Case Study 2 Analysis Flashcards
Paragraph 1
‘Sanjeev and Maya, both aged 28, have recently married. They have no children and are not planning to have any children for the foreseeable future.’
Our analysis
It’s rare to see a young couple without children in R06.
Although the case study states they are not planning on having any children in the ‘foreseeable future’, that’s not quite the same as not planning on having any children ever, so something just to bear in mind on the off-chance the CII through in a curve ball about how having children might impact their aims and objectives in the future.
With no mortgage at present and no children, life cover may not be a priority for the couple as they are both employed. However, this should still be discussed with them to see if it is something that they would like to put in place, particularly once their future mortgage is arranged.
Paragraphs 2 and 3
‘Sanjeev is employed as a trainee architect and receives a gross salary of £36,000 per annum. When he is fully qualified, his employer will increase his salary to £50,000 per annum gross. He is a member of his employer’s workplace pension scheme and contributes 5% of his gross salary to the scheme. His employer contributes 4% of his gross salary to the scheme. Sanjeev’s pension fund has a current value of £18,000 and is invested in a UK equity tracker fund. Sanjeev is also a member of his employer’s death-in-service scheme which will pay out two times basic salary on death whilst in service.
Maya is employed as a purchasing manager for a retail company and receives a gross salary of £42,000 per annum. She opted out of her employer’s workplace pension scheme as she believes it to be unaffordable, based on their current financial position. Her employer offers employer matching for pension contributions of up to 6% of gross salary. Maya receives no other employer benefits.’
Our analysis - Sanjeev
Sanjeev’s gross salary places him in the basic rate tax band at present and he is likely to
remain there after his salary increase.
He currently contributes £1,800 (£36,000 x 0.05) into his workplace pension.
His employer contributes £1,440 (£36,000 x 0.04).
This leaves £56,760 (£60,000 - £1,800 - £1,440) of his annual allowance for 2023/24 available. In addition, there is likely to be potential to carry forward.
We need to consider the suitability of a UK equity tracker fund for Sanjeev in relation to his attitude to risk (ATR), capacity for loss (CFL) and financial aims.
Sanjeev’s DIS will pay out either £72,000 (£36,000 x 2) or £100,000 (£50,000 x 2) once he is fully qualified. We should consider the pros and cons of his DIS given it is the couple’s sole source of financial protection.
Our analysis - Maya
Maya is a basic rate tax payer.
She has opted out of her workplace pension scheme and is therefore missing out on employer matching pension contributions of up to 6%, as well as tax relief on her own contributions. We should make Maya aware that her employer will automatically re-enrol her after 3 years of her opting out.
While we absolutely need to discuss with Maya how she can improve the affordability of saving for her retirement, we might also want to think about how opting out of auto enrolment works. This might include conducting a current cash flow analysis to determine the couple’s surplus disposable income, as well as rethinking their current regular savings.
As Maya receives no other sickness benefits (and there’s no mention of any for Sanjeev), this is clearly a priority for them.
Additional information needed
Income and expenditure?
Essential and discretionary expenditure?
Willing to carry out current cash flow analysis?
Willing to use a Lifetime ISA to benefit from Government Bonus?
Willing to use a Lifetime ISA and redirect excess savings to meet protection /
retirement needs?
Is Maya willing to make regular contributions if affordability allows?
Affordability of contributions based on cash flow analysis
Funds available under workplace pension?
Capacity for loss?
Pension fund charges?
The extent to which she’d be prepared to rely on their other assets?
Would she nominate Sanjeev as beneficiary of death benefits?
What would she like to happen after first / second death?
Paragraph 4
‘Sanjeev and Maya live in a rented property which is costing £1,200 per month. They are currently saving on a monthly basis to build up a deposit to help them buy their first home. They will require a deposit of at least £50,000 and have a current savings balance for this goal of £20,000 which is held in a joint deposit savings account, paying interest of 3% gross per annum. They each save £500 per month into the account from their salaries and aim to be in a position to purchase their first property within the next three years.’
Our analysis
Given the ages of Sanjeev and Maya and their desire to save for their first home, a Lifetime ISA seems like a prime topic to be tested. The mechanics of Lifetime ISAs, as well as the pros and cons of using them for Sanjeev and Maya should be considered.
Given the short timescale we’d be looking at a cash version, for up to £4,000 of their £6,000 annual savings (£500 x 12 months). This would give them their full entitlement to the £1,000 government bonus per year.
To achieve £30,000 in 3 years’ time using a Lifetime ISA (ignoring interest, but including the government bonus), the couple only need to be putting £333.33 (£4,000 a year) each into their mortgage deposit savings. (£4,000 + £1,000 = £5,000 x 3 = £15,000 x 2 (one account each) = £30,000.
This frees up money (£500 - £333.33 = £166.67) for Maya to contribute to her pension. Although it’s not quite enough to contribute the full 6% for maximum matching contributions (£42,000 x 0.06 = £2,520 / 12 = £210 per month), she could ask Sanjeev to give her some of the money from the savings he will make. Alternatively, the current cash flow analysis may discover discretionary expenditure that can be cut. Or she can park this until Sanjeev’s salary increases.
Additional information needed
When will Sanjeev’s training period end?
Do they have any debt and would they like to pay that off before taking out
mortgage?
Confirmation target deposit is sufficient required?
Whether it is feasible to have this saved in the next 3 years?
ATR/ capacity for loss in relation to this objective?
Willingness to open and maximise Lifetime ISAs for tax efficiency?
Willingness to use other assets?
What other house buying costs do they need to budget for?
Parental help?
Affordability?
How much emergency fund do they need first?
What type of mortgage do they intend to take out (repayment or interest only)?
And over what term?
Willingness to protect mortgage repayments on illness / death?
Paragraph 5
‘Sanjeev and Maya each have cash ISAs, which have a fixed rate of 5% for a one-year term, which ends in March 2024.’
Our analysis
Given their high ATR, Sanjeev and Maya may wish to reconsider their use of cash ISAs when their rate expires. Rates are likely to start falling, so they may not be able to fix at the same rate. S&S ISAs may well be more appropriate.
Paragraph 6
‘Sanjeev and Maya have no protection arrangements, other than Sanjeev’s death-in-service from his employer. They wish to ensure they have adequate protection going forwards but are not certain of their actual needs at present.
Sanjeev and Maya believe they have a high attitude to risk and neither of them has any strong interest in Environmental, Social and Governance (ESG) investments.
Sanjeev and Maya have set up mirror Wills which leave all assets to the survivor on first death and to Sanjeev’s nephew who is currently 5 years old, on second death.’
Our analysis
As the couple have no children at present and no mortgage, their main financial protection need would appear to be income protection and, possibly, critical illness cover.
Given money is tight, the couple may wish to consider cheaper alternatives, such as ASU.
When someone has left a gift to a minor child in a will, the asset will be placed into a trust in the care of the appointed trustees until the minor child reaches the age specified in the will (e.g. 18, 21, 25). If no age is mentioned in the will, then the nephew would own the assets outright at 18 in the event of both deaths. NB This would not be a bereaved minor’s trust as the beneficiary is their nephew, rather than their son or daughter.
Additional information needed – financial protection
Level of income and/or capital required and for how long?
Do they wish to protect their standard of living in the event of death as well as
illness?
Do they wish to protect any future mortgage in the event of death as well as illness?
Would expenditure change at all in the event of death/illness?
Confirmation that the only other protection cover they have is Sanjeev’s DIS
Is the DIS cover under trust?
Has Sanjeev nominated a beneficiary for DIS cover?
Entitlement to State benefits?
Willingness to use pension fund as death benefits?
Has Sanjeev nominated a beneficiary for his pension fund?
Willingness to use other assets, or downsize in future?
ATR and capacity for loss in relation to this objective?
Affordability / budget to be spent in providing solution?
Smoker status / hazardous hobbies that would impact underwriting?
Does their will reflect their current wishes?
Who will look after their estate in the event of second death while Sanjeev’s nephew
is still a minor?
Paragraph 7
‘Sanjeev and Maya have the following assets:
Our Analysis
The deposit savings account will enable Sanjeev and Maya to use their personal savings allowances of £1,000 each. Interest in excess of these will be charged at 20%.
The couple have Cash ISAs, which is not in line with their belief that their ATR is high. We should consider risk profiling for this couple.
There are no FSCS issues.
There is no IHT issue as the couple’s assets are relatively low in value at present.\
Additional information needed – assets
Would the couple consider completing a risk profiling questionnaire?
Would the couple consider investing in S&S ISAs, which would be more in line with
their ATR?
