Practice Test 10 - Bisham & Val

Question 1

State the process a financial adviser should follow to provide Bisham and Val with suitable advice on their savings and investments.

Answer 1

• Disclose status/fees/client agreement.
• Factfinding/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.

Question 2

Identify the reasons that an adviser should not solely rely on the output from a computer-based risk-profiling tool to confirm Bisham and Val’s attitude to risk.

Answer 2

• Different results for Bisham and Val may 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.
• Capacity for loss.
• Different risk for different objectives/timescales.

Question 3

Bisham and Val are uncertain whether the with-profits bond meets their needs.
State the information you would require to advise Bisham and Val on whether to surrender or retain the bond.

Answer 3

• Amount of original investment/any further investments.
• Date of investment.
• Details of withdrawals taken/planned.
• Underlying investment/asset allocation.
• Market value reduction/exit penalty/charges/surrender value/any guarantees.
• Bonus history/terminal bonus/performance.
• Switch options/cost of switching.
• Financial strength of provider.

Question 4

Comment on the suitability of Bisham and Val’s existing investment portfolio.

Answer 4

• Bisham and Val may hold too much in cash.
• Cash holding not in line with attitude to risk (ATR).
• Their savings account will not be earning high interest/savings would be eroded by inflation.
• Not fully covered by Financial Services Compensation Scheme.
• Bank account/Open-ended investment company should be in Bisham’s name.
• The with-profits/corporate bond/UK equity fund may/may not match their ATR.
• Not tax efficient/no ISAs.
• Lack of diversification.

Question 5

State the actions Bisham and Val could take now to mitigate their potential Inheritance Tax liability.

Answer 5

• Use annual gift allowances/small gift exemption.
• Regular gifts out of excess income.
• Execute a deed of variation.
• Make pension contributions.
• Charitable/political donations.
• Invest in assets which offer Business property relief/ AIM Shares/ Enterprise investment scheme.
• Make potentially exempt transfers/chargeable lifetime transfers.
• Discounted gift trusts/loan trust.
• Joint life second death whole of life in trust.

Question 6

With regard to Val’s imminent inheritance:
Describe how a deed of variation to her mother’s Will is set up and the formalities which must be incorporated within the deed.

Answer 6

• Must be in writing/legal document.
• Signed/dated/witnessed.
• Deed states what is being varied in will/intestacy/the ‘what’.
• Must be clear who is benefitting from variation/the ‘who’.
• All affected beneficiaries must agree.
• All affected beneficiaries must be at least aged 18.
• All affected beneficiaries must be of sound mind.
• It will be treated as taking place on the donor’s death.
• Must be executed within two years.
• The deed should not be for consideration of money or money’s worth.
• The deed should contain a statement that ‘the variation’ is to have effect for Capital Gains Tax/Inheritance Tax.
• The deed should contain an exemption certificate for variations of stock, shares or securities.

Question 7

With regard to Val’s imminent inheritance:

Comment briefly on the benefits and drawbacks of this type of arrangement for Bisham and Val. (Deed of variation)

Answer 7

• Bypasses Bisham & Val’s estate/does not affect Val’s nil rate band.
• Saving Inheritance Tax of 40%/£120,000 on their deaths.
• Giving up capital/income.
• May need this in the future for long term care.
• Cost of deed of variation.

Question 8

Explain the benefits to Val of remaining as a member of her employer’s defined benefit pension scheme, for both her and Bisham.

Answer 8

• Guaranteed income.
• £40,000 per annum.
• Guaranteed income increases/discretionary increases.
• Spouse’s pension.
• No investment risk/fund erosion.
• Protection under Pension Protection Fund.
• No charges/fees for advice/ongoing monitoring.
• Lump sum death benefit on death before retirement.
• Tax free lump sum/pension commencement lump sum.
• Employer’s contribution/employer bears main cost of scheme.

Question 9

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

Answer 9

• Change in circumstances/objectives/lifestyle/health/deed of variation.
• Income requirement/ expenditure change/ income change/ tax status/ further inheritances.
• Investment performance/benchmarking/on track/asset allocation/rebalance.
• Change in attitude to risk/capacity for loss.
• Charges.
• Use of tax allowances.
• Changes in economy/markets.
• Legislative/tax changes/new products on the market.