Practice Test 10 - Alan & Kim

Question 1

State the additional information that you would require in order to advise Alan and Kim on their financial aim of ensuring they have adequate income in retirement.

Answer 1

• Income/capital needed in retirement.
• Intended retirement date.
• Pension plan charges.
• Fund choices available/asset allocation.
• Nomination of beneficiary.
• BR19/State Pension forecast.
• Auto-enrolment contributions for Kim/contribution history.
• Further inheritances expected/use of other assets/savings/downsize.
• Capacity for loss.
• Affordability/budget.
• Ethical/religious preferences.
• Pension projections.
• Will the employer redirect National Insurance saving back to Alan’s pension.

Question 2

Explain how Alan’s maximum tax-relievable pension contribution for the current tax year is determined. No calculations are required.

Answer 2

• Take current annual allowance/£40,000.
• Calculate current employer contribution/£62,000 x 8% = £4,960.
• Calculate personal contribution for the tax year/£4,960.
• Deduct both employer and employee contribution from annual allowance/ £40,000.
• This gives remaining allowance for current tax year.
• Must use current years allowance first.
• Can use any carry forward allowance from previous three tax years.
• Unused carry forward cannot exceed earned income in current tax year/ £62,000.

Question 3

State five benefits and five drawbacks to Alan of using his employer’s salary sacrifice arrangement to increase his pension benefits.

Answer 3

Benefits:
• Income Tax saving/tax relief.
• Saves employee National Insurance (NI).
• Saves employer NI.
• Employer may pay NI saving to Alan’s pension.
• Regain Child Benefit.
• Increased pension with same net salary.

Drawbacks
• Lower earned income so death-in-service may be reduced/may affect employer sick pay/redundancy/income protection.
• May affect ability to borrow mortgage/due to lower earnings.
• May affect State benefits.
• Extra paperwork/administration.
• May impact on future pay increases.

Question 4

Explain to Alan the advantages of continuing to fund his defined contribution group personal pension scheme to provide an improved income in retirement, rather than using a stocks and shares ISA.

Answer 4

• 40% tax relief.
• Higher contributions.
• Employer contributions.
• Cannot withdraw before age 55/57.
• Improved death benefits.

Question 5

Explain to Alan and Kim how the income and capital gains on their existing OEICs are likely to be treated for tax purposes.

Answer 5

• Tax/income is split 50:50 on emerging markets fund.
• Open-ended investment company (OEIC) income taxed as dividend.
• First £5,000/£10,000 of dividend free of tax/dividend allowance;
• thereafter 7.5% Income Tax for Kim;
• 32.5% Income Tax for Alan.
• Capital Gains Tax (CGT) on disposal/sale.
• Gains up to £11,300 exempt/annual CGT exemption.
• CGT of 10% for Kim.
• CGT of 20% for Alan.
• Losses can be set against gain.

Question 6

Recommend and justify how Alan and Kim could improve the tax-efficiency of their existing savings and investment portfolio.

Answer 6

• Use ISA allowances.
• National Savings Certificates/Premium bonds.
• Tax efficiency.
• Transfer cash accounts to Kim.
• All interest is tax free/tax free savings allowance available either Kim or Alan/could save 40% tax.
• Transfer sufficient OEIC’s to Kim.
• Interspousal transfer/no loss/no gain/utilises Kim’s dividend allowance/utilise Alan’s dividend allowance.
• Saves 10% CGT/25% Income Tax.
• Use annual CGT exemptions/£11,300.
• Register carried forward losses with HM Revenue & Customs/to reduce CGT.
• Pension contributions/Enterprise Investment Scheme.
• Tax relief/tax reducer/tax free growth.

Question 7

Recommend and justify a suitable financial protection policy to ensure that any childcare costs can be met in the event of Kim’s death.

Answer 7

• Family Income Benefit (FIB)/decreasing/level term.
• Single Life.
• Sum assured is sufficient to meet childcare costs.
• Term to Oliver’s 18th birthday/children no longer financially dependant/13 year term.
• Guaranteed premiums;
• to ensure affordability/known cost.
• Indexation;
• to keep pace with inflation.
• Waiver of premium;
• to maintain premiums in event of illness/incapacity.
• Written in trust/life of another;
• to ensure speedy payment/outside estate/guaranteed destination.

Question 8

Alan and Kim would like to invest a regular sum to fund future deposits for their children’s first homes.

State five advantages of using a stocks and shares ISA, rather than a Junior ISA for this purpose.

Answer 8

Advantages
• Higher contribution limits/£20,000.
• Larger range of providers/greater fund choice.
• Unlimited access if needs change/can be used for other purposes.
• Continued control at age 18/no guaranteed access by child.
• Can leave existing Child Trust Funds invested/no need to transfer to Junior ISA.

Question 9

Alan and Kim wish to invest the inheritance from Alan’s aunt for their long-term financial security.

Answer 9

• Reduces volatility/risk.
• Non-correlated assets.
• Can match attitude to risk.
• Can be rebalanced.
• Potential for higher returns.

Question 10

State the main benefits of investing the inheritance in a diversified investment portfolio.

Answer 10

• Disclose status/fees/client agreement.
• Fact-finding / goals / expectations/objectives/affordability/timescales.
• Attitude to risk/capacity for loss.
• Analysing the client’s situation.
• Conduct product research.
• Formulating recommendation/develop the financial plan.
• Make a recommendation/presentation to client.
• Implementation/suitability letter.
• Annually review/rebalance/monitor.