Practice Test 6 - Tom & Lucy

Question 1

List the additional information you will require to be able to advise Tom and Lucy on their following financial aims:
ensure sufficient funding is in place to repay the mortgage in 10 years’ time;

Answer 1

Ensure sufficient funding in place to repay mortgage.
• Current interest rate on mortgage/monthly payments.
• Term of current mortgage interest rate option.
• Early repayment penalties.
• Charges on current investment funds/asset allocation.
• Exit penalties on existing investments.
• Use of other assets.
• Affordability.
• Current contributions to investments.
• Capacity for loss.
• Base cost of investments/original investment amount(s)/withdrawals taken from investments.

Question 2

List the additional information you will require to be able to advise Tom and Lucy on their following financial aims:
provide adequate financial protection until the children have completed full-time education and university.

Answer 2

Provide adequate protection until children have completed full-time education/university.
• Affordability.
• Sick pay entitlement.
• Smokers/lifestyle.
• Any planned change in employment/expected promotions.
• Any plans for further children.
• Amount of cover required/anticipated costs of further education.
• Duration of further education fees/Term of need.
• Details of Death Benefits.
• Does employer provide any employee benefits?
• Use of other assets/support from grandparents.

Question 3

You intend to use a stochastic modelling tool to assist in analysing the asset allocation of Tom and Lucy’s investments.
Explain briefly to Tom and Lucy the purpose of a stochastic modelling tool and the type of information it can provide.

Answer 3

• Analyse the potential risks and returns.
• Compares attitude to risk (ATR) against current portfolio.
• Tool suggests asset allocation;
• to meet objective.
• A forecast shows the potential future values;
• in a range of different market conditions/based on market assumptions;
• indicates if they need to invest more/are on track/exceeding;
• or delay/revise their objective.

Question 4

You intend to use a stochastic modelling tool to assist in analysing the asset allocation of Tom and Lucy’s investments.
Comment on the suitability of Tom and Lucy’s existing investment portfolio.

Answer 4

• Tom and Lucy’s investments are unlikely to be suitable.
• Funds investing in higher risk areas.
• Lacks diversification.
• Does not match attitude to risk (ATR).
• They are using stocks and shares ISAs/not using cash ISAs.
• Paying tax at higher rate/impact on Child Benefit.

Question 5

State four main advantages and four main disadvantages of using Tom’s inheritance to repay part of the mortgage, compared with placing the money in an investment portfolio.

Answer 5

Advantages
• Reduction in interest paid on mortgage/reduced outgoings.
• Reduced debt/guaranteed return/tax free.
• May allow a remortgage to a lower rate/more equity.
• Removes any potential investment risk/in line with Lucy’s low attitude to risk.
Disadvantages
• Lack of investment growth.
• Less liquidity.
• Early repayment charges
• May not be in line with Tom’s medium attitude to risk.

Question 6

Recommend and justify suitable protection policies to enable Tom to repay the mortgage in full and meet the childcare costs in the event of the death or disability of Lucy.

Answer 6

• Single life.
• Term/family income benefit (FIB);
• to the age where children are no longer dependent;
• include indexation;
• to ensure benefit maintains purchasing power;
• include waiver of premium;
• to ensure premium is maintained in the event of Lucy’s illness.
• To replace income/pay child care costs.
• Term to match mortgage/10 years;
• Sum assured at least to match mortgage/£200,000+.
• In trust/life of another.
• Speedy payment/known beneficiary.
• To repay mortgage.
• Individual income protection insurance (IPI) for Lucy.
• Own occupation.
• Widest cover.
• Term to retirement/10 years/children’s dependency.
• Up to 50-75% of income.
• Cannot be cancelled/multiple claims.

Question 7

Outline five benefits and five drawbacks of consolidating Tom’s personal pensions into a single personal pension plan.

Answer 7

Benefits
• Lower charges.
• Wider range of investments funds.
• Reduced administration.
• Potentially greater growth.
• On-line access.
Drawbacks
• Loss of potential guarantees/loss of guaranteed returns.
• Loss of Guaranteed Annuity Rate.
• Exit penalties.
• Monies out of the market during transfer process.
• Administrative/advisory/set-up costs/for the new pension.

Question 8

Explain briefly the actions that Tom and Lucy could take to maximise their entitlement to Child Benefit.

Answer 8

• Child Benefit lost above £60k/maximum Child Benefit for income below £50k.
• Maximising the use of Tom’s ISA allowances.
• Political donations.
• Transfer any non-ISA investment holdings/interest-bearing deposits to Lucy.
• Make Charitable Donations.
• Making pension contributions.
• Salary sacrifice.
• Reduce his taxable income for child benefit purposes.

Question 9

State seven financial areas to discuss at your next review meeting with Tom and Lucy.

Answer 9

• Any change in personal circumstances/death/birth/divorce/ill health.
• Any changes in income/expenditure/affordability.
• Review of investment performance/rebalancing/attitude to risk (ATR).
• Any new monies to invest/inheritances.
• Legislation/Regulatory/Taxation/Economic/Market changes.
• New products available.
• Use of annual tax exemptions/ISA/Capital Gains Tax (CGT)/Inheritance Tax (IHT).