What are Jeremy and Anna’s financial aims? (3)
- Ensure they have sufficient income to allow Jeremy to reduce his working hours to a three-day week in January 2026.
- Repay their outstanding mortgage.
- Generate a tax-efficient and sustainable income throughout retirement.
Outline to Jeremy and Anna the key issues that may result in them failing to achieve the required level of retirement income. (8)
- Both may be HRTs before June 2028 as a result of salaries and State Pensions, meaning more tax on deposit account interest, higher tax rate on dividends for Anna.
- Market downturn will severely impact savings & pensions as heavily invested in equities.
- Overweight in Cash – will not keep pace with inflation. Interest rates may decrease, reducing returns.
- They have already used this year’s ISA allowances, likely to have used their DA and PSAs – limited tax efficient options (other than pensions).
- Their jointly held OEIC might have a substantial gain meaning more tax on encashment to reduce their spendable cash.
- Writing off the loan to daughter means that capital will not be available in retirement.
- Legislation and taxation changes e.g. freezing of personal allowance or higher income tax rates – more funds needed for same net income.
- Annuity rates may fall before they retire, offering lower secure incomes in retirement.
Fact Finding
State the additional information that a financial adviser would require to allow them to advise Jeremy and Anna on their financial arrangements. (18)
- Family health/longevity history.
- Required income from Jan 2026/required income in retirement.
- Views on flexible vs guaranteed income.
- Emergency fund requirements now and in future.
- Interest on cash holdings and income from investments
- Willingness to transfer ownership of savings and investments for tax-efficiency.
- All investments held – performance/asset allocation/charges.
- OEIC – base costs/any withdrawals/any previous losses to carry forward.
- Purpose of investments/preferred source of capital for mortgage repayment.
- Experiences/knowledge of investments.
- CFL/check ATRs are accurate.
- Willingness to increase pension contributions/salary sacrifice available/ Jeremy’s pension contribution history.
- State Pension forecasts/BR19s/willingness to defer State Pensions.
- Pension schemes – fund details and performance/charges/fund choice/early PCLS options/vesting options.
- Downsizing/are they expecting any inheritances?
- Views regarding long term care provision.
- Do they have LPAs in place?
- Any further gifts planned or made/have they used their £3,000 annual exemptions?
Explain why Jeremy and Anna would benefit from receiving and acting on advice from a qualified financial adviser given their forthcoming change in circumstances. (12)
- Identifies and quantifies objectives e.g. retirement income required/identify shortfalls
- Assess ATR/CFL.
- Budgeting/affordability/cash flow analysis.
- Analyse suitability of existing arrangements in line with objectives.
- Tax planning/use of tax allowances/tax efficiency.
- Helps them pay off mortgage in most tax efficient manner/fund retirement plans and take retirement income (and top-up income) tax efficiently.
- Ensures diversification/rebalancing/monitor performance.
- Benefit from research/expertise/receive recommendations/implement a financial plan.
- Ongoing service/reviews.
- New funds/new investment opportunities/new products.
- Less admin for Jeremy and Anna/peace of mind.
- Regulated advice/consumer protection/consumer duty.
Identify the benefits (5) and drawbacks (2) of fixed fees.
Benefits
* Clear and predictable – clients know in advance what they will pay.
* Easy to obtain and compare quotes from other advisers.
* Fees are based on service cost and perceived value, not market performance.
* Transparent and fair structure.
* Less likely to discourage open time-consuming discussions compared to time-based charging.
Drawbacks
* May seem excessive if the work turns out to be less involved than expected.
* Some clients may not fully understand how the fee was calculated and be reluctant to pay.
Identify the benefits (3) and drawbacks (4) of time-based charging.
Benefits
* Familiarity – same basis as other professionals e.g. solicitors.
* Basis of charge to Jeremy and Anna based on amount of work and complexity.
* Charges not linked to increases and reductions in value of investments.
Drawbacks
* Sometimes perceived to reward inefficiency or create an incentive to ‘run up the clock’.
* May lead to the clients avoiding contact or work due to worries about cost.
* Clients may not have cash to pay large bills for advice.
* Fees are potentially subject to value added tax (VAT)
Identify the factors that would typically influence Jeremy and Anna’s capacity for loss. (10)
- Jeremy’s reduced income from Jan 2026 and their retirement in 2028.
- Age/timescales.
- Health/family history of health.
- Amount of sustainable income in retirement needed/expenditure anticipated.
- Asset values/ £90,000 mortgage liability to be repaid.
- Any expected inheritances/ willingness to downsize.
- Large emergency fund.
- Investment experience/knowledge.
- Economic environment/market conditions.
- Full State Pension entitlements.
Identify the main factors and assumptions that you should consider when formulating a cash flow model for Jeremy and Anna. (11)
- Timescales/life expectancy assumptions.
- Current and future income needs/planned capital expenditure.
- Income changes on first death.
- Current assets available/income from all sources including guaranteed income from State Pension/£90,000 required from assets to pay off outstanding mortgage.
- Downsizing/inheritances.
- Charges.
- Inflation rate assumptions/earnings growth.
- Growth rate assumptions on pensions and investments.
- Use of tax-efficient wrappers/allowances (Pension/ISA)/future tax rate assumptions.
- Level of risk/ATR/CFL – how this might change in retirement.
- Market corrections/estimates of market falls/stress test.
Identify seven issues relevant to Jeremy and Anna that will likely necessitate the need for a financial review in the run up to retirement. (7)
- Need for additional income from January onwards — review how this will be funded.
- Sourcing of capital for expenses (e.g. mortgage repayment) and impact on retirement income.
- Income tax planning, especially when State Pensions commence/decision to defer State Pension.
- Their current high ATR — may need review as retirement approaches.
- Market downturns may require adjustments to their investment strategy.
- Changes in interest rates may affect deposit returns, PSA usage, and tax position.
- Impact of any budget or legislative changes on their retirement plans.
Aim 1 - Sufficient income for Jeremy to reduce his working hours
Identify the factors an adviser would need to consider to ensure they have sufficient income from January 2026. (14)
- Expected expenditure from January 2026 onward.
- Ongoing earned incomes/Jeremy’s salary is dropping from £70,000 to £42,000.
- Monthly savings from repaying the mortgage.
- Timing and amount of State Pension/option to defer.
- Income tax positions for both.
- Pension contributions required before 2028.
- Views on topping up income from savings and pensions.
- CGT position on OEICs – use of CGT AEAs
- 5% tax deferred withdrawals from investment bond – £44,000 currently available.
- Yield on OEICs/ISAs to support cashflow.
- Interest rate on deposit accounts/capital available from deposit accounts.
- Willingness to access pensions to meet income needs.
- Market timing for encashment of equity-based investments.
- Cash flow modelling/CFL.
Aim 1 - Sufficient income for Jeremy to reduce his working hours
List the issues Jeremy and Anna should be aware of if they decide to use flexi‐access drawdown to supplement their income from January 2026. (12)
- Income not guaranteed/investment and longevity risk and fund may deplete if withdrawals are excessive.
- Income is flexible.
- Income is taxable at Jeremy’s marginal rate which could lead to higher rate tax whilst still earning.
- Can use tax‐free cash in full or part for tax efficient income.
- Complex/ongoing administration and reviews needed.
- Higher charges including platform, fund and adviser charges.
- Any income taken would trigger money purchase annual allowance (MPAA) and will restrict future contributions to £10,000 per annum/tax-free cash only would not trigger MPAA.
- Potential for growth
- Fund selection can match ATR.
- No tax on death benefits before 75/flexible death benefits/on death can pass to family/IHT efficiency (until 2027).
- Can purchase annuity at any time/annuity rates may fall or rise.
- Health may change/enhanced annuity rates.
Aim 1 - Sufficient income for Jeremy to reduce his working hours
Explain the benefits (5) and drawbacks (8) of Jeremy purchasing a short-term annuity with his pension funds to bridge the income gap until they retire.
Benefits
* Provides guaranteed income over a fixed term (up to 5 years).
* Reduces exposure to market volatility.
* Simplifies budgeting with predictable payments.
* Guaranteed period can be included.
* Potential for flexibility to vary annuity income
Drawbacks
* Less scope to manipulate income for tax-efficiency.
* Lack of flexibility – once set up, features e.g. term cannot be changed.
* Annuity rates may be low, especially for short terms.
* Guaranteed period and escalation costly and will reduce income.
* No option for spouse/civil partner’s pension available.
* No investment growth potential/could reduce overall returns compared to drawdown in a rising market.
* Does not match ATR.
* MPAA would be triggered.
Aim 1 - Sufficient income for Jeremy to reduce his working hours
Recommend and justify the actions that Jeremy and Anna could take to generate a tax-efficient income from January 2026. (7)
- Use CGT AEA on OEIC portfolio. Use up to £3,000 AEA each pa to generate tax free capital each tax year as income in retirement or to fund ISAs.
- Manage OEIC portfolio share to control dividend apportionment. To remove higher rate tax (33.75%) on Jeremy’s dividends above his DA of £500/ Anna can get dividends above her DA of £500 at basic rate (8.75%)
- Register any OEIC losses. To use against future gains and
minimise tax so increasing cash available. - Apportion more of deposit account to
Anna. To reduce tax rate on interest above PSAs (Anna £500, Jeremy £1,000) from 40% to 20%. - Ensure receiving best interest rate
possible on cash holdings. Consider NS&I premium bonds for part
of current account. Increase yield on capital into
retirement. Increased returns likely/tax free prizes. - Bond withdrawals within 5% limit. To generate tax deferred income.
- Take income from ISAs. Tax free
Aim 2 – Repay their outstanding mortgage
Outline the factors that should be taken into account before deciding how to repay the £90,000 mortgage. (16)
- Up to £44,000 can be taken from the bond tax deferred.
- Additional withdrawals (above 5% allowance) or full encashment of segments would result in a chargeable gain, taxed at a further 20% as Jeremy is a HRT.
- Could avoid/reduce tax on interest above their PSAs if deposit account used.
- Could avoid/reduce tax on dividend income above their DAs if OEIC used.
- PCLS on pension is tax free, any flexible income would be taxable at marginal rate.
- May be loss on OEIC/could register losses for future use.
- May be a gain – could use CGT AEAs (£3,000 each) and offset any CGT losses carried forward.
- Impact on IHT – pension IHT free until 2027.
- ISAs are tax efficient (no CGT or Income Tax)/tax free growth on pensions.
- MPAA triggered if income from drawdown or UFPLS used.
- Market timing/past performance of funds being considered for encashment.
- Loss or reduction to ongoing income from the investment encashed.
- Effect on overall portfolio diversification and ATR alignment.
- Impact on overall liquidity of remaining investments/emergency fund requirements.
- Investments earmarked for retirement funding.
- Interest rate on deposit account v potential growth on investments.
Aim 2 – Repay their outstanding mortgage
Identify five benefits and drawbacks for Jeremy and Anna of repaying the
mortgage in January 2026.
Benefits
* Permanent saving in interest in future on mortgage.
* Reduced monthly outgoings at a time when Jeremy’s income will drop.
* Worry/concern of debt removed before full retirement.
* Can use funds that are mismatched to ATR to rebalance portfolio.
* No investment risk.
Drawbacks
* Loss of access to capital/reduced liquidity.
* Loss of potential growth on capital which could have exceeded interest rate cost.
* Loss of income from capital.
* Market timing may be poor.
* Charges may be made on encashment/mortgage redemption costs.
Aim 2 – Meeting Objectives
Explain in detail the income taxation implications for Jeremy if he were to withdrawal funds from his investment bond to repay the mortgage. (12)
- Bond is taxed internally/basic rate tax equivalent.
- Can take 5% tax deferred withdrawals.
- These are cumulative so £44,000 to date.
- Further part surrender of £46,000 would exceed the 5% accumulated allowances and be a chargeable gain.
- If policy is segmented he could encash entire segments rather than a part surrender of entire bond offering planning for tax-efficient encashments.
- Whilst he is a HRT the entire gain would be in higher rate tax bracket.
- Top-slicing would not be available as entire gain would fall within higher rate tax band.
- So, a further 20% tax could be due.
- No PSA available as used against the deposit interest.
- 20% tax already paid within the fund/not reclaimable.
- Leaving the bond until 2028 when he is in basic rate tax would mean no further income tax.
- The need for the 5% withdrawals as ‘income’ in retirement.
Aim 3– Generate tax-efficient and sustainable income through retirement.
State the factors that a financial adviser should consider when assessing the suitability of Jeremy and Anna maintaining their current savings and investments to use for their retirement income. (13)
- Tax status – currently Anna is a BRT and Jeremey is a HRT – both likely to be BRTs in retirement.
- Deposit interest likely to be above their PSAs/savings eroded by inflation/they have adequate emergency fund.
- ISAs have tax free income and growth.
- Amount of dividends being received from OEIC dependent on performance and not guaranteed.
- 100% equity funds likely to be volatile – sequencing risk of regular encashments/good potential for growth and match ATRs.
- Liable to CGT on gains from OEIC/use of CGT AEA of £3,000 each pa.
- 5% tax deferred cumulative withdrawals available from investment bond.
- Top-slicing, segmentation allow for more tax-efficient encashments.
- Cautious managed fund offers lower volatility but limited growth above inflation.
- Investment bond fund taxed at 20%.
- Fund choices/switching options.
- Charges.
- Investments could be transferred intra spouse for tax efficiency.
Aim 3– Generate tax-efficient and sustainable income through retirement.
Explain to Jeremy and Anna how they should calculate any potential CGT liability on their OEICs. No calculations are required. (7)
- Identify base costs and any reinvested dividend Income.
- Deduct base cost from current value to identify gain.
- Gains split 50/50 (joint ownership).
- Calculate any previous capital gains taken in current tax year.
- Deduct any previous losses/losses carried forward/registered/deduct costs of sale.
- Deduct available CGT AEAs of £3,000 each (pa).
- Jeremy taxed at 24%/Anna taxed at 18% and possibly 24% if gain in the higher rate tax bracket.
Calcs not required but it would be a good idea to go through how you would calculate a gain and write down every single point
Aim 3– Generate tax-efficient and sustainable income through retirement.
Identify any actions which they could take to reduce the potential CGT liability on a future encashment. (5)
- Bed and ISA in the new tax year.
- Crystallise appropriate gains/use CGT AEAs (£3,000 each).
- Wait until they fully retire in 2028 as they will then be BRTs
- Register losses with HM Revenue & Customs.
- Could use Enterprise Investment scheme (EIS)/could transfer into discretionary trust (for CGT deferral/holdover relief).
Aim 3– Generate tax-efficient and sustainable income through retirement.
Identify any benefits (5) and drawbacks (4) for Jeremy and Anna using their OEIC portfolio for income.
Benefits
* Easy to monitor/accessible.
* Produce joint dividend income and uses both their DAs.
* Likely to only pay basic rate tax on dividends from 2028 when BRTs at 8.75% above DA.
* Underlying capital may grow so dividends may increase over time.
* Can use CGT AEAs to make capital tax free encashments each year.
Drawbacks
* Amount of annual dividends difficult to predict/variable.
* Higher rate tax on some of the dividends until 2028.
* Not in an ISA so generally not income tax or CGT efficient.
* Sequencing risk on high-risk fund if making regular capital withdrawals.
Aim 3– Generate tax-efficient and sustainable income through retirement.
Explain to Jeremy and Anna the process for claiming their State Pension and the rules should they consider deferring. (10)
- Jeremy and Anna need to actively claim the pension.
- This can be done by post, phone or online.
- If not claimed then deferral is automatic.
- Increased by 1% for each nine weeks of deferral.
- Minimum nine weeks deferral.
- Equivalent to 5.8% per annum.
- In addition to annual increases.
- This can also be done once the pension is in payment.
- No lump sum option available.
- Cannot inherit deferred State Pension/deceased estate can claim up to three months arrears.
Aim 3– Generate tax-efficient and sustainable income through retirement.
State the benefits (4) and drawbacks (3) of Jeremy and/or Anna deferring their State Pensions.
Benefits
* The deferred pension will be increased by 1% for each nine weeks
* The increased payments are for life, so could be payable for a long time/triple lock inflation.
* Avoids either of them going into higher rate tax.
* They can start their pension anytime after at least 9 weeks.
Drawbacks
* Increased pension only, no lump sum.
* Limited death benefits to spouse if death during deferral period.
* Loss of immediate income which will take a long time to catch up.
Aim 3– Generate tax-efficient and sustainable income through retirement.
Explain to Jermey how his maximum tax-relievable pension contribution for the current tax year is determined and the process of using carry forward to make additional contributions. (10)
- Take current annual allowance of £60,000.
- Calculate current employer contribution
- Calculate personal contribution for tax year.
- Deduct both employer and employee contribution from £60,000.
- This gives remaining allowance for current tax year.
- Must use current years allowance first.
- Can use any carry forward allowance from three previous tax years.
- Tax relief limited to earned income in current tax year.
- Pay contribution net of 20% tax and claim back 20% via self-assessment.
- No need to inform HMRC (if carry forward used)/keep a record of calculations.
Aim 3– Generate tax-efficient and sustainable income through retirement.
Explain the key reasons why Jeremy and Anna should invest some of their current cash holdings in other asset classes. (7)
- They have too much cash/excess emergency fund.
- Can match their high ATR/Cash does not meet their ATR.
- Limited growth potential on cash/potential for growth on investments.
- Interest rate risk/relatively low income in retirement.
- Inflation risk on cash/can reduce inflation risk with investments.
- Interest likely to exceed each of their PSAs
- Interest above PSA charged at 40% for Jeremy and 20% for Anna.
