Exam January 2018 - Adam & Kathryn

Question 1

Identify the additional information that a financial adviser would need to advise Adam and Kathryn on generating sufficient income in retirement.

Answer 1

Adam
Defined Benefit scheme:
 Number of years’ service, the accrual rate and pensionable salary
 Commutation rate
 Indexation of the scheme in retirement
 Solvency of the employer
 Funding status of the scheme
 Penalties on early retirement
 Death benefits payable

Kathryn
Group Personal Pension Plan
 Projected benefits to anticipated retirement age
 Choice of funds available

Both
 Level of income required in retirement
 Any lump sums required in retirement
 Intended retirement dates/ scheme pension ages
 Their views on inflation
 Their views on future legislative changes
 Their views of future growth rates
 Their ATR and capacity for loss in this area
 Any ethical views / socially responsible views
 Are they prepared to earmark other assets for this area
 Current tax year and previous three tax year’s relevant accrual
 Willingness to use investments to provide income in retirement

Question 2

Adam and Kathryn are considering using some of the money held on deposit to improve their income in retirement.
State the benefits of Kathryn making additional National Insurance contributions to increase her State Pension entitlement.

Answer 2

 She may pay class 3 contributions to increase entitlement to her State Pension benefits.
 She can only pay for a year she had insufficient class 1 or class 2 NICs
 She must be resident in the UK throughout the tax year concerned
 and been previously liable to pay class 1 or 2 NICs
 Class 3 contributions cannot be paid in the tax year in which she reaches State pension age
 Class 3 contributions can be paid up to six years after the tax years to which they relate

Question 3

Comment briefly on the suitability of Adam and Kathryn’s savings and investments.

Answer 3

 As a basic rate tax payer Kathryn will have a Personal Savings Allowance of £1,000, not fully utilised
 As a higher rate tax payer Adam will have a Personal Savings Allowance of £500, not fully utilised
 Interest paid on their cash deposits will not be subject to income tax due to their respective personal savings allowances

Any income distribution or capital gain from assets held within their ISAs are tax free

 Any income received from Kathryn’s unit trust will be within her dividend allowance taxed at 0%
 Part / all gains could utilise her CGT exemption
 Any gains above his available annual CGT exemption of £11,300 will be subject to CGT at 10% as long as within her basic rate band

 Income received from Adam’s OEIC are likely to exceed his dividend allowance
 Any excess would be taxed at 32.5%
 Any gains above his available annual CGT exemption of £11,300 will be subject to CGT at 20%

 The investment bond will be subject to additional income tax of 20% for Adam on any chargeable gains
 Any chargeable gain from the investment bond for Kathryn will not be subject to any further income tax, although an additional 20% may be payable if any gain takes her into the higher rate tax bracket
 Top slicing can be used to minimise this potential liability
 They may not have used their current ISA allowances
 They may not have used their current CGT exemptions
 They have not utilised any tax free premium bonds / NSCs

Question 4

Describe the actions Adam and Kathryn could take to improve the tax-efficiency of their savings and investments.

Answer 4

 Adam to transfer part of OEIC to Kathryn after utilising his £20,000 ISA allowance
 Kathryn then to utilise her current ISA allowance on her holding
 Balance will utilise her remaining dividend allowance and any potential CGT will be at a lower rate
 Any excess income will be at lower rate of 7.5%
 Interspouse exemption can be utilised
 ISAs will then provide tax free income and growth in the future
 Assign the bond to Kathryn prior to any encashment
 Potentially saving 20% income tax on any gain
 Assigning does not constitute a chargeable event
 For Kathryn, as a basic rate tax payer no further liability on the gain
 Unless, after top slicing, the gain takes her into the higher rate tax band
 In which case a further 20% income tax could be due
 Both crystalise any gains / losses on collectives
 To utilise CGT exemption / carry forward losses for future gains
 They do not hold any tax efficient NS&I savings products

Question 5

Recommend and justify the actions that Adam and Kathryn could take to immediately reduce their potential Inheritance Tax liability.

Answer 5

• Gifts out of income using normal expenditure rules
• Each use the £3,000 annual exemption for current tax year
• and for previous tax year (if unused)
• Use £250 small gifts exemption
• As immediate IHT saving for amounts gifted
• Place existing assets in trust / Make lifetime transfers to their children / PETs / CLTs
• As funds would be out of their estate after 7 years
• Joint life, 2nd death, whole of life plan in trust to children for their long-term liability
• In order for children to have funds to pay the IHT due
• Discretionary will trust
• To allow the growth of assets to up to the NRB on 1st death to be protected from future IHT

Question 6

State six benefits of Adam and Kathryn settling money into a discounted gift trust to mitigate their potential Inheritance Tax liability.

Answer 6

• Upon Adam’s death a discretionary will trust is created
• Two trustees, of which Kathryn can be one to maintain control of investment decisions and beneficiary payments
• For a class of discretionary beneficiaries, including Kathryn and the children
• For assets held in Adam’s sole name
• Up to the value of the prevailing nil rate band
• Kathryn will still be able to access income / capital if needed whilst she is alive
• As she can receive discretionary payments or loans from the trustees
• The funds would pass to her children on her eventual death
• Any growth on the assets placed into the trust on Adam’s death
• Will be free from IHT on Kathryn’s subsequent death
• Easily achieved by transferring £40,000 of deposits to Adam’ sole name from joint holdings*
• And creating a codicil to the existing will

Question 7

State eight factors a financial adviser should take into account when reviewing Adam and Kathryn’s investments at their next annual review.

Answer 7

 Any health problems
 Changes in expenditure/income requirements
 Changes in personal circumstances
 Adam taking benefits from Defined Benefit scheme
 Kathryn taking benefits from the GPP
 Scheme funding position change
 Alteration of wills
 Tax year end / beginning or use of ISAs / CGT / IHT exemptions
 Adverse market conditions
 Significant Legislation changes
 New product in marketplace
 Changes in expenditure/income requirements at retirement
 Changes in personal circumstances
 DB scheme funding position
 Adam’s employer’s solvency situation
 Performance of Kathryn’s GPP
 Scheme funding position change
 Significant Legislation changes
 Kathryn’s NIC record / BR19