Practice Paper 1 Flashcards
General Topic Areas From Practice Paper 1 (26 cards)
Explain capacity for loss
Ones capacity for loss is their ability to absorb potential losses without significant impact on their financial stability or lifestyle.
State 8 factors which could impact ones capacity for loss
Ones capacity for loss could be impacted by:
- Ones overall wealth
- Current and future needs
- Income needs
- Other assets and investments
- Inheritances that may be expected
- Time horizons before drawing upon the investments
- Liabilities
- Health/family health history
- Emergency fund
What is a ‘Target Date Fund’
A target date fund is a ready made portfolio where the asset allocation of bonds and equities will adjust closer to and in retirement to reduce volatility and risk in the portfolio
How might a target date fund be appropriate for an investor?
- Can match the target date fund with their retirement age
- Can be used for draw down
- Growth potential
- Actively managed
- No need to try to time the market
- Can easily switch retirement date/new target date
- Asset allocation will change to reduce risk/volatility
- Can select funds to match their ATR
Define an AIM ISA
An AIM ISA is a portfolio of AIM quotes shares which are held within an ISA wrapper. Designed for IHT planning to benefit from shares that qualify for Business Property Relief.
How does IHT relief work with AIM ISAs?
If a qualifying asset is held on death and has been held for 2 years, the investor will get 100% IHT relief.
State 5 benefits of AIM ISAs
AIM ISAs provide:
- Tax free income and growth
- Assets benefit from BPR at 100% so free of IHT after 2 years
- Speed of IHT relief in comparison to other IHT planning
- Retain control and ability to make withdrawals
- Professional management
State 5 risks of AIM ISAs
The risks of AIM ISA’s are:
- Capital is at risk
- Less diversification
- IHT relief not guaranteed (may die before 2 years or rules may change)
- Assets may be illiquid
- Higher risk
When one dies, how are their debts treated?
When one dies, their debts become a liability on their estate leaving the executor responsible for paying any outstanding debts
How are debts paid on the estate if there is not sufficient assets/money to pay them all back?
Liabilities would be paid in priority order, any outstanding would be written off
What is a Collective Investment Fund?
A Collective Investment Fund is an investment fund where it enables investors to ‘pool’ their money together with other invests
State two key benefits of a Collective Investment Fund
A CIF allows for:
- Investors to reduce their risk by spreading investments more widely than what would have been possible if they were investing directly.
- Investors benefit from ongoing professional management
Which type of Collective Investment Fund is closed-ended and define what close-ended means?
An Investment Trust is closed ended, this means that there are a fixed number of shares and the share price is determined by the demand for the shares and the NAV .
Which type of Collective Investment Funds are open-ended and define what open ended means?
OEICs and Unit Trusts are both open-ended which means that units are created and cancelled to meet investor demand - therefore the value of the units are based on the NAV of the investments.
Which type of Collective Investment Fund is structured as a company?
An Investment Trust is structured as a company
What three things is the income in retirement based on in a DB scheme.
Retirement income is based on:
- Accrual rate
- Salary
- Number of years in scheme
What are the two types of DB scheme?
The two types of DB scheme are final salary and career average
Who bears the responsibility and the risk of ensuring that there is sufficient money to pay the income from a DB scheme?
The employer bears the responsibility and the risk
When would you not be able to transfer a DB Scheme pension?
You would not be able to transfer a DB scheme pension when you are still working for the employer or have less than one year until you would normally be entitled to receiving an income from the pension
State what a funded scheme is and an unfunded scheme in relation to DB schemes
A funded scheme is where the employer would set aside money in advance to fund the members retirement income.
Whereas an unfunded scheme is where the employer the employer will pay retirement benefits out of their assets at the time of retirement
How long is a CETV guaranteed for?
A CETV is guaranteed for three months
When would you need to obtain financial advice when transferring a DB scheme
You would need to obtain financial advice when the value is over £30,000 and transferring to a DC scheme.
State 6 risks of transferring a DB scheme pension to a DC scheme
- Loss of guaranteed income for life
- Will be invested, therefore no certainty
- Any future income after transferring will be dependent of performance of the investments
- Member is responsible for where to invest or pay someone to do such
- Ongoing running costs of pension and investment charges
- Longevity risk
- Transferring is irreversible
- Investment risk
What is the maximum investment for an EIS scheme in a tax year
The maximum EIS investment in a tax year is £1,000,000 or £2,000,000 for investments into knowledge intensive companies
