice.
• Willingness to make further pension contributions/tie up funds long-term.
• Pension death benefit nominations.
• How are current pensions contributions for Joshua structured - employee/employer split?
• Required/desired emergency fund.
• Are they making regular savings into ISAs?/have they used their allowance?
• Interest rate/access terms on the cash holdings.
• CFL.
• Asset allocation/performance/charges on the funds.
• Platform/how are funds held?
• Views on ESG investing?/has Amina considered ethical banking?
• Any surplus funds within the company?
• Views on Joshua’s decision with regards to the company.
• Does he have plans to expand his business in the future?
• Why is he drawing only £65,000 from the £90,000 turnover/what is the annual profit?
• Why has he structured his earnings in this way?/has he ever received advice on this issue?
• Views on taking on someone to help with administration?
• Is the mortgage protection policy payable on first or second death?
• Term/monthly repayment on the mortgage.
• Amina’s sick pay entitlement/any other employer benefits.
• Premium on mortgage protection policy.

Question 3

State the additional information that Joshua and Amina’s financial adviser would require to advise on their objective to improve their existing protection arrangements.

Answer 3

• Affordability of contributions/regular expenditure.
• Smoker status/family health/medical history.
• Any other debts/plans to move to bigger property/capital expenditure needs.
• Does Amina intend to remain with her employer? /Amina’s sick pay entitlement.
• Any inheritances expected.
• Value of Joshua’s business/surplus cash holdings.
• Priority of protection needs.
• Assistance available from family/childcare costs/are they claiming tax-free childcare?
• Term of mortgage/plans to move.
• Views on inflation/increasing cover.
• For income protection would they prefer own/any occupation definition.
• Requirement for waiver of premium.
• Intended retirement age.
• Pension death benefits available/nominations.
• Premium for current decreasing term assurance.
• State benefit entitlement/NICs history.
• Expected dependency of children.
• Any further children planned.

Question 4

State the additional information that Joshua and Amina’s financial adviser would need to obtain in relation to their pension arrangements to enable them to advise on their objective to improve their retirement savings provision.

Answer 4

• Details of the provider/financial strength.
• Trust/master trust/contract based.
• Level of matched contributions available for Amina.
• Vesting options.
• Death benefit options before/during retirement/nominations.
• Target date on Joshua’s plan.
• State pension entitlement/BR19.
• Charges/held on platform.
• Performance.
• Fund choices available.
• Can salary sacrifice be used for Amina’s bonus?
• Asset allocation/geographical/sector weighting for Joshua’s fund.
• Projected entitlement.
• Contribution history.
• Nomination forms completed?

Question 5

Outline the main factors that might affect Joshua and Amina’s capacity for loss.

Answer 5

• Timescale/intended retirement age.
• Age.
• Their level of salary.
• Large emergency fund.
• Limited other assets.
• Large mortgage/no other apparent debts or liabilities.
• Three young financially dependent children.
• They are in good health/lack of protection products.
• Objectives.
• Employer sick pay/State benefits.

Question 6

Identify the key issues that a financial adviser should discuss with Joshua and Amina at their next annual review.

Answer 6

• Has Joshua made a decision on his business structure?
• Changes in circumstances/any further children.
• Mortgage repayment/refinancing plans.
• ATR/CFL.
• Asset allocation/performance/benchmark/do holdings still align with ethical values.
• Charges.
• Protection provision.
• Cheoris in tosation tax rates/products av:
• Changes in legislation/tax rates/products available/economic conditions/interest rates.

Question 7

Describe the process an adviser could use to ensure there are sufficient funds under an existing pension plan to provide the required level of target benefits.

Answer 7

• Establish the income required, allowing for inflation.
• Calculate the fund required based on assumed/agreed annuity rate.
• Allow for pension commencement lump sum requirement.
• Calculate existing benefits using assumed or agreed growth rate.
• Include ongoing funding.
• Calculate the shortfall and the increased contributions required.
• Ongoing reviews needed.

Question 8

Explain to Joshua and Amina why it is important for them to regularly review their retirement provision.

Answer 8

• Check growth/performance/benchmark.
• Review retirement needs/check they are on target.
• Review charges/new or alternative products.
• Tax position/unused allowances/tax efficiency.
• Market conditions/inflation/economic conditions.
• Income/capital available from other sources/inheritances received.
• Potential to increase contributions.
• Review retirement date/check target date remains appropriate.
• Review ATR/CFL.
• Changes to health/family situation.
• Changes to legislation/pension legislation

Question 9

Outline the weaknesses in Joshua and Amina’s current protection provision.

Answer 9

• Joshua has no life cover besides mortgage protection.
• Amina has only employer’s death in service benefit/this would cease if she left employment/inadequate.
• No family income benefit/cover for costs in the event of death.
• Three young children dependent on them.
• No PHI/no CIC/mortgage cover does not include CIC.
• No redundancy cover for Amina.
• No PMI.
• Joshua is a builder/he is reliant on physical health.
• Joshua has no employer sick pay.
• Limited State benefits available/State benefits are inadequate.

Question 10

Identify the factors that a financial adviser should consider when establishing a suitable suite of financial protection products to meet Joshua and Amina’s requirements.

Answer 10

• Limited cover at present/life cover for mortgage only/no PHI, CIC, PMI.
• Mortgage term/plans to move.
• Any more children planned?
• Trust status for life cover.
• Smoker status/family history/dangerous hobbies/pastimes.
• Affordability/cost of premiums/surplus income.
• Priorities/term/retirement age/sum assured.
Joshua is business owner/no employer cover.
• Nominations on pension/death in service cover.
• Plans to change employment/security of employment.
• Premium and term on existing term policy

Question 11

Outline to Joshua and Amina the key differences between critical illness cover (CIC) and income protection (IP).

Answer 11

• CIC pays a lump sum/IP pays regular income.
• CIC can be held for life/IP ceases on retirement.
• CIC pays on diagnosis of specified condition/not linked to job
• Survival period of up to 30 days.
• IP is limited by income/CIC can be unlimited.
• IP can include deferred period to meet need/reduce premiums.
• IP based on ability to work.
• CIC usually cancelled on claim.
• IP can have multiple claims/insurer cannot cancel.
Waiver of premium optional on CIC/automatic on IP.
• Children’s cover available on CIC/houseperson’s on IP.

Question 12

Identify the key factors that Joshua and Amina’s financial adviser should consider when reviewing the suitability of their existing mortgage protection policy.

Answer 12

• Term of mortgage.
• Plans to move.
• Premium amount.
• First or second death.
• Guaranteed or reviewable premium.
• Cost of alternative policies.
• Insurability/state of health/underwriting.
• Cover amount/does it still match the mortgage amount?
• Any critical illness cover?
• In trust?

Question 13

Explain to Joshua and Amina why it is important to review their current protection arrangements.

Answer 13

• Limited life cover.
• No health/IP/CIC/PMI.
• Joshua is a business owner/no sick pay/no company benefits.
• Also needs quick return to work as runs his own business as a builder.
• It doesn’t appear that Amina has employer benefits/life cover only.
• Death-in-service ceases if she leaves the employer.
• Consider unemployment cover.
• Three dependent children.
• No pension death benefit nominations evident.
• Affordability/CFL/limited emergency resources.
• Cannot access pensions as too young.
• Limited State benefits payable.

Question 14

Outline the key issues that Joshua and Amina’s financial adviser should take into account when helping them to prioritise their protection needs.
• Affordability/expenditure.

Answer 14

• Liabilities/outstanding mortgage.
• Joshua has no sick pay/limited sick pay.
• No family protection in place.
• Period of children’s dependency/plans to have more children.
• Term of mortgage/plans to move.
• Amina’s job security/intention to change jobs.
• Support from family/financial or practical.
• Inheritances/windfalls expected.
• Pension death benefits.
• Willing to use current assets/savings/emergency funds.
• Family health history/health issues in family/smoker status/any hazardous pursuits.

Question 15

Explain to Joshua and Amina the factors that they should consider when deciding whether to close his limited company and operate on a self-employed basis.

Answer 15

• Limited company structure is more flexible and can be more tax efficient.
• Limited company allows payment via dividends and/or salary.
• Self-employed income taxed as profits.
• Company pays Corporation Tax on profits which is lower rate than Income Tax.
• Able to control earnings.
• No NICs on dividends.
• Dividend tax rates lower than on earned income.
• Ability to make employer pension contributions/employer contributions free of NICs as a limited company.
• Can also make pension contributions for Amina.
• Potential to split income with Amina.
• Potential to claim CGT business asset disposal relief on closure.
• Limited admin when self-employed/sole trader.
• Can hire accountants/professional company secretary to help with administration.
• Company can borrow separately/limited liability.
• A company is a separate legal entity and debts are its own/can’t be enforced against individuals
• As a sole trader Joshua would have unlimited liability for debts.
• Need to publish accounts as a limited company.
• More costs involved with operating as a limited company.

Question 16

Outline to Joshua and Amina the rules regarding business asset disposal relief and why Joshua and Amina may not be eligible for it should they close his limited company.

Answer 16

• Must be an employee or office-holder in the company.
• They must dispose of any assets within 3 years of closure.
• It must be a trading company rather than for example an investment company.
• Must have at least 5% of shares or voting rights/entitled to 5% of profits in a close company.
• Must have owned the business for at least 2 years prior to closure.
• Annual exempt amount can be deducted against the gain.
• Special tax rate of 10%/ E1m lifetime limit.
• Claimed via self-assessment/deadline 31 January in tax year following the one after sale.
• Relief clawed back if the claimant starts another business carrying out similar activities within 2 years.
• This may apply to Joshua who is considering self-employment.
• Need to show that avoiding tax was not the motivation for closure.

Question 17

Outline the factors that Joshua and Amina should consider when deciding whether to increase their monthly pension contributions to their workplace schemes.

Answer 17

• Affordability/expenditure.
• Liquidity/accessibility/normal minimum pension age due to increase to 57, likely to increase further.
• Views on pensions.
• Provision vs target amount.
• Annual allowance/contribution history.
• ATR/CFL.
• Availability of further matched contributions.
• Pound-cost averaging.
• Changes to tax rules/legislation.
• Priority vs other objectives/insurance cover.
• Child Benefit tax charge.
• State Pension entitlement
• Tax relief on contributions/40% for Joshua & Amina.
• Tax free income growth/IHT free/25% PCLS.
• Flexible death benefits/tax free before age 75.
• Low cost/ease of admin.

Question 18

Outline the strengths and weaknesses in Joshua and Amina’s current investment and pension provision and whether they are likely to be suitable to meet their retirement needs.

Answer 18

• Limited pension provision.
• They have a long time horizon to make contributions.
• Good/suitable level of emergency funds.
• Good level of ISA savings/scope to use future allowances.
• Scope to make further pension contributions/Joshua’s contributions are minimal.
• Contribution method is not tax efficient/consider further company contributions.
• Amina is an ESG investor/may limit investment opportunities.
• May also have higher charges/more volatility/potentially lower growth.
• Heavy exposure to UK/country weighting.
• Equity weighting appears appropriate for time horizon.
• Need to know asset/sector allocation for some holdings.

Question 19

State the key risks associated with the investment in Amina’s UK ethical equity fund.

Answer 19

• Concentration risk/weighted towards UK.
• Political/government/economic risk.
• Limited scope for diversification with ESG. ›
• Market risk/systemic risk/capital loss/volatility.
• Regulatory/legislative risk.
• Event/non-systematic/environmental/operational risk.

Question 20

Explain to Amina the screening processes that can be used by ethical fund managers and give the reasons why a fund manager may choose not to invest in a particular company.

Answer 20

• Positive screening.
- Companies that meet set criteria/ethical standards/values.
• Negative screening.
- Avoids companies which breach criteria/ethical standards/do not align with values.
• Poor corporate governance.
- Unethical business practices/tax practices/excessive remuneration.
• Does not meet screening criteria.
- Poor employee welfare standards.
- Tobacco/alcohol/gambling/arms/.
- Pollution/nuclear power/oil.
- Animal testing.

Question 21

Describe the issues that an adviser will need to consider when formulating a sustainable and responsible investment strategy for Amina.

Answer 21

• Strength of her beliefs/motivation/shades of green.
• Positive/negative screening.
• ESG factors.
• Range of funds/restricted fund choice/less diversification.
• Lack of standardisation in assessing ESG status.
• Companies not required to disclose all information relating to sustainability practices/ can make comparison difficult.
• Higher costs due to additional research.
• Potential for greenwashing.
• Fund performance/increased volatility.
• Reputation of fund manager/expertise.
• ATR/CFL.
• Tax wrappers/Investment wrappers.
• Ethical banking.
• Timescales/objectives.

Question 22

State the key factors that a financial adviser should take into consideration before recommending a fund switch within Joshua and Amina’s workplace pensions.

Answer 22

• Fund choices available/ethical options.
• Actual return/benchmark/against other funds.
• Ongoing charges.
• Cost of switches.
• ATR/CFL
• Inflation.
• Intended retirement date.
• Liquidity/market conditions.
• Vesting intentions.

Question 23

Recommend and justify a range of actions that Joshua and Amina could take in order to improve their existing protection arrangements.

Recommendations in bold followed by justification

Answer 23

• Family income benefit/joint life first death.
• in trust for family
• Term in line with period of dependency

• Pays ongoing income in the event of death.
• Current provision inadequate/only covers mortgage/death in service ceases if Amina leaves employment/ Joshua does not have any cover.
• Matches the period for which cover is needed.
• Outside the estate, avoids probate.

• Income protection for both.
• Deferred period six months/in line with Amina’s sick pay.
• Index linked.
• Guaranteed premiums.

• Joshua has no employer sick pay.
• Therefore protection is important.
• They have sufficient emergency fund to cope for a few months.
• Inflation protected.
• Security/budgeting.
Multiple claims possible/insurer cannot
cancel.
• Can be paid until normal retirement age.

• Private medical cover.

• Joshua is a builder hence injury could restrict his ability to work.
• Joshua has no employer benefits.
• Quick treatment and return to work/no need to wait for NHS.
• Can select level of cover.

• Ensure nomination forms on pensions are up to date.

• Ensures death benefits are past to beneficiaries without delay in line with Joshua and Amina’s wishes.

Question 24

Outline why income protection policies may be more suitable for Joshua and Amina rather than critical illness cover in order to meet their current protection needs.

Answer 24

• Income protection provides tax-free income/meet expenditure.
• Can be paid until retirement.
• Critical illness provides a lump sum.
• Wider range of cover (related to ability to work).
• Can claim more than once.
• Can link cover to income.
• Automatic waiver of premium.
• Benefit level can be adjusted if they change jobs.
• Deferred period to reduce premiums/match sick pay/emergency fund
• Rehabilitation benefit/proportionate benefit.

Question 25

Recommend and justify a suitable policy to provide a regular income in the event of Joshua or Amina suffering a long-term illness and explain how this could be set up in an affordable manner.

Recommendations in bold followed by justification

Answer 25

• Income protection.
• Two separate policies.

• Pays an ongoing tax-free income.
• They are in good health/simple underwriting.
• Each gets separate cover/can claim separately.

• Term to intended retirement age.

• Covers the remainder of their intended working lifetime.
• Multiple claims/cannot be cancelled by insurer.

• Own occupation.

• Provides the widest level of cover/best chance of claim.
• Joshua is a builder/manual labourer/physical injury would prevent him doing his job.

• Six month deferred period.

• Joshua has no employer sick pay.
• Amina is not mentioned as having sick pay.
• Short deferred period therefore desirable.
• Emergency fund adequate for six months/keeps costs down.

• Guaranteed premiums/reviewable premiums.

• Known cost/budgeting/reviewable reduces cost.

• Indexation.

• Keeps pace with inflation.

Question 26

Recommend and justify a suitable policy to provide for Joshua and Amina’s children in the event of either of their deaths.

Recommendations in bold followed by justification

Answer 26

• Family Income Benefit.

• Pays an ongoing income which allows the costs of the surviving partner and children to be covered.
• Tax-free income.
• No cover at present besides mortgage and Amina’s death-in-service/inadequate cover.
• Decreasing term/low cost.
• option to pay via company/tax deductible premiums

• Joint life first death

• Provides cover in event of either death.

• Indexed.

• To keep pace with inflation.

• Term to meet financial dependency of children.

• Protects family without incurring unnecessary costs.

• Guaranteed premiums.

• Known cost/affordability.

• Waiver of premium.

• Pays ongoing premiums in the event of sickness/disability.

• In trust.

• Does not form part of the estate.
• Not subject to IHT.
• Allows for quick payout without having to wait for probate to be granted.

Question 27

Outline to Joshua and Amina the advantages and disadvantages of closing the company down and operating on a self-employed basis.

Answer 27

Advantages

• Simplified administration/not required to file with Companies House/no legal reporting requirements.
• Likely to be less costs involved/lower overheads.
• Could potentially claim CGT business asset disposal relief.
• Potential for simplified expenses.

Disadvantages

• Unlimited liability/no personal protection against claims.
• Company can potentially pay for benefits.
• Less tax efficient to draw income from, all profit subject to Income Tax/cannot take dividends/use DA.
• As a sole trader will pay class 2 NICs (albeit only in tax year 2023/24) and class 4 NICs/can arrange salary within a company structure to avoid NICs.
• Cannot make employer pension contributions/tax deductible pension contributions/save employer and employee NICs.
• Cannot provide pension/benefits for Amina.
• Cannot split income/keep reserve for bad trading years.

Question 28

Explain to Joshua and Amina the steps they can take to improve the tax efficiency of the income from Joshua’s building company.

Answer 28

• Maintain company structure/as the owner of the business, he has the right to set his own salary/dividends.
• Income can be taken as mix of dividends and salary to maximise net take home pay.
• Salary reduces Corporation Tax liability.
• Minimum salary level can be set at Joshua’s personal allowance/no Income Tax due.
• Still entitled to State benefits/State pension.
• Use dividends to top up salary/no NICs on dividends.
• Dividends taxed at lower rate than salary/8.75% basic-rate, 33.75% higher rate.
• Can use DA of £1,000 (he is not using currently)
• Can also pay Amina a salary in dividends, uses her DA.

Question 29

Recommend and justify a range of actions that Joshua could take in order to ensure his business structure is most suitable for his needs now and in the future.

Recommendations in bold followed by justification

Answer 29

• Keep the limited company structure currently.

• The structure allows much more flexibility over their financial affairs (see question above for justifications on how it can improve tax efficiency of income.
• Facility to hold a float in case of ill health, a bad trading year etc…
• Joshua can hire a professional company secretary/use an accountant to reduce the administration burden.
• Tax efficient way to make pension contributions for Joshua and potentially Amina (see question below for more justifications))

• Annual reviews.

• Ensure this decision is monitored annually in line with Joshuas views, objectives and turnover.

Question 30

Recommend and justify a range of actions that Joshua and Amina could take in order to improve their current retirement savings provision.

Recommendations in bold followed by justification

Answer 30

• Keep the limited company structure and restructure income with dividends and salary.

• As the owner of the business, he has the right to set his own salary/dividends.
• Should increase net take home pay/more surplus income to increase pension provision.
• More tax efficient due to the NICs saving and lower dividend tax rates/8.75% and 33.75% versus 20% and 40%. Uses DA.
• Can ensure he still qualifies for State pension/benefits.

• Joshua should make his full pension contributions as employer rather than personal ones (if he decides to keep the company open).
• Consider company contributions for Amina.

• The overall 8% requirement allows for this and does not require the employee to contribute/as the owner of the business, he has the flexibility to do this.
• It is more tax efficient due to the NICs saving.
• Employer’s NICs also saved, could be rebated into pension.
• Amina is company secretary/ contributions likely to be considered
‘wholly and exclusively’ for the purposes of the business.
• She is not near her annual allowance, therefore has scope for more contributions to be made.
• This is more tax efficient than personal contributions.
• Contributions for Amina can get money out of the business tax efficiently.

• Increase pensions contributions
• Keep both of their total remuneration below £50,000

• Would regain full entitlement to Child Benefit if both incomes below £50,000 (£60,000 for 2024/25)
• Boosts retirement provision
• They would receive higher-rate tax relief on pension contributions.
• Tax free income and growth/PCLS/IHT free.
• Flexible death benefits/tax free before age 75.

• Continue to use ISA allowances (up to €20,000)

• No Income Tax or CGT liability within the wrapper.
• They have cash deposits not ISA
wrapped/currently paying tax at 40% above their £500 PSA
Can invest in cash or stocks andshares
ISAs as required.

• Consider general account investments.

• Potentially sufficient cash/surplus income to do so.
• Able to utilise annual exempt amount and DA.
• Ability to utilise bed and ISA.

Question 31

Outline the benefits to Joshua and Amina of making regular monthly savings into their ISAs.

Answer 31

• Tax-free income and gains.
• They have sufficient emergency fund/cash savings/surplus income/affordable.
• Inflation risk on cash holdings/reduces inflation risk.
• Matches their medium-to-high ATR.
• Pound-cost averaging/contributions buy more units when markets fall.
• Potential for growth.
• Long timeframe for investment as still young.
• Accessible/liquidity.
• Can start or stop contributions at any time.
• Savings discipline.
• Ability to diversify portfolio/use different investment styles.
• ISA allowance cannot be carried forward.
• Can use APS in the event of death.

Question 32

Outline why Joshua’s current method of pension contribution is not optimal for his needs and the actions he could take to improve this.

Answer 32

• Current contributions are part personal and part company.
• Salary is deducted as a business expense.
• Employer’s/employee’s NICs payable.
• These are not reclaimable if personal contributions made.
• Pay the entire amount as an employer contribution.
• Also deducted as a business expense.
• Likely to be considered wholly and exclusively for business purposes.
• Full amount into pension/No NICs payable.
• Also no employer’s NICs/increase profits.
• Could rebate the saving into the pension.
• 8% requirement does not include minimum employee contribution.
• As the business owner, he has the flexibility to determine this.

Question 33

Explain the key benefits for Joshua and Amina of investing their regular pension contributions into equity-based funds.

Answer 33

• Potential for capital growth.
• Best performing asset/outperformance over long-term.
• Long timescale to retirement.
• Pound cost averaging.
• Benefits from volatility.
• Inflation protection.
• Matches ATR.
• Wide range of funds/ economies/diversification/can switch.
• Tax relief/tax free income/gains.
• Inceaser potenta res ofscale on workplace schemes.

Question 34

Outline how a bonus sacrifice arrangement works and the potential benefits and disadvantages to Amina of sacrificing her bonus into her pension.

Answer 34

• Bonus is paid directly into her pension.
• This is made as an employer contribution.
• Tax deductible as a business expense.

Benefits

• Increases pension provision/investment growth.
• Tax-free income/gains/PCLS.
• NICs saving/employer may share employer’s NICs.
• 40% Income Tax saving.
• Tax-free on death prior to age 75.

Disadvantages

• Loss of immediate cash.
• Illiquidity/cash tied up until at least age 57.
• Potential for capital loss.