Case Study 2 Flashcards by Adrian Solem

What are Paul and Sangita’s financial aims? (3)

ensure that sufficient financial protection is in place to support the family in the event of either death or disability.
improve the tax-efficiency of their current financial arrangements.
set up an appropriate investment strategy to build up their retirement savings

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SWOT analysis

Strengths (12)

Paul and Sangita are in good health.
They have a significant degree of income with basic earnings of £160,000 before pension contributions and tax.
They are not solely reliant on a single income albeit Sangita is the main breadwinner.
There is no mention of job insecurity.
They are likely to have surplus income from employment and savings income.
There are no evident liabilities other than their mortgage, which appears to be affordable.
Sangita has considerable DIS.
Mortgage is covered in full on death by a decreasing term policy.
They have a healthy and easily accessible emergency fund.
They have a long timescale and seemingly surplus income to fund their retirement.
There are no current IHT issues.
They have nominations in place on their pension plans.

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SWOT analysis

Weaknesses (14)

They have 2 financially dependent children for at least 11 years.
Heavily reliant on Sangita’s income as Paul’s would not be sufficient to meet family needs.
Unlikely to be claiming child benefit in view of Sangita’s income.
No income protection or critical illness cover in case they were unable to work due to ill-health.
This is particularly important for Sangita as they could not rely on Paul’s salary alone.
Paul has very limited life cover and Sangita’s employer death-in-service plan will cease if she leaves her employment.
No PMI.
Significant mortgage liability.
Sangita is a HRT and loses the majority of her personal allowance due to £25,000 of earnings above £100,000.
No use of CGT AEA or DA/Paul will pay Income Tax on interest above his PSA on his deposit account.
Relatively low CFL.
ESG views do not appear to be reflected in their portfolio.
They do not have Wills in place. Intestacy rules will distribute the solely owned assets on death.
They appear to have no guardianship arrangements in place for the children.

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SWOT analysis

Opportunities (9)

They are in good health so can establish appropriate protection with simple underwriting and lower costs.
They likely have surplus income – can build up savings through an investment strategy based on objectives, ATR and ESG views.
Availability of this year’s ISA allowances.
Use of other tax allowances – CGT AEA, DA and Sangita’s PSA.
Increasing pension contributions for Sangita to maximise effective 60% tax relief/reinstate personal allowance/can use carry forward.
Paul can rejoin his employer scheme and benefit from employer pension contributions.
Salary sacrifice for Sangita.
Set up LPAs albeit this may not be a priority given their age.
Put Wills in place with guardianship requirements for children.

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SWOT analysis

Threats (9)

Loss of income through death, ill health or redundancy.
Loss of Sangita’s death in service if she leaves employment.
Increase in interest rates/monthly mortgage cost increasing if on variable rate/impact of interest rate decrease on cash holdings
Period of high inflation impact on outgoings.
ESG focus may reduce investment opportunities.
Reduction of tax allowances/freeze on personal allowance.
Changes to legislation/taxation.
Loss of mental capacity of either.
If no Wills are in place, they will die intestate. All non-joint assets will pass to the children, not to each other, and there will be no guardianship arrangements specified

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Fact-Finding

State the additional information that a financial adviser would require to allow them to advise Paul and Sangita on their financial situation. (16)

Mnemonic - (PATHETIC WINE & PASTE TWIG)

Current expenditure/emergency fund requirements.
Are children in good health?
Timescales/financial dependency of children/plans for more children?
Details of their mortgage/interest rate, term remaining, type of rate (fixed, tracker, etc.), and monthly repayments.
Details of the existing decreasing term policy – include CIC/monthly premium/term/in trust?
Security of current employment.
Does Paul intend to increase his working hours? – what would his full-time salary be?
Childcare arrangements and any costs now or in the future?/school or university fees.
Level of cover required on ill-health and death of either/details of employer sick pay.
State benefit entitlements and State Pension forecast/planned retirement age/any deferred pensions.
Paul’s pension – Details of Paul’s employer pension scheme/employer contribution rate/amount Paul would need to contribute/opt in details.
Sangita’s pension – history of pension contributions/salary sacrifice available/views on increasing contributions/employer matching if increased contributions/charges/performance and fund choice.
Interest rate on deposit account and Cash ISA.
CFL.
Any other debts /any inheritance due/any financial support from family?
Clarity of their views on ESG investment.

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Risk

Identify the client‐specific factors that would typically influence Paul and Sangita’s attitude to investment risk. (11)

Stability of employment/heavy reliance on Sangita’s income.
Expenditure.
Health/age/timescales of investments.
They have two financially dependent children for at least 11 years.
Level of existing assets/income from existing assets/mortgage/expected inheritances.
Level of emergency fund.
Lack of protection for ill-health and death.
Limited Investment experience.
Objectives/priorities.
Their views on economic environment/market conditions.
Tolerance for loss/risk versus reward/relatively low CFL.

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Reviews

Identify the key issues that a financial adviser should discuss with Paul and Sangita at their next annual review. (9)

Changes to views or objectives
Changes in income/expenditure/tax status/capital needs/inheritances
Risk profile/CFL.
Use of tax allowances.
Rebalance/asset allocation/performance
Charges
New products available/political/economic changes/market conditions
Protection needs
Health/family/other personal circumstances.

Always keep the clients in mind. Consider what changes the clients is planning
to make (or clearly should make). This will help you to personalise what is quite
a generic question and pick up full marks.

So, for Paul and Sangita, their main aims are protection and establishing an
investment strategy for retirement – so has anything changed around this?

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Aim 1–Ensure protection is in place in the event of death or disability

Outline the key factors an adviser will need to take into account, when
establishing Paul and Sangita’s current protection needs. (13)

Income/expenditure/budget/affordability.
Limited capital/assets.
Any outstanding debt other than mortgage?
Existing provision/Sangita’s employer sick pay/decreasing term/Sangita has DIS of £500,000/Paul has no DIS/limited State Benefits available.
Timescales/financial dependency of children/plans for more children?
They have limited protection/no IP, CIC or PMI/no unemployment cover.
Amount needed for emergency fund.
Any help from family/future inheritances.
Low cost (relatively young/in good health/low risk occupations).
Protection is their priority.
Nominations for DIS.
Unmarried couple with no Wills in place – die intestate, all individually owned assets would pass to children/no guardians appointed.
Relatively low CFL.

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Aim 1–Ensure protection is in place in the event of death or disability

Outline the process an adviser would need to follow to assess a suitable level of life cover for Paul and Sangita. (14)

Calculate capital needs.
Immediate needs for survivor e.g. funeral expenses, emergency fund as solely owned assets will be frozen during probate.
Longer term needs for survivors may include school fees/university fees.
Other bequests.
Calculate income needs for surviving spouse.
Total expenditure required less surviving spouses’ ongoing income less costs saved on person’s death e.g. direct living costs.
Or calculate minimum expenditure amount needed to reduce costs.
Apply appropriate multiple to calculate lump sum required.
Build in additional amounts to cover possible inflation/or index link sum assured.
Consider State benefits.
Consider existing provision/existing assets/Sangita’s DIS /pension funds/decreasing term policy/employer sick pay.
Identify shortfall.
Consider potential changes/leaving employer.
Assess affordability.

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Aim 1–Ensure protection is in place in the event of death or disability

Explain why Sangita’s existing employer death in service schemes may not be suitable or sufficient to meet their long-term protection needs. (6)

Cover is lost if Sangita changes employer and this is the only life cover above the mortgage protection.
Employer may change terms of cover/eligibility.
Benefits fixed by employer/cannot increase cover/inflexible.
May be insufficient cover.
Only provides cover for death/no CIC/no IP.
Reduced benefit if salary sacrifice used/part time.

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Aim 1–Ensure protection is in place in the event of death or disability

Explain how each estate would be distributed in the event of either Sangita or Paul’s death. (9)

Paul and Sangita would die intestate as they have no Wills in place.
Their estates would be distributed under the laws of intestacy.
They are not married / No rights as a common law spouse.
Individual’s estate refers to assets held only by either Paul or Sangita.
All individually owned assets would pass to the children in equal shares held in statutory trusts until age 18.
The house would pass to the survivor as this is a jointly owned asset.
Sangita’s pension is in trust so will not pass through intestacy/nominations are in place so will be passed to Paul.
DIS may not pass automatically to Paul if no nomination in place.
Neither survivor would be able to use the Additional Permitted Subscription allowance on the ISAs.

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Aim 1–Ensure protection is in place in the event of death or disability

Identify and explain the key instructions that should be included in a Will. (8)

Identify beneficiaries.
Identify split of estate.
Specific gifts/charitable donations.
Identify suitable executors.
Residuary beneficiaries in event of death of main beneficiaries.
Funeral requirements.
Need for trusts/identification of Trustees.
Guardianship details for the children.

Easy marks can be lost here. Essentially spell out a will for them as if it’s someones first day on earth.

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Aim 1–Ensure protection is in place in the event of death or disability

Explain to Paul and Sangita the difference between Mirror Wills (3) and Mutual Wills (4)

Mirror Will leaves assets outright to each other.
Can be changed at any time even after the death of one of them (as long as they have the mental capacity to do so).
They do not need to give notice to each other if they wish to amend or revoke their own Will.
A mutual Will is an agreement to make Wills at the same time on agreed terms.
There is a legally binding obligation that the Wills shall not be changed after the first death.
This can be reassuring to Paul and Sangita that nothing will change after the first death.
However, while both are still alive and have capacity, they can agree to revoke the mutual Wills and write new ones.

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Aim 1–Ensure protection is in place in the event of death or disability

Meeting objectives
State why personal income protection insurance for Sangita may be more suitable than critical illness insurance. (8)

IP offers long-term income replacement, better suited to their needs.
CIC may help with one-off costs but won’t replace lost income.
In the event of a claim, monthly income, makes budgeting easier than a lump sum
CIC pays a one-off lump sum for specific listed illnesses only.
If Sangita becomes ill with a non-specified condition, CIC may not pay out.
IP with own occupation definition would cover her if she can’t do her marketing role.
IP allows multiple claims during the policy term.
CIC usually pays once only, then ends.

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Aim 1–Ensure protection is in place in the event of death or disability

Meeting objectives
Recommend and justify a protection product that would provide the family with a regular income in the event Sangita was unable to work through illness or injury. (8)

1 product to recommend and then the other marks are for the benefits of that product.

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IPP - Sangita is main breadwinner/protecting her income is a priority.
Replaces income in the event of being unable to work due to illness/incapacity.
In good health should not be unaffordable and simple underwriting.
Rehabilitation/proportionate benefit.
Tax-free income.
Multiple claims - Cannot be cancelled by insurer
Deferred period in line with employer sick pay. - To pay out as soon as employer benefit stops/will not eat into savings.
Own occupation - Widest definition, Should not be too expensive as she has a lower risk occupation.
Income protected at maximum/65% income. - To enable them to maintain their standard of living.
Indexation - Keep pace with inflation.
Term to selected retirement age - Allows them to continue to meet
objectives to retirement
Guaranteed premium - For peace of mind that it will not go up

Rule of thumb is 1 justification to every rec, but add as many as you can think as no negative marking
There is often a recommend and justify question relating to a protection
product. Before recommending a protection product, there are two key things
to watch out for:

Does the client/s want an income or a capital sum?
Is it needed to protect in the event of death or in ill-health or both?

Aim 1–Ensure protection is in place in the event of death or disability

Meeting objectives
Recommend and justify a suitable protection policy for Sangita and Paul to provide a regular income in the event of death or critical illness. (8)

There is 1 product to recommend and the other marks are benefits of that product

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Family income benefit - Pays a tax-free regular income in the event of death. Decreasing term assurance/keep costs lower. Simple underwriting as young and in good health.
With CIC - Pays out a tax-free income in the event of diagnosis of a serious illness
Joint life first death - Provides cover in event of either death.
Sum assured to meet ongoing family income needs. - Currently they have insufficient life cover/no CIC.
Index linked - Keeps pace with inflation.
Term to end of children’s dependency - Ensures aligns with family needs.
Guaranteed premiums - Provides certainty of cost
Waiver of premium - Continues premiums in the event of illness.

Rule of thumb is 1 justification to every rec, but add as many as you can think as no negative marking
There is often a recommend and justify question relating to a protection
product. Before recommending a protection product, there are two key things
to watch out for:

Does the client/s want an income or a capital sum?
Is it needed to protect in the event of death or in ill-health or both?

Aim 1–Ensure protection is in place in the event of death or disability

Explain to Paul and Sangita why they should set up Wills as soon as possible. (10)

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Avoids time delays due to intestacy/laws of intestacy do not apply.
Provides clear instructions as to how the estate is to be distributed.
Option to set up funds under trust for their children.
Can choose the people that will be responsible for administering the estate.
Avoids the intestacy rules likely to be inappropriate for Paul and Sangita.
Surviving parent will have inadequate provision.
Ensures no assets are put into statutory trust for the children on first death.
Ensures children to not get full access to their share at 18.
Can make specific provision for the guardianship of children.
Provides instructions on funeral arrangements.

Aim 2 –Improve the taxefficiency of their current financial arrangements

Outline the factors you would take into account when reviewing the tax efficiency of Paul and Sangita’s current financial arrangements. (11)

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Sangita is currently a HRT, she has also lost most of her personal allowance due to £25,000 of earnings over £100,000.
Total pension contribution of £25,000 would reinstate it in full by reducing adjusted net income to £100,000.
Can benefit from effective relief of 60% on pension contributions.
Paul has not joined his scheme so misses out on tax relief and employer contributions.
Sangita has a PSA of £500 and is not using this.
Paul has PSA of £1,000.
He will be paying 20% tax on interest above his PSA of £1,000.
They have not used their ISA allowances.
ISAs have tax free income and growth.
All assets (except currently Sangita’s pension – until 2027) will be added to estate for IHT purposes.
Because Sangita has an adjusted net income of more than £80,000 they will pay a high income child benefit charge equal to the amount of child benefit being received (if they are receiving it)

Aim 2 –Improve the taxefficiency of their current financial arrangements

Meeting objectives
Recommend and justify a range of actions that Paul and Sangita can take to improve the tax-efficiency of their current arrangements. (5)

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Sangita to make additional pension contributions - Increase personal allowance / effective tax relief at 60% (up to £25,000 gross
in total). Tax free growth on fund. IHT free until 2027.
Use salary sacrifice if available - NI saving/increase in real contribution. Employer may rebate NI saving.
Paul should rejoin his pension scheme - Benefit from employer contribution and 20% tax relief.
Use ISA allowances. Paul transfer £20,000 from cash funds to an ISA - Tax free income and growth. Deposit account is not tax-efficient, he will be paying 20% interest above his PSA of £1,000 but ISA tax free.
Consider switching some of Paul’s deposit account holdings to Sangita - She has not used her ISA allowance and is not using her PSA.

Rule of thumb is 1 justification to every rec, but add as many as you can think as no negative marking

Aim 3 – Set up an investment strategy to build up retirement savings.

Analysing the Client’s Financial Situation

Outline the issues you would need to consider when setting up an appropriate investment strategy for Paul and Sangita to build up their retirement provision. (14)

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Retirement income target.
Assumed rate of return/inflation.
They are young so have a long investment period
Surplus income/affordability/sufficient emergency fund.
Lump sum or monthly contributions/pound cost averaging.
Tax relief available on pension contributions/details of Paul’s pension scheme/employer matching.
Tax positions/PSAs.
They have not used this year’s ISA allowances/are eligible for Lifetime ISAs
Adventurous ATR/relatively low CFL.
ESG views – may restrict fund choices.
Past performance/benchmark performance/management style/available fund choices within their plans.
Charges for switches/charges on funds/advice fees.
Diversification (asset and geographical).
Volatility.

Aim 3 – Set up an investment strategy to build up retirement savings.

Analysing the Client’s Financial Situation

State the process that a financial adviser should follow in advising Paul and Sangita on how to establish a suitable strategy for their savings and investments to meet their future objectives. (12)

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Establish the relationship, disclosure of status, adviser remuneration.
Fact-find
Establish the client’s goals/expectations/objectives/fact-finding/ESG preferences.
Assess ATR/CFL.
Establish affordability.
Analyse current savings and investments.
Research/formulate recommendations.
Making recommendations.
Take into account client’s tax status and use of tax wrappers.
Consider asset allocation and fund selection.
Suitability report/implementation.
Review/ rebalance/monitor.

Aim 3 – Set up an investment strategy to build up retirement savings.

Analysing the Client’s Financial Situation

Explain to Paul and Sangita the key differences in using pensions compared to stocks and shares ISAs for their retirement provision. (7 main differences)

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Tax Relief on Contributions
* ISA - No as funded from net income
* Pension - Yes on contirbutions at marginal rate/effective rate
of 60% for Sangita.

Tax on withdrawals.
* ISA - No tax on withdrawals.
* Pension - 25% TFC, remaining 75% taxed as income.

Access Age
* ISA - Anytime (unless LISA which has specific terms)
* Pension - Currently 57

Annual Contribution Limit
* ISA - £20k for the 2025/26 tax year
* Pension - £60k or 100% of earnings (lowest of)

Employer Contributions
* ISA - Not applicable
* Pension - Includes employer contributions

Inheritance
* ISA - Forms part of estate
* Pension - IHT free until April 2027

Investment Choice
* ISA - Wide range
* Pension - Wide range but may be provider limited

Aim 3 – Set up an investment strategy to build up retirement savings.

Analysing the Client’s Financial Situation

State the actions that a financial adviser should take regarding Paul and Sangita’s interest in ESG when advising them on their investments. (7)

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Explain Environmental, Social and Governance (ESG) investing.
Explain screening/shades of green.
Establish their opinion on ESG/specific areas of concern.
Research information on ESG.
Assess their current investments in relation to ESG.
Realign the portfolio where necessary.
Document the ESG position and any changes made.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Analysing the Client’s Financial Situation** **Identify** and describe three investment risks of Paul and Sangita holding a high cash balance. (3)

* **Interest rate risk** - Risk of lowering interest rates = lower returns. * **Inflation risk** - Spending power of cash could be eroded over time. * **Taxation/legislation risk** - Change in legislation may increase the tax on their investments

# Aim 3 – Set up an investment strategy to build up retirement savings. **Analysing the Client’s Financial Situation** Explain to Paul the benefits (9) and drawbacks (8) of maintaining his investment in his global equity tracker fund.

**Benefits** * Low cost/cost effective. * Run by computer system/no human judgement. * Potential for growth. * Perform in line with index. * Geographical diversification/global. * Liquid. * Easy to follow performance/understand. * Active managers don’t always outperform. * Matches ATR. **Drawbacks** * Will underperform the market due to charges. * Tracking error/will never match market exactly. * Perform poorly in falling market. * No active management/no alpha. * Currency risk due to global index-trackers. * Lack of control over underlying assets. * Lack of asset diversification – all equities. * Unlikely to align to ESG preferences.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Analysing the Client’s Financial Situation** Outline the benefits (4) and drawbacks (4) of Sangita’s pension investment remaining in the default UK cautious managed fund.

**Benefits** * Provides steady return. * Diversified asset classes. * Low charges. * Simple no decision option/limited review needed. **Drawbacks** * Does not match ATR. * Longer timescale allows for higher risk and volatility. * Limited growth potential. * Unlikely to align to ESG preferences.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain in detail why Sangita should consider increasing her pension contributions into her employer’s qualifying workplace pension scheme. (11)

* Increased retirement income and PCLS/meets objective of adequate income in retirement. * Regain some or all her personal allowance/effective tax relief of 60%. * Employer may match higher contribution. * Tax-free growth/IHT free (until 2027). * Can select fund to match ATR. * Increased death benefits to Paul/tax free on death before 75 * No administration/deducted from gross salary/admin done by employer. * Low-cost scheme/subsidised by employer. * Long timeframe to contribute gives growth potential. * Wide range of funds/can add further diversification/can match ATR. * Simple admin/deducted via salary/no need for tax reclaim for basic taxpayers/low cost.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** State the reasons why Paul should consider opting back into his employer’s workplace pension scheme. (13)

* Builds up a fund for retirement. * Fund grows tax‐free/IHT free (until 2027). * Employer contributions will be made at least 3% of earnings. * Maximum amount he will need to contribute is 5% of gross salary = 4% net. * Tax‐free cash/pension commencement lump sum. * Tax relief on personal contributions. * Can match ATR. * Does not appear to have any other pension benefits/limited income in retirement. * Can be left to Sangita/IHT free (before 2027)/tax free before age 75 subject to lump sum and death benefit allowance/flexible death benefits. * Wide range of funds/can add further diversification/ can match ATR. * Simple admin/deducted via salary/no need for tax reclaim for basic rate taxpayers/low cost. * Pound cost averaging/benefit from volatility. * May be offered a link to Death In Service.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain to Sangita and Paul why making monthly contributions for their future savings will potentially be more suitable than single premiums. (6)

* Pound cost averaging. * Benefit from volatility/more units purchased in falling market. * Avoids market timing risk/investing lump sum just before any downturn. * Reduces risk of investing in higher-risk funds. * Evens out cost of unit purchases. * They appear to have surplus income to invest rather than lump sums.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain why investing into a S&S ISA with a range of collective investment funds might be a suitable investment strategy for Sangita and Paul. (7)

* Tax free income and growth. * Diversification. * Reduces risk/volatility. * Professional management/expertise. * Cost effective. * Funds can match attitude to risk/ESG preferences. * Wide choice of funds/passives/actively managed by experts/Discretionary Fund Management/multi-asset.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain the benefits (3) and drawbacks (6) of Paul and Sangita using Lifetime ISAs as a long-term savings vehicle.

**Benefits** * 25% Government bonus on contributions. * No withdrawal penalty from age 60. * Tax free income and growth. **Drawbacks** * Penalty of 25% on withdrawals if Paul or Sangita access capital before age 60. * Contributions limited to £4,000 per tax year. * Contributions only allowed until age 50. * May have limited investment options compared to other ISAs. * Charges/advice costs to set up new plan. * Legislation may change.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain to Sangita and Paul why making pension contributions may be more beneficial in the long term than contributions to a Lifetime ISA (LISA). (12)

* Sangita can benefit from an effective rate of 60% tax relief on contributions. * Paul can benefit from 20% tax relief and employer contributions. * No tax relief on LISA contributions and no employer contributions. * Currently IHT free fund (until 2027) * LISA funds always in estate. * Penalty of 25% on withdrawals from LISA if capital accessed before 60. * Can access pension funds from 57 (currently). * LISA limited to £4,000 pa each but £60,000 limit (or net relevant earnings) for tax-relievable pension contributions (plus carry forward). * Contributions only allowed until age 50 on a LISA. * LISA 25% bonus may be less than pension tax relief. * May have limited investment options with LISA compared to pension funds. * Sangita’s employers may be willing to increase their matching amounts to extra pension contributions.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain the potential advantages (6) and disadvantages (6) of using ESG investments as part of an investment portfolio.

**Advantages** * Holdings can be aligned with personal values. * Positive impact on society. * Strong corporate governance. * Lower legal and reputational risk/positive brand image. * Some evidence of better potential long-term returns. * Greater transparency and accountability in dealings. **Disadvantages** * Limited number of investment options. * Lack of standardisation in assessing ESG status. * Companies not required to disclose all information relating to sustainability practices. * This can make comparison difficult. * Higher costs due to additional research. * Potential for greenwashing.

# Aim 3 – Set up an investment strategy to build up retirement savings. **Meeting objectives** Explain to Paul and Sangita the benefits of investing in a multi-asset fund. (10)

* Risk rated to match ATR. * Wide range of assets. * Diversification. * Good prospects for long term growth. * Actively managed/professional management. * Potential for growth. * Rebalances regularly. * Access to specialist investments, ETFs, derivatives etc. * Can match ESG preferences. * Reduces need for reviews.

Case Study 2 Flashcards

Use the case study in front of you like you would in exam (35 cards)