Practice Test 5 - George & Ann

Question 1

State the process an adviser should follow to advise George and Ann on their investment planning.

Answer 1

• Establish the relationship/disclosure of status/adviser fee.
• Goals/expectations/objectives/affordability/timescales.
• Attitude to risk/capacity for loss/asset allocation.
• Analysing the client’s situation.
• Formulating recommendation/develop the financial plan.
• Make a recommendation/presentation to client.
• Implementation.
• Annually review/rebalance/monitor.

Question 2

Identify the reasons why an adviser should not solely rely on a risk profiling tool to clarify George and Ann’s attitude to risk.

Answer 2

• Different results for George and Ann require further discussion.
• Different programmes produce different results.
• Does not allow client to express their views/closed questions/not client specific/ excludes ethical views/excludes subjective views.
• Potential for client to misinterpret/client may misunderstand question.
• Will be unsuitable if they have a zero capacity for loss/ignores capacity for loss.
• Different risk may be in evidence for different objectives/ timescales.

Question 3

Explain why George could consider using flexi-access drawdown to provide an income from his pension fund rather than purchase an annuity.

Answer 3

• Potential for growth.
• Flexible death benefits/can pass on fund value to family members.
• No spouse’s pension decision needed.
• Can choose level of income/can get more income than under a conventional annuity.
• Annuity rates may improve in future/offer poor value for money.
• Flexible income/ability to vary income.
• Matches his attitude to risk.

Question 4

State five benefits and five drawbacks of a salary sacrifice pension arrangement.

Answer 4

Benefits:
• Saves employees national insurance (NI)/income tax.
• Reduces employers NI.
• Increase pension without affecting net pay.
• The employer may retain NI saving.
• Employer NI savings may be paid into employee pension.

Drawbacks:
• Salary reduction may affect borrowing capacity.
• Maximum benefits on employee benefits may be affected/Income Protection Insurance.
• May affect State benefits.
• Complexity/increased administration.
• May impact on future salary increases/bonus.

Question 5

State the reasons why a spousal bypass trust may still be suitable to receive any death benefits paid from George’s pension fund to minimise any future Inheritance Tax (IHT) liability.

Answer 5

• Ann can be a trustee.
• A potential beneficiary.
• So Ann will retain control/trustees will retain control.
• Fund remains outside of estate.
• This will help reduce the inheritance tax (IHT) payable on 2nd death.
• Ann can take income/capital.
• Ann can take a loan from the trust;
• which must be repaid on her death;
• thereby reducing her estate for purpose of inheritance tax (IHT).
• The children/grandchildren can receive benefits/skip generation.
• Ensures certainty of beneficiaries.

Question 6

State the factors an adviser should take into account when advising George on whether to continue to defer his State Pension.

Answer 6

• State of health.
• Taxation position.
• Cash sum needed/available.
• Need for income.
• Death benefits provided on deferment.
• Widows benefits provided.
• Enhanced income due to deferring.

Question 7

Calculate, showing all your workings, George and Ann’s immediate IHT liability on second death. Ignore the value of George’s personal pension and State Pension in your calculation.

Answer 7

Total investments       £1,345,000
Other assets                   £110,000
                                    £1,455,000
less 2 x NRB                (£650,000)
less 2 x RNRB             (£200,000)

                                  £605,000
                                     x 40%
                                  £242,000

Question 8

Recommend and justify ways in which George and Ann could immediately reduce the IHT liability that would be payable on either death.

Answer 8

• Expression of wish on George’s pension/place it in Trust.
• Keep benefits out of estate/ensure goes to intended beneficiary.
• Make gifts out of regular income.
• Utilise annual gift allowance/£3,000 and previous years if unused.
• Small gift allowance/£250.
• Charitable donations/political parties.
• Making pension contributions.
• All of the above removes monies out of estate.
• Utilise discounted gift trust.

Question 9

Recommend and justify the actions that could be taken to maximise tax efficiency of George and Ann’s assets. Ignore any IHT liability.

Answer 9

• Sell (some of) Unit Trust.
• Annually.
• Utilise Capital Gains Tax allowance.
• Use ISA allowance.
• Tax free NS&I.
• Tax efficiency.
• Place investments and savings in Ann’s name.
• Saves tax.
• Utilise Enterprise Investment Scheme (EIS)/ Venture Capital Trusts (VCT).
• Tax relief/tax reducer/any tax savings.
• Makes pension contributions.
• Tax relief/any tax savings.

Question 10

State the factors an adviser should take into account when reviewing George and Ann’s investments at their next annual review.

Answer 10

• Investment performance/benchmarking/on track.
• Asset allocation/rebalance.
• Income requirement/expenditure change/income change.
• Change in attitude to risk or capacity for loss.
• Legislative/tax changes/new products on market.
• Changes in economy.
• Use of tax allowances.
• Change in circumstances/objectives/lifestyle/health/their tax status.