Case Study 1

Question 1

Target Date Retirement Fund - overview (7)

Answer 1

• Member selects fund that aligns with their retirement date
• first invests in riskier assets and then less volatile as approach retirement
• fund is actively managed (unlike lifestyle) so can account for market movements
• driven by target year and not by members age
• can switch fund if change retirement date
• Vidas likely in growth phase wherein target investment growth that covers inflation + 3% net of charges, has long term volatility of 10-12% and aims for steady real growth through diversification.
• moves into consolidation phase 10 years prior to retirement

Question 2

First time buyers (6)

Answer 2

• 0% stamp duty payable on purchases under £300k
• 5% if between £300k-500k
• should not exceed this otherwise will be taxed at normal rates
• their parents lending money for the deposit does not effect first time buyer relief
• can use LISA towards property if not over £450k - may want to consider this otherwise government bonus lost
• may be eligible for help to buy equity loan if purchasing new build (no charges due in first 5 years)

Question 3

JISA - Advantages (6)

Answer 3

• Tax efficient and gives potential for investment growth - £100 rule does not apply to income produced from JISAs
• Does not use their allowances
• Range of available funds they can invest in
• £9k per annum likely to be sufficient for further education costs
• Can contribute lump sum or via regular contributions
• anyone can contribute

Question 4

JISA - Disadvantages 6

Answer 4

• Children can choose funds from age 16
• No access to funds until child becomes 18
• Is child’s product and they may not use it for education when turning 18 (lack of control for parent)
• investment risk or inflation risk if invested in cash
• charges applicable may be high
• may require advice for investment and most appropriate provider etc

Question 5

Benefits of using a financial adviser (18)

Answer 5

• Help the client to identify financial problems and goals
• Identify financial strategies by showing and discussing options available
• Setting priorities in line with clients aims and objectives
• Researching the market for the best products
• Executing the planning as client may not have the time or knowledge to do themselves
• Wealth creation and preservation
• Helps clients to avoid common financial mistakes
• Adviser expertise and regulated advice
• Less admin for client
• they have an adventurous ATR therefore will be able to suggest higher risk investments
• charges review
• financial planning tools available to adviser
• likely to result in improved returns
• ongoing monitoring of investments
• diversification can be achieved
• Review the market for new products
• keep up with changes in taxation and legislation

Question 6

Multi-Asset funds (4)

Answer 6

• funds that invest across all asset classes including cash, fixed interest securities ad equities producing diversification
• can also be fund of funds
• tailored to specific risk profiles, here, 40-85% equities would be most suitable for Vatil’s ATR
• also include 0-35%, 20-60% and flexible (up to manager)

Question 7

Benefits of Family-Income Benefit (10)

Answer 7

• Tax free income paid out
• sum assured is not limited
• term can be set to match needs
• low cost cover
• can get guarantee premiums
• can be set up under trust
• indexation is available
• meets objectives
• simple underwriting as both in good health
• cannot be cancelled by insurer

Question 8

LISA - Drawbacks (9)

Answer 8

• max contribution of £4K
• early access leads to penalties
• penalty on withdrawal exceeds government bonus
• can only use for mortgage or retirement purposes
• investment risk or inflation risk
• may have high charges
• need for financial advice
• limited choice of providers
• add admin as may need to set up another S&S or Cash ISA to fulfil allowance

Question 9

What are advantages of making regular contributions into S&S JISA rather than cash JISA (7)

Answer 9

• no prospect for investment growth
• Juna young so long timescale for growth
• pound cost averaging
• benefit from investment volatility
• can stop and start contributions when they want
• assists with budgeting
• reduces risk of poor investment timing

Question 10

What are the risks of relying on death in service benefits for family protection (5)

Answer 10

• may lose cover if change/leave employment
• employer can change terms
• benefit level may not be right for requirements
• as based on income, if part-time, level of cover decreases
• only covers death and not long term or serious illness

Question 11

Recommend and justify suitable policies to provide protection in the event of long-term illness or disability (16)

Answer 11

• IP policies for both as this pays out tax-free regular income on the event of long term illness or disability
• these should be taken out as single life policies in order to maximise benefits and deferral periods will be different
• the sum assured will be 50-60% of their earnings
• the deferral period should be 6 weeks for Vidas as he receives SSP during this period, and 13 weeks for Viktoria for the same reason
• the term should be to their selected retirement ages
• indexation should be included to ensure benefits keep up with inflation
• the policies should be taken out on an own occupation basis as this increases the chance of a pay out
• guaranteed premiums should be selected in order to maintain certainty of costs throughout the term

Question 12

Recommend and justify suitable policies to protect the family in the event of the death of Vidas or Vik (12)

Answer 12

• both should take out level term polices as they provide a tax-free lump sum on their deaths
• these should be in the form of two single life policies, as the amounts needed on death may differ
• the sum assured should at a minimum cover any impending mortgage, and be sufficient enough to provide for the survivor and family
• the term should be until their retirement age, to ensure they are covered up to this point
• the policies should be put into discretionary trusts as this will avoid probate and keep the proceeds outside of their estate
• waiver of premium should be included so they are able to maintain cover in the event that they cannot pay their premium

Question 13

Recommend and justify suitable protection policies in the event of serious illness (16)

Answer 13

• they should take out level term standalone CIC for each of them as this will maximise benefits for little difference in cost and pays out a tax free lump sum on the diagnosis of a critical illness
• single life policies should be taken out as amount needed may differ
• the sum assured should be sufficient enough to maintain the families current lifestyle and pay off impending mortgage
• the term of the policy should be to their nominated retirement ages
• they should select premiums to be guaranteed as this allows for certainty of costs throughout the policy term
• waiver of premium should be included to maintain cover in the event that they are unable to pay premium
• should meet ABI best practice guidelines for CIC as this is the best level of protection available
• CIC policies may include child cover and will pay out if their children are diagnosed with a CI

Question 14

State the factors an adviser should consider when identifying a suitable sum assured for life cover and/or CIC (6)

Answer 14

• debts
• expenditure
• cost of adapting home for CIC
• childcare costs
• availability of state benefits
• income

Question 15

Assuming they are not yet married and have not drawn valid wills they will; (4)

Answer 15

• die intestate
• only inherit jointly held assets
• they are unmarried
• single owned assets will pass to child

Question 16

If they are not yet married but draw up valid wills before they marry (3)

Answer 16

• up to point of marriage, JOA will pass to survivor
• single owned assets pass according to will
• if wills werent drawn up in anticipation of marriage, wills are invalidated on marriage

Question 17

what are the advantages (4) and disadvantages (4) of saving for the childrens further education costs by setting up a bare trust

Answer 17

• income tax based on childrens tax position
• same with CGT
• does not impact ISA contributions
• choice of funds can match ATR

Disadvantages;

• if trust funded by parents and income exceeds £100, income tax liability falls on parent
• children can demand access at 18
• may not use funds for further education
• separate trust needed for second child add admin

Question 18

what are the advantages (2) and disad (3) of Vidas’ parents helping them build a deposit via loan

Answer 18

Adv;

• repayments more flexible
• interest charged may be low

Disadv;

• may need formal agreement
• lenders may feel that loan repayment affects affordability
• may restrict amount that can be borrowed via mort

Question 19

what factors should be consider if repaying car loan early (5)

Answer 19

• any penalties
• early settlement figure obtained?
• how would this pay off impact deposit for property
• having an outstanding loan will affect mortgage amount
• lenders may have affordability concerns

Question 20

Outline pros (8) and cons (5) of being invested in a tracker fund

Answer 20

Pros;

• low cost
• run by computer system and therfore no human judgement
• potential for growth
• performs in line with index
• can track any index
• liquid
• easy to follow performance
• active managers dont always outperform

Cons;

• will underperform market due to charges
• tracking error means will never match exaclty
• perform poorly in falling market
• no active management
• lack of control over underlying asset

Question 21

Explain how multi-asset fund works and how they match ATR (9)

Answer 21

• fund that invests in various asset classes to achieve diversification such as cash, FIS and equities
• funds diversified and can be spread over sectors
• cautious funds have greater amount in FIS
• adventurous has higher amount in equities
• Vidas best option is 40-85% fund
• actively managed
• greater potential for growth with lower vol due to diversification
• rebalances regularly
• access to specialist investments

Question 22

Benefits of a target retirement date fund (5)

Answer 22

• can be used for drawdown
• good growth potential in growth stage
• actively managed unlike lifestyling
• can switch retirement date if needed
• can select fund to match ATR

Question 23

Compare CIC and IP policies (11)

Answer 23

• IP pays out regular income whereas CIC lump sum
• IP pays out on being able to work due to sickness whereas CIC is on diagnosis of CI
• IP allows multiple claims where CI only once
• IP cover decreases over the term
• CIC can be WOL therefore longer term available
• IP % of salary whereas CI no linked to earnings
• IP pays out after deferral period whereas CIC after survival period
• IP based on occupational definitions
• CIC can include life cover and other benefits such as child cover
• IP has more detailed underwriting
• CIC can be set up under trust

Question 24

Implications of parents making a gift for deposit (7)

Answer 24

• considered a PET and no immediate tax charge
• value of PET reduces over 7 years
• once 7 years have past, sits outside estate
• if exceed NRB than considered a CLT and immediate tax charge of 20% may be applicable
• able to utilise £3,000 per parent gift allowance and can use allowance from previous year if not used
• if die within 3 years may be subject to IHT at 40% and 3-7 years tapered relief
• could use life cover policy to cover any potential IHT liability

Question 25

Considerations for parents loaning deposit to Vidas (6)

Answer 25

- will need to draw up formal loan agreement and needs to be signed/handwritten - this sets out term of loan such an interest rate, term and monthly repayment amount - will loan be secured against property - need to cover off what happens on divorce or default on loan - what happens in the event of death of the parents - loan remains in their estate