Exam January 2018 - Suresh & Anya

Question 1

Outline the key factors that a financial adviser should consider when putting in place a suitable investment strategy for Suresh and Anya’s retirement planning.

Answer 1

 Level of income required in retirement
 Any lump sums required in retirement
 Their intended retirement dates
 Current fund sizes
 Current investment fund
 Will employer allow reduction to minimum of 1% each
 Fund choice available
 Their views on inflation
 Their views on future legislative changes
 Their views of future growth rates
 Their current state pension entitlement / BR19s / NIC record
 Their ATR and capacity for loss in this area
 Their ethical / SRI views
 Their budget/affordability in this area, lump sums and/or monthly contributions
 Are they prepared to earmark other assets for this area
 Any inheritances due

Question 2

State four benefits and four drawbacks for Suresh and Anya of using their savings to repay their credit card debts.

Answer 2

Benefits:
 Repays all of the debt immediately / debt free / piece of mind
 Save on expensive interest payments
 Will increase disposable income
 May improve their credit score
 Will improve affordability criteria for mortgage purposes

Drawbacks:
 Loss of emergency funds / liquidity
 The existing funds may otherwise be used towards the house deposit
 Loss of potential investment opportunities / Premium Bond wins
 The debt may rebuild again
 Less funds to obtain LISA bonus
 No credit can harm credit score

Question 3

List six key areas for investment which are typically excluded by socially responsible investment managers.

Answer 3

 Tobacco/alcohol
 Religious issues
 War zones/weapons/armaments
 Environmental issues/pollution/energy companies
 Animal welfare
 Social/political policies
 Exploitation of labour/excessive remuneration

Question 4

State five drawbacks of using a socially responsible investment strategy.

Answer 4

 Restricted choice / restricted investment options / less diversified
 Usually Higher fund charges / passive investment rarely available
 More volatile / higher risk
 Limited dividend income
 Potentially lower growth / poorer performance
 Difficult to screen large companies / opaque business structure

Question 5

Recommend and justify one suitable protection policy for Anya to provide her with a regular income in the event of her suffering a long-term illness or disability.

Answer 5

 PHI/IPI recommended for both
 Benefit level at 65% of income / maximum available
 After taking into account any employer benefits payable
 To provide a tax free monthly payment in the event of each of them being unable to work due to long term disability
 Term until the Suresh and Anya’s retirement ages
 Minimum deferred period for both / 4 weeks / to match any employer benefits
 Budget allowing
 Indexed benefits
 To ensure cover maintains real spending power
 Own occupation option, if available
 To provide widest / better cover than any occupation
 Guaranteed premium
 To ensure long term affordability

Question 6

Suresh and Anya are considering opting out of their qualifying workplace pension schemes.
Explain in detail to Suresh and Anya the key benefits of remaining as members of their respective employer’s pension schemes

Answer 6

• Up to 5% employer contribution
• Potential capital growth
• Potential higher income at retirement
• NET pay relief

Question 7

Suresh and Anya are considering opting out of their qualifying workplace pension schemes.
If Suresh and Anya opt out of their qualifying workplace pension schemes, state their employer obligations in respect of Suresh and Anya re-joining the schemes.

Answer 7

opt in every three years

Question 8

Identify the key benefits for Suresh and Anya of using a Lifetime ISA to save a deposit for their new home.

Answer 8

 Available since 6th April 2017
 The lifetime ISA can only be held in sole names
 It is available for both as under 40 years old
 It offers the ability to save £4,000 per tax year each, which fits their target amount
 This contribution would form part of their overall £20,000 ISA allowances
 The government will add a bonus of 25% based on the annual contributions made
 Any bonus will be first added in April 2018 and then added when the contribution is made thereafter
 On any contribution until age 50
 Funds can be invested in cash or stocks and shares
 So LISA investment options can match their attitude to risk
 Growth and income are tax free
 As they would use it for house purchase, there would be no penalties on withdrawal as long as withdrawn 90 days prior to completion
 Any excess savings can be used towards retirement
 However, withdrawals prior to age 60, other than for first time house purchase
 Unless early access is due to Terminal Illness
 Are subject to a 25% penalty on the amount withdrawn

Question 9

State seven key benefits for Suresh and Anya of receiving ongoing financial advice.

Answer 9

 Help them to meet their conflicting financial objectives, goals and priorities they have
 Benefit from research
 Budgeting/cash flow
 Assessment of suitability of existing arrangements
 Tax planning, use of tax wrappers or tax efficiency
 Assess attitude to risk (ATR) and capacity for loss
 Receive recommendations/create a financial plan
 Dealing with professionals/knowledge/clarity of explanation
 Ongoing service/reviews
 Consumer protection/regulated advice