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•Everyone needs to be able to pay their monthly outgoings with some money left over to cover irregular expenditure
•Personal budgeting exercises enables advisers to determine if client is living beyond their means or identify any surplus income
•Disposable income is the difference between income and expenditure
•By fully understanding client’s income and expenditure position able to strike a balance between identified needs and budget to ensure recommendations are affordable


Borrowing and Debt

•Expenditure should be considered under:
o Essential spending
o Everyday spending
o Occasional or non-essential spending

•Secured loans e.g. mortgage could result in clients losing their home if unable to meet repayments

•Constant short-term borrowing indicates poor budgeting

•Consider replacing long-term borrowing with cheaper finance / switch services

•Debt management plan
o If have surplus income and unsecured debts
o Consolidates all debts into single affordable monthly repayment
o Either DIY or use firm (but charge fee)

•Debt consolidation
o Negotiate new loans to repay existing loans
o Lower interest rate and lower monthly repayment
o May be fees
o May increase overall cost if over longer term
o May lose home if secured on it

•Debt counselling available through e.g. Citizens Advice, StepChange

•Consider using other resources to reduce debt
o Bankruptcy / individual voluntary arrangement last resort


Mortgages and Loans

•Mortgage - the security offered in exchange for loan
•Assignment - signing over security to lender in exchange for mortgage/loan
•Second charge - use equity in home as security against another loan, first charge takes priority


Method of Interest Repayment: Two Main Types of Mortgage:

Capital and Interest:
- Monthly repayments include capital to repay outstanding balance and interest
- Mortgage and interest reduce over period of loan

Interest Only:
- Only accruing interest is paid and outstanding capital remains the same
- Loan is repaid at the end of the term via proceeds of savings plan e.g. ISA, endowment or house is sold
- Mortgage Market Review reduced availability of interest-only mortgages


Mortgage Interest Rate Options

•Capped - maximum interest rate for specified period
•Cap and collar - minimum and maximum rate for specified period
•Discount - interest rate reduced by set percentage below standard rate for set period
•Euro/foreign currency - interest and capital designated in other currency
•Equity linked (shared appreciation mortgages)- lender takes stake in equity, reduced loan amount so less interest but on sale of property equity stake repaid to lender
•Fixed interest- interest rate fixed for set period
•Flexible - ability to vary monthly repayments/make overpayments then withdraw reserve at any time
•Offset - mortgage and current account linked with interest charged on net balance
•Tracker – variable rate, changes automatically in line with index (e.g. LIBOR)


Equity Release

•Allows older clients to release equity in their homes (minimum age 60)
•No fixed term and allows client to stay in their home for the rest of their life unless they go into long-term care
•They are either:
o Lifetime mortgages or home reversion plans

•Lifetime mortgage
o Take out a loan secured on the home
o Interest can be rolled up (loan and rolled up interest repaid when home is sold)
o Fixed repayment lifetime mortgage - no interest but higher amount is repaid
o Interest-only – pay monthly interest, capital repaid when home sold
o Home income plan - loan used to buy an annuity which pays interest/loan repaid when home is sold
o If shared appreciation element, lender has a stake in equity
o Take lump sum or drawdown (ad-hoc withdrawals)

•Most lifetime mortgages offer ‘no-negative-equity guarantee’ – the lender guarantees that the client (or their beneficiaries) will not have to pay back more than the value of the home (even if the debt has become more than this)

•Home Reversion Plans
o Sell all or part of home in return for cash lump sum, income or both
o Client can stay in home
o Sellers usually get between 20-60% of market value, the older the client, the higher the percentage
o May pay nominal rent, or to receive greater % - pay market rent


Home purchase plans

•Sharia compliant (no interest):
o Ijara – monthly payments held by firm and used to buy home at end of term
o Diminishing musharaka – each monthly payment buys additional share of home – pay rent, rent gets smaller over time as ownership increases


Sale and rent back agreements (flash sale, mortgage rescue, rent back, sell-to-let)

•Company buys home of those in financial difficulty and allows them to rent it back for short time
•Won’t get full value, will only get to stay for short time, could be evicted if breach tenancy



•Long-term investment to generate income (rent) and capital gain (sale of property at future date) – risky, as no guarantee of either
•Consumer buy-to-let regulated by FCA – accidental landlords
•Commercial buy-to-let not regulated by FCA – running a business


Types of Loan

o Possible to increase payments, repay at any time and variable interest rates available (determined by base rate and default risk), tend to be for larger purchases e.g. mortgages

o Fixed rate of interest and fixed repayments with penalties for early repayment, costs can be higher, tends to be for smaller purchases e.g. sofa


Use of Loans

•Make use of someone else’s money for purchase if either insufficient funds themselves or if already making better use of money
•Gearing - interest rate payable on loan must be less than increase in value of property
•Repaying mortgage - consider interest rate achievable on investment versus interest rate payable on debt



•Basic requirement of financial planning
•Whilst still working it is possible to earn way out of financial difficulty, but death/incapacity changes this assumption
•Factors determining protection needs
•Age - cost of protection increases with age so better to take out protection earlier
o Under 18 - no protection needed as provided by parents
o 18 to mid-20s - protection needs start as providing for themselves
o Mid 20’s - mid 40’s - largest protection need - family and spouse, house moves
o Mid 40’s - children start to become independent and protection needs reduce
o 50’s - priority shifts from protection to investment
o Retirement - priority is to produce income

o Number and age (could also be elderly parents)
o Children - dependency usually lasts till financial independence
o Changes to dependencies e.g. becoming a single parent or re-marriage

o Amount of income (to be replaced) and affordability (how prioritised)
o Death cover - use multiple of income less State benefits, pension scheme benefits and any cost savings
o Ill-health cover - percentage of earnings less benefits from other sources
o Consider impact of inflation

•Financial liabilities
o Consider existing and future liabilities e.g. mortgage, loan, IHT
o Liabilities may be capital sum or regular payments

•Employment status
o Employees likely to have protection e.g. death in service
o Unemployed and retired likely to only have State and personal benefits
o Business owners need to provide own cover and key person/ share protection/ partnership protection

•Existing cover
o Breach of ‘suitability’ rules to cover a need that is already covered
o May be in form of existing insurances, lump sum pension benefits, employer benefits, State benefits


Life Cycles

Vulnerable Years:
•Early years of marriage/relationship and starting a family
•Lower income but high protection needs
•Little spare income

Relaxed Years:
•Entering 40’s
•Increased income
•Children entering financial independence
•Higher cost of protection

Anxious Years:
•Entering 50’s
•Earnings peaking
•Mortgage paid off (or nearly)
•Children financially dependent
•Little time to make up pension shortfall
•Increased cost of protection
•Increased awareness of morbidity/mortality
•Inheritance tax planning becoming more important

Divorce may affect life cycles: single parent with increased protection needs, maintenance payments, reduced pension provision.

Fewer families now conform to this traditional model.


Life Assurance Contracts

•Term assurance
o Pays out lump sum on death of life assured
o No saving/investment element
o Premium based on age, term and amount of cover
o No payment at maturity for survival
o No surrender value
o Level - level sum assured and level premium
o Decreasing - sum assured decreases but premium remains level/used with repayment mortgages as debt reduces over term
o Family income benefit - on death of life assured series of payments made (instead of lump sum)
o Increasable term - sum assured can be increased during term without further medical evidence
o Convertible term - able to convert policy into whole of life or endowment during term
o Renewable term - at maturity date able to effect a new policy without further medical evidence
o NB additional features increase premiums

•Endowment Policies
o Primarily used as savings vehicles but will pay lump sum on death of life assured
o Surrender value is low in first few years
o Low-cost endowment for mortgage high life cover (to match mortgage), lower savings

•Whole of life policies
o Primarily used for life cover but they do have investment element
o Joint life second death basis for potential IHT liabilities
o Non-profit - fixed level of cover, accumulates (low) surrender value
o With profit - minimum guaranteed level of cover but increases annually through addition of bonuses, terminal bonus payable on death. Accumulates surrender value although low initially.
o Flexible - policyholder selects level of cover at outset (between minimum and maximum), premiums used to purchase units in life office funds with cost of life cover deducted. Level of cover can be altered and offers high level of cover for lower premiums.


Sickness Insurance

•Provides either income or lump sum in event of sickness or injury
•Income protection (IP)
o Designed to replace lost income in event of being unable to work for period of time (deferred period)
o Longer the deferred period, lower the premium
o Benefits paid until earlier of return to work/retirement age or end of policy term
o Benefits from individual policies are tax exempt
o Underwriting is based on morbidity (not mortality)
o Gender neutral pricing
o Benefit restrictions to incentivise return to work (50% - 60% earnings)
o Permanent policy - if premiums paid cannot be cancelled regardless of how many claims made

•Personal Accident and Sickness
o Pay regular benefit in event of being unable to work due to accident/illness.
o Option of one-off lump sum payment in event of e.g. loss of limb
o Shorter deferred periods than IP with reduced underwriting and more occupations accepted
o Contract reviewed annually and benefits paid for shorter period (1 or 2 years)
o Accident, sickness and unemployment (ASU) cover similar, but with unemployment as an extra benefit

•Critical illness cover (CIC)
o Pays lump sum on diagnosis of specified critical illness with no reference to ability to work
o Provided by stand-alone policy or incorporated into e.g. term policy.
o Reviewable CIC developed as cost of CIC increasing, reviewed every 5 - 10 years in line with medical science
o Before cancelling a policy consider extent of existing conditions
o Used to provide private treatment, alterations to home, buy medical equipment, repay mortgage
o IP and CIC are complementary, not substitutes

•Private Medical Insurance
o Gives choice in the level of care received
o Full underwriting or on a moratorium basis (no questions but health conditions in last 5 years excluded)
o Not cover conditions that exist at outset / pre-existing conditions in recent past
o Not cover chronic conditions (designed for acute conditions)
o Excludes outpatient treatment, routine treatment, dental treatment
o Other exclusions – normal pregnancy, HIV/AIDS, fertility treatment, mental health conditions, elective treatments

•Payment protection insurance (PPI)
o Usually available in connection with house purchase or loan to meet monthly repayments
o Redundancy / accident / sickness
o Premiums must be paid monthly
o Benefits paid for 1 or 2 years, or until return to work if sooner
o Low take-up due to policy restrictions and premiums, despite little State help

•Mortgage payment protection insurance (MPPI)
o Provides cover for mortgage and associated payments
o Minimum standards as per UK Finance / ABI: must provide accident, sickness and unemployment cover, maximum deferred period of 60 days, benefit period not less than 12 months, pays self-employed if informed HMRC stopped training involuntarily and registered for ESA

•Joint policies available, mix and match benefits to each need
•If temp during claim, claim suspended
•Provider can cancel/withdraw policy with 90 days’ notice
•Provider can amend policy with 30 days’ notice
•Cover mortgage payments plus mortgage-related policies (e.g. life cover)

• Expensive
• State benefits issues:
o Receipt of State benefit reduces need for private provision
o Low levels of State benefit emphasise need for private provision

•Benefits normally paid through Department of Work & Pensions (DWP)
•Increasing cost of provision and ageing population

•Benefit Cap
o A cap on the total amount of certain benefits that some households can receive
o £442.31 for couples/those with children live in London (£384.62 outside London)
o £296.35 single person (£257.69 outside London)
o Does not apply in a number of circumstances, including where a household member is entitled to working tax credit or universal credit (other restrictions apply), or in receipt of certain other benefits


Universal Credit

•Aims to ensure people are better off in work
•Paid monthly to help budgeting
•Everyone on the benefits listed below has either been moved or will be moved onto Universal credit shortly:
o Income-based Jobseekers’ allowance
o Income-related ESA
o Income support
o Child tax credit
o Working tax credit
o Housing benefit


Family Benefits

•Child Tax Credit
o Paid to families with children
o Integrated with tax system
o Replaced by universal credit for most new claimants

•Child Benefit
o Non-means tested
o Tax charge where parent / partner has income over £50,000

•Statutory Maternity Pay
o New mothers
o 6 weeks at 90% average gross weekly earnings
o 33 weeks at standard rate or 90% average gross weekly earnings, whichever lower

•Statutory Paternity Pay
o 1 or 2 consecutive weeks at standard rate or 90% average gross weekly earnings, whichever is lower

•Statutory Adoption Pay
o 39 weeks at standard rate or 90% average gross weekly earnings, whichever lower

•Maternity Allowance
o Standard rate or 90% average gross weekly earnings, whichever lower, if don’t qualify for SMP.

•Income Support
o Low income with severe disability not signed on as unemployed
o Everyone else must apply for universal credit

•Jobseeker’s Allowance
o Main benefit for those of working age who are unemployed or work less than 16 hours per week
o Capital means testing after 6 months
o If eligible for universal credit, apply for ‘new style’ JSA

•Statutory redundancy payments
o Tax-free
o If employer pays in excess of £30,000, liable to income tax and employer national insurance

•Working tax credit
o Replaced by universal credit for new applicants
o Paid to those on low income
o Up to 70% childcare costs covered
o If over 25, work 30 hours plus a week to be eligible

•Support for Mortgage Interest
o To help pay interest only on loans up to £200,000 (£100,000 if get State pension credit)
o For those receiving certain income-related benefits
o Usually paid to the lender
o Loan payments limited to 2 years if claim jobseeker’s allowance
o No limit if receive income support, income-related ESA, State pension or universal credits
o Deferred period usually 39 weeks (none if get State pension credit)
o Loan repayable when property is sold, on death or voluntarily earlier


Disability and Sickness Benefits

•Attendance Allowance – tax-free for those over State pension age needing help with care / mobility
•Carer’s Allowance - taxable benefit if looking after disabled person
•Employment and Support Allowance replaced Incapacity Benefit for all new claimants after 27 October 2007
•Personal Independence Payment (PIP) from 8 April 2013
o Based on assessment of need
o Care and mobility components

•Replaces Disability Living Allowance for those between 16 and State pension age.
o Care and mobility components

•Employment and Support Allowance - two types:
o Contributory ESA (not means-tested, but taxable) and Income related ESA (means-tested, but tax-free)
o Assessment phase followed by main phase in either work-related or support group (the former being those for whom there is an expectation of return to work)

o Disabled people can lease new car, scooter or powered wheelchair
o Eligible if receive higher rate of mobility component of DLA / enhanced rate of mobility of PIP/ war pensioners’ mobility supplement / armed forces independence payment

•Statutory sick pay
o Standard rate paid 28 weeks by employer

•New State Pension for those retiring on/after 6 April 2016
•Basic State Pension (BSP) plus Additional State Pension (ASP) (SERPS/S2P) if retired before then
•Equalisation of ages, increasing SPA, ‘triple lock’ guarantee
•State Pension Credit - aim is to reward savers - 2 elements:
o Guarantee credit (to top up income)
o Savings credit (extra income if made own provisions)
o Savings credit only usually available if reached SPA prior to 6 April 2016


Other State Benefits

•Bereavement support payment
o Lump sum £3,500 (£2,500 lower rate)
o 18 months £350 (£100 lower rate)
o Claim within 3 months of relevant death (spouse/civil partner)

•Winter fuel payment
o Born before 5 October 1954
o £100 - £300 to help with heating bills

•Cold weather payment
o £25 each 7-day period of very cold weather between November and March

•Additional support for those on low incomes
o Council tax reduction
o Funeral payments
o Healthcare travel costs
o Healthy start
o Housing benefit
o Local housing allowance


Retirement Planning

•Aim of pension provision is to avoid poverty in old age
•Many people have little provision beyond that provided by the State
•Inflation causes problems for pensions
•Longevity/declining birth rate - fewer people working supporting larger retired population
•Lack of planning and lack of contributions - too little/too late


Factors Affecting Pension Income

o Age now and planned retirement age determines funding period and importance

o Income wanted in retirement and maximum allowable contributions
o Consider income in today’s terms and as percentage of salary applying inflation
o State pension age reviewed every 6 years

o Determines priorities and money available for contributions

•Previous and current pension arrangements
o Deduct existing provision (State, current and retained) from total income required to identify shortfall

•State provision
o Basic or New State pension depending on whether retired before or after 6 April 2016


Other Retirement Funding

•ISA - no tax relief on contributions, funds grow free of tax on income and gains

•Compulsory Purchase Annuity (CPA) - taxed as earned income

•Purchased Life Annuity (PLA) - capital element (not taxed) and interest element (taxed as savings income), 20% taken at source, interest element can be offset against Personal Savings Allowance / starting rate for savings income

•PLA rates tend to be higher than CPA rates

•If in DC scheme, can take tax-free pension commencement lump sum and enter flexi-access drawdown (taxed as earned income), or take uncrystallised fund pension lump sums (UFPLS) – 25% tax-free, 75% taxed as earned income, if they do not wish to buy an annuity straightaway / at all


Pension Provision Products

•New State Pension
o Reach State pension age on/after 6 April 2016
o 35 qualifying years to receive full amount
o 10 years to receive anything at all
o Deduction for any time contracted out
o NI record determines how much they will get (starting amount)
o Compare to what they would’ve got from old system and receive the higher amount

•Basic State Pension
o Reach State pension age before 6 April 2016
o Basic State pension plus additional (earnings related) element
o Graduated state pension became State Earnings Related Pension Scheme (SERPS) then became Second State Pension (S2P)

•Private Pensions
o Beneficial to self-employed, highly paid, those wanting to supplement State
/employer provision

o Set up by employer with trustees overseeing
o Defined Benefit (DB) - pension related to earnings using accrual rates, pension value is certain, and liability lies with employer, escalating costs meant reduction in schemes, scheme closures and switching to career average revalued earnings (CARE) schemes, actuary advisers trustees amount to be paid into pooled fund to pay out promised benefits, benefit to employee – known pension, drawback for employer – unknown and ever increasing cost
o Defined Contribution (DC) - also known as money purchase, pension dependent on investment performance, contributions % of salary of fixed amount, ear- marked individual pot

•Personal Pension
o Individual contract and earmarked policy (can be held collectively as a Group PP)
o Stakeholder - private pension with government-imposed restrictions


Pension Providers

Public sector occupational schemes
•Civil servants and NHS, unfunded or funded on pay-as-you-go basis Private sector occupational schemes
•Self-administered (only largest companies) or insured (provided by life/pension office)
•Unit trusts, OEICS, banks, insurance companies and investment managers all provide pension funds

October 2012 new legislation makes it compulsory for employers to enrol eligible workers into a qualifying workplace pension scheme and to make contributions to it
•Known as ‘auto enrolment’
•An eligible worker is an employee aged between 22 and Stage pension age and earning above £10,000.
•NEST - low cost workplace pension scheme
•Can use existing scheme if it meets minimum contributions (DC), minimum benefits (DB)


Saving and Investing

•The need to generate sums for future spending is met through regular saving and/or making existing investments grow
•Important that clients understand any investment return will be reduced if risks are lessened
•Saving objective - turn small amounts of money into bigger lump sums
•Investment objective - may be to maintain value or provide real growth or convert into income in future



Up to 5 years
Emergency fund
(3/6 months’ expenditure)
Available at short notice
and within safe asset e.g.
deposit account

5 - 15 years
School fees or wedding

5 years plus
Pension planning, more
important to maintain and
build on value, wide range
of options over this


Savings products

•Savings accounts
o Savings – higher interest than current account, easy access, get back what put in plus interest
o Cash ISA – maximum £20,000 per tax year, tax free, may be easy access / notice period, get back what put in plus tax-free interest
o Notice – give notice to take money out, e.g. 30/60 days, otherwise reduced interest
o Fixed-rate bond (term) – 1 year plus, minimum deposit £1,000, penalty if want early access
o High-interest regular savings – taken from current account each month for fixed term, interest paid yearly, may only be able to access at end of year

o Interest rates - teaser rates can fall, tiered rates may be available
o Notice periods – 7, 30, 60 or 90 days
o Minimum deposits – typically higher for higher rates
o Additional bonuses – may be payable
o Restricted access – in return for higher rate
o Interest accrued – daily / monthly/ annually
o Money is not invested but deposited
o Access could be branch only, post, phone, online
o Cash ISA and Junior Cash ISA offer tax-free interest

o Interest is ‘savings income’
o Banks, building societies and NS&I pay interest gross (without deduction of tax)
o 0% starting rate band for savings income if it falls in first £5,000 of taxable income
o Personal savings allowance (PSA) - £1,000 basic rate taxpayer, £500 higher rate taxpayer, nothing for additional rate taxpayers
o Savings income falling into PSA taxed at 0%
o Thereafter - BRT 20%, HRT 40%, ART 45%

•National Savings and Investments (NS&I)
o Set up by government
o Money invested can be borrowed and used for government purposes
o Interest payments can be met from taxes
o Accountable to Treasury
o Full range of investment products
o Some products are tax free – Direct ISA, Junior ISA, Premium Bonds
o Guaranteed returns are sometimes available
o Income producing products are available


Use of Deposit Based Investments

Emergency Fund:
Varies per individual
Ballpark figure is 3-6 months’ expenditure or 10% of total investments

Only asset class that can maintain capital value
And pay return up to 5 years

For income needs
To take advantage of investment opportunities

Asset allocation and for diversification
Likely to return less than inflation


Investment products

3 layers
o 1: Underlying investment – shares, bonds, property, cash, alternatives
o 2: Pooled investment – OEIC, unit trust, life/pension fund
o 3: Tax wrapper – ISA / pension

o Access to selection of investments
o Able to switch holdings quickly and cost-effectively
o Able to see many holdings together

•Equity investment
o Become shareholder – receive dividends (income) hope for share price to rise (capital growth), may get voting rights
o High risk, especially if only invest in single company
o Better to use collectives
o Able to switch holdings quickly and cost-effectively

• Uses
o Short-Term - Speculation only
o Medium-Term - Income via dividends Capital preservation Growth in excess of inflation
Asset allocation
o Longer-Term - Income
Capital preservation
Growth in excess of
inflation Asset allocation


Government securities and corporate bonds

•Loan to a company, Government or local authority
•For fixed rate of interest payable on pre-defined basis
•Loan stock / fixed interest / debt securities / gilts (loans to Government) / corporate bonds (loans to companies)
•Provide regular, stable income

•Income based on face/nominal value of investment (referred to as coupon)
o Usually £100
•Capital - usually repaid at nominal value at end of term
•Less risky than shares, but credit risk - risk of loan/coupon not being paid

o Safe - government backed but lower interest rate

•Corporate bonds
o Risk depends on credit rating of company (the higher the better)
o Higher credit rating, lower interest rate and vice versa
• Index-linked
o Interest and capital value linked to RPI
o Most are government issued

• Uses
o Short-term - Savings Income (fixed commitments) Pensions
o Medium-term - Savings
Income (including income from PLAs) Pension lifestyle funds Asset allocation
o Longer-term - Income (low risk) Pension income (low risk) Asset allocation