General Questions

Question 1

Bob, a UK domicile, married Maria in Spain, her home country. They are both now residents of the UK. Bob is concerned about his health and feels it would make sense for many reasons to gift their fully-let, second home in Spain worth €600,000, held in his name, to his wife. Which statement is true regarding the consequences of Bob’s intention?

A. As Maria is Spanish and the home is in Spain there are no IHT consequences in the UK
B. As they are both resident in the UK there may be IHT consequences
C. As they are married under European law inter-spouse transfers are exempt
D. As husband and wife all inter-spouse asset transfers are exempt from UK IHT

Answer 1

B. As they are both resident in the UK there may be IHT consequences.

As Bob’s wife is a UK resident non-domicile there is a restriction on inter-spouse transfers. If Bob does not live for 7 years after the PET there may be IHT consequences for Maria. If Maria had been UK domiciled and resident any inter-spouse transfer would be exempt.

Question 2

For Critical Illness Cover, when the insurer reviews the policy they are most likely to consider:

A. The health of the individual life assured, but not general medical advancements
B. Both the health of the individual life assured, and general medical advancements
C. Neither the health of the individual life assured, and general medical advancements
D. General medical advancements, but not the health of the individual life assured

Answer 2

D. General medical advancements, but not the health of the individual life assured.

The CISI manual states “It is important to note that [CIC] policy reviews do not look at the health of the individual life assured, but at general medical advancements.”

Question 3

Martin’s contributions to his pension are taken directly from salary by his company before tax and national insurance contributions have been paid. Which of the following is most likely to be true?

A. This is a Group Personal Pension scheme
B. This is a contract-based scheme
C. This is a net pay arrangement
D. This is a relief at source arrangement

Answer 3

C. This is a net pay arrangement.

Martin’s pension is a ‘net pay’ arrangement which means that an employee has their contribution deducted from their pay before tax is applied, thereby receiving full tax relief immediately.
Most GPPPs and contract based schemes are ‘relief at source’ arrangements.

Question 4

Donald is a 36-year old, self-employed carpenter who specialises in timber frames for houses.

Donald’s assets primarily consist of a house worth £320,000 on which he has a mortgage of £105,000, and a portfolio of £30,000 nominal value 3.5% gilts 2045. They are currently trading at £131.25 per £100nv.

If Donald reinvests the income from his gilts this year and buys more gilts, assuming the price remains constant, what will the nominal value of his holding increase by?

A. £350
B. £800
C. £956
D. £1,050

Answer 4

B. £800.

Income on the gilts = £30,000 x 3.5% = £1,050
Current market price of gilts = £131.25
Nominal value purchased = £1,050 / £131.25 x £100 = £800.00

Question 5

Bill owns his own house in his name only which is worth £350,000. He has financial assets worth £120,000. He is married to May and has one son Mark, 7. If he dies suddenly from an undiagnosed heart condition having not got around to writing a will, which of the following apply?

A. Bill has died testate and his estate will be distributed according to law
B. Under new legislation May is fully protected and will inherit the house and assets and personal effects
C. May and Mark will be entitled to half of the estate each
D. May will receive all the personal effects and chattels plus £370,000 and Mark will receive £100,000

Answer 5

D. May will receive all the personal effects and chattels plus £370,000 and Mark will receive £100,000.

Bill has died intestate. His wife May, gets personal effects and chattels plus £270,000 and 50% of the remaining assets (£200,000). Mark receives 50% of the assets exceeding £270,000.

Question 6

Mavis and George are twins who were born on 16 July 1953. Assuming they have both made full national insurance contributions throughout their lives, which of the following is true?

A. They will both be entitled to the state pension at the same time
B. Mavis will be entitled to her state pension first
C. George will be entitled to his state pension first
D. Mavis’s state pension age will be 60 while George’s state pension age will be 65

Answer 6

B. Mavis will be entitled to her state pension first

The state pension age (SPA) is now 66 for men and women. For many years, however, it was different for men and women. For women born after 5 April 1950 and before 6 December 1953 it increased from 60 to 65 - for Mavis it was approximately 64 years.

From 2018 to 2020 the SPA was increased to 66 for both. This has led to some potentially unfair outcomes for some women, who claim these changes were unfair or not communicated properly (see ‘Waspi women’).

Question 7

Which of the following characterises an annuity certain?

A. An annuity which pays a stream of fixed income until death
B. An annuity which pays out for a specific period
C. An annuity which commences payment immediately
D. An annuity which pays a certain income stream from a future starting date

Answer 7

B. An annuity which pays out for a specific period.

An annuity certain is a guarantee that an annuity will be paid for a specified period, whether the annuitant survives or not. This is to avoid the possibility of an early death soon after an annuity is purchased.

Question 8

What is the main purpose of the independent governance committees initiated by the Office of Fair Trading?

A. To provide a direct agent for workplace scheme members to assess and raise concerns about value for money
B. To provide oversight of the trustee in schemes that operate off-shore but are accessible to UK members
C. To implement a recovery plan if the valuation shows the scheme is not meeting its funding objective
D. To provide information to members and others regarding the lifetime allowance, transfers and benefits

Answer 8

A. To provide a direct agent for workplace scheme members to assess and raise concerns about value for money.

The independent governance committee provides a direct agent for workplace scheme members to assess and raise concerns about value for money.

Question 9

A firm can issue a ‘summary resolution communication’ to the complainant if a complaint can be resolved within:

A. 1 day
B. 3 days
C. 5 days
D. 7 days

Answer 9

B. 3 days.

FCA rules provide a simplified process if the firm resolves the complaint within three business days of receipt. Within this timeframe, the firm can issue a ‘summary resolution communication’ to the complainant, explaining the firm’s response and noting that the firm accordingly considers the matter closed.

Question 10

Which of the following is NOT a feature of a decreasing term assurance?

A. The premium paid decreases over the term of the policy
B. The sum assured declines over time
C. They are commonly used for debt repayment mortgages
D. They can be lapsed before expiring

Answer 10

A. The premiums remain level but the sum assured decreases. They are used to cover declining liabilities such as repayment mortgages. The policies can be lapsed early.

Question 11

Moves in the lifetime allowance have led to the government allowing investors to protect their old lifetime allowances through fixed protections and individual protections. Which of the following best describes these protections?

I. Fixed protection fixes the LTA at the previous rate; individual protection fixes the LTA at the value of pension savings
II. Fixed protection does not allow further benefit accrual; individual protection does
III. Individual protection fixes the LTA at the previous rate; fixed protection fixes the LTA at the value of pension savings
IV. Fixed protection allows further benefit accrual; individual protection does not

A. I and II
B. I and IV
C. II and III
D. III and IV

Answer 11

A. I and II

Fixed protection 2014 (FP14), for example, relates to the reduction of lifetime allowance from £1.5 million. This could be retained at £1.5 million if the individual applied before 6 April 2012. It requires that no further benefit accruals are made in future.

Individual protection 2014 (IP14), for example, allows individuals to retain an LTA based on the value of their pension savings at 5 April 2014 up to a maximum of £1.5 million, subject to the total value of all pensions at 5 April 2014 being at least £1.25 million. Future contributions and accruals are allowed.

Question 12

Which legislation controls pension trustees?

A. Trustee Act 2000
B. Pensions Acts (1995 and 2004)
C. Finance Act 2004
D. Financial Services and Markets Act 2000

Answer 12

B. Pensions Acts 1995 and 2004

The Pensions Acts outline specific responsibilities of pension trustees.
Trustee Act 2000 builds on these for other (non-pension) trustees.
The Finance Act 2004 deals with scheme administrators’ duties rather than scheme trustees.

Question 13

When a financial planner is compiling a summary of the client’s income and expenditure over the course of a year, which of the following is true?

A. State benefits should be excluded from the calculation of income
B. Income and pension contributions should be shown gross
C. National insurance and other taxes should not be included as expenditure
D. The financial planner must include the full value of any debts in the calculation

Answer 13

D. The financial planner must include the full base of any debts in the calculation.

The plan should include state benefits, taxes and taxable benefits in kind. Although debt REPAYMENTS would be included, the ‘full value’ of the debts would not.

Question 14

Which of the following best indicates the payment period for Bereavement Support Payment?

A. Twelve months
B. Eighteen months
C. Two years
D. Until retirement

Answer 14

B. Eighteen months.

The payment period will be for 18 months. Anyone still in financial need after this time will be supported through other parts of the welfare system.

Question 15

Which of the following is a disadvantage of an offshore non-reporting fund?

A. All gains are subject to CGT at 28%
B. All gains after the annual allowance are subject to CGT at 18%
C. All disposal gains are subject to income tax
D. An offshore fund is not subject to UK taxation for UK resident taxpayers

Answer 15

C. All disposable gains are subject to income tax.

In a non-reporting funds capital gains tax allowances cannot be used. All gains, as well as distributions, are subject to income tax.

Question 16

Sheila has always dreamed of sending her child Tarquin to university, and paying all of his fees so that Tarquin can start his career free of any student debt. She is determined to invest part of her savings today so that when Tarquin goes to university nine years from today she can use this sum to provide Tarquin with the income he will need without needing to use any of her other capital or income for this purpose.

Sheila estimates that Tarquin will need £9,000 per year to pay for his tuition fees, and a further £6,000 per year for his living expenses. Tarquin will take a three-year degree.

You estimate average long-term investment returns (after tax) of around 8% p.a. will be achievable, and that inflation will remain at 3.25% p.a. for the foreseeable future.

Sheila would like you to estimate how much capital she will need to invest today in order to achieve her dreams. How much of her savings must Sheila invest?

A. £27,952
B. £28,720
C. £43,050
D. £45,000

Answer 16

B. £28,720

The best way to carry out this calculation is to do it in three stages; first, calculate the real rate of return, then the future value of the three-year annuity needed to pay Tarquin’s university costs; then calculate the present value of the three-year annuity required to be invested today.

The real rate of return to use is (1.08 / 1.0325) - 1 = 0.046, i.e. 4.6%pa.

The value of the annuity needed to pay for the tuition fees and maintenance costs can be calculated by working out a two-year annuity to find the amount for the second and third years, and adding £15,000 for the first year (as the fees are paid upfront):

(£15,000 x (1/0.046) x (1-(1/(1.046^2)) + £15,000 = £43,050

Now discount this back to the present value: £43,050 / 1.0469 = £28,720.

Question 17

You are reviewing the investments of your client, Marmaduke (43 years old). You have been his financial planner for several years now.

Marmaduke’s current financial position is as follows: Principle residence = £529,000 with a £200,000 mortgage
Pension savings (£300 per month) = £106,230
ISA wrapped investments = £34,500
Non-ISA wrapped investments = £12,300
Cash savings = £8,000
10-year £100,000 investment bond = £114,800
Disposable income after essential expenditure and investments = £5,000 per year

If Marmaduke was to encash the bond today, what would be the tax consequences?
A. Marmaduke would have no tax consequences, as investment bonds are tax-free
B. As the investment fund has incurred no tax liabilities, Marmaduke will need to pay tax on any profit
C. The investment bond paid tax and Marmaduke would also be liable if earning above the basic rate
D. Top slice relief can be used to reduce any capital gains tax incurred on the bond

Answer 17

C. The investment bond paid tax and Marmaduke would also be liable if earning above the basic rate.

The investment bond pays tax at 20%. Marmaduke will receive any profit net of 20%, so if he is not a basic rate taxpayer there may be further tax to pay. Top slice relief does, potentially, reduce the tax burden, but it is income tax, not capital gains tax.

Question 18

George, 69, makes a £10,000 pension contribution. If his total taxable income is £110,000 what will the effective marginal tax rate saving be on the contribution?

A. 45%
B. 40%
C. 20%
D. 60%

Answer 18

D. 60%

Income earners above £100,000 lose their personal allowance at the rate of £1 per every £2 of income. A pension contribution is tax deductible and will reduce the taxable income thus regaining the tax allowance (50% of 40%) and saving tax of 40%. Hence the marginal saving is 60%.

Question 19

Jason is a member of a 1/60th defined benefit scheme. At the start of the year he has 29 years’ service and earned £25,000. At the end of the year his salary had increased to £35,000. CPI is 2%. Calculate his deemed pension contribution for the year?

A. £5,175
B. £5,417
C. £82,800
D. £86,672

Answer 19

C. £82,800

Revised pension entitlement = (30/60) (35,000) = 17,500
Previous pension entitlement = (29/60) (25,000) = 12,083
Uplifted for inflation = 12,083 x 1.02 = 12,325
Increase in pension entitlement = 17,500 - 12,325 = 5, 175
Deemed pension contribution = 5,175 x 16 = 82,800

Question 20

An investor, aged 50, has been diagnosed with a serious illness and has been given a life expectancy of less than one year. The investor has funds in a pension scheme, totalling benefits worth £800,000.

The investor wants to commute part of the scheme to ensure his final year is comfortable and his family are left in a comfortable position. He wants to leave the remainder of the scheme intact to gift to his wife. Which of the following is TRUE?

A. It is possible to meet all the investor’s objectives and there will be no tax charge due.
B. It is possible to meet all the investor’s objectives but there will be a tax charge on the commuted schemes.
C. It is not possible to commute only part of the scheme. The investor will need to commute the scheme in full.
D. It is not possible to commute the schemes as the investor is below the minimum retirement age for the UK.

Answer 20

C. It is not possible to commute only part of the scheme. The investor will need to commute the scheme in full.

Taking pension benefits under the age of 55 is possible if an individual is in ill health. If the member’s life expectancy is less than one year, then it is possible for them to commute all their uncrystallised pensions for a serious ill-health lump sum. For this to happen the member must be under the age of 75, they must have some lifetime allowance remaining and each arrangement must be commuted in full (however not all arrangements have to be commuted).

The lump sum is a benefit crystallisation event and is subject to the LTA but no income tax is due on it.

Question 21

Which of the following is false regarding equity release schemes?

A. They provide a tax-free lump sum.
B. They can be transferred to another property.
C. There is a built-in guarantee that the property does not fall into negative equity.
D. They can include buy-to-let property.

Answer 21

D. They can include buy-to-let property.

Equity release schemes can provide a tax-free lump sum from an individual’s home while allowing them to continue living there as long as it is their main residence. The advantages include flexibility to transfer the plan to another property without penalty, and a built-in guarantee that the property does not fall into negative equity.

Question 22

Hilda is a financial planner, and is providing advice to Roger, a retail client. Roger is the only person in his family with a full-time job, and is concerned about the effect that his death or critical illness could have upon his family.

Hilda believes that a policy should be set up to provide both life and earlier critical illness coverage to Roger. Which of the following types of trust should be used to allow Roger to benefit in the most tax-efficient manner?

A. A bare trust
B. A split trust
C. A discretionary trust
D. A life interest trust

Answer 22

B. A split trust.

Where a policy is set up to provide critical illness benefits as well as death benefits (life and earlier critical illness), it is important that a split trust is used. This ensures that the insured person receives any critical illness payment while any death benefit is paid to the trustees and held in trust for the beneficiaries.

If an ordinary discretionary trust or flexible power of appointment trust was used, the person insured would not be able to benefit as the settlor (the person who sets up the trust) is not normally included as a beneficiary for inheritance tax reasons.

Question 23

Hugh expects to live 18 years after retirement. Hugh requires a gross level annuity of £18,000 per annum, payable monthly in arrears. If the yield of long-dated gilts is 4.8%, what is the lump sum Hugh will need to build up to purchase this annuity on retirement?

A. £213,739
B. £216,675
C. £217,542
D. £224,000

Answer 23

B. £216,675

This is a 216-month annuity (18 years x 12), at a rate of 0.4% per month (4.8%pa / 12 months), of £1,500 per month (18,000pa / 12 months).

£1,500 x (1/0.004) x (1-(1/(1.004^216))) = £216,675.

Question 24

Patricia sold a life assurance single-premium managed bond for £110,000 this year, 10 years after it was purchased for £100,000. Withdrawals of £3,000 have been made each year for the last ten years. Patricia’s taxable income is £2,500 below the maximum of the basic rate band. What reliefs will reduce the income tax payable on this chargable event, if any?

A. Income tax allowance
B. Capital gains tax allowance
C. Inheritance tax nil rate bond
D. Top-slicing

Answer 24

D. Top-slicing relief.

The top-slicing relief is available to basic rate taxpayers who are pushed into the higher rate bracket by realised gains on life assurance bonds. The gain on the bond is £40,000 (£3,000 x 10 years + £10,000). The annualised gain of £4,000. £2,500 takes up the remainder of her basic rate band, leaving £1,500. As this is deemed to have been received net of 20%, a further 20% is due. £1,500 x 20% = £300.

The £300 x 10 years result in additional tax of £3,000, and not £8,000 on the full £40,000 gain.

Question 25

Jake and Marvin are civil partners and are looking at setting up a joint life policy to provide protection in the event of one spouse’s death. They would like the survivor to receive a pay-out in the event of the first spouse’s death. Which of the following policies would BEST suit Jake and Marvin’s needs?

A. Joint life, first death, on a joint tenant basis
B. Joint life, first death, on a life tenant basis
C. Joint life, second death, on a joint tenant basis
D. Joint life, second death, on a life tenant basis

Answer 25

A. Joint life, first death, on a joint tenant basis.

The policy needs to be on a ‘first death’ basis so that the survivor (the ‘second death’) gets a pay-out whilst they are still alive.

With a ‘joint tenant’ basis, it doesn’t matter which of Jake or Marvin dies first, as they both own the whole policy. ‘Life tenant’ is a term associated with an interest in possession trust – and has no relevance in this context.

Question 26

A client has recently applied for private medical insurance and has been advised that a moratorium will apply. This is likely to indicate that:

A. Pre-existing conditions will not be covered
B. Underwriting is unlikely to be needed at claim stage
C. Premiums are not payable for the first 12 months
D. The client will be unable to claim for any condition for the first 12 months

Answer 26

A. Pre-existing conditions will not be covered

Policies can be underwritten, or they can be accepted without underwriting but subject to a moratorium. This means that pre-existing medical conditions will not be covered - sometimes, this is based on a minimum time period, such as two years.

It does mean that the contract can be set up quickly, but it does mean that underwriting is simply delayed until claim stage.

Question 27

When evaluating recommendations for a client, the financial planner will need to provide information that allows for which of the following?

A. Good communication and justification of the recommendations
B. An understanding of the adviser’s regulatory status
C. An appreciation of the correlation between products
D. Trust and confidence in the service provided

Answer 27

C. An appreciation of the correlation between products.

The financial planner will need to provide information to the client that allows them to easily navigate the various options presented, gain a thorough understanding of the risks and costs associated with these options, appreciate the correlation between products, investments and strategies recommended, and how these will affect the future value of the client’s portfolio of assets.

Question 28

A client has gross earnings of £44,500, including £2,000 of savings income for the 2021-22 tax year. The amount of income tax due on the savings income will be:

A. £200
B. £300
C. £400
D. £600

Answer 28

A. £200

Note that BRT is £37,700 AFTER the personal allowance, so it is up to £50,270.

As a basic-rate taxpayer, £1,000 is tax-free, with the other £1,000 taxed at 20%.

Question 29

The key advantage of using a cross-option (or double-option) agreement in a shareholder protection arrangement is that it:

A. Retains business relief for inheritance tax (IHT) purposes
B. It is not classed as a gift with reservation
C. Qualifies for business asset disposal relief for capital gains tax (CGT) purposes
D. Will be treated as a no-loss, no-gain transfer

Answer 29

A. Retains business relief for inheritance tax (IHT).

A cross-option (or double-option) agreement gives the option to the remaining partners or directors to buy the deceased’s interest from the beneficiaries, and giving the beneficiaries the option to sell their inherited shares.

You should note that this is an option, not a binding agreement. This is important to keep the inheritance tax business relief on the company shares. If either party exercises their option, the other party must comply.

Question 30

What is the name of the person(s) who sets up a trust?

A. Settlor
B. Trustees
C. Proposer
D. Life assured

Answer 30

A. Settlor

The settlor is the person who sets up the trust, and transfers the legal ownership of the trust property to the trustees. The trustees look after the trust property for the benefit of the beneficiaries who can be anyone the settlor chooses.

Options C and D are related to life assurance policies.

Question 31

Harriet has an adjusted income of £270,000. From this, she contributes £80,000 to her pension. Assuming only half of her allowances have been used in the previous three years, which of the following best indicates the contribution that will benefit from tax relief and any allowance unused from this year?

A. Harriet receives tax relief on £80,000 and has £20,000 allowance unused
B. Harriet receives tax relief on £80,000 and has no allowance unused
C. Harriet receives tax relief on £40,000 and has no allowance unused
D. Harriet receives tax relief on £20,000 and has £20,000 allowance unused

Answer 31

B. Harriet receives tax relief on £80,000 and has no allowance unused.

Harriet has an adjusted income of above £240,000 but a threshold income below £200,000 (£270,000 - £80,000 = £190,000). Harriet’s allowance will not be tapered.
Harriet’s allowance, therefore, is £40,000, but she also has half of the previous three years unused, an additional (20k+20k+20k =) £60,000.
Harriet will, therefore, get tax relief on the full £80,000 contribution. However, the allowance for the current year is always used first, leaving no unused allowance from this year.

Question 32

The regulation of which of the following is the responsibility of the Financial Conduct Authority?

I. Registration of schemes
II. Promotion and marketing of schemes
III. Ensuring compliance with charge-capping
IV. Authorisation of pension advisers

A. I and III
B. II and IV
C. I, II and III
D. I, II and IV

Answer 32

B. II and IV.

The FCA is responsible for: - Sales, promotion and any marketing of pension plans - Authorisation of investment firms that run the investment plans for pension schemes - Authorisation of advisers that provide advice on pension plans

TPR is responsible for: - Registration of schemes - Employer designation - Ensuring compliance of charge-capping for stakeholder schemes

Question 33

What responsibilities would Juliet have as a pension trustee?

I. Ensuring the employer pays the contributions in a timely manner
II. Ensuring the employer pays the correct benefits in a timely manner
III. Ensuring the scheme is registered with the FCA
IV. Ensuring the year-end accounts are filed within 9 months of the year-end

A. I and IV
B. I and II
C. II and III
D. I, III and IV

Answer 33

B. I and II.

Workplace trustee pension schemes must be registered at the Pensions Regulator and the Annual Report including Annual Accounts must be filed within 7 months of year end.

The pension administrator ensures that the scheme is registered with the FCA and ensures that ongoing tax relief is provided by the relief at source method.

Question 34

Personal pension plans replaced what type of pension in 1988?

A. Retirement annuity contracts
B. Self-invested personal pensions
C. Career average earnings scheme
D. Personal equity plans

Answer 34

A. Retirement annuity contracts.

Personal pension plans replaced RACs in a wave of publicity in July 1988. The flexibility that they offered promised to put the returns (and the risks) of retirement planning in the hands of the individual.