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CII - R01 > 2 - Retail Customers > Flashcards

2 - Retail Customers Flashcards

1
Q

Assessing needs and objectives

What 3 things should you consider regarding client needs before making a recommendation?

A
  • Areas of advice/need
  • Risk profile
  • Changes in circumstances
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2
Q

Recommendations

5 things you should do when making a recommendation to a client

A
  • Ensure you have completed KYC information before making a recommendation
  • Consider affordability, debt repayment, impact on benefits and tax
  • Recommend a product/service matching their risk profile
  • Recommend the most appropriate product & provider and explain your decisions
  • Provide the level of service committed to in initial disclosure, outsource arrangements you can’t deal with
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3
Q

Suitability Reports

7 characteristics

A
  • Tailored to client circumstances
  • Specifies their demands & needs
  • Clear & plain language
  • Explains reasons for recommendations and how they meet the needs
  • Explains disadvantages, including risks, costs, charges, potential penalties
  • Highlights client objectives not covered
  • Highlights implications of any ‘focussed’ advice provided
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4
Q

Client Reviews

Who needs them?

A

Consider whether your client will benefit from them.

Can reduce risk of complaints.

Ensures recommendations remain suitable given changes in circumstances, market conditions and products available.

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5
Q

Consumers’ main financial needs

List of 7

A
  • Budgeting
  • Managing Debt
  • Borrowing
  • Protection
  • Saving & Investment
  • Retirement
  • Inheritance
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6
Q

Which type of mortgages is not regulated by the FCA?

A

Buy to let

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7
Q

Types of Loan

Describe structured and unstructured loans

A

Refers to the interest rate and repayments etc.

In unstructured loans like mortgages and commercial property loans these can be varied. Usually they are secured and so have low rates.

Structured loans and usually smaller for things like sofas or cars, have fixed repayment schedules and high interest rates.

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8
Q

Mortgages

2 types of home purchase plans

A

Ijara - Monthly payments are held by a firm and used to purchase the property at the end of the contract.

Diminishing Musharaka - Monthly payments used to buy an increasing share of the property from the firm, with rental payments decreasing over time in proportion.

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9
Q

Mortgages

Difference between sale & rent back and home reversion

A

Sale and rent back (AKA flash sales) schemes are when a firm quickly purchases the property and rents it back to the customer for a short fixed period of time.

Home reversion schemes require the mortgage to be paid off in full. The customer receives some cash in return for selling their home, but is allowed to continue living in it.

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10
Q

Life Assurance

Term Assurance

Nature

Life cover/investments split

Illness cover?

A

Is only in place for a fixed period of time.

Pays a lump sum (or several lump sums to members of a family) on death.

Does not pay out on illness

No savings/investments element.

Usually the cheapest method.

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11
Q

Life Assurance

Endowment Policy

Life cover/investment split

Illness cover?

A

Pay a lump sum on death but they are primarily savings vehicles.

Can also include critical illness cover.

Not a great way of providing life cover since most of the premium is directed towards the savings element.

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12
Q

Life Assurance

Whole of Life Policy

Nature

Life cover/investment split

A

Offer a guaranteed level of cover for the lifetime of the assured.

Usually a small element of investment, although this can vary, primarily these are for life cover.

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13
Q

Life Assurance

Non-profit Whole of Life Policy

A

Guarantees a fixed level of life cover regardless of how long the assured lives for.

As a result it accumulates a surrender value, but this is likely to be quite low.

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14
Q

Life Assurance

With Profit Whole of Life Policy

A

Guarantees a minimum level of life cover, but this amount increases each year by the addition of annual (or ‘reversionary’) bonuses (which may not be guaranteed).

Once added they boost the minimum level of cover.

Also there is likely to be an additional final bonus paid on death, especially if there has been a high level of reversionary bonuses.

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15
Q

Life Assurance

Flexible Whole of Life Policy

A

AKA: ‘Unit-linked whole of life’ or ‘universal life plans’.

These allow the policyholder to choose between minimum and maximum amounts of cover.

Over the life the policy holder can choose to purchase units as premiums are paid. The policy grows in value as the number of units accumulates.

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16
Q

Life Assurance

Term Assurance

Level

Diminishing

Family Income Benefity policy

Increasable

Convertible

Renewable

A

Level term assurance has a fixed payout throughout the life, whilst diminishing assurance pays a lower payout as time goes by to match the profile of a falling liability (eg mortgage). Both have fixed premiums throughout the life.

Family income benefit pays out a series of regular payments instead of a lump sum, a type of diminishing contract.

Increasable assurance allows the customer to increase cover with no additional health checks in the future.

Convertible can be converted into an endowment or whole of life policy with the same sum assured.

Renewable policies benefit from a low initial premium but guarantee you can continue to be covered. Premia will increase in the future, but no need for future health checks.

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17
Q

Sickness/Health Insurance

Income Protection

Payouts received - time period

Tax impact

A

Once the insured has been out of work for at least the ‘deferred period’ benefits are paid, continuing until they die, return to work or the contract ends (usually retirement).

Benefits from an individual policy are exempt from tax.

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18
Q

Sickness/Health Insurance

Personal accident and sickness insurance

Payouts - time

Other comparisons to income protection

A

Pay regular benefits whilst the insured is unable to work, but also pay one-off lump sums for things such as loss of limbs, eyesight or becoming permanently disabled.

The deferred period is likely to be very short (1 to 14 days) but benefits are only paid for one to two years.

There will be fewer health and occupation questions compared to income protection and fewer occupations are excluded.

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19
Q

Sickness/Health Insurance

Private Medical Insurance

2 types

A

Full Medical Underwriting requires questions about health of the insured. Based on the results the insurer decides the conditions of cover.

Moratorium basis doesn’t ask health questions but any health conditions suffered from in the last 5 years are automatically excluded.

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20
Q

Sickness/Health Insurance

Critical Illness Cover

3 differences to income protection

A

Similar to income protection but:

  • Lump sum not regular income
  • Based on diagnosis of specific illnesses, not whether you are unable to work
  • Can be provided by stand-alone policies or incorporated in whole life, term or endowment policies
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21
Q

Sickness/Health Insurance

PPI

AKA?

A

Usually only available in connection with a loan. Packaged to offer one or more of:

Accident benefit

Sickness benefit

Unemployment benefit

So known as ASU policies

22
Q

Sickness/Health Insurance

Mortgage PPI

4 features

A
  • Provide accident, sickness and unemployment cover
  • Pay out after maximum of 60 days off work
  • Provide cover of at least 12 months
  • Pay out to self employed who have informed HMRC they have involuntarily ceased trading and registered for Employment & Support Allowance (ESA)
23
Q

Savings and Investment

Definition of short, medium, long term

A

Short term is for emergency funds, a pot of money of about 3 to 6 months income (or 10% of capital if that is the main source of income). Can be as long as 5 years and include house deposits, holidays, cars, weddings.

Medium term is 5 to 15 years, could also be for something like a wedding.

Long term is 15 years+.

24
Q

Savings and Investment

Help to Buy ISA

Max bonus on regular amount

Home purchase restrictions

Max initial deposit

Max total bonus

A

Get a £50 bonus for every £200 invested, up to a max of £3k on £12k saved.

Available for purchases up to £450k in London, £250k outside.

Maximum initial deposit is £1k, maximum monthly saving is £200.

25
Q

Savings and Investment

Tax on Savings

New policy on tax deducted at source

Tax payable on savings for different tax brackets

A

Since 6 Apr 16 banks, building societies and NS&I can pay interest gross.

Basic rate tax payers get £1k tax free interest, £500 for higher rate (after which 40% tax) and additional rate pay 45% on everything.

26
Q

Savings and Investment

NS&I

A

Governement backed savings and investment products, and are therefore totally secure.

They are all ‘deposit-based’ products.

27
Q

Savings and Investment

Use of Deposit products

A

Suitable for emergency funds and for short term use, for which they are the only asset that can reliably maintain nominal value of capital and achieve a return.

For medium term use the impact of inflation can erode their value.

28
Q

Investments

Index-linked fixed interest investment

A

Index linked means the interest and capital value are linked to an inflation index (RPI).

29
Q

Investments

Permanent Interest Bearing Shares (PIBS)

A

Fixed interest investments issued by building societies.

Similar to corporate bonds except they have no expiry date and interest payments can be missed in exceptional circumstances (don’t need to be caught up later).

If the building society demutualises they convert into Permanent Subordinated Bonds (PSBs).

30
Q

Investments

4 types of pooled investment

A
  • Open ended investment funds
  • Life assurance and pension funds
  • Endowments
  • Investment trusts
31
Q

Investments

4 types of open-ended investment

A
  • Units Trusts
  • OEICs
  • SICAV (french)
  • FCPs (french)
32
Q

Investments

Investment Trusts

2 features

A

These are closed-ended investment companies.

They are allowed to borrow money to invest (geared).

33
Q

ISAs

3 types

A

Cash (including help to buy)

Stocks & shares

Innovative finance (peer-to-peer)

34
Q

ISAs

Limits

Withdrawal rules

Age limits

A

£15,240 total limit split however you want.

Allowed to withdraw and put back in the same year.

18 year minimum age for stocks & share and innovative finance, 16 years for cash (inc. help to buy).

35
Q

ISAs

Junior ISAs

Who are they available to?

Limit

Withdrawal restriction

A

Available to children born before 1 Sep 2002 or after 2 Jan 2011.

£4,080 annual limit can be split between cash or stocks and shares.

No withdrawals before 18 years old (except very rare circumstances).

36
Q

Retirement

2 annuity types

Tax treatment

A

CPA (Compulsory Purchase Annuity) is bought from the proceeds of a pension. Income is taxed based on income paid at 20%/40%/45%.

PLA (Purchase Life Annuity) is purchased from other funds (usually get better rates) and income is separated into an income and capital element for tax purposes (capital is tax free).

37
Q

Retirement

State Pension

Date for new state pension

qualifying years required

Amount received

A

New state pension is for those reaching state pension age after 6 Apr 2016.

Need 35 qualifying years NICs and not been ‘contracted out’ at any time during working life for FULL new state pension, otherwise get slightly lower amount.

Receive £155.65 per week (old ‘basic’ state pension is £119.30).

38
Q

Retirement

2 types of private pension

3rd sub-type

A

Occupational pensions are set up by employers, DC or DB basis.

Personal pensions are funded by savings of the policyholder.

Stakeholder pensions are personal pensions which meet some additional requirements.

39
Q

Retirement

Providers of occupational pension arrangements

2 divisions

Further subdivisions

A
  • Public sector schemes (i.e. civil servants)
  • Private sector schemes

Private sector schemes can be either:

  • Self-administered schemes (managed by the company itself) or
  • Insured schemes (managed by a life assurance or pension provider)
40
Q

Retirement

NEST

A

NEST is the National Employment Savings Trust which is a scheme designed to meet the needs of low to moderate earners and their employees.

41
Q

Retirement

Auto-enrolment

A

Employers have to enrol all eligible workers into a qualifying workplace pension arrangement, and choose one of 2 qualifying schemes:

  • Make at least 3% contribution to a DC scheme or NEST or
  • Offer a DB scheme or hybrid scheme which meets the test scheme standard.
42
Q

Estate Planning

Inheritance Tax

Who is it payable by?

Nil rate band

Rate of tax

A

Payable by UK domiciles, based on value of worldwide assets.

Also payable on the UK assets of non-domiciles.

First £325k is covered by nil rate band.

Above this the rate is 40%.

43
Q

Estate Planning

Inheritance Tax

2 methods of reducing impact of IHT

Specific transfer to avoid IHT

Rule change in October 2007

A

IHT impact can be reduced by trying to reduce the liability (estate planning, writing a will, using allowances and trusts etc.) or by providing for money to cover the tax liability.

PETs (potentially exempt transfers) are tax free if 7 years before death.

In October 2007 it became possible to transfer unused nil-rate band between spouses.

44
Q

Estate Planning

Inheritance Tax

2 financial vehicles used

A

Life assurance policies move value out of an individuals estate but don’t give immediate benefit to beneficiaries. They provide a tax-free lump sum on death sufficient to pay the IHT liability.

Policies with trusts and insurance policies also move capital out of an individuals estate.

45
Q

Tax planning

4 main approaches

A
  • Make the maximum use of tax allowances,
  • Choose the most suitable investments according to the investor’s own tax position,
  • Choose investments that provide tax-free returns and
  • Choose investments that qualify for tax relief on initial investments.
46
Q

State Benefits

7 Benefits for Parents

A

Child Benefit - Universal, non-means-tested.

Child tax credit - Launched by labour, payable regardless of whether parents work (integrated in tax system).

Child trust fund - Ended in 2011, voucher to invest on behalf of children.

Statutory adoption pay - 39 weeks of pay at min(standard rate, 90% earnings).

Statutory maternity pay - 6 weeks @ 90% earnings, 33 weeks @ min(standard rate, 90% earnings).

Statutory paternity pay - 1 or 2 consecutive weeks at min(standard rate, 90% earnings).

Sure start maternity grant - £500 for low income families per child.

47
Q

State Benefits

3 Benefits for Unemployed

A

Income support - For those on low incomes who aren’t signed on as unemployed.

Jobseeker’s allowance - Main benefit for working age unemployed (or less than 16 hours per week) and looking for work.

Working tax credit - Paid by HMRC to people on low incomes, can include a childcare element. If you’re over 25 you must work at least 30 hours per week.

48
Q

State Benefits

Mortgage Interest Support

Amounts, waiting periods, limits

A

Get help paying mortgage interest if you’re receiving certain benefits.

If you get State pension credit it’s on £100k of your mortgage with no waiting period.

Otherwise it’s on £200k but 39 week waiting period.

Limited for 2 years if you receive jobseeker’s allowance.

49
Q

State Benefits

7 sick and disabled benefits

A

Attendance allowance - Tax free for those over 65 years old who are disabled and need care.

Carer’s allowance - Taxable benefit to look after somebody disabled (don’t need to be related).

Personal Independence Payment (PIP) - Successor to DLA.

Disability living allowance (DLA) - Tax-free for disabled who have difficulty walking and so need care. Ending for those born after 1948 and over 16 years old.

Employment and Support Allowance (ESA) - Successor to incapacity benefit, paid to the ill or disabled but aims to get them into work.

Incapacity Benefit - If illness started before 27 Oct 2008 while under state pension age.

Statutory Sick Pay - Standard weekly rate paid for up to 28 weeks if unable to work.

50
Q

State Benefits

3 pensioner benefits

A

New/Basic State Pension - Paid after state pension age, which rises to 66 by April 2020.

Pension Credit - Guarantees minimum income when over state pension age by topping up. Also exists a savings credit for over 65s but won’t be available after 2016.

Additional State Pensions - Taxable, earnings-related components of pre-2016 state pension (State Graduated Pension, State Earnings Related Pension, State Second Pension). New state pension has deductions instead for time contracted out of those schemes.

CII - R01 (9 decks)

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