Exam October 2017 - Matthew & Linda

Question 1

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

Answer 1

• Income/capital needed in retirement.
• Intended retirement date/scheme normal retirement date.
• Group personal pension scheme (GPP) – employer matching/will company NI saving be paid into pension.
• BR19/State Pension forecast.
• Pension projections/statement/accrual.
• Widow’s pension.
• Financial strength of Matthew’s employer/scheme solvency.
• Further inheritances expected/use of other assets/savings/downsize.
• Capacity for loss.
• Affordability/budget.
• Ethical/religious preferences.
• Any other pension plans/has Mathew joined the GPP.

Question 2

Explain to Matthew and Linda the potential benefits of receiving and acting upon advice from a financial adviser.

Answer 2

• Identify goals/shortfalls/problems/objectives.
• Assess attitude to risk/capacity for loss.
• Budgeting/affordability/cash flow.
• Analyse suitability of existing arrangements/analyse client circumstances.
• Tax planning/use of tax allowances/tax efficiency.
• Benefit from research.
• Receive recommendations/implement a financial plan.
• Ongoing service/ongoing reviews.
• Professional/expert knowledge.
• Clarity of explanation/aids customer understanding/peace of mind.
• Consumer protection/regulated advice.

Question 3

Recommend and justify one suitable protection product that meets the family’s protection needs to cover the death or serious illness of Matthew or Linda.

Answer 3

• Term assurance/family income benefit policy/whole of life.
• Critical Illness Cover (CIC).
• Joint life first death/2 single lives.
• Minimum term 22 years/to retirement/to match mortgage.
• Sum assured at least £220,000.
• To repay mortgage/to replace income/maintain standard of living.
• Indexation.
• Keep real terms values/keep pace with inflation.
• Guaranteed premiums.
• Known cost/affordability.
• Written in trust/split trust.
• Speedy payment/outside of estate/CIC paid to policy holder.
• Waiver of Premium.
• To ensure premiums paid in the event of accident or sickness.

Question 4

Explain how Matthew’s maximum tax-relievable pension contribution for the 2017/2018 tax year is determined. No calculations are required.

Answer 4

• Take current annual allowance/£40,000.
• Determine pension input amounts for current tax year;
• for employer and employee.
• Deduct pension input amount (from annual allowance).
• This gives remaining allowance for current tax year.
• Determine pension input amounts for previous three tax years.
• Calculate any unused carry forward allowance.
• Must use current year’s allowance first.
• Total contribution cannot exceed earned income in current tax year/£110,000.

Question 5

State the benefits of Matthew using salary sacrifice to make additional contributions into his employer’s group personal pension (GPP) scheme.

Answer 5

• Income Tax saving/tax relief.
• Saves employee National Insurance (NI).
• Saves employer NI.
• Employer may pay NI saving to Matthew’s pension.
• Usually no reduction to net salary.
• Reinstate his personal allowance.
• Increased pension benefits/potential growth.

Question 6

Explain how a target date fund, using a lifestyling strategy, operates and the benefits to Matthew of using this fund.

Answer 6

• Invests in equities initially.
• Reduces risk (as approaching retirement date).
• Professional fund management/active management.
• No cost for investment advice.
• Potential for growth.
• Balanced to suit medium risk/matches his attitude to risk.
• Diversification.

Question 7

State the main features of a Junior ISA and explain how such a product could be used by Matthew and Linda to make provision for their children’s future university costs.

Answer 7

• Max contribution £4,128 per annum.
• Not taxable on parents.
• Tax free benefits.
• Potential for growth.
• Anyone can contribute.
• Runs to age 18/child has access at 18/used to pay fees at age 18.
• Child can make investment choices at 16/control at age 16.
• Can roll over to Adult ISA at 18.
• Cash and stocks and shares.
• Wide Fund choice/choice of providers/switching/can match attitude to risk.
• Child can also have cash ISA at 16.

Question 8

State five benefits and five drawbacks of Matthew and Linda contributing to Stocks and Shares ISAs as mortgage repayment vehicles.

Answer 8

Benefits
• Tax free benefits.
• Growth potential.
• Can contribute £40,000 per annum in total.
• May produce a surplus for them.
• Could repay early.
• Could cash in and spend.

Drawbacks
• Shortfall risk.
• Uses ISA annual allowance that could be used for other purposes.
• Charges/advice costs.
• Longer term/increased interest costs.
• Require regular reviews/need ongoing advice.
• Liquidity.