Outline to Max the key issues that may result in him** failing** to meet his plan to generate a sustainable and tax efficient income in retirement
[11 points]
- Timescale to retirement [Capacity for loss]
- Overexposure and concentration to UK equities - diversification risk
- Pension date and retirement date may be misaligned
- Only has state pension (no secured pension)
- High inflation possibility
- Reduced Interest rates?
- Currently HRT payer - more income tax liability
- Reducing AEA tax liability on disposal of shares
- Reducing dividend allowance - higher tax on dividends
- Market downturn
- Changes to health/no income protection
Fact finding [Generic]
State the additional information a financial advisor would require to allow them to advise Max on the suitability of his financial arrangements to meet his long term retirement needs
[22] [Get 12 at least]
- Family health history
- Current expenditure/future expenditure in retirements
- Future inheritance?
- Intended retirement date if not September
- Views on inflation
- Views on economic risk
- Priority of objectives
- State pension entitlement (BR19)
- Workplace pension - what funds can be invested in?
- Views on flexibility vs secured income
- Affordability to make additional pension contributions
- Emergency fund?
- Income from OEICS, S&S ISAs, investment truists / lOSSES
- Isa allowance for the year
- Details of platform/costs
- Interest rates on cash holdings
- Notice on deposit account
- Charges on funds
- CFL
- Experience of investments
- LPA?
- Does he hold health and financial POA for mother
Fact finding [Specific]
State the additional information that Max’s financial advisor would require to advise on his objective to adjust his invesment portfolio to generate an additional sustainable income throughout retirement
18 - Get 10
- Intended retirement date
- Required income in retirement/flexible or lump sum income needed
* Purpose of each investment [are they all intended to support income?] - Flexible income or secured income?
* Performance/returns/benchmark
* Fund charges
*** Switching/timescales **
* Features/charges of platform
* Where are OEICs and investment trusts held? can they be transferred to ISA? - Inflation protection
* Gains on OEICS/withdrawls for CGT allowances
* Income from OEICS, S&S ISA, Investment trusts - Use of annual ISA allowance
- Any expected income? Downsizing?
- Experience of investing?
- Views on existing investments
* Views on diversifying investments from equities
* Are funds passively/actively managed
Outline the factors an advisor should consider and process they should follow when recommending a fund switch
14
- Disclose Status fee/client agreement
- Fact finding - know your client
- Assess ATR/CFL
- Timescales - when is Max retiring
- Charges
- Performance
- Selection of funds
- Asset allocation
- Funds should match ATR and timescale
- Present Max with documentation/recommendation
- Include any risk in recommendation
- Get client permission
- Suitability letter to Max
- Annual review
State the main factors that might affect Max’s attitude towards investment risk in the run up to his retirement
13
- Current Age
- Retirement age
- Single/reliant on one income
- Income and expenditure needed in retirement
- State pension entitlement
- Lack of other secured income
- Vesting plans vs secured income
- Sequencing risk
- Significant assets/ CFL
- Large emergency funds
- No liabilities as we know
- Good health
- Objectives
Explain the benefits to Max of a current cash flow statement when devising his financial plan
7
- Considers his expenditure needs [shows difference between expenditure and income
- Highlights area for cost reduction
- Will consider retirement needs and identifies opportunities to fill gaps whilst still working
- can be used to analyse future cash flow in retirement
- Can stress tests for inflation protection
- Will identify point of run out of money UPFLS/FAD
- Enables Max to learn impact of high expenditure
State the benefits and drawbacks of using an asset allocation model when devising an investment strategy for Max
5, 6
Benefits
* Match his Adventurous ATR/reblance
* Consider past and expected future returns
* Considers volatility
* Identifies issues in current portfolio
* can include geographical/sector allocations and asset allocation
* can conisder income/growth requirements
Cons:
* Does not recommend appropriate tax wrapper for Max’s position
* Charges are not considered
* Questions aren’t always relevant
* Different models different results
* Underlying assumption on historic data
* Needs to be reviewed
Client review [Generic]
Identify the key issues that a financial advisor should discuss with Max at the next annual review
13
- Still working on retirement date?
- Did he defer State pension?
- Changes to any views/objectives
- Changes to income/expenditure
- Tax status
- Any inheritance received
- Changes to ATR/CFL
- Use of tax allowance/pension contributions
- Emergency fund still there
- Any changes to portfolio/ asset allocation/ performance/ rebalancing
- New products available/ economic changes/ market conditions/ available
- Changes to health? He is in good health
- Any changes to Will/LPA position
Explain to max the importance of conducting a review of his investments and reviewing them on a regular basis thereafter
11
- Pension fund retirement date misaligned to reality of retirement date
- Reduce risk and provide income with current objective
- Review and monitor lack of diversification - all in UK equities
- Monitor income and capital needs - to ensure tax efficiency
- ATR/CFL may change in run up of retirement
- Review allowance in current year CGT annual exempt amount /ISA
- Review performance/charges
- Circumstances may change
- Ensure income and dividends from OEICs and shares match ongoing needs to take dividend income, reivnest or take montlhy income from them
- Indivdual shares and OEICs require regular monitoring
- Political/economic/taxation changes
Outline the factors Max’s financial advisor would need to consider when advising him on an appropriate strategy to meet his retirement income objectives
18
- Intended retirement date/phasing
- Longevity - he is in good health
- State pension entitlement (BR19)
- Capital and income retirements now vs retirement
- Flexible or secured income
- Adventourous ATR/CFL
- Fund choice available (active/passive/allocation)
- Tax position - Currently HRT may be BRT later
- Inheritance from mother?
- Purpose of assets will they be used as retirment income
- cash flow analysis
- Existing pension provision
- growth assumptions and stress test
- inflation assumption
- yield on shares/performance
- investment trust - premium or discount
- Platform features
- Interest on cash holdings
Outline the factors that Max’s financial advisor would need to consider before advising him whether to increase contributions to his workplace pension scheme
6
- Current expenditure
- Level of income now vs retirement
- 40% Tax relief on contributions within higher rate band - tax free fund growth
- 25% Tax free PCLS within lump sum allowance may not be a higher rate tax payer so income tax at basic rate
- Access to significant other investments which are not as tax efficient
- Can access pension fund as he is past min retirement age
Outline the process a financial advisor would use to evaluate the adequacy of Max’s retirement position
7
- Establish income required allowed for inflation
- Calcualte fund required based on assumed withdrawl rate
- Allow for PCLS requirement
- Calculate existing benefits using assumed growth rate
- Include ongoing funding
- Calcualate shortfall and increased cont required
- Ongoing reviews needed
Explain to Max how his state pension entitlement will be determined
9
- Recieve SP at 66
- Min 10 years needed to recieve any state pension
- Full rate 2023/2024 - £221.20
- For a full new state pension (35 years)
- Qualifying years can be met through contributions or credits
- Starting amount calculated at 5/4/2016
- Triple locked pension increased by higher of earnings, prices
- Taxed as earned income
- Option to defer
Explain to Max the process for claiming his state pension and rules should he consider deferring
8
- Max will need to actively claim his state pension
- Can be done by post, phone or online
- If not claimed then deferral is automatic
- Increased by 1% for each 9wks of deferral/min 9 wks of deferral
- In additional to annual increases
- Can be done once pension is in payment
- No lump sum option available
- If max passes away after reaching state pension can claim 3 months
Explain how a salary sacrifice arrangements works and how this may be used to maximise the tax efficiency of Max’s pension arrangements
12
- Max signs a written agreement with employer
- Agreement normally cannot be revoked
- Salary reduced by amount of pension contribution
- May reduce DIS benefit
- May impact state benefit entitlement
- May impact future salary increase
- Employer puts this into pension scheme as employer contribution
- Saves NICs
- Increase his pension cont without affecting his net pay
- More tax-free growth within funds
- Greater PCLS entitlement
- Administratively simple
Comment on the suitability of Max current investment and pension holdings
9
- Pension fund does not match planned retirement date
- Asset allocation may be inappropriate and not suit vesting plans
- Equity focus match ATR
- Lack of asset diversification
- Currency risk on global equity funds
- Sig volatility on self-managed portfolio
- Offer little protection as he approaches retirement
- Potential to outperform inflation over longer term
- Only appears to use actively managed funds, no passive investments
Explain to Max why diversification is important
5
- Reduce risk in portfolio
- Some assets are not strongly correlated
- Downside of investment can be offset by upside of another
- Sector diversifcation reduces risk with specific areas of economy
- Geographical diversification spreads risk of across number of different economies
Outline the factors Max advisor should consider when determining whether he should consolidate his investments onto the platform
12
- Ease of transferring assets onto platform
- Range of providers/tax wrappers/funds available
- Limitation of platforms - what is not available
- Does it have acess to same funds/shares as OEICs and indivdual shares
- In specie transfer allowed?
- Does platform offer ISA - what are rates
- Exit charges/Entry charges
- Platform charges
- Performance is easier to obtain
- Can apply asset allocation strategies across different tax wrappers
- Online switching easier
- Charges/discount for large portfolio
*
Outline the factors a financial advisor would need to take into consideration when reviewing potential options to ensure Max’s savings and investment portfolios is tax efficient as he approaches retirement
13
- Use of ISA allowance
- Annaul allowance pension cont - 60k limited to earnings (60k)
- Pensions offer tax relief/ tax free income and growth, PCLS but income taxable, IHT free
- Max currently HRT, likely to be BRT in retirement
- PSA - 500 can be 1000 if pension cont makes him BRT
- Interest from cash savings taxed at 40%
- NS&I premium bond prizes are tax free
- Dividend allowance reducing to 500 in 2024/2025
- OEICs and shares produce dividends taxed at 33.75% over DA
- Investment bonds offer 5% tax deferred income
- Gains on OEICs and investment trusts subject to CGT 20% above AEA
- CGT reduces to £3000 in 2024/2025
- AIM shares are IHT efficient but limited benefit as estate is going to charity
Recommend and justify a range of actions that Max should take in order to achieve his objective to generate an additional and sustainable income in retirement
8
1. Max should defer his state pension until he finishes work
* Does not need income at present
* Would be paying HRT on SP
* Deferring increases ecured income in retirement, assisting sustainability
* Likely to be BRT on retirement
* Good health so likely to benefit more in deferral
2. Consider investing some of his cash deposits/premium bond into fixed rate bonds
* Too much money held in cash (77k)
* Premium bonds do not offer guarantee returns
* He is higher tax rate payer
* Defer interest until he is retired/BRT
3. Sell some of the the smaller companies shares
* These are very high risk
* He is looking to de-risk/unlikely to meet risk profile in retirement
* He can use his CGT annual exempt amount
**4. Use bed and ISA **
* ISA income is free of income Tax and gains are free of CGT
* OEICs and investment trusts are less tax efficient
* uses CGT AEA
5. Make additional monthly pension contributions to his workplace scheme
6. Consider annuity purchase
7. Switch funds to suit vesting needs/reduce volatility
* Smaller company shares are very high risk
* Heavy exposure to equity market and UK in particular
8. Increased exposure to fixed interest/gilt and property funds
* Adds diversification of asset classes and lowers the volatility of the portfolio
* Fixed interest/gilts can be indexed linked to protect inflation
Explain in detail why Max should consider increasing his pension contributions into his employer workplace pension scheme
13
- Increased pension pot/meets objective of sustainable income in retirement
- 40% tax relief on contributions
- Potential for tax-free income and growth
- His other assets are not as tax efficient (40% tax savings income, 33.75% on dividend over DA and potential for CGT on OEICs, investment trusts and shares)
- Extend basic rate band/ could regain £1,000 PSA
- Flexible options onretirement/ FAD/UFPLS/annuity
- Can use pension to provide tax-efficient income via annuity
- No admin done by employer
- Limited time frame to cont £3,600 if no relevant UK earnings
- Wide range of funds to match ATR
- Employer may cont to NIC
- Flexible death benefits - tax-free on death before 75
- Other assets can be used prior to acessing the more tax-efficient pension
32
Explain the benefits to Max of increasing his monthly pension contributions as an alternative to making a lump sum contribution
6
- Pound cost averaging
- Benefit from investment volatility
- Can stop and start contributions/flexibility/convenience
- Assists with budget
- Reduces risk of poor investment timing
- Contributions increase if salary increase
Explain why max should consider securing part of his retirement income with an annuity purchase
12
- Matches his desire to reduce level of risk
- Provides Guaranteed income for life
- Match essential expenditure/budgeting
- He is in good health so value for money/long payment period
- No cost/needs for ongoing advice
- He hasno other guaranteed pension provision other than state pension
- Can buy capital protection/guarantee
- Single life offers a higher annuity rate as no spouse pension requred
- No investment risk
- No advice cost
- Sufficient liquid assets elsewhere
- No dependence hence inheritance not a concern
Outline why Max should consider deferring his state Pension entitlement
6
- Does not appear to require the income whilst working
- Will save higher rate tax
- Likely to be a BRT in retirement
- Increase pension by 1% for each 9 weeks deferred
- Increased secured entitlement helps achieve sustainable income
- In good health so more likely to live long enough to benefit from deferral
