Generic Questions/Analysis Flashcards

Question

What is stress testing? (3 marks)

Answer 1

- How a portfolio might perform in a downturn. - Could client cope if capital ran out completely. - Could they manage on a lower income during a downturn/ensure capital is not too depleted.

Answer 2

- Pound cost averaging. - Benefit from investment volatility. - Can stop and start contributions/flexibility/convenience. - Assists with budgeting. - Reduces risk of poor investment timing.

Answer 3

- Establish the income required, allowing for inflation. - Calculate the fund required based on assumed/agreed annuity rate. - Allow for PCLS requirement. - Calculate existing benefits at retirement age using assumed or agreed growth rate. - Include ongoing funding. - Calculate the shortfall and the increased contributions required. - Ongoing reviews needed.

Answer 4

- Easy access online at all times. - Total wealth can be seen at the press of a button. - Wide range of providers/asset classes/funds/investments/tax wrappers. - Performance is easy to obtain. - Full details of investments - online switching. - Consolidated tax statements are automatic. - Time and effort efficient for the client/their accountant for tax returns. - Can promote good relationship with the adviser. - Management of family assets - discounts of their charges. - Unbundled charging/transparent charges. - Funds can usually be bought without an initial charge. - Large portfolios can attract volume discounts (e.g. large fund discount). - Calculation tools. - Reduced paperwork. - Reports and valuations can be stored online. - Automatic rebalancing.

Answer 5

- Functions as an investment trust but at least 80% of its value must be unlisted shares (includes AIM listed shares). - The VCT must be listed on the London Stock Exchange. - Tax relief at 30% on investment of up to £200,000 per tax year. - This is a tax reducer. - Tax relief reclaimed if investment not held for 5 years. - No income tax liability on dividends received. - No CGT liability on gains - no minimum holding period.

Answer 6

- Investment into a single company. - Tax relief at 30% on investment of up to £1,000,000 per tax year (£2,000,000 if a knowledge intense company). - This is a tax reducer. - Tax relief reclaimed if shares sold within 3 years. - No liability to CGT. - Dividends are taxable.

Answer 7

A fund that invests in other funds (fund of funds) or in funds made up of shares, bonds, and cash (a mixed investment range).

Answer 8

- The testator (clients) must be of sound mind. - There must be a clear intention to dispose of property. - They must be at least 18. - It must be in writing (typed or handwritten). - It must be signed by them as testators. - It must be signed by a minimum of two witnesses - who are not executors or beneficiaries. - The witnesses must be present when the testators sign.

Answer 9

PROCESS: - Administrators will need to be appointed. - They apply for letters of administration. - Debts will need to be paid. - The estate is then valued. - The IHT liability is calculated and must be paid within 6 months. - The IHT must be paid before the estate is distributed. POTENTIAL PROBLEMS: - Not having a Will causes delays. - The estate does not pass in a way they might want. - They cannot state their wishes re funeral arrangements/guardians for children etc. - Court decides custody of children if no guardians.

Answer 10

- To hold trust property and to administer it for the benefit of the beneficiaries. - Hold the title documents to any trust property. - Everything they do must be for the benefit of the beneficiaries. - Invest any cash wisely or pay it out to a beneficiary immediately. - Take account of the standard investment criteria. - Monitor investments. - Avoid conflicts of interest. - Use utmost diligence. - Keep proper accounts.

Answer 11

- A deed of variation must be drawn up within 2 years of death to be IHT effective. - Only those giving up benefit need to sign the deed. - All beneficiaries must agree. - All beneficiaries must be at least 18. - All beneficiaries must be of sound mind. - The deed must refer specifically to the Will. - The deed must state that is it to be effective for inheritance tax purposes. - The deed must state who the bequest is being re-directed to. - Must be in writing/legal document. - Deed states what is being varied in Will/intestacy, the 'what'. - It will be treated as taking place on the donor's death. - The deed should not be for consideration of money or money's worth. - The deed should contain a statement that the variation is to have effect for either CGT, IHT, or both.

Answer 12

- As they earn over £50,000 they will be liable for the High Income Child Benefit charge. - As their income exceeds £60,000, they will have an additional income tax charge. - This will be equal to the Child Benefit received.

Answer 13

 Establish/define relationship/confirm scope of service/fees  Fact-find/obtain goals and objectives/confirm capacity for loss/ATR  Analyse current situation/existing investments/identify shortfalls  Develop financial plan/research  Present financial plan/recommendation/discuss  Provide suitability report/information documents  Implement plan/obtain client agreement  Monitor/review.

Answer 14

 Recognise needs and objectives  Help clients understand general aims and specific objectives  Ask open and closed questions/obtain hard and soft facts  Ensure objectives are SMART  Identify which are short-term/long-term/emphasis importance of long-term needs  Establish views on family/dependents  Establish timescales  Quantify and qualify objectives  Prioritisation/different views/not feasible to achieve all goals

Answer 15

 Lifetime cash flow projections are used to forecast clients’ income and expenditure profiles over the long term  They provide a year-by-year summary of cash paid to and paid out by the client, showing the years where there will be a surplus or a deficit.  The main variables are: o The level of income and capital inputs o The level of expenditure o Assumptions made about future increases in income, capital values, spending and inflation o Projections can then be amended to include the effect of recommendations

Answer 16

 ATR differs for different objectives  Changes based on investment experience/knowledge  Changes based on personal circumstances/health  Changes based on income/any recent inheritance  Changes over time  Fund performance/market performance/ensure investments match ATR  Capacity for loss

Answer 17

 Tax-free lump sum on death during term  (Usually includes Terminal Illness benefit)

Answer 18

 Tax-free lump sum upon diagnosis of critical illness after survival period of up to 30 days

Answer 19

 Level  Increasing  Term 100  Decreasing  Increasable  Renewable  Convertible

Answer 20

 Standalone or combined with life assurance  Free children’s cover

Answer 21

 Waiver of Premium  Can include CIC

Answer 22

 Reviewable (every 5 or 10 years) or guaranteed premiums  Sum assured can be index linked (set % or in line with inflation - no further underwriting)  Waiver of premium  Life cover buy-back

Answer 23

 Life and earlier CIC policies should use a split benefit trust

Answer 24

 Fixed sum assured throughout term

Answer 25

 Sum assured increases throughout term  Either on fixed % or in line with index such as RPI

Answer 26

 Written to age 100 (can be used as alternative to whole of life)

Answer 27

 Sum assured reduces each year in pre-determined way  Used to protect a capital and interest mortgage  Inter vivos to cover potential IHT liability on recipient of PETs – sum assured reduces in line with effects of taper relief  Family income benefit - sum assured is an amount paid each month/quarter/year from date of death until end of policy term  May be able to commute regular payments for a lump sum

Answer 28

 Sum assured can be increased without underwriting

Answer 29

 Usually for a 5-year term at outset  At end of term a new 5-year policy can be started without underwriting (premium likely to be higher)  Premium will be based on age at renewal

Answer 30

 Policy can be converted into a whole of life or endowment with same or lower sum assured without underwriting  Premium for new policy will be based on age at conversion

Answer 31

Regular tax-free income when unable to work due to accident/ illness

Answer 32

Deferred period (4, 13, 26, 52 or 104 weeks)

Answer 33

Paid until return to work, retire, death or policy ends

Answer 34

Rehabilitation benefit - proportionately reduced benefit to top up earnings when someone returns to work but on a part time basis

Answer 35

Proportionate benefit - reduced benefit equivalent to reduction in earnings for those who return to work but in a lower paid job

Answer 36

No limit on claims

Answer 37

Benefit limited to 50-65% pre-claim income

Answer 38

Own occupation (widest cover) or any occupation

Answer 39

Guaranteed or reviewable premiums

Answer 40

Automatic waiver of premium

Answer 41

Tax-free income if insured has accident or can’t work due to sickness

Answer 42

Benefit limited to set % of earnings and a monthly max amount

Answer 43

Usually annual contract but can be for shorter periods – can be cancelled by the insurer

Answer 44

Shorter deferred period but will only pay benefit for 1 or 2 years

Answer 45

Standalone or bolt on to household, motor or travel insurance

Answer 46

Refund of medical expenses Lump sum payments for loss of limb, loss of sight etc.

Answer 47

Tax-free income if insured has accident or can’t work due to sickness or unemployment

Answer 48

Usually annual contract but can be for shorter periods – can be cancelled by the insurer

Answer 49

Max benefit payment period 2 years

Answer 50

Pre-existing medical conditions, excluded Benefit limited to set % of earnings and a monthly max amount Possible lump sum payments for loss of limb, loss of sight etc.

Answer 51

Amount to cover mortgage if insured has an accident or unable to work due to sickness accident or involuntary unemployment

Answer 52

Benefit payable for at least 6 months but probably limited to maximum of 1 or 2 years

Answer 53

Deferred period – often 30-180 days

Answer 54

Must cover self- employed MPPI cannot be sold at the same time as a mortgage Minimum standards set by ABI & CML

Answer 55

Covers costs of private treatment e.g. consultant fees, investigations, treatment, accommodation costs

Answer 56

 Indemnity policy - can only claim back expenses incurred  For acute conditions (not chronic conditions that are incurable)  May need to pay excess or co-payment  Basic plan usually restricted to accommodation, drugs, dressings, and doctor’s fees  Mid-range covers more items, longer claim periods and higher limits  Comprehensive plans have longer claim periods, higher limits, and often wider choice of hospital. Home nursing and private ambulance usually covered. May also include alternative medicine, dental treatment. Policies can cover whole family not just one person  Treated as a benefit in kind if premiums paid by employer.

Answer 57

 Use PCLS or savings to pay a lump sum to an insurance company  This is irrevocable/inflexible  Annuity rate agreed for lifetime/fixed term/underwriting required  Income paid as a mix of return of capital and income  Return of capital is tax free  Income element is taxable as savings income  Can use his personal savings allowance  Tax is deducted at source by insurance company  Escalation is available  Joint life available  Capital guarantee available

Answer 58

Minimum 80% in unquoted companies including AIM Maximum 15% in one company with a minimum of 10% in ordinary shares

Answer 59

Exempt from Income Tax from VCT investments of up to £200,000 per tax year

Answer 60

30% on first £200,000

Answer 61

None (no holding period)

Answer 62

Forms part of estate as normal.

Answer 63

Investment in unquoted trading companies including AIM companies

Answer 64

Liable to Income Tax

Answer 65

30% up to a max of £2m - any amount over £1m must be invested in knowledge intensive companies

Answer 66

Free - after 3 years

Answer 67

100% business relief after 2 years.

Answer 68

Designed to help small start- up unquoted companies raise finance

Answer 69

Liable to Income Tax

Answer 70

50% on first £100,000

Answer 71

Free - after 3 years

Answer 72

Yes - 50% exempt of the re-invested amount

Answer 73

100% business relief after 2 years.

Answer 74

 Disclose status/fee/client agreement.  Fact-finding/goals/objectives  Attitude to risk/capacity for loss  Analysis of the client’s situation/affordability  Undertake research  Formulate recommendation/develop plan  Make a presentation/recommendation to client  Implement/suitability letter  Annual review/monitor

Answer 75

 Fact-finding/knowing your client/client agreement  Assess attitude to risk/capacity for loss  Timescale  Charges  Performance  Fund choice available  Asset allocation/diversification  Select fund to match attitude to risk  Present client with documentation  Obtain client permission/implement  Suitability Letter/recommendation letter to client

Answer 76

 Letter of authority/obtain plan details  Confirm date of purchase  Base cost/any further investments/withdrawals/fund switches  Identify reinvested income  Calculate gain/performance history  Assess asset allocation  Identify suitable benchmark  Identify Alpha/compare against benchmark  Review charges  Comparison with risk-free return/risk adjusted return  Review volatility/risk rating of fund  Assess funds against attitude to risk/capacity for loss

Answer 77

- PET - IHT free after 7 years - No IHT initially as it's a PET - Beneficiaries CANNOT be changed. - When can Beneficiaries benefit? Beneficiaries can demand the trust fund at age 18. - Income is taxed on the beneficiary using their own rates and personal allowance - Capital gains are taxed on the beneficiary using their rates and full annual exempt amount - IHT liability on the settlor if death occurs within 7 years of the PET. The trust fund forms part of the estate of the beneficiary if they should die.

Answer 78

- Chargeable lifetime transfer (CLT) - IHT free after 7 years - IHT initially only if transfer is over the NRB and then at 20% if trustees pay and 25% if settlor pays - Trustees have discretion to change beneficiaries - The trustees have control over who gets income and who gets capital. The beneficiaries do not have a right to either. - Trust has a standard rate band of £1,000. Above this, trustees are charged at the rates applicable to an additional rate taxpayer. - The trust has a CGT exempt amount of 1/2 the normal amount (split between number of trusts settlor set up to a minimum of 1/5 each) CGT rate for trustees is 20% - IHT liability at outset, if gift is over the NRB. Back in estate if death within 7 years. Trust fund potentially chargeable every 10 years (periodic charge) and when capital is distributed (exit charge (both no more than 6%)

Answer 79

- Provides clear instructions as to how the estate is to be distributed - Can choose the people that will be responsible for administering the estate - Avoids the intestacy rules - Can make specific provision for the guardianship of children

Answer 80

 Administrators will need to be appointed  They apply for letters of administration  Debts will need to be paid  The estate is then valued  The IHT liability is calculated and must be paid within 6 months  The IHT must be paid before the estate is distributed

Answer 81

 Administer deceased’s affairs/obtain most up to date copy of Will  Obtain full details of all assets/liabilities/settle debts  Complete IHT return/pay IHT  Obtain/apply for probate  Distribute estate in accordance with Will/inform beneficiaries of entitlements  Complete Income Tax/CGT return  Prepare estate accounts

Answer 82

 Ensure executors/trustees in place and able to act  Considers change in family circumstances/divorce/can change beneficiaries/grandchildren/ensure wishes are reflected  Financial position may change  IHT planning/changes in legislation

Answer 83

 To hold trust property and to administer it for the benefit of the beneficiaries  Hold the title documents to any trust property  Everything they do must be for the benefit of the beneficiaries  Invest any cash wisely or pay it out to a beneficiary immediately  Take account of the standard investment criteria  Monitor investments  Avoid conflicts of interest  Use utmost diligence  Keep proper accounts

Answer 84

 If death occurs with uncrystallised pension funds the fund value often paid to spouse  This could then be included in that spouse’s estate when they die and could increase/create an IHT liability  Death benefit should be paid into a spousal by-pass trust  Spouse can be trustee as well as a potential beneficiary  They could receive income/capital/loans from the trust at trustee’s discretion  As they have no right to benefit the value of trust will not be included in their estate  The maximum IHT saving would be fund value x 40%

Answer 85

- ensure that they have an adequate income in retirement - review the suitability of their investments in advance of their retirement - consider a range of options in respect of Carol's inheritance and to review their potential inheritance tax liability

Answer 86

 Income needed in retirement/capital needed  Thoughts on how they wish to take their income/benefits in retirement/flexibility/guaranteed income/increasing/tax-free lump sums  Plans to use other assets at retirement/downsizing  Existing workplace schemes: o Do they have recent valuations? o Current transfer values/SRA/any penalties for early retirement o Are there any guarantees - guaranteed annuity rate? o Charges/fund details o Death benefit nominations completed/up to date?  Do they have any other deferred benefits?  What is their investment experience?  Growth rates to be assumed/inflation/projections/performance/charges  Use of tax allowances/likely future tax status  Affordability/budget for further contributions before retirement/willingness to maximise contributions this tax year  History of contributions/use of carry forward  Current health status  State Pension expected/BR19/State Pension age  Other debts/liabilities  Income generated from other savings

Answer 87

 Carol has her entire workplace pension held in one fund and one asset class  Does not match ATR  Does not offer any asset/fund management diversification  Limited long-term growth  Jim has his entire workplace pension fund invested in one UK and one Global equity fund  Although this more closely aligns to his ATR and offers better potential for growth it does not offer the necessary asset or fund management diversification  Need to manage volatility of funds if they are considering annuity purchase.

Answer 88

Benefits:  Can choose how much to crystallise and when/can control amount of Income Tax payable  25% of the value will be tax free  If just takes PCLS then MPAA not triggered  Uncrystallised funds can continue to grow  Any remaining uncrystallised funds will be available for beneficiaries  Tax free if they die before 75 and paid out within 2 years of death  Can be used to top up income before they receive State Pension Drawbacks:  Any funds not taken remain subject to investment risk  Reviews may be needed in respect of any uncrystallised funds

Answer 89

 Guaranteed income for life/no investment risk  Can include dependant benefits /annuity protection  If death before age 75 ongoing income paid tax free  Can include unlimited guarantee period  Can include annuity protection  Can include indexation  Simple contract/no on-going advice/reviews required  Benefit from mortality drag

Answer 90

 Cannot benefit if annuity rates improve/locked into the annuity rates at time of crystallisation  Death benefits have to be chosen at outset/cannot be passed through generations  No prospect of investment growth (unless investment linked annuity is used)  Risk of mortality cross subsidy  Escalation can be expensive  Annuity does not match ATR

Answer 91

 No income limit/flexibility of income/income can be varied  Not locking into an annuity/poor annuity rates/can purchase later/rates may improve  Tax‐efficient income  Flexible death benefits; annuity/lump sum/dependants and nominee’s FAD/pass on through the generations  Tax free death benefits if die before age 75/flexibility of beneficiary/can nominate beneficiary  Potential for investment growth  Matches ATR

Answer 92

 Complexity/ongoing decisions/need for regular reviews  UFPLS or income from FAD will trigger MPAA/£4,000 annual allowance  Investment risk/fund could be depleted  Income not guaranteed  Annuity rates may fall  Legislation may change  Charges

Answer 93

 40% tax relief on contributions within higher-rate tax band  Tax free growth  Flexible benefits

Answer 94

 To ensure they know when and what they will receive  Pay Class 3 NICs should there be any gaps in NI record

Answer 95

 Do not need PCLS/can take lump sums if required from other assets/more tax efficient  Can control amount of Income Tax  Matches ATR/flexible, tax efficient income/flexible death benefits – tax free before age 75

Answer 96

 Pensions are IHT efficient/tax efficient fund  Current funds are not diversified, not income producing, do not match ATR

Answer 97

 ISAs are Income Tax-free  Dividend income from Bank shares tax- free up to £2,000 (will reduce to £1,000 in April 2023 then £500 in April 2024)  Interest from OEIC will use PSA  Interspousal transfer ensures can use both Jim and Carol’s allowances

Answer 98

 Locks in gains/no CGT payable/make use of CGT annual exempt amount at current rate of £12,300  Again, interspousal transfers ensure both annual exempt amounts can be used

Answer 99

 Monitor performance/asset diversification/change in their needs and objectives and personal circumstances

Answer 100

 Income and expenditure required in retirement  Any surplus income/willingness to use investments to top up pension  Will increase pension income/PCLS/reduces reliance on other assets in retirement  40% tax relief on contributions within higher-rate band/tax-free fund growth  25% tax free PCLS/may not be a higher-rate taxpayer in retirement so income likely to be taxed at basic-rate  Salary/bonus sacrifice may be available/can reduce National Insurance costs/employer may share NIC savings  If sacrifice bonus Jim will save Income Tax on £6,000/as well as NICs  Contributions will be immediately outside of the estate for IHT  Can have immediate flexible access to pension funds  No administration/deducted from salary  Low charges/subsidised by employer  Flexible death benefits  State Pension entitlement (from aged 66 to 67 depending on DOB)/if they have other deferred benefits  Single premiums do not benefit from pound cost averaging/dependent on market at time of investment

Answer 101

 Take current annual allowance/£40,000  Determine pension input amounts for current tax year/employer and employee contributions are included  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 (salary plus bonus)

Answer 102

 Current expenditure/planned expenditure/capital needs  Guaranteed income/flexible income  Timescales/plan to retire in 6 months  Assets available to provide income/objectives for inherited money/gifts/further inheritances/priorities  Safe withdrawal rate/sustainability  State Pension benefits/age  Tax status in retirement/use of tax allowances/ISA allowance/to provide tax- efficiency  Economic conditions/inflation/market conditions/current annuity rates  Longevity/family health/how long will income be required?  Required/expected rate of return on investments  ATR/prospect of fund growth/inflation/cash flow analysis  Health/longevity/income needs of surviving spouse

Answer 103

 Entitled to contribute £3,600 gross/£2,880 net each year  Receives 20% tax relief  Can benefit from pound cost averaging  Tax-free pension commencement lump sum  Potential for tax-free growth  IHT-efficient/death benefits  Flexible access to benefits

Answer 104

 Retirement options taken/level of income they are receiving and from which sources  How inherited money was used  Target income changes/new requirements for lump sums now in retirement  Use of other allowances e.g., ISAs, CGT  Change of personal circumstances including health  Changes in external factors such as economy and political changes/State benefits  Fund valuations and performance  Asset allocation and rebalancing  Changes to ATR/capacity for loss

Answer 105

 Jim and Carol will receive their State Pension between age 66 and 67  Minimum of 10 years needed to receive any State Pension  Full rate in 2022/23 = £185.15  For a full new State Pension – 35 qualifying years are needed  Qualifying years can be met through contributions or credits  Starting amount calculated at 5/4/2016  Triple lock/State Pension increased by higher of earnings, prices and 2.5%  Taxed as earned income  Option to defer/must be for at least 9 weeks/rate of increase 1% per 9 weeks which equates to 5.8% per year

Answer 106

 Investment experience  Level of emergency fund required  Income or growth required/client objectives/timescale  Interest being received on cash ISAs  Type of money market fund/returns  Use of tax allowances/Capital Gains tax/ISA/pension contributions/uncrystallised losses  Acquisition date and cost of OEIC/base cost of shares  Level of dividends/interest received  Performance  Charges  Are they willing to transfer ownership of their savings or investments  Plans to make gifts/planned use of inheritance

Answer 107

 Excessive cash/emergency fund and does not match their ATR  Their cash ISAs/Money Market funds are not likely to be earning high interest/savings would be eroded by inflation  They have ISAs for tax efficiency but have not used their allowance this year  Overall, there is insufficient diversification/overweight in UK/no global equities in ISAs or OEIC/no commercial property or other asset classes  Lack of income producing funds to top up income  Jim’s OEIC fund does not match ATR  Individual shares match ATR and could provide income from dividends/restricted to one sector so high risk

Answer 108

Benefits:  Liquid/could be used to supplement income in short term Drawbacks:  Low returns/will not keep pace with inflation  Does not match ATR  Have sufficient emergency funds

Answer 109

BENEFITS:  Suitable as part of a wider portfolio/as offers diversification DRAWBACKS:  No index-linking for inflation proofed income  No global diversification  Amount held in fixed interest does not match ATR  Limited growth potential and funds have been very volatile recently given risk/reward

Answer 110

BENEFITS:  Good potential for growth  Good hedge against inflation  Matches ATR DRAWBACKS:  Too much of portfolio held in UK smaller companies/needs to be diversified/no geographical diversification  Not normally an income producing fund  Reduced liquidity

Answer 111

 Amount held in these fund as a percentage of overall portfolio  Returns  Charges  How long would it take to release funds/could be used for short term income needs  Assets contained in the underlying portfolio  ATR  Experience of fund management team

Answer 112

 Protection against inflation  Geographical diversification

Answer 113

 Diversification - bond funds normally hold a range of bonds of varying maturities/geographical diversification  Liquidity - daily trading  Can provide a regular income  Can match ATR

Answer 114

 Can match ATR  Provide income/aim to maintain income and capital in line with inflation  Asset allocation expertise/uses wider range of assets/investment strategies  Increases diversification/reduces volatility within one fund  Can access specialist investments/institutional funds

Answer 115

 Professional active management/wider investment options/diversification  Potential for higher returns  Can target objective of increased income in retirement  Bespoke service to match their ATR  No requirement for ongoing involvement  A DFM may ensure use of CGT annual exempt amounts and ISA allowances  Should provide regular reviews/updates on performance

Answer 116

 Higher charges  No guarantee of performance  May invest in unacceptable sectors/lack of control

Answer 117

 They are both higher-rate taxpayers but likely to be basic-rate taxpayers in retirement so:  Both can make additional pension contributions before retirement  40% tax relief/tax efficient fund/IHT efficient  Use their annual ISA allowance/tax free growth on ISA/bed and ISA OEIC and/or Bank shares  Interspousal transfer of OEIC and Bank shares o Uses both their PSA, currently £500 (will increase to £1,000 in retirement if they become basic-rate taxpayers) on interest from OEIC o Can use both their dividend allowance on dividends from shares/allowance currently £2,000 but reducing to £1,000 from 6 April 2023 then £500 from 6 April 2024/no gain on interspousal transfer o Can each use their CGT exempt amount on gains from OEIC and shares

Answer 118

 Bank shares o Pay dividends/Carol higher-rate taxpayer so tax rate 33.75% - likely to drop to basic-rate in retirement (8.75%) o She has a £2,000 dividend allowance/dropping to £1,000 from 6 April 2023 and £500 from 6 April 2024  OEIC o As funds are held in fixed-interest securities income treated as interest o Can use PSA of £500/this will increase to £1,000 if they are basic-rate taxpayers in retirement  Potential for CGT on both OEIC and Bank shares on disposal o Taxed @ 20% if encashed in 2022/23 tax year as higher-rate taxpayers/may become basic-rate taxpayers after retirement (although CGT annual exempt amount reducing in 2023/24) o Bank shares base cost will be date of Carol’s mother’s death o Use of CGT annual exempt amount o Any losses can be offset against gains

Answer 119

 Ensure cash holdings are achieving highest possible interest rate/fixed term likely to offer higher interest rates  Switch some cash ISA holding to stocks and shares ISA  Cash ISA has limited income/returns will not match inflation  Diversify portfolio  Switch funds to match ATR/higher potential for income and growth/can take capital withdrawals  Fund switches can be made on platform/free of charge  No tax implications for switches  Interspousal transfer of OEIC/no gain on transfer/can use both Jim and Carol’s PSA (£500)  Use ISA allowance/Bed & ISA OEIC/ ISA funds to align to match ATR and income needs  Maintain individual Bank shares/matches ATR/interspousal transfer to use both dividend allowances and CGT annual exempt amounts on eventual disposal

Answer 120

 Provides dividend income/lower tax rates on dividend income  Possible Interspousal transfer to split gains/income for tax efficiency  No gain/no loss for CGT on interspousal transfer  Can then use dividend allowance each currently £2,000 is set to reduce to £1,000 then £500 over next two tax years  Matches their ATR  Can use CGT exempt amounts  Flexible withdrawals  Can bed and ISA each tax year  Potential for capital growth/dividend growth  Provides degree of inflation proofing

Answer 121

 High risk/shortfall risk/capital loss  Lack of geographical/sector diversification  Dividend income taxable above £2,000 (currently)/not held in ISA  May be liable to CGT on encashment

Answer 122

 How the £200,000 was used/gifts made  Personal circumstances/changes/health/family/retired  Income/outgoings/budget/inheritances/new money/tax status  ATR/capacity for loss  Current valuations/investment returns/growth/rebalance/performance  Use of tax allowances  New products/changes to legislation/taxation including impact of reduction of dividend allowance and CGT annual exempt amount  Economic position/market changes  Charges/fees

Answer 123

 Pension death benefit nominations/make pension contributions/IHT free  Use assets within estate before pensions/reduces value of taxable estate  Use of gifting allowances/removed from their estates  Consider EIS or SEIS/matches ATR  Make charitable gifts/reduces effective IHT rate  Make PETs and CLTs/reduces IHT over 7 years  Review whole-of-life policy and maintain sum assured to help pay any residual IHT on death/ensure policy is under trust  Consider DGT/immediate discount/growth outside of estate  Spousal bypass trust for pensions/avoids death benefit being added to member and spouses’ estate should member die first/spouse can benefit if member dies first, and children can still be beneficiaries  Set up Deed of Variation for inheritance/pass directly to children’s estate/does not pass into Jim and Carol’s estate/reduces potential for IHT of 40% on the inheritance

Answer 124

 Each has a Nil Rate Band (NRB) of £325,000 o Unused NRB can be transferred to surviving spouse  Each has a Residence Nil Rate Band (RNRB) of £175,000 o Home must be inherited by direct descendants (children) or lineal descendants e.g., grandchildren o Unused RNRB can be transferred to surviving spouse  Total NRB plus RNRB on 2nd death is £1m  Their total estate is currently worth £1,325,000  Current IHT liability = £325,000 x 40% = £130,000  Estate will increase by a further £200,000 when they receive the inheritance/additional £80,000 IHT liability

Answer 125

 £3,000 annual allowance (and previous years if not used) - reduces estate immediately  £250 small gifts allowance- reduces estate immediately  Make gifts out of surplus income- reduces estate immediately o expenditure must be from income and not capital o must be regular and must not affect their normal standard of living o if cannot be covered by an exemption these will be PETs

Answer 126

 Carol and Jim should make single premium pension contributions/ensure contribution is sufficient to top up pension income to required level for retirement in 6 months/use carry forward if required:  supplements retirement income  tax relief on contributions/tax free growth  pension contributions would be immediately free from IHT  if drawdown/UFPLS used can be passed on through generations  Use ISA allowance for current year/tax free income/growth  Consider gifts: £3,000 annual allowance and £250 small gifts allowance/immediately outside of the estate for IHT  Set up Deed of Variation for any excess:  money will pass directly into children’s estate/bypassing Jim and Carol’s estate so no IHT payable

Answer 127

 Must be in writing/legal document  Signed/dated/witnessed  Deed states what is being varied in Will/intestacy  Must be clear who is benefiting from the variation  All affected beneficiaries must agree and be over 18 and be of sound mind  It will be treated as taking place on the donor’s death  Must be done within 2 years of death  Deed should not be for consideration/money or money’s worth  Deed should contain a statement that the variation is to have effect for IHT

Answer 128

 Accept increased premium/to maintain current sum assured  Retain existing premium - resulting in reduced sum assured  Reduce premium/sum assured will reduce – maintains affordability of policy  Can cancel policy at no cost:  loss of premiums/unlikely to have a surrender value  Consider rebroke /Jim and Carol have stopped smoking so may be able to achieve better premium

Answer 129

 Can be investment in a single company  Tax relief at 30% on investment of up to £1m per tax year (£2m if extra £1m is in knowledge intensive company)  Tax relief given as a tax reducer  Tax relief reclaimed if shares sold within 3 years  Can use deferral relief for CGT on potential gains of OEIC or Bank shares if reinvested in EIS shares  No liability to CGT on the EIS after 3 years  Any dividends are taxable  IHT relief after 2 years  Matches ATR as part of a diversified portfolio

Answer 130

- ensure her protection arrangements are adequate for her needs - consider investment options following the divorce settlement - execute the pension sharing order

Answer 131

 Expected costs of university/living and tuition fees  Level of income needed in the event of death or serious illness  Any lump sum needed in the event of death or serious illness  Term of cover/duration of university fees/period of dependency  State of health/family health/smoker/hazardous hobbies/lifestyle  Affordability/budget  Current expenditure/cash flow analysis  Will in place/willingness to write a new Will  Any assistance from family members/use of savings  Any debts/liabilities  Confirm Sasha is nominated as beneficiary on pension

Answer 132

 She is now the sole earner/rely on her salary/single parent  No life cover/no death in service (DIS)  No critical illness cover  No Income Protection cover  Loss of Private Medical Insurance/Sasha’s PMI cover dependent on her father’s employment  Her capital will be eroded in event of her illness  No regular maintenance payments from Faizal/ex-husband  Limited pension fund  Any Will made during her marriage will now be out of date  Nomination on her pension may be out of date/or needed  Inflation risk on cash holdings/poor return/excess cash

Answer 133

 No further underwriting/continuing cover  Will cover pre-existing conditions/comprehensive cover/any exclusions?/any restrictions  Limited time period to apply for continuing cover  Cost of cover/is it affordable?  Can she find cheaper cover?/can she reduce cover?  Has she ever made a claim?/policy excess?  Is she in good health/does she need comprehensive cover?  Premiums will increase each year/may become unaffordable  Is she willing to self-insure/self-fund?/priority  Would her current employer consider offering any cover?

Answer 134

Income Protection - To replace income in the event of illness/incapacity - 4 week deferred period to pay out as soon as possible as doesn't appear to have sick pay from employer. - Own occupation to give the widest definition - Benefit will be 50-60% of earnings - Term would be to selected retirement age - Guaranteed premiums for peace of mind that they will not go up - Indexation in order to keep pace with inflation

Answer 135

Level term/decreasing term life or earlier critical illness policy - Pays out a tax-free lump sum in the event of death or earlier diagnosis of a serious illness/total permanent disability included - Single life policy in trust for Sasha as it will be outside of the estate/speedy payment. Use split trust (for CIC) - Term to end of University/Sasha financially independent/or Jenny's normal retirement date - Sum assured to cover University fees/living costs - Indexation to keep pace with inflation - Waiver of premium in order to maintain the policy in the event of long-term illness or disability - Guaranteed premiums just for the certainty of cost throughout the term

Answer 136

 Administrators required/personal representatives  Letters of administration  Any debts will need to be paid/assess value of debts  The estate is valued  The IHT liability is calculated  Any IHT must be paid within six months  This must be paid before estate can be distributed  Sasha’s assets held in trust until age 18  It will cause delays  Funeral arrangements will not be known

Answer 137

 A Will is not revoked by divorce  But any Will may be out of date/may need updating  Treated as if Faizal has died/cannot benefit (unless the Will was made in anticipation of divorce)  He cannot be an executor of the Will/may need to be changed  Rest of Will remains valid  Need a trust for Sasha as currently a minor  Appoint trustees of choice  Update any nomination on her pension

Answer 138

 Does she want to retain access or will she consider use of trusts  Timescale  Current net income  Consideration of how much emergency fund is needed  Return on existing savings and investments/performance of pension funds  Consideration of the use of a discretionary fund manager  Willing to look at asset allocation/diversification to better match her ATR  Does she need income/does she have any income requirements?  Details of pension contributions/willing to use carry forward  Would employer support a higher contribution/salary sacrifice available?  Is she claiming child benefit?  Has she done a formal risk profile assessment?  Willingness to continue investing in ISAs

Answer 139

 Range of asset classes not used/lack of diversification/underweight in equities  Does not match Jenny’s attitude to risk  Is ISA allowance being fully used  Adequate/excessive emergency fund  Current account likely to be paying no/low interest  Too much held on deposit/above FSCS limit although 6-month temporary high balance applies

Answer 140

 What are the expected living expenses/allowance whilst at university?  What tuition fees can be assumed  Assumed inflation rate  Affordability/budget  Is she expecting Sasha to get paid work/contribute to cost?  Any other help/grandparents?  Will she want to fund the costs from income or capital?  Is she prepared to put in place protection arrangements to cover university costs should she fall ill/die?  Priority of the aim  Use of protection products

Answer 141

* How much is the loan?/What is the interest rate? * Sasha may never have to repay/earnings may never reach threshold * Debt will be cancelled after 30 years * Student Loan does not affect Sasha’s credit rating * Loss of capital/may impact her own retirement objectives/affordability/tax considerations * Loss of potential investment growth * Political risk/loans may be cancelled in future.

Answer 142

Advantages  No CGT liability on encashment Disadvantages  Loss of potential growth in value of investment  Cash can only be replaced by using future year’s allowances/unless flexible ISA

Answer 143

 Lack of diversification  Jenny may need income/growth over the longer term  Low interest rate/poor rates of return from cash  Not tax‐efficient/interest is taxable although may be covered by her PSA  Not in line with attitude to risk/too low risk  Default risk as exceeds Financial Services Compensation Scheme (FSCS) limit of £85,000.  Temporary additional FSCS protection up to £1m for 6 months/proceeds of divorce  Lack of potential for growth/better growth potential available elsewhere  Inflation risk  Interest rate risk

Answer 144

 Increases fund/increases chance of retiring when she wants to  Increased pension commencement lump sum  Tax-free growth/tax relief  Employer matching/lower charges/less admin  Carry forward available  Nomination for Sasha  IHT-free/reduces IHT liability/income tax-efficient on death before 75.

Answer 145

 May have limited affordability  Loss of liquidity/loss of access to capital until normal minimum pension age  No pound cost averaging/investment risk/moderate capacity for loss (CFL)  Only 25% Pension Commencement lump sum (PCLS) and income is fully taxable  Contributions limited by annual allowance/earnings limit.

Answer 146

 Global diversification/can invest in any area  Currently most of portfolio in cash/limited equities and only in the UK  Reduces concentration risk/larger selection of companies  Greater growth prospects/developing markets/tech stocks  Different economic cycles globally/reduced correlation  Needs growth/she has time for some volatility  Can match her attitude to risk (ATR)  Professional/active/passive management/no Alpha for tracker fund  Global equity may pay higher dividends/benefit from currency movements

Answer 147

o Increased regular pension contributions for tax relief/tax free growth o Pound-cost-averaging to reduce volatility/increase returns o Ensure maximum employer matching for contributions o Use salary sacrifice to increase pension contributions/reduce NICs o State Pension/BR19

Answer 148

o Increase exposure to equities through collectives o Diversification/choice of funds to match her ATR o Equities tend to outperform other assets over medium to longer-term o Greater potential for capital growth o Pound-cost-averaging on regular savings benefits from volatility/reduces market timing risk o Jenny can use her currently unused dividend allowance o No CGT on internal fund changes/can use CGT exempt amount o She retains control and access o Flexibility with contributions/can start and stop o Suitable for medium/long term investment o Reduce cash balances o Switch cash ISA to stocks and shares ISA o Inflation risk on cash/poor returns from cash o Continue investment in ISAs for tax-free growth/income o Reduce monthly expenditure if possible

Answer 149

Where each constituent of the index being tracked is held in accordance with its index weighting. Advantage: Accurate. Disadvantage: Expensive.

Answer 150

A representative sample of securities from each sector of the index is held. Advantage: Less expensive. Disadvantage: Potentially encourages biases towards those stocks with the best perceived prospects.

Answer 151

Computer modelling to find a representative sample of securities that mimic the broad characteristics of the index being tracked. Advantage: Costs less than replicating the index. Disadvantage: More complex.

Answer 152

 Low cost/cost effective  Run by computer system/no human judgement  Potential for growth  Perform in line with index  Exposure to different asset classes  Can access geographical diversification/global  Can track any index/wide range of indices to track  Liquid  Easy to follow performance/understand  Active managers don’t always outperform

Answer 153

 Will underperform the market due to charges  Tracking error/will never match market exactly  Perform poorly in falling market  No active management/no alpha  Lack of control over underlying assets

Answer 154

 She has excess cash/emergency fund  No interest/income paid on Premium Bonds  No potential for capital growth  Unknown returns/may not win a prize  Inflation risk/returns unlikely to match inflation  Suitable for short-term holding/not suitable for long-term  May not match attitude to risk

Answer 155

 Inflation risk on cash/poor returns/multi-asset funds protect against inflation/should out-perform cash  Wide range of assets available/diversification  Non-correlation of assets  Reduces volatility/risk  Can be active/passive/professionally managed  Risk rated to meet ATR/cash does not match ATR  Fund switching/easy to change funds/liquidity  Could provide additional income/dividends

Answer 156

 Internal gains not taxed  If equity based, she could use her dividend allowance  Dividends will be taxed at 8.75% up to the basic-rate threshold  Interest from fixed interest investment taxed at 20% up to the basic-rate threshold  CGT exempt amount of £12,300  Gains subject to CGT at 10% (if stays a basic-rate taxpayer)  Any assignment/transfer/fund switch is a CGT disposal  Tax return required/cost/admin

Answer 157

 Transferring lump sum into a discretionary trust for the benefit of Sasha  Jenny would be trustee so retains control during her lifetime  Sasha would have no right to benefit, it would be at the discretion of the trustees  The gift into trust would be a chargeable lifetime transfer  If gift is below the nil rate band there is no IHT charge at outset  Jenny as settlor would need to survive for 7 years for the gift to fall out of her estate  The trustees could invest in non-income producing assets e.g., investment bonds  Segments/the policy could be assigned to Sasha when she needs money  The money could be used for Sasha’s university fees and living expenses

Answer 158

 Pension sharing divides the scheme member’s pension rights at the time of divorce  As Faizal’s scheme is a defined contribution scheme, the amount will be expressed as a percentage of his fund  Jenny’s share is 50% of the value of the pension scheme currently worth £180,000  Jenny could transfer this to her own workplace pension scheme or to a personal pension  The original scheme can, but does not have to, offer Jenny membership  Jenny will need to make an active choice about where she wishes her pension credit to go  When pension benefits are shared, they are passed irrevocably to Jenny  Pension sharing is therefore a clean break for both  The pension provider will usually charge a fee for pension sharing  Sharing orders must normally be implemented within four months of the scheme receiving the necessary information

Answer 159

 Potentially loses less value than if offset or earmarking had been used  Immediate settlement and a clean break  No Income Tax implications for Faizal  Pension debit will not count towards his lifetime allowance

Answer 160

 Pension credit does not affect her annual allowance  Pension not lost on her remarriage or cohabitation  Pension credit not lost on Faizal’s death  Immediate settlement  A clean break  She has control of investment  She can decide retirement date  She can decide on strategy/FAD or annuity

Answer 161

 If there is an option for funds to remain in Faizal’s scheme/fund choices/charges/any guarantees  Details of Jenny’s workplace scheme/fund choices/charges/ease of having pension benefits in one place  Use of an individual SIPP/wider investment choice/charges may be higher

Answer 162

 Wider investment choice/can hold cash/diversification  A choice of benefit options e.g., flexi‐access drawdown, phased  Online access/ease of admin/can monitor performance  Easier to match attitude to risk  Potential for higher returns

Answer 163

 Recent divorce/single parent  Moderate capacity for loss  Possible affordability issues  No maintenance payments from Faizal  Limited pension savings  No protection in place

Answer 164

 Family member/trusted friend present at meetings  Clarity of explanation/no jargon/check her understanding  Set out explanations in writing  Give time to consider decisions/ensure no ‘undue influence’ exerted over her  Flexible outcomes required/her position has changed  Record ‘difficult’ information  Strict confidentiality for information revealed  Fact finding/compliance/recommendations/reviews

Answer 165

 Change in risk profile/capacity for loss  Change in tax position/employment  Change in health  Marriage/cohabitation  End of tax year - use of ISA allowance  When Sasha starts university  Review progress against objectives  Legislative changes / economic changes  Review of fund performance of ISA and pension

Answer 166

 She has adequate emergency fund so able to tolerate loss/volatility  Just returned to full time work  Cautious to medium risk profile  Level of income/capital/expenditure  She has no mortgage  Due to receive share of pension  She has one financial dependant  Any inheritances expected  Does she have investment experience/knowledge

Answer 167

 She must be of sound mind  She must be aged 18  It must be in writing  It must be signed by Jenny as testator  It must be signed by a minimum of two witnesses who are not executors or beneficiaries  There must be a clear intention to dispose of property

Answer 168

 Make gifts/potentially exempt transfers to Sasha  Transfer lump sum into trust for Sasha / outside her estate after 7 years  Use annual allowances/£3,000/£250/gifts out of normal expenditure/maintenance  Consider use of DGT to create income for her/Sasha and reduce IHT  Make pension contributions  Make charitable donations  Take out a whole of life policy in trust for Sasha if there is still an IHT liability after all planning has been done

Answer 169

 Desired level of income/need for capital  Current expenditure/affordability  Cashflow modelling  BR19/State pension forecast  Growth assumptions based on ATR/stress test/projection from existing provider  Inflation assumptions  Current contributions/any lump sums  Costs/charges  Current/future tax status  Other sources of income/use of other assets  Calculate fund value/contributions needed to provide income  Based on annuity rates/safe withdrawal rate (SWR)/longevity  Compare projections with capital value required/establish shortfall.

Answer 170

 Diversification reduces risk by reducing concentration/ increasing the number of asset classes  Some asset classes are not strongly correlated - a loss with one asset class might not mean a loss in another  Geographical diversification spreads the risk across a number of different economies / currencies / national markets  Sector diversification reduces the risk associated with specific areas of the economy or particular firms

Answer 171

 Loans start to be repaid the April after the course is finished  Repayments will only be made if income is over the repayment threshold currently £27,295 a year  If income falls below the threshold repayments will stop and will only restart once income is over the threshold again  Additional voluntary repayments can be made at any time  Repayments are 9% of income over the repayment threshold  Repayments are made through the UK tax system if employed and through self- assessment if self-employed  Current interest rate is 6.3% (capped)

Answer 172

 The university sets the tuition fee  The loan is paid directly to the university  The student has to pay it back  Full-time students can get up to £9,250

Answer 173

 Details of household income must be given along with the course start date  The loan is paid directly into the student’s bank account at the start of each term  It has to be paid back  In the 2022/23 academic year the loan is up to £9,706 if living away from parents and outside London

Answer 174

 Current income needs/income needs in retirement  Planned capital expenditure/new capital/gifts/proposed use of inheritance  Current assets/current income/level of guaranteed income  Growth rate assumptions/interest rate assumptions/charges  Inflation assumptions  Attitude to risk/capacity for loss  Longevity/health  Market corrections/estimates of market falls/stress test  Impact of death of either

Answer 175

Benefits:  Potential growth/stay invested  Flexible income  Tax efficient income  IHT free/outside of estate  Annuity rates may improve/no mortality drag  Choice of successor/flexible death benefits  Matches ATR Drawbacks:  Increased fees/charges  Investment risk/loss of mortality gain  May fritter funds/deplete funds before death  Need advice/complex/reviews  Income not guaranteed  Triggers MPAA

Answer 176

 When did the policy start?  What is the sum assured – is it sufficient?  Is the policy in trust for children?  Details of funds  What is your attitude to risk with regard to this policy?  Are Jim and Carol aware that at the review the premiums/sum assured may have to change?/Is there an option to increase cover?  On what basis was the policy set up – minimum/maximum/type of cover/increasing/waiver of premium?  What is the current value of the policy?  Do you have a current surrender value?  Does it have critical illness cover?  Health/due to recent change in smoker status consider re-broking

Answer 177

Benefits  Cannot be cancelled by insurer/can claim more than once  Can claim for a longer period/to retirement  Own occupation definition available  Indexation of benefits  Can include proportionate/rehabilitation benefit  Guaranteed Premiums Drawbacks  Usually more expensive  Longer deferment period before receipt of claim  Does not cover unemployment  No lump sum benefits/no cover upon death  Stricter underwriting

Answer 178

 She has excess cash holdings  Fixed interest and some equity exposure matches her attitude to risk  Cash exposed to inflation risk  Interest rate risk  No real growth potential on cash/potential for growth on equities  Transfer maintains ISA wrapper/transfer does not use current year ISA  Wide fund choice/hold on platform/active/passive  Suitable for long-term investment  ISA wrapper is wasted on cash as she has a PSA  Increases diversification within her portfolio  Equities generally outperform other assets

Answer 179

 Income/capital needed on long term illness/serious illness/death  Timeframe/objectives/priorities  Affordability/planned capital expenditure  Liabilities/debts/credit cards  No sick pay from employer  No personal protection in place  Support from family/any inheritances expected  Willing to use current assets/savings/investments/emergency fund  Underwriting issues/family health history/hazardous pursuits/smoker status  Attitude to risk/her capacity for loss since the divorce  Use of trusts/nominations/Will in place

Answer 180

Initial Thoughts:  Consider current health  Consider plans and income required in retirement  They will not receive State Pension until age 66 to 67 (depending on DOB) – how will they fund interim years?

Answer 181

Initial Thoughts:  Consider increasing pension contributions to maximise 40% tax relief  Pension funds likely to be insufficient to meet pension income needs  Consider suitability of funds to match ATR and timeframe to retirement  Do they have other deferred pension plans?  Consider level of State Pension benefits they will receive

Answer 182

Initial Thoughts:  Review whole-of-life policy, does it meet current IHT liability?  Consider deed of variation on inheritance to pass directly to children  Consider use of inheritance to top up pension income

Answer 183

Initial Thoughts:  Consider tax efficiency of investments/higher-rate taxpayers, likely to become basic-rate taxpayers in retirement  Consider suitability of investment funds  Recommend alternative solutions  Both have a PSA of £500  Both have a dividend allowance of £2,000 – Jim does not have relevant assets to use his

Answer 184

Initial Thoughts:  Consider ways to ensure that as much of estate passes to the children on second death

Answer 185

Initial Thoughts:  No mention of Wills/impact of divorce on any Will  Does she receive Child Benefit for Sasha?  No mention of health status

Answer 186

Initial Thoughts:  Jenny’s estate is over the IHT nil rate band  What is the interest rate being received on savings  Consider the options for the lump sum  Consider the options for pension sharing order

Answer 187

Initial Thoughts:  Jenny is a basic-rate taxpayer  No sick pay/life cover/CIC or PMI  Total review of protection needs required  Does pension fund match her ATR?  Pension funding options/salary sacrifice?

Answer 188

Initial Thoughts:  Merits of funding tuition fees and living expenses herself instead of Sasha using student loans

Answer 189

Initial Thoughts:  Cash flow analysis?  Interest rate on cash ISA?  Does she want to keep premium bonds/what has the return been?  Return on stocks and shares ISA  No use of dividend allowance  PSA can be used against interest  Lack of diversification within portfolio  Too much in cash/only UK equity exposure

Answer 190

Using this type of trust allows an individual to access their original capital at any point and in any amount but the growth will not be included to their estate for Inheritance Tax purposes. The outstanding loan remains in the settlor’s or donor’s estate for Inheritance Tax purposes. The loan can be waived in part or in full at any time.

Answer 191

A Discounted Gift Trust is a trust based inheritance tax planning arrangement for those individuals who wish to undertake inheritance tax planning but who are unable to lose full access to their investment. The term "discounted" is used because the value transferred on establishing the trust is less than the amount invested. There are two basic types of Discounted Gift Trust, but many variations on the general theme. Nil or negligible discount is available where the settlor is, or is "rated" over 90. The value transferred in such cases is the policy premium. A Discounted Gift Trust (DGT) is a trust-based inheritance tax (IHT) planning arrangement for those individuals who wish to undertake IHT planning but who are unable to lose full access to their investment. In a DGT, access is typically provided by means of a series of preset capital payments to the investor who will be the settlor of the trust. The term ‘discounted’ is used because the value transferred on establishing the trust is less than the amount invested. This is the logical consequence of the fact that the settlor is entitled to a stream of capital payments. The settlor is typically entitled to payments on specified dates subject only to be alive on those dates. The settlor's transfer or gift is the bond/policy premium less the value of the payments receivable during his/her lifetime.

Answer 192

- allow an IHT-effective transfer - allow settlor access through preselected payment stream - may attract a discount - tried and tested – ‘work as described’

Answer 193

- relatively inflexible - payment stream can't be changed - payments generally capped so as not to exceed the 5% rule

Answer 194

A loan trust involves an individual establishing a trust. But rather than making a gift, the settlor lends money to the trust. The trustees then invest this money, typically into an investment bond, for the benefit of the trust beneficiaries. The settlor can demand repayment of the outstanding loan at any time - this can either be in full or in part. If regular loan repayments are needed, the trustees can repay the loan by using the 5% tax deferred withdrawal facility from the bond. The settlor cannot benefit from the trust fund - any fund growth must be used for the benefit of the trust beneficiaries. Key points: - The amount of the outstanding loan remains within the settlor's estate for IHT - Any growth, over and above the outstanding loan, is immediately outside the settlor’s estate - The loan is interest free and repayable on demand - The 5% tax deferred allowance on bonds can be used to make loan repayments without an immediate tax charge - If access to the loan is no longer required it can be waived or gifted Waiving or gifting the right to the loan in the settlor’s Will can avoid the need to call in the loan and a possible chargeable gain

Answer 195

A money market fund is a kind of mutual fund that invests in highly liquid, near-term instruments. These instruments include cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity (such as U.S. Treasuries). Money market funds are intended to offer investors high liquidity with a very low level of risk. Money market funds are also called money market mutual funds. - A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. - Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum. - A money market fund generates income (taxable or tax-free, depending on its portfolio), but little capital appreciation. - Money market funds should be used as a place to park money temporarily before investing elsewhere or making an anticipated cash outlay; they are not suitable as long-term investments.

Answer 196

Wholesale markets where banks, building societies and governments lend and borrow money from each other. They are considered short-term (less than 1 year) debt instruments that are traded in high volumes and provide low risk.

Answer 197

Treasury Bills - Debt Management Office (DMO) Commercial Bills - Companies Certificate of Deposits - Banks

Answer 198

Treasury Bills No interest payments but issued at a discount to their maturity value Commercial Bills No interest payments but issued at a discount to their maturity value Certificate of Deposit The deposit carries a fixed rate and term

Answer 199

Minimum investments in money market instruments are high which makes it difficult for an individual to gain access to the market. However, a fund is a collective investment vehicle that pools together investors’ funds to invest in the money market.

Answer 200

Standard Fund – 6 to 12 months Short-term Fund – 2 to 4 months

Answer 201

Pay a fixed rate of interest, known as the coupon. This is set at issue and is a percentage interest on the nominal value. A fixed redemption value, known as the par/nominal value. A fixed redemption date, known as the maturity date. This is set at issue.

Answer 202

Non-systematic risk is a specific risk that occurs as a result of the issuer, it can be eliminated by diversification Systematic risk is a market risk (interest and inflation rates) that is unavoidable, it cannot be eliminated by diversification

Answer 203

Inflation - Erodes the purchasing power of interest Interest rates - Generally bond prices move in the opposite direction Credit risk - Issuer may not be able to pay interest or capital at maturity Currency - Movements in exchange rates affect the value of holding Liquidity - May be difficult to sell at an acceptable price

Answer 204

Negative correlation

Answer 205

It reduces non-systematic/specific risk.

Answer 206

Cash and Property. If interest rates are high the returns on cash deposits become attractive, but property investors will be hit by the increased cost of borrow.

Answer 207

Through diversification.

Answer 208

VCT: 30% on first £200,000 EIS: 30% up to £1,000,000 (£2,000,000 for knowledge intensive companies) SEIS: 50% on first £100,000

Answer 209

A hard fact is a verifiable fact (e.g., name, age salary, marital status) A soft fact is opinion based (e.g., ethical views, family values)

Answer 210

Formulating the investment strategy for asset allocation. This sets out the proportion of capital to invest in each asset class to generate a portfolio that needs the needs of the client.

Answer 211

Funds objectives Costs and charges Management group Performance of fund manager Type/ structure (unit trust/ OEIC etc.)

Answer 212

It looks at the difference between the return you would have expected from a security, given its beta, and the return it actually achieved.

Answer 213

Where an employee agrees to a reduction in their salary in exchange for a bigger employer contribution. There must be a written agreement in place, this must be done before salary is actually reduced and the reduction cannot take them below the national minimum wage.

Answer 214

Offsetting Earmarking Sharing

Answer 215

Pension sharing divides the member’s pension rights at the time of divorce, and it must be transferred into the ex-spouse’s name This provides a clean separation as each spouse has their own pension from this point forward

Answer 216

Both the old and new basis are increased each year by the triple lock This is the greater of CPI, National Earnings Average or 2.5% The earnings-related elements of the old regime together with any protected amount of the single tier pension is only increased by CPI

Answer 217

Yes, under both the old and new regime, individuals can defer their State pension; however, the rules vary depending on which version of the State pension is being received Deferral can occur at any point, i.e., before the pension becomes payable if it is not needed or it can be deferred once in payment; however, it can only ever be deferred once

Answer 218

By making the choice to defer your State pension, you will receive an increased pension once it is drawn For pre April 2016 – pensions will be increased at a rate of 1% for every 5 weeks of deferment For post April 2016– pensions are increased at a rate of 1% for every 9 weeks of deferment Another key difference is that a deferred pre April 2016 State pension can be taken as a taxable lump-sum (this is no longer possible)

Answer 219

 Sudden or permanent loss of assets  The need to increase the income taken from a portfolio  The need for large withdrawals  Future inflation is higher than expected  The pension holder living longer than expected  Investment returns are lower than expected

Answer 220

Provides cover towards costs of long-term care in old age

Answer 221

If an individual makes a lifetime gift to another individual or to an absolute/bare trust or a disabled person’s trust, this is a PET Free from IHT if the donor survives 7 years from making the gift, otherwise there is a charge of 40% if its value exceeds the available NRB – the recipient pays tax liability

Answer 222

If an individual makes a lifetime gift to a discretionary or interest in possession trust, this is a CLT Tax is charged at the lifetime rate of 20% when gift is made if it exceeds the available NRB. On death of the donor within 7 years, further tax might be due

Answer 223

Income Support Jobseeker’s Allowance (JSA) Statutory Sick Pay (SSP) Employment and Support Allowance (ESA)

Answer 224

Child Benefit Payable if responsible for a child under 16 or under 20 in approved education/training.

Answer 225

It is non-contributory, is not means-tested and is tax free A new claim can be back-dated 3 months Entitlement to Child Benefit is not affected by any other benefits received by the claimant

Answer 226

If a claimant or their partner has an adjusted net income in excess of £50,000, there is a tax charge of 1% of the amount of Child Benefit for every £100 in excess of £50,000. Therefore, if adjusted net income exceeds £60,000 the charge wipes out the benefits.

Answer 227

Whole of life policies pay out a lump sum on death whenever that occurs, whereas term assurance pays out a lump sum on death only if death occurs during the term of the policy

Answer 228

Unit linked policies combine life cover and investment Maximum cover plan – premium guaranteed for initial term then reviewed upwards in line with age Standard cover – premium set so that it does not need to increase Guaranteed cover (non-profit) – no investment element, guaranteed level of cover for guaranteed premium, may have surrender value

Answer 229

Increasing term assurance - the sum assured increases during the policy term by either a fixed amount or in-line with inflation Decreasing term assurance – sum assured falls each year in pre-determined way to £0

Answer 230

Mortgage protection assurance – s/a decreases each year in-line with outstanding mortgage value Family income benefit (FIB) – s/a is expressed as amount payable each year to the family, from death until policy ends Gift inter vivos– s/a decreased in-line with IHT payable on a potentially exempt transfer (PET)

Answer 231

A type of term assurance policy written to age 100, can be used as alternative to a WoL policy Often a cheaper alternative, however, must consider the possibility of surviving past 100

Answer 232

A term assurance policy can be converted to a WoL policy at any point during the term without the need for further medical evidence

Answer 233

A type of term assurance bought by employers to pay out death in service benefits to employees' dependents RLPs don’t form part of employee’s annual or lifetime pension allowance

Answer 234

Where life cover is provided for both parties, but is used where a lump sum is only needed on death of the second person (e.g., for an IHT liability that may arise on the second death) When first spouse/CP dies the policy simply continues Write under trust to avoid IHT

Answer 235

Do not have to wait for probate Proceeds may not be subject to IHT (in addition, premiums likely to fall into an IHT exemption) Benefits of the policy are distributed as per wishes of settlor without need of a will Better protection against creditors if settlor becomes bankrupt

Answer 236

The beneficiary has an absolute right to the income and capital held in trust and the trustees have no discretion in the handling of trust assets Beneficiaries are stated upfront and cannot be changed Gifts into absolute trusts are PETs

Answer 237

The settlor specifies a list of beneficiaries/ potential beneficiaries and nominates one or more of them to have an interest in possession If no other action is taken, these beneficiaries will receive the trust proceeds Gifts into interest in possession trusts are CLTs

Answer 238

Where trustees have the power of appointment to choose beneficiaries from a class/es of potential beneficiaries Gifts into discretionary trusts are CLTs

Answer 239

If a life policy contains CIC, a split trust could be used This enables the settlor to benefit from CIC payment, but any life payment will be administered to beneficiaries via the trust

Answer 240

Personal details including age Current state of health Medical history Occupation and any hazardous pursuits Lifestyle

Answer 241

Short term policies may apply moratorium basis instead of full medical underwriting This excludes pre-existing medical conditions during past 5 years for 2 years

Answer 242

An additional benefit added to term or WoL policies Pays out when life assured diagnosed with terminal illness and has a life expectancy of less than 12 months Not available as a separate policy and is not paid in addition to sum assured

Answer 243

The transfer of ownership from one person to another Assignments can be temporary or permanent Types include: absolute (sale or gift), mortgage, bankruptcy and to trustees

Answer 244

Under a joint tenancy, if one of the joint tenants dies, their interest passes automatically to the surviving tenant Under a tenancy in common arrangement, the death of a tenant results in their share passing to their estate and can therefore be distributed as per their will

Answer 245

If the deceased bequests at least 10% of their net estate to a registered charity Net estate = taxable estate after deducting NRB but before taking charity donation into account

Answer 246

Transfers between legal spouses/civil partners Gifts to charities Gifts in consideration of marriage Annual exemption of £3,000 Small gift exemption of £250 Gifts out of normal expenditure

Answer 247

Tax may be immediately payable on a CLT if the total of CLTs in a 7-year period exceeds the current NRB. Donor or recipient can pay the tax: Recipient pays – charge 20% on excess of NRB Donor pays – charge 25% on excess over NRB

Answer 248

When a person inherits property through a will or intestacy, they can vary the terms of the will or the intestacy by executing a deed of variation –allows beneficiaries to change the distribution of the estate Must be signed by all parties adversely affected

Answer 249

Permanent health insurance (PHI) – because IP is a permanent policy and does not need renewing each year. The insurer cannot cancel the policy or increase premiums, even if more than one claim is made, as long as premiums are maintained

Answer 250

It is a long-term policy that pays out a regular monthly income when the insured is unable to work because of a long-term illness or incapacity

Answer 251

An individual can take out policy anytime between 18-60 and they tend to end around planned retirement date

Answer 252

Most common deferred period are 4,13,26,52 weeks Typically plans with a shorter deferred period are more expensive

Answer 253

Usually 50-60% for individual policies Up to 75% for group policies

Answer 254

The policy does not pay a benefit until a specified period, e.g., 2 weeks of continuous sickness, has elapsed, but when the policy does pay out it is backdated to the first day of illness Generally used by self-employed

Answer 255

Own occupation – policy pays out if individual can’t perform their current role Suited occupation – policy pays out if individual can’t perform a similar role Any occupation – policy pays out if individual can’t perform any role/occupation

Answer 256

Rehabilitation benefit – proportionately reduced benefit that aims to make up the difference due to less hours or different job Proportionate benefit – similar to above but provides reduced benefit equivalent to reduction in earnings compared to 12 months prior to incapacity

Answer 257

To offset inflation risk

Answer 258

It covers the payment of premiums If the policyholder of an IP plan suffers an accident or becomes ill and as a result is not working – the insurance company waives the premiums at the level, they were being paid

Answer 259

To encourage the claimant to return to work speedily

Answer 260

Concerned with morbidity – as they are looking at the chances of being too ill to work as opposed to the chances of dying Chances of becoming ill significantly higher than the chance of dying

Answer 261

Age Health Smoking status Occupation Hobbies/ pursuits Deferred period

Answer 262

Class 1 – managerial, executive, administrative and professional workers Class 2 – shop workers, skilled light manual workers in non-hazardous jobs, catering Class 3 – skilled workers in non-hazardous manual jobs Class 4 – skilled workers in hazardous jobs

Answer 263

Guaranteed – premiums remain constant throughout life of contract Reviewable – insurer increases premiums based on the insurer’s claim history Guaranteed premiums tend to be significantly higher (certain policyholders like the certainty set premiums)

Answer 264

To match the Statutory Sick Pay Period of 28 weeks

Answer 265

CIC pays a lump sum on diagnosis of a number of specified illnesses, e.g., heart attack

Answer 266

Sets out standards that insurers must adopt in order for policies to be listed as CIC. Standards include: a common format for the way CIC is described to buyers, use of common generic terms and the use of model wordings NB. The previous ABI Statement of Best Practice on Critical Illness included a list of core conditions the policies should cover

Answer 267

If CIC is added to a life assurance contract and the individual claims under the CIC policy, it is effectively an accelerated death payment during the lifetime of the individual, instead of the sum assured on death

Answer 268

Split trust This allows the policyholder to receive any CIC benefit, while the life assurance cover benefit is payable to the beneficiaries

Answer 269

14-30 days

Answer 270

Provides an additional sum assured payable on the diagnosis of a critical illness in the child of the policyholder (subject to survival period) It is underwriting-free and normally pays out either a set amount or percentage of the sum assured

Answer 271

Usually once the policyholder suffers a critical illness the policy pays out and the plan ceases; however, they could have an even greater need for life cover Buy-back options allow a restricted amount of life cover to be taken out without further medical underwriting

Answer 272

Acts as a ‘catch-all’ Although the condition the claimant has is not specified in the policy conditions, the standard of the insured’s life is so poor that they are not able to live a ‘normal life’ again and so the policy pays out

Answer 273

Cancer Kidney failure Heart attacks Stroke Loss of limbs Major organ transplant Multiple sclerosis

Answer 274

Morbidity is primary factor along with medical history and family history Expenses and investment are less important

Answer 275

The onus is on the policyholder to prove the claim they should inform the life office ASAP after falling ill

Answer 276

Individual policies

Answer 277

Typically, IP covers more conditions and replaces the claimant’s income which they are heavily reliant on

Answer 278

A type of plan that normally covers many more illnesses. Pays out a proportion of the sum assured on diagnosis and then adds additional payments when/if the illness progresses Becoming increasingly common due to advancements in healthcare and medicine

Answer 279

A policy that pays out to replace earnings if policyholder is unable to work due to sickness or an accident. It is a basic form of insurance and most contracts are annual (or shorter) Available as a standalone policy or as a bolt-on

Answer 280

Death Permanent disablement Loss of an eye Loss of a leg, foot or toe Loss of an arm, hand, finger or thumb

Answer 281

Medical expenses Weekly sickness benefit

Answer 282

Acute conditions – those that occur rapidly and it’s usually possible to cure in a relatively short time

Answer 283

Comprehensive plans usually have a longer claim period, with higher limits and often a wider choice of hospitals Extras such as home nursing and private ambulances are included

Answer 284

They are long-lasting and usually not curable so therefore treatment might not be right, instead long-term care insurance might be more appropriate

Answer 285

Instead of fully underwriting the policy, a moratorium basis can be used. Meaning that medical conditions the customer has suffered during the previous 5 years before the start of the policy are excluded for a period of 2 years

Answer 286

Basic plans Standard plans Comprehensive plans

Answer 287

Provides a monthly benefit to maintain mortgage payments for up to 12, 18 or 24 months (either linked to mortgage payments, percentage of salary or fixed amount) Deferred period is typically 30-60 days

Answer 288

Short term income protection (STIP)

Answer 289

Similarities: benefits paid for a maximum of 2 years, also a similar deferred period of 30-60 days and have similar exclusions Differences: the insured benefit is not limited to mortgage payments and a possibility of lump sum benefit for events such as loss of sight

Answer 290

Main aim of protection planning is to provide sufficient income to cover client’s needs in the event of death, disability, involuntary unemployment Create a cash flow statement to provide the basis of what expenditure is required to support the income once held of the insured

Answer 291

It might affect their eligibility for means-tested State benefits Value and liquidity of capital is important in order to make sure it’s enough/feasible to be used for protection purposes

Answer 292

Allows clients to receive treatment when they need/want it, rather than waiting for treatment under the NHS Additional benefits such as private hospitals, ambulances and medical centres Clients who travel overseas regularly

Answer 293

The trustees of the member's pension arrangement are responsible for implementing a pension sharing order, although in practice this duty will usually fall to the scheme administrator. In order to implement a pension sharing order the administrator may require information from the trustees of the pension arrangement, the member and the member's ex-spouse/civil partner as well as the court. Following implementation of the order the member's ex-spouse/civil partner will receive a pension credit which may be held within the existing pension arrangement or transferred to another pension arrangement. The member's pension receives a corresponding pension debit.

Answer 294

Both parties to the divorce are required to get valuations of their pension benefits. These are then used to agree whether a split is needed and if so, what that split will be. This information is required before the divorce hearing. It is important that the scheme/provider is made aware that the information is required for a divorce. It’s worth noting and making your client aware that as the split is a percentage of the value of the plan, the amount is not guaranteed. This is because the unit price of the funds will change between the original valuation to agree the split and when the benefits are actually shared after the divorce is finalised the figure will change. This is not a mistake. The rules in Scotland are different as it is monetary amount that is agreed and not a percentage. The pension sharing order may be implemented on any day, chosen by the trustees, within what’s known as the implementation period. The implementation period runs for 4 months from the date of the pension sharing order or the date the trustees have all the information they need if later. The scheme administrator chooses the valuation date within the implementation period on which to calculate the actual share of the pension rights. The benefits must then be transferred before the end of the implementation period.

Answer 295

1 - Establish and define the client and personal financial planner relationship. 2 - Gather client data and determine goals and expectations. 3 - Analyse and evaluate the client's financial status. 4 - Develop and present the financial plan. 5 - Implement the financial planning recommendations. 6 - Monitor the financial plan and the financial planning relationship.

Answer 296

On account of: - age, - state of health or mind, - recently bereaved.

Answer 297

Life assurance and pensions - keep records for 5 years.

Answer 298

- Specific - Measurable - Action-related - Realistic - Time-related

Answer 299

* Wills - important for clients to understand effects of dying intestate * On intestacy - children in family entitled to their share at age 18 * Ensure will is up to date and reflects client’s wishes * Gifts and loans – lifetime gifts will either be exempt (no tax at all), potentially exempt – PET- no lifetime tax, taxed if die within 7 years and value over NRB, taper available after 3 years - or chargeable - CLT – lifetime tax at 20% if over NRB, then 40% (less 20% already paid) due on death within 7 years and value over NRB, taper available after 3 years, loans repayable on death * Nil rate band is £325,000 2021/22 - transferable between spouses/civil partners * Residence nil rate band where residential property left to direct descendants £175,000 2021/22 – this is also transferable if it is unused in full or in part of 1st death of spouse/civil partner, tapered if net value of estate over £2m by £1 for every £2 excess * Both expected to remain the same until the end of 2025/26 tax year * Trusts - note if client is settlor, trustee, or beneficiary of a trust * Desirable to have copy of trust deed * Types of trust: bare trust, interest in possession, discretionary, trusts for vulnerable beneficiaries * Include details of any Power of Attorney, Enduring Power of Attorney or Lasting Power of Attorney

Answer 300

Consider: * Any mismatch between client’s risk profile and existing investments * Any excess of investments in one asset class, market or provider * Charges * Objectives * Any With Profit issues * Investment risk issues - identify: o 3 to 5-year volatility on each investment o Volatility for whole portfolio versus client’s attitude to risk o Drawdown per investment i.e., maximum % loss over period of ownership o Asset class, economic sector and market % breakdown o Assessment of probability of client meeting investment targets

Answer 301

* List immediate and potential dependants covered * For each plan list who is covered (immediate or potential dependants) * Calculate financial loss expected on death/incapacity * Calculate length of time support required * Determine possible future dependant’s needs e.g., school funding or assistance with house purchase * Existing liabilities e.g., mortgage should be covered by life and health insurance * Compare existing cover to need identified

Answer 302

* Highlight income and CGT issues * How much income is subject to higher rate tax - pension opportunities? * Tax planning: o Use of marriage allowance o Spread/transfer ownership o Appropriateness of tax wrappers o Potential CGT on switching o Consider disposing in stages to use more than one CGT annual exempt amount o Delay until a basic rate taxpayer in retirement o Child benefit position

Answer 303

Lump sum and income paid tax free if within 2 years

Answer 304

Lump sum and income taxed at recipient’s marginal rate

Answer 305

Life assurance - base on need not standard calculations Step 1: Identify need (spouse/children) Step 2: Quantify level of cover (capital, long and short-term income) Step 3: Determine period of cover (different for each need) Step 4: Consider existing policies Step 5: Recommend appropriate policy/s ``` Capital needs (in event of death) o Funeral expenses o Emergency fund o Specific bequests o Debts and mortgage o IHT o Aggregate to calculate total lump sum needed ``` Long-term income needs o Annual personal living expenses of surviving spouse (deduct costs saved e.g., mortgage) o Add: additional costs e.g., childcare, replacing employer benefits o Deduct: continuing long-term net income - survivor's income o Deduct: long-term net income e.g., widow's pension o Calculate total long-term income needed Short-term income needs o Extra short-term income e.g., childcare o Add: other short-term income o Calculate total short-term income needed

Answer 306

Term fixed sum on death within term, level or decreasing Whole of life fixed sum on death whenever it occurs, covers funeral expenses, legacies, IHT bill Consider other factors e.g., inflation, additional benefits for family, flexibility, waiver of premium, existing cover, timescales, State benefits

Answer 307

Term linked to need, e.g., expected financial dependency of child (18 or end of university?) Full recommendation often too costly - consider the following in order to reduce cost: o Reduce required income - scale back or look for alternative sources of income o Could period of cover be shortened? o Are additional policy features e.g., future increase options really needed? o Could additional cover be provided through employer under PP rules? o Could cover be provided as part of a package? Relevant life policies o Stand-alone death in service plans o To benefit from tax advantages must only provide lump sum death benefit payable before 75 to an individual, trust or charity and must not provide any other benefit, have a surrender value, or be mainly used for tax avoidance o If these conditions are met, policy does not form part of pension value for lifetime or annual allowances nor is it taxable benefit in kind, benefits are also free from IHT if paid through discretionary trust

Answer 308

Capital needs are generally high priority - mortgage usually largest Long-term income o Consider if essential to maintain same standard of living o Can surviving spouse work? o Deduct State benefits ``` Incapacity and health o How long could family cope with lack of income? o How long do employer benefits last? o Identify level of income provided o Deduct saving and survivor income ```

Answer 309

Income while unable to work Covers many illnesses Based on ability (not inclination) to work Benefit based on pre-disability earnings N.B. There may be a case for IP and CIC although compromise (due to cost) may be required

Answer 310

Benefit not limited to earnings Restricted list of illnesses Benefit not dependent on earnings/ability to work Provides capital lump sum N.B. There may be a case for IP and CIC although compromise (due to cost) may be required

Answer 311

Gives clients ability to choose when and where they receive treatment Employer provision - few tax advantages (premium is fully taxable and subject to Class 1A NICs) Private provision - level and cost varies considerably, can add spouse and children

Answer 312

State help with mortgage payments for those receiving income related benefits Support for Mortgage Interest (SMI) Interest up to £200,000 of mortgage/loan (£100,000 if receiving State pension credit) Waiting period is 39 weeks after claiming benefits No waiting time for those on State pension credit 2-year limit for some applicants Since 6 April 2018, payable as a loan not a benefit o Repayable with interest on sale of home

Answer 313

In-house or outsource to discretionary investment management firm - generally based on: o Strength of investment process o Continuity of manager o Proven investment style o Clearly defined investment objectives o Strong and consistent past performance record Income or growth consider tax implications Active or passive: passive funds becoming increasingly popular as deliver asset allocation at lower cost and difficult to predict which active managers will outperform Fund of fund or fund of choice - fund of fund can provide simple, managed solutions/valuable on smaller portfolios Fund managements styles o Absolute return aim for positive returns in all markets, rather than aim to beat a benchmark o Bottom-up pick stock based on fundamental analysis (value investing) o Top-down pick sectors in economy then pick stock within sector o Sector rotation top-down manager switches sectors/industries based on economic and technical indicators Fund charges - ensure client is getting value for money

Answer 314

Past performance - basis of fund selection may be past performance Diversification - in 2008/09 all international markets and most asset classes moved together Investment planning is more of an art than a science and portfolios may not behave as expected particularly over the short-term

Answer 315

Initial Input: No relief Growth: Tax free Encashment: Tax free

Answer 316

Initial Input: No relief Growth: Income taxable / internal gains tax free Encashment: CGT on gains

Answer 317

Initial Input: No relief Growth: Income and internal gains deemed to have been taxed at basic rate Encashment: No CGT, Qualifying tax-free, Non-qualifying gains subject to higher rates of income tax

Answer 318

Initial Input: No relief Growth: UK tax free, Except withholding tax. Encashment: No CGT, Full income tax on gains.

Answer 319

Initial Input: Full relief, subject to limits. Growth: Tax free Encashment: 25% tax free, 75% taxable.

Answer 320

Initial Input: 30% income tax relief, Tax reducer (hold for 3 years) CGT deferral relief available. Growth: Taxable dividends. Encashment: CGT free on disposal (after 3 years).

Answer 321

Initial Input: 50% income tax relief, Tax reducer (hold for 3 years) CGT reinvestment relief available. Growth: Taxable dividends. Encashment: CGT free on disposal (after 3 years).

Answer 322

Initial Input: 30% income tax relief, Tax reducer (hold for 5 years). Growth: Tax free. Encashment: CGT free on disposal (from outset).

Answer 323

Provides biggest tax advantage for most investors for cash and fixed interest Less so now personal savings allowance in place Also consider IHT disadvantages £20,000 (2021/22) limit spread across all four (IFISA, cash (including H2B), stocks and shares or Lifetime) Help to Buy ISA o Every £200 saved, government bonus £50 up to max £3,000 on £12,000 savings o Bonus on home purchase up to £450k in London, £250k elsewhere o Closed to new savers 30 Nov 2019 o Existing savers can continue to contribute until 1 Dec 2030 Innovative Finance ISA o Peer to peer ISA, separate to cash/stocks and shares ISA Lifetime ISA o Since April 2017, available to under 40s to save for first home/retirement o Up to £4,000 per year of £20,000 overall limit, £1,000 government bonus o Withdraw funds for purpose other than house purchase before age 60 generally lose bonus, interest/growth on bonus plus 5% charge Junior ISA o For children not eligible for child trust fund /children wishing to transfer from child trust fund o At 16, child takes control of account and can decide where to invest o At 18, becomes adult ISA o Parental settlement rules don't apply Continuing ISA o On death, ISA becomes continuing account of a deceased investor (continuing ISA) o No further funds added o Income and capital continue to accrue tax-free until earlier of estate being administered, ISA closed, 3 years and one day from death Additional permitted subscription o If an ISA holder in a marriage or civil partnership dies their ISA benefits can be passed to their spouse/civil partner via an additional ISA allowance o The surviving spouse/civil partner can invest as much into their own ISA as their spouse/partner used to have in addition to own annual limit o If higher, the value at the point the deceased's ISA stopped being a continuing account can be invested, rather than the value at date of death.

Answer 324

Subject to tax on income they generate but free of tax until encashment Can use CGT annual exempt amount then taxed at 10% or 20% Most appropriate for growth-oriented investments

Answer 325

2021 average boarding fee in sixth form £12,573 per term 2021 average day school fee in sixth form £5,489 per term Since 2017 - university fees up to £9,250 a year in England Can be financed by loans Loan is repaid at annual rate of 9% of the former student's income that is over £27,295 a year Undergraduate education - affluent parents have bought property for student/s to live in Support now available for Masters and PHDs in form of loans, also need to consider loss of earnings Lifetime cash-flow projection would identify periods of heavy expenditure e.g., children attending expensive schools at the same time Advisable to build up a school fee reserve (emergency fund) to avoid having to withdraw child from school in event of financial difficulties

Answer 326

No tax relief on contributions No employer contributions £20,000 maximum contributions pa Fund income and growth free from tax Fund can be accessed at any age, tax free and without penalty

Answer 327

Tax efficiency varies according to client's circumstances Higher rate taxpayers whose pension contributions are funded by their company and would otherwise pay tax at 40% or 45% and NICs on their remuneration will benefit the most Maximum tax relief is 45% plus 13.8% employer and 2% employee's NICs

Answer 328

Ensures assets are given in accordance with client wishes Provides guardianship for children Facilitates tax planning Alternative is intestacy, NB co-habitees do not inherit o First £270k plus chattels goes to spouse/civil partner o Remainder split 50:50 surviving spouse/civil partner and children

Answer 329

Features Cash lump sum gifted into bare (PET) or discretionary (CLT) trust Invest in investment bond Fixed payments are made from bond to settlor 5% rule often used PET/CLT is less than cash gifted as discount given to reflect the fact some of the funds come back to the settlor Medical underwriting required Settlor should spend returned funds ``` Pros Effective for IHT Regular income Neither GWR nor POAT apply Discount If value under available NRB, no IHT charges (immediate, periodic, exit) for discretionary trust ``` Cons Inflexible income 5% runs out after 20 years Bond CGT inefficient

Answer 330

Features Settlor creates trust Makes interest-free cash loan to trust Trustees buy investment bond Capital remains in estate (loans repayable on demand / death) 5% rule can be used to make loan repayments Or lump sums can be taken IHT charges (immediate, periodic, exit) are after deduction of loan No exit charge on loan repayments Pros Growth outside of estate straight away Full access to capital 'Income stream' ``` Cons Capital remains in estate 5% runs out after 20 years Should spend returned funds No immediate benefit Trustees should ensure trust always has enough to repay the loan ```

Answer 331

Business relief - if transferred as lifetime gift or on death at least 2 years after acquisition then 100% relief and free from IHT Life assurance: written in trust to cover potential IHT liability o Ensures funds are available to pay IHT on lifetime gifts (if death occurs within 7 years) o Provides cash to pay IHT on death o Able to use annual/normal expenditure exemption Drawback is that regular commitment is needed thus reducing spendable income

Answer 332

Advantages - Beneficiaries cannot access without trustee agreement - Tax planning flexibility e.g., skipping a generation - Can hold assets for benefit of a minor Disadvantages - Complex - Expensive to administer - Can lead to additional income tax, CGT and IHT

Answer 333

- An agreed lump sum of capital that the client is willing to lose access to is placed into the Trust. - The Trust then invests the funds received into a single premium life assurance Investment Bond. - A level of regular income withdrawals is taken, to meet income needs agreed upon. - The lump sum is notionally split into two parts following underwriting. - The discounted element based upon the level of likely income the client will receive back during their lifetime is removed from the estate for IHT immediately. - This will be based on client’s age, health and level of income taken. - If the client is in good health, the discount should be significant. - The balance will be treated as either a CLT if Discretionary Trust or PET if a Bare Trust is used and then this sum will also become exempt from IHT after 7 years.

Answer 334

- It’s a loan so not a gift. - Basically lump sum into trust with settlor as trustee and whoever else. - Invested into an Investment Bond. - Can take capital lump sums when they want and use the 5% deferred Bond allowance. - Loan remains inside estate for IHT as it’s not a gift but any growth is outside of it. - Only really effective for IHT if the client spends the loan repayments/capital lump sums/5% deferred allowance. - So the idea is you spend the capital over time to get it out of your estate whilst having the investment growth outside of your estate. - Flexible as client can have all the loan back any time if they wish whereas with a DGT you can’t change the levels of income and therefore can’t have access to the capital via ad hoc lump sums.

Answer 335

- Provide additional opportunities for the client to ask questions about the discussions held and information provided. - Continuously seek confirmation that the client has understood the discussions held and information provided. - Offer the client the opportunity to have a family member or friend present during the meetings and discussions. - Offer the client the opportunity to complete any paperwork, or agree to a transaction, after a period of further consideration. - If for any reason it is felt that the client does not understand the options or service being offered, then the transaction should not be proceeded with at that time.

Answer 336

- What is her budget in this area? - What age will Sasha be financially independent? - Are there any other assets that can be used? - Does she wish to earmark any assets for her protection needs? - Is she expecting any inheritances? - Have the appropriate nomination forms been completed for her pension? - Smoker status/hazardous pursuits/health issues? - Views on inflation? - Does she have a Will or LPA in place?