Practice Test 1 - Joseph & Sally

Question 1

Identify the additional information that an adviser would require in order to advise Joseph and Sally on their financial aims.

Answer 1

• Expected cost of school fees.
• Duration of school fees.
• Value of the gift from Sally’s parents/when the gift will be received.
• Period of dependency.
• Details of Sally’s life policy.
• Any expected inheritances.
• Any other protection policies.
• Sick pay/protection arrangements through Joseph’s employer.
• Past pension death benefits.
• Any nomination of benefits for Joseph’s pension death-in-service/fund value of Joseph’s pension.
• Statements/value of any savings and/or investments/offset amount.
• Value of the property they wish to buy/amount of mortgage/deposit/loan to value.
• Level of equity in current property/house value and mortgage debt.
• Who do they wish to leave their assets to on death?
• Guardianship.
• Income and expenditure/affordability.
• Ethical preferences.
• State of health/smoker status/family medical history.
• Attitude to risk.
• Ownership of assets/property.

Question 2

Explain to Joseph and Sally how their assets would be distributed if either of them died today.

Answer 2

Joseph and Sally are NOT MARRIED.

Joseph does NOT have a will. He would die instestate
• If Joseph died, his estate would be divided equally between both children.
• Jointly held assets pass to the survivor.
• Assets held under tenancy in common form part of the estate.
• His pension death benefits would be subject to nomination/distributed at the discretion of the trustees.

Sally made a will to leave everything to her parents.
• If Sally died, her parents would receive her estate.

Question 3

State three benefits and three drawbacks of Joseph and Sally retaining their current offset mortgage for their purchase of a new home.

Answer 3

Benefits
• Any surplus money in their current/savings accounts effectively reduces mortgage interest/reduces tax liability.
• The mortgage is portable between properties which potentially reduces fees.
• Increased liquidity/accessibility.

Drawbacks
• No guarantee of repayment at the end of the term.
• Exposed to rises in base rates/higher interest rates.
• May not match their desired repayment date.

Question 4

Recommend and justify a suitable mortgage repayment vehicle for Joseph and Sally’s new property, assuming they retain their existing mortgage.

Answer 4

• ISA/endowment/pension.
• Joseph is a higher rate taxpayer.
• Tax efficiency
• Growth potential.
• Matches their attitude to risk.

Question 5

Identify the specific protection needs for Joseph and Sally.

Answer 5

Joseph
• Income/capital in the event of death/critical illness.
• Income in the event of incapacity/disability.

Sally
• Income/capital in the event of death/critical illness.
• Income in the event of incapacity/disability.

Both
• Repay the mortgage in the event of death/critical illness of either.

Question 6

Recommend and justify suitable protection products to meet Joseph and Sally’s needs in the event of death or serious illness of either of them.

Answer 6

Death or critical illness to cover mortgage
• Level term policy/term assurance.
• Critical illness included.
• Written on a joint life first death/event basis/two single policies.
• To repay mortgage.
• Term to match mortgage.

Death or critical illness to replace income/capital
• Level term assurance/family income benefit/whole of life.
• Critical illness included.
• A joint life first event/two single lives.
• To replace income/to cover the costs of the survivor and the children.
• Term to retirement age/period of children’s dependency.
• Indexation.
• To keep pace with inflation.

Applicable to either policy
• Written in trust/life of another.
• To avoid probate/outside estate/speedy payment/intended beneficiary.
• Waiver of premium.
• To ensure premiums continue in the event of incapacity.
• Own occupation on total permanent disability.

Question 7

Recommend and justify suitable protection products to meet Joseph and Sally’s needs in the event of long term illness or incapacity of either of them.

Answer 7

Joseph (Breadwinner)
• An income protection policy.
• Own occupation.
• To provide the widest definition of cover/increase likelihood of successful claim.
• Deferred period to match any sick pay arrangements.
• The maximum benefit/50-75%/meet outgoings.
• Because he is the breadwinner.
• Indexation of cover to keep pace with inflation.
• Term to retirement.

Sally (housewife)
• Income protection policy/houseperson’s cover.
• To cover the cost of childcare.
• Written to the age she expects her youngest child to be independent/to retirement.

Question 8

State the factors that should be taken into account when devising a plan for school fees for Joseph and Sally’s children.

Answer 8

• Amount of fees.
• When fees start to be payable.
• How long the fees are payable for.
• The children will start school at different times/overlap.
• Short timescale to first tranche of payment/low risk asset allocation required for first tranche.
• Inflation assumption.
• Growth rate assumption.
• Any available investments/inheritances/grandparents contribution level.
• Bursaries/scholarships.
• Appropriate tax wrappers/use of allowances.
• Use of appropriate protection products.
• Attitude to risk/capacity for loss.
• Ethical preferences.
• Whether they are going to have any more children.
• Affordability.
• Client’s tax status.
• In whose name the investments should be placed.