Practice Test 4 - Jon & Amy

Question 1

Identify and explain four errors or inconsistencies in the information provided within the case study.

Answer 1

• They state they will receive their State Pension at age 65.
• Due to their ages, this will be age 67/68.
• They want tax efficiency but have savings/investments in Jon’s name as a higher rate taxpayer.
• They should be in Amy’s name as a basic rate taxpayer.
• They are low/medium risk investors but have Asia Pacific/Recovery Equity investments.
• This is a high risk investment/conflicts with attitude to risk.
• They feel they have adequate pension provision, but they are only contributing £100 per month each to their pensions.
• This premium amount is unlikely to provide the level of pension income they would require.

Question 2

State the long-term protection products you would recommend for Jon and Amy for their long-term financial security. Identify the level of cover, term and how each should be structured. Provide justification for each recommendation.

Answer 2

Term Assurance/family income benefit (FIB)/whole of life (WOL)
• Lump sum/income.
• Term or FIB cost effective/cheaper solution than WOL/WOL guaranteed insurability for life.
• Joint life first death/two single lives.
• At least £250,000/£50,000 per annum (5 x Jon’s salary).
• At least 28 years/to cover mortgage term/until children are not dependent/whole of life/ to retirement.
• Waiver of premium should be considered.
• To be placed in trust.

Income Protection Insurance (IPI)
• For Jon.
• Maximum 13 week deferment/short deferred period.
• 50-75% of earnings.
• Own occupation.
• Indexation/escalation.
• To retirement.
• Breadwinner.
• IPI for Amy when she returns to work/house persons cover.

Private Medical Insurance
• For both/Jon.
• Comprehensive.
• Annually reviewable/open-ended.
• Speedy return to work/quicker treatment.

Question 3

Comment on the suitability of Jon and Amy’s existing pension arrangements.

Answer 3

• They are making low/inadequate contributions.
• They would be better off making higher contributions for Jon than Amy.
• Jon would receive tax relief at 40%/higher rate tax payer.
• Amy would receive tax relief at 20%/basic rate tax payer.
• Amy’s cash fund risk is inappropriate.
• Jon’s fund likely to be suitable.

Question 4

Identify the main steps taken by an adviser in the pension planning process.

Answer 4

• Agree growth rate and inflation.
• Obtain current valuation.
• Identify target income in retirement allowing for pension commencement lump sum.
• Project current funds (to retirement age).
• Project current/ongoing contributions (to retirement age).
• Identify shortfall.
• Calculate required contributions.
• Allowance made for State Pension/BR19.
• Annual/regular review.

Question 5

Comment on Jon and Amy’s investment portfolio and how it might be restructured to meet their attitude to risk and desire for tax efficiency.

Answer 5

• Asia Pacific Equity/Recovery Fund is a high risk investment and should be transferred to a lower risk fund.
• Investments should not be in Jon’s name/transfer taxable investments as he is a higher-rate tax payer and Amy is a basic-rate tax payer.
• Use of ISAs/National Savings Certificates.
• They need to use Capital Gains Tax (CGT) exemptions.
• Make use of inter-spousal transfers for CGT purposes to take advantage of the CGT 10% rate applicable to Amy.
• Make use of their Dividend Allowances/£5,000 and Personal Savings Allowances/£1,000 for Amy and £500 for Jon
• Could pay some of their investments into pension.

Question 6

Recommend ways that their current portfolio can be utilised to provide income when Amy takes maternity leave.

Answer 6

• Take up to 5% tax deferred of original investment from bond.
• Assess availability of unused accumulative withdrawals from previous years on their bonds.
• Investigate market value reduction.
• Utilise Capital Gains Tax allowance for unit trusts.
• Take income from risk inappropriate investments first.
• Utilise income producing funds.

Question 7

Describe in detail three ways in which Jon and Amy can repay their mortgage at or before their desired retirement age.

Answer 7

Interest only
• ISA/investment vehicle/pension commencement lump sum by regular savings for tax efficiency.
• Not guaranteed to repay mortgage.
• Confirm attitude to risk.
• Establish asset allocation.
• Agree growth rate assumption.
• Calculate required contribution level.

Capital and interest repayment
• Change to repayment.
• This will guarantee to repay the mortgage, assuming payments are maintained.
• It will also increase repayment considerably.
• Over payments.
• Save interest.

Use of capital
• Repay mortgage using existing investments.
• Reduced liquidity/investments may be required for other purposes.
• Will remove any potential for growth.
• Reduced outgoings.