1
Q
When can an attorney make decisions about a person’s health and welfare?
A
Only when the person does not have the capacity to make those decisions themselves.
2
Q
What types of decisions can an attorney make under health and welfare duties and powers?
A
Decisions about daily routine and care, including:
Washing
Dressing
Eating
Medical care
Living arrangements.
3
Q
What is an attorney responsible for under property and financial affairs duties and powers?
A
Helping manage the donor’s:
Money and bills
Property and investments
Pensions and benefits.
4
Q
How must an attorney manage a donor’s finances?
A
They must manage the finances in the donor’s best interests.
5
Q
When can an attorney help make decisions about property and money?
A
They can help make decisions immediately.
6
Q
When can an attorney make property and financial decisions without the donor’s permission?
A
Only when the donor loses mental capacity.
7
Q
What happens to a Lasting Power of Attorney (LPA) if the donor loses mental capacity?
A
It is not revoked. The LPA continues to be valid if the donor loses mental capacity.
8
Q
What are the two types of Lasting Power of Attorney (LPA)?
A
Property and Financial Affairs
Health and Welfare
9
Q
When can a Property and Financial Affairs LPA be used?
A
It can be used while the donor still has mental capacity.
10
Q
When can a Health and Welfare LPA be used?
A
It can only be used once the donor has lost mental capacity.
11
Q
What must donors do to set up an LPA?
A
They must complete the documents for the type(s) of LPA they want to set up.
They can set up one or both.
12
Q
Where must an LPA be registered?
A
With the Office of the Public Guardian (OPG).
13
Q
What mental requirement must a donor meet to create an LPA?
A
They must have mental capacity when setting it up.
14
Q
What does an LPA allow an attorney to do?
A
Make decisions on behalf of the donor if the donor loses mental capacity.
15
Q
What confirmation is required to complete an LPA?
A
A certificate from a prescribed person confirming the donor understands the LPA.
16
Q
Can a donor cancel an LPA?
A
Yes, they can cancel it at any time as long as they still have mental capacity.
17
Q
What should happen when appointing a single attorney in an LPA?
A
A replacement attorney should be named, otherwise if the original attorney dies or becomes disqualified the LPA will lapse.
18
Q
What happens if joint attorneys act jointly and one dies or becomes disqualified?
A
The LPA will lapse.
19
Q
What does it mean if attorneys act jointly and severally?
A
They can make decisions together or individually, and if one dies or becomes disqualified the LPA can continue.
20
Q
Why should a Will be reviewed regularly?
A
To ensure it still reflects the testator’s wishes.
21
Q
How can reviewing a Will help prevent disputes?
A
It helps avoid disputes by ensuring the Will is clear and up to date.
22
Q
Why is it important to review executors and trustees in a Will?
A
To ensure executors and trustees are still appropriate and able to act.
23
Q
Why might family circumstances require a Will to be reviewed?
A
Changes such as marriage, divorce, grandchildren, or changes to beneficiaries may mean the Will needs updating.
24
Q
Why should a Will be reviewed if financial circumstances change?
A
Because the testator’s financial position may change, affecting how assets should be distributed.
25
How can Inheritance Tax affect the need to review a Will?
IHT planning or changes in legislation may require updates to the Will.
26
Why should funeral wishes be reviewed in a Will?
To ensure funeral wishes remain accurate and up to date.
27
What is the first key instruction that should be included in a Will?
Identification of beneficiaries.
28
What instruction in a Will determines how assets are distributed?
Identification of the split of the estate.
29
What types of specific allocations can be included in a Will?
Specific gifts and charitable donations.
30
Who should be identified to administer the estate in a Will?
Suitable executors.
31
Why should residuary beneficiaries be included in a Will?
To receive the remaining estate if main beneficiaries die before the testator.
32
What personal arrangements can be specified in a Will?
Funeral requirements.
33
When might trustees need to be identified in a Will?
When gifts are left to grandchildren or when restrictions are placed on gifts to grandchildren.
34
What is the first duty of an executor after someone dies?
Administer the deceased’s affairs and obtain the most up to date copy of the Will.
35
What financial information must an executor gather?
Full details of all assets and liabilities and settle any debts.
36
What inheritance tax responsibilities does an executor have?
Complete the IHT return and pay any Inheritance Tax due.
37
What legal step must an executor usually take to administer the estate?
Apply for and obtain probate.
38
How must an executor distribute the estate?
In accordance with the Will and inform beneficiaries of their entitlements.
39
What tax returns may an executor need to complete for the estate?
Income Tax and Capital Gains Tax (CGT) returns.
40
What financial records must an executor prepare for the estate?
Estate accounts.
41
What is a mirror Will?
A Will where each person leaves their assets outright to the other.
42
Can a mirror Will be changed after one person dies?
Yes, it can be changed at any time after the death of one person, as long as the surviving person has mental capacity.
43
Do people with mirror Wills need to notify each other if they change or revoke their Will?
No, they do not need to give notice to each other if they amend or revoke their own Will.
44
What is a mutual Will?
An agreement between two people to make Wills at the same time on agreed terms.
45
What happens to mutual Wills after the first death?
There is a legally binding obligation that the Wills cannot be changed after the first death.
46
Why might mutual Wills be reassuring for a married couple?
Because nothing can change after the first death and the agreed beneficiaries will benefit in full.
47
When can people with mutual Wills write new Wills?
If both parties are still alive and have mental capacity.
48
What type of transfer is used for a Bare Trust?
A Potentially Exempt Transfer (PET).
49
What type of transfer is used for a Discretionary Trust?
A Chargeable Lifetime Transfer (CLT).
50
After how many years does a Bare Trust gift become IHT free?
7 years.
51
After how many years does a Discretionary Trust gift become IHT free?
7 years.
52
Is there any initial IHT on a Bare Trust transfer?
No.
53
When is initial IHT payable on a Discretionary Trust transfer?
Only if the transfer exceeds the Nil Rate Band (NRB).
Tax is 20 percent if trustees pay or 25 percent if the settlor pays (grossed up).
54
Can beneficiaries be changed in a Bare Trust?
No.
55
Can beneficiaries be changed in a Discretionary Trust?
Yes. Trustees have discretion to change beneficiaries.
56
When can beneficiaries access funds in a Bare Trust?
They can demand the trust fund at age 18.
57
Who controls distributions in a Discretionary Trust?
Trustees control who receives income and capital.
Beneficiaries do not have an automatic right to either.
58
How is income tax treated in a Bare Trust?
Income is taxed on the beneficiary using their own tax rates and personal allowance.
59
How is income tax treated in a Discretionary Trust?
No tax if income is below £500.
Above £500 it is taxed at additional rate trust rates.
60
How are capital gains taxed in a Bare Trust?
Capital gains are taxed on the beneficiary using their own tax rates and full annual exemption.
61
What CGT exemption applies to Discretionary Trusts?
Trusts receive half the normal CGT annual exemption
(split between trusts set up by the same settlor to a minimum of one fifth each).
62
What CGT rate applies to Discretionary Trusts?
24 percent.
63
What is the IHT position for a Bare Trust if the settlor dies within 7 years?
The PET becomes chargeable and is included in the settlor’s estate.
64
What happens to a Bare Trust fund if the beneficiary dies?
The trust fund forms part of the beneficiary’s estate.
65
What is the IHT treatment of Discretionary Trusts at the outset?
If the transfer exceeds the NRB, it is chargeable immediately.
It is brought back into the estate if death occurs within 7 years.
66
What ongoing IHT charges apply to Discretionary Trusts?
Periodic charge every 10 years
Exit charge when capital is distributed
Both maximum 6 percent.
67
What is one benefit of using a loan trust for IHT planning?
Growth on the amount loaned occurs inside the trust, so it sits outside the settlor’s estate for IHT.
68
How does a loan trust allow the settlor access to their capital?
The loan is interest free and repayable on demand, so the settlor can access the outstanding balance if needed.
69
What income feature can a settlor take from a loan trust bond?
They can withdraw up to 5 percent per policy year of the amount loaned as income with no immediate tax liability.
70
How can the settlor retain influence over a loan trust?
The settlor can act as a trustee and have discretion over when and to whom trust funds are distributed.
71
Why might a loan trust bond be written on younger lives assured?
To give trustees flexibility on how to use the policy after the settlor’s death.
72
What is a key drawback of a loan trust for IHT planning?
There is no immediate IHT saving on the settlor’s estate.
73
What happens to the settlor’s income after the loan is fully repaid?
The settlor will have no ongoing income.
74
What happens to the outstanding loan if the settlor dies?
The loan must be repaid to the settlor’s estate and may become subject to IHT.
75
How might investment growth affect the inheritance in a loan trust?
If the bond grows faster than the loan repayments, the settlor’s remaining estate may be smaller on death.
76
What potential tax charges can apply to a loan trust?
The trust may be subject to 10 yearly periodic charges and exit charges.
77
What is a Discounted Gift Trust (DGT)?
A gift made into trust where the settlor retains a right to regular payments for life, while the remaining capital is held for beneficiaries.
78
What types of trusts can be used for a Discounted Gift Trust?
Bare (absolute) trust
Discretionary trust
79
How are transfers treated for IHT in a Discounted Gift Trust?
Bare trust: Potentially Exempt Transfer (PET)
Discretionary trust: Chargeable Lifetime Transfer (CLT)
80
What determines the discount applied in a Discounted Gift Trust?
Underwriting and the settlor’s entitlement to regular payments.
81
How does the settlor’s health affect the discount in a DGT?
If the settlor is in good health, the discount is usually larger.
82
What is the IHT advantage of the discount in a DGT?
The discount is treated as an immediate reduction in the settlor’s estate for IHT.
83
What happens to the remaining value of the gift in a Discounted Gift Trust?
It remains in the estate for IHT purposes until 7 years have passed.
84
How are funds typically invested in a Discounted Gift Trust?
The trustees invest the money in an investment bond.
85
What income right does the settlor retain in a Discounted Gift Trust?
The settlor has the right to receive an income for life (or until the fund runs out).
86
How do trustees usually provide the income in a DGT?
Using the 5 percent withdrawal facility from the investment bond.
87
What is the tax treatment of withdrawals in a Discounted Gift Trust if within limits?
If withdrawals remain within 5 percent, there are no immediate Income Tax consequences.
88
Why is a Discounted Gift Trust useful for estate planning?
The investment bond is held within the trust for beneficiaries, so the growth sits outside the settlor’s estate.
89
What control can the settlor retain in a Discounted Gift Trust?
They may retain control as trustee and decide when and how funds are distributed to beneficiaries.
90
What key limitation must settlors understand when using a Discounted Gift Trust?
They have no access to the capital, only the income payments.
91
What financial planning advantage can a Discounted Gift Trust provide?
It can provide a secure lifetime income while reducing the estate for IHT purposes.
92
What types of companies do VCTs invest in?
At least 80 percent in unquoted companies including AIM.
Maximum 15 percent in one company with at least 10 percent in ordinary shares.
93
What types of companies do EIS investments target?
Unquoted trading companies, including AIM listed companies.
94
What is the purpose of SEIS investments?
To help small start up unquoted companies raise finance.
95
How are VCT dividends taxed?
Exempt from Income Tax for investments up to £200,000 per tax yea
96
How are EIS dividends taxed?
They are liable to Income Tax.
97
How are SEIS dividends taxed?
They are liable to Income Tax.
98
What Income Tax relief is available with VCTs?
30 percent relief on investments up to £200,000 per year.
99
What Income Tax relief is available with EIS?
30 percent relief on investments up to £2 million per year
Amounts over £1 million must be invested in knowledge intensive companies.
100
What Income Tax relief is available with SEIS?
50 percent relief on the first £200,000 invested.
101
What rule applies to the tax reducer for VCT, EIS, and SEIS investments?
The tax reducer cannot exceed the tax actually paid.
102
What is the minimum holding period for VCTs?
5 years.
103
What is the minimum holding period for EIS investments?
3 years.
104
What is the minimum holding period for SEIS investments?
3 years.
105
What is the CGT treatment for VCTs?
No CGT on gains and no minimum holding period required for CGT exemption.
106
What is the CGT treatment for EIS investments?
Capital gains are CGT free after 3 years.
107
What is the CGT treatment for SEIS investments?
Capital gains are CGT free after 3 years.
108
Is reinvestment relief available with VCTs?
No.
109
Is reinvestment relief available with EIS?
Yes.
110
What reinvestment relief applies to SEIS?
50 percent of the reinvested amount is exempt.
111
What is the IHT treatment for VCT investments?
They form part of the estate for IHT.
112
What is the IHT treatment for EIS investments?
100 percent Business Relief after 2 years.
113
What is the IHT treatment for SEIS investments?
100 percent Business Relief after 2 years.
114
Why is diversification important in investing?
It reduces risk in a portfolio by holding a range of different assets.
115
How can different investments help during changing market conditions?
Different investments perform well in different market conditions.
116
How does diversification balance investment performance?
The downside risk of one investment can be offset by the upside potential of another.
117
What type of risk can diversification reduce?
Investment specific risk.
118
What type of risk cannot be removed by diversification?
Market risk.
119
What tax related limitation exists when using an asset allocation model?
It does not recommend an appropriate tax wrapper or consider the client’s tax position.
120
What cost related factor is often ignored by asset allocation models?
Charges are not considered.
121
Why might questions in an asset allocation model be unreliable?
The questions asked are not always relevant to the client’s situation.
122
Why can different asset allocation models produce different results?
Because different models use different methodologies and assumptions.
123
What assumption issue exists with asset allocation models?
They are based on historical data and assumptions that may change.
124
Why must asset allocation models be reviewed regularly?
Because client circumstances and market conditions change over time.
125
What is the first step when reviewing the performance of an existing investment?
Obtain a letter of authority and the plan details.
126
Why should you confirm the date of purchase when reviewing an investment?
To understand the investment timeframe for performance analysis.
127
What transaction information must be gathered when reviewing an investment?
Base cost, additional investments, withdrawals, and fund switches.
128
What income information should be identified during an investment review?
Any income generated from the investment.
129
What performance calculation should be carried out when reviewing an investment?
Calculate the gain and review the performance history.
130
Why should asset allocation be assessed during an investment review?
To ensure the portfolio remains suitable and appropriately diversified.
131
Why must a benchmark be identified when reviewing an investment?
To provide a reference point for comparing performance.
132
What is alpha in investment performance analysis?
The performance of the investment relative to its benchmark.
133
Why should charges be reviewed when assessing an investment?
Because fees can significantly affect overall returns.
134
What comparison helps assess risk adjusted performance?
Comparing returns with the risk free rate and risk adjusted return measures.
135
Why should volatility or the fund’s risk rating be reviewed?
To understand the level of investment risk taken to achieve the return.
136
What suitability measures should funds be assessed against during a review?
ATR (Attitude to Risk) and CFL (Capacity for Loss).
137
What is a key cost advantage of tracker funds?
They are low cost and cost effective compared with actively managed funds.
138
Why are tracker funds cheaper to run than active funds?
They are run by computer systems and do not require human investment judgement.
139
What growth potential do tracker funds provide?
They provide potential for growth by following the performance of the index.
140
How do tracker funds perform relative to their index?
They perform in line with the index they track.
141
Why do tracker funds offer wide diversification?
They can track many different indices across global markets.
142
What liquidity advantage do tracker funds typically provide?
They are generally highly liquid and easy to buy or sell.
143
Why are tracker funds easy for investors to monitor?
Their performance simply follows the index, making them easy to understand and track.
144
Why might tracker funds still be attractive compared with active funds?
Because active managers do not always outperform the market.
145
Why will tracker funds usually underperform the index slightly?
Due to charges and fees.
146
What is tracking error in tracker funds?
The difference between the fund’s performance and the index, meaning it will never match the index exactly.
147
Why can tracker funds perform poorly in falling markets?
Because they follow the index and cannot move defensively.
148
What management limitation exists with tracker funds?
There is no active management and no opportunity to generate alpha.
149
What currency risk can affect global tracker funds?
Currency fluctuations from overseas investments.
150
What control limitation do investors have in tracker funds?
There is no control over the underlying assets chosen by the index.
151
What accessibility benefit do investment platforms provide?
Easy online access at all times.
152
How do platforms help clients view their overall wealth?
Total wealth can be viewed instantly at the press of a button.
153
What investment choice advantage do platforms provide?
Access to a wide range of providers, asset classes, funds, investments, and tax wrappers.
154
How do platforms make performance monitoring easier?
Performance information is easy to obtain.
155
What investment management feature do platforms offer for switching funds?
Online switching between investments.
156
How do platforms help with tax reporting?
They provide automatic consolidated tax statements.
157
Why are platforms time efficient for tax returns?
They provide clear information for clients and accountants, making tax returns easier to complete.
158
How can platforms help client adviser relationships?
They can promote stronger relationships through better transparency and reporting.
159
How can platforms help with family asset management?
They allow family assets to be managed together, often reducing charges through discounts.
160
What charging transparency benefit do platforms provide?
They offer unbundled and transparent charging structures.
161
What initial investment cost benefit can platforms provide?
Funds can often be purchased without an initial charge.
162
How can larger portfolios benefit on investment platforms?
They may receive volume based discounts.
163
What planning tools do investment platforms provide?
Calculation and planning tools.
164
How do platforms help reduce administrative work?
They reduce paperwork through digital administration.
165
How are reports and valuations stored on platforms?
They can be stored and accessed online.
166
What portfolio management feature can platforms provide automatically?
Automatic portfolio rebalancing.
167
What is the first step an adviser should take before recommending a fund switch?
Complete fact finding, know your client checks, and confirm the client agreement.
168
What client risk factors must be assessed before recommending a fund switch?
Attitude to Risk (ATR) and Capacity for Loss (CFL).
169
Why should timescale be considered before recommending a fund switch?
To ensure the investment remains suitable for the client’s time horizon.
170
Why must charges be reviewed before recommending a fund switch?
Because switching costs and ongoing charges can affect investment returns.
171
Why should the performance of the current fund be reviewed?
To determine whether the existing fund is underperforming or unsuitable.
172
Why is fund choice important when recommending a switch?
To ensure suitable alternative funds are available for the client’s needs.
173
Why should asset allocation and diversification be considered before switching funds?
To ensure the portfolio remains balanced and appropriately diversified.
174
How should a new fund be selected during a fund switch recommendation?
It should match the client’s Attitude to Risk (ATR).
175
What should the adviser do before implementing the fund switch?
Present the recommendation and supporting documentation to the client.
176
What must be obtained before a fund switch is implemented?
Client permission or authority to proceed.
177
What document must be provided after recommending a fund switch?
A Suitability Letter explaining the recommendation.
178
What flexibility does Phased Annuity Purchase provide when taking pension benefits?
You can choose how much of the pension fund to crystallise to achieve the required income.
179
Why can income in the early years of Phased Annuity Purchase be tax efficient?
Because income can be mainly taken from Pension Commencement Lump Sum (PCLS).
180
What income security does an annuity provide in phased annuity purchase?
A lifetime guaranteed income.
181
What additional options may be included with annuity income?
Options such as spouse or widow benefits and annuity protection.
182
How can flexible annuity options help manage income?
They can be used to reduce income if required.
183
What happens to uncrystallised funds in a phased annuity purchase strategy?
They can remain invested and continue to grow.
184
What happens to remaining uncrystallised pension funds in phased annuity purchase?
They remain available for beneficiaries.
185
What is the death benefit position before age 75 in phased annuity purchase?
Tax free death benefits and currently IHT free.
186
What flexibility does Phased Flexi Access Drawdown (FAD) provide?
You can choose how much of the pension to crystallise to produce the required income.
187
How is income structured in Phased FAD?
25 percent PCLS and 75 percent Flexi Access Drawdown.
188
What happens to the remaining pension fund in phased FAD?
It remains invested.
189
Why can phased FAD provide potential investment growth?
Because remaining funds stay invested and can be aligned with the client’s ATR.
190
What decision flexibility exists with phased FAD?
Decisions about how to use remaining funds can be deferred.
191
Why might phased FAD avoid locking into poor annuity rates?
Because it does not require purchasing an annuity immediately, allowing rates to potentially improve.
192
What are the death benefits of phased FAD before age 75?
Tax free death benefits, currently free of IHT, with flexibility of beneficiary.
193
What flexibility does UFPLS (Uncrystallised Funds Pension Lump Sum) provide?
You can withdraw as much of the pension fund as needed.
194
How is tax applied to UFPLS withdrawals?
25 percent tax free and 75 percent taxed as pension income.
195
Why can UFPLS be tax efficient?
Because part of each withdrawal is tax free.
196
What happens to the remaining pension funds when using UFPLS?
They remain invested.
197
How can remaining funds in UFPLS be invested?
They can be invested to suit the client’s Attitude to Risk (ATR).
198
Why does UFPLS offer potential investment growth?
Because unused funds remain invested in the pension.
199
What flexibility does UFPLS provide regarding future pension decisions?
The decision about how to use remaining funds can be deferred.
200
Why might UFPLS help avoid locking into poor annuity rates?
Because the investor does not need to purchase an annuity immediately.
201
Why is UFPLS considered simple to understand?
Because withdrawals are straightforward lump sums from the pension fund.
202
Why can UFPLS be useful for tax planning?
Because withdrawals can be managed each year to control taxable income.
203
What are the death benefits of UFPLS before age 75?
Tax free death benefits and currently free of IHT with flexible beneficiary options.
204
What is phased annuity purchase?
A method of gradually accessing a pension fund while securing guaranteed income in stages.
205
How does a client decide income in a phased annuity purchase strategy?
Each year the client decides how much income they require.
206
How is the required income generated in phased annuity purchase?
A portion of the pension fund is crystallised to provide the chosen level of income.
207
How is the crystallised pension fund split in phased annuity purchase?
25 percent is taken as PCLS and 75 percent is used to purchase a lifetime annuity.
208
What happens if the client needs additional income later in phased annuity purchase?
They crystallise another portion of the pension fund, taking into account income already received from previous annuity purchases.
209
What flexibility does phased annuity purchase provide when accessing pension funds?
The client can choose how much of the pension fund to crystallise and when.
210
Why can income from phased annuity purchase be tax efficient?
Because 25 percent of the crystallised amount is taken as tax free PCLS.
211
Why is income in the early years of phased annuity purchase often tax efficient?
Because it can be mainly taken from PCLS rather than taxable income.
212
What income security does phased annuity purchase provide?
The annuity provides a guaranteed income for life.
213
What additional options can be included with annuity income?
Options such as spouse’s benefits, annuity protection, and escalation.
214
What happens to uncrystallised pension funds in phased annuity purchase?
They remain invested and can grow in line with the client’s ATR and ESG preferences.
215
What happens to remaining uncrystallised pension funds on death before age 75?
They can be paid tax free to beneficiaries, within lump sum and death benefit allowances, if paid within two years.
216
Why might phased annuity purchase suit a client’s balanced attitude to risk?
Because it provides a combination of guaranteed income and flexible income.
217
What risk remains for funds not yet used to purchase an annuity?
They remain subject to investment risk.
218
Why may regular reviews be required with phased annuity purchase?
To monitor uncrystallised funds and investment performance.
219
What limitation exists when choosing additional annuity options?
Options such as spouse’s benefits must be selected at outset and cannot usually be changed, and extra options increase cost.
220
Why might phased annuity purchase produce less favourable annuity rates?
Because buying several smaller annuities may result in poorer rates.
221
Why can funds used to purchase an annuity not be passed to children?
Because the capital is exchanged for guaranteed income and no longer forms part of the pension fund.
222
What practical drawbacks can occur with phased annuity purchase?
It can involve high charges and be complex to manage.
223
What is a salary sacrifice arrangement for pension contributions?
An agreement where the employee gives up part of their salary in exchange for a pension contribution paid by the employer.
224
How is salary adjusted in a salary sacrifice pension arrangement?
The employee’s salary is reduced by the amount of the pension contribution.
225
Who pays the pension contribution in a salary sacrifice arrangement?
The employer pays the contribution directly into the pension scheme as an employer contribution.
226
What additional benefit might an employer add in a salary sacrifice pension arrangement?
The employer may add some or all of the National Insurance contributions (NICs) saved to the pension.
227
What NIC saving benefit does salary sacrifice provide?
It saves National Insurance contributions for both the employee and employer.
228
What Income Tax related benefit can salary sacrifice provide?
It can save Income Tax and may help preserve Child Benefit and the personal allowance.
229
How can salary sacrifice increase pension contributions without reducing take home pay significantly?
Because the tax and NIC savings increase the effective pension contribution.
230
How might employer NIC savings be used in a salary sacrifice arrangement?
The employer may add their NIC savings into the pension contribution.
231
What might an employer do with the NIC savings from salary sacrifice?
They may retain the NIC savings.
232
How can salary sacrifice affect borrowing capacity?
Because salary is reduced, it may reduce borrowing capacity for mortgages or loans.
233
How can salary sacrifice affect Income Protection benefits?
The maximum benefit may be reduced because it is based on the lower salary.
234
How might salary sacrifice affect future salary increases?
It may impact the level of future salary increases.
235
How can salary sacrifice affect death in service benefits?
It may reduce death in service benefits if they are based on salary.
236
How might salary sacrifice affect state benefit entitlement?
It may impact entitlement to certain state benefits.
237
What administrative drawback can occur with salary sacrifice arrangements?
They may involve extra paperwork and administration.
238
Is a salary sacrifice arrangement binding on the employer?
No, it is not binding on the employer and may be changed or withdrawn.
239
How is a Purchased Life Annuity (PLA) funded?
By using PCLS or personal savings to pay a lump sum to an insurance company.
240
Is a Purchased Life Annuity flexible once purchased?
No. It is irrevocable and inflexible once set up.
241
How is the income from a Purchased Life Annuity determined?
An annuity rate is agreed based on underwriting for either lifetime income or a fixed term.
242
What two elements make up income from a Purchased Life Annuity?
A return of capital and income.
243
How is the return of capital treated for tax in a Purchased Life Annuity?
It is tax free.
244
How is the income element of a Purchased Life Annuity taxed?
It is taxable as savings income.
245
How is Income Tax collected on a Purchased Life Annuity?
Basic rate Income Tax is deducted at source by the insurance company.
246
What tax free allowance may apply to a Purchased Life Annuity?
The Personal Savings Allowance (PSA).
247
What optional feature can help protect income against inflation in a Purchased Life Annuity?
Escalation options.
248
What relationship option can be included with a Purchased Life Annuity?
A joint life annuity to continue payments to a partner.
249
What protection option can be included with a Purchased Life Annuity?
A capital guarantee.
250
What are Class 3 National Insurance contributions?
Voluntary National Insurance contributions paid to fill gaps in a person’s NI record.
251
Why might someone pay Class 3 National Insurance contributions?
If they have an inadequate National Insurance record.
252
How can Class 3 NICs affect State Pension entitlement?
They can increase entitlement to the new State Pension or Basic State Pension.
253
Within what time limit should Class 3 NICs normally be paid?
Within 6 years of the end of the tax year in which the shortfall occurred.
254
Can Class 3 NICs be paid after reaching State Pension Age (SPA)?
Yes, but only for contribution gaps that occurred before reaching SPA.
255
What is the safe withdrawal rate?
A strategy used to determine how much can be withdrawn from a pension or investment fund without running out of money.
256
What common rule of thumb is used for the safe withdrawal rate?
4 percent per year over a 30 year retirement period.
257
What factor can significantly affect the safe withdrawal rate?
Asset allocation.
258
How should the safe withdrawal rate be adjusted for a client?
It should be adapted to the client’s Attitude to Risk (ATR).
259
What is stress testing in investment or retirement planning?
Assessing how a portfolio may perform during a market downturn.
260
Why is stress testing important for retirement planning?
To check whether the client could run out of capital completely.
261
What income concern does stress testing examine?
Whether the client could manage on a lower income during a downturn without depleting capital too quickly.
262
What is the first step when assessing if a pension can meet target benefits?
Establish the income required, allowing for inflation.
263
How is the required pension fund estimated for retirement planning?
By calculating the fund needed using an assumed or agreed annuity rate.
264
Why must PCLS requirements be considered when assessing retirement funds?
Because taking tax free cash reduces the remaining pension fund available for income.
265
How should existing pension benefits be assessed when reviewing retirement planning?
By calculating current benefits using an assumed or agreed growth rate.
266
Why should ongoing funding be included when assessing pension adequacy?
Because future contributions will increase the projected pension fund.
267
What should be calculated if there is a pension funding gap?
The shortfall and the additional contributions required.
268
Why are ongoing reviews important in pension planning?
To ensure the plan remains on track as assumptions, markets, and circumstances change.
269
What does Term Assurance provide?
A tax free lump sum on death during the policy term.
Usually includes a Terminal Illness benefit.
270
What does Critical Illness Cover (CIC) provide?
A tax free lump sum on diagnosis of a specified critical illness, usually after a survival period of up to 30 days.
271
What types of Term Assurance are available?
Level term
Increasing / index linked
Decreasing term
Renewable
Convertible
272
How can Critical Illness Cover be arranged?
It can be standalone or combined with life assurance, and may include free children’s cover.
273
What optional feature can be added to Term Assurance to protect premiums?
Waiver of Premium.
274
What additional cover can be included with Term Assurance?
Critical Illness Cover (CIC).
275
How can premiums be structured for Critical Illness Cover?
They can be reviewable (every 5 or 10 years) or guaranteed.
276
How can the sum assured on Critical Illness Cover be protected against inflation?
It can be index linked (set percentage or in line with inflation) without further underwriting.
277
What protection feature can be included with Critical Illness Cover if the policy is cancelled?
A life cover buy back option.
278
Can Term Assurance policies be written in trust?
Yes.
279
What type of trust is often used for life and earlier critical illness policies?
A split benefit trust.
280
What does Income Protection Insurance provide?
A regular tax free income if the insured cannot work due to accident or illness.
281
What is the deferred period in Income Protection?
The waiting period before benefits begin, typically 4, 13, 26, 52 or 104 weeks.
282
When do Income Protection benefits stop?
When the insured returns to work, retires, dies, or the policy term ends.
283
What is a rehabilitation benefit in Income Protection?
A proportionately reduced benefit paid when someone returns to work part time.
284
What is a proportionate benefit in Income Protection?
A reduced benefit paid when someone returns to work but in a lower paid job.
285
Is there usually a limit on claims for Income Protection?
No limit on claims during the policy term.
286
What percentage of income can usually be insured with Income Protection?
Typically 50 percent to 65 percent of pre claim income.
287
What definition of incapacity provides the widest cover in Income Protection?
Own occupation.
288
What types of premiums can apply to Income Protection?
Guaranteed or reviewable premiums.
289
What premium feature is usually included automatically with Income Protection?
Automatic waiver of premium while claiming.
290
What does Personal Accident and Sickness Insurance (PAS) provide?
A tax free income if the insured cannot work due to accident or sickness.
291
How are benefits usually structured in PAS policies?
A fixed amount not linked to earnings.
292
What is the usual policy term structure for PAS policies?
Usually annual contracts, which may be cancelled by the insurer.
293
What deferred period is typical for PAS policies?
Often around 4 weeks, with benefits payable for 26, 52 or 104 weeks.
294
What additional cover can PAS policies be linked to?
They can be standalone or linked to household, motor, or travel insurance.
295
What additional benefits may be included in PAS policies?
Refund of medical expenses
Lump sum payments for loss of limb or loss of sight
296
What does Accident, Sickness and Unemployment Insurance (ASU) provide?
A tax free income if the insured cannot work due to accident, sickness, or unemployment.
297
What type of policy structure does ASU typically have?
Usually an annual contract that can be cancelled by the insurer.
298
What is the maximum benefit period for ASU policies?
Usually up to 2 years.
299
How is the deferred period for ASU typically structured?
Similar to MPPI waiting periods.
300
Are pre existing medical conditions covered by ASU?
No, they are normally excluded.
301
How are benefits limited in ASU policies?
They are limited to a percentage of earnings or a monthly maximum amount.
302
What additional benefit may be included with ASU policies?
Lump sum payments for events such as loss of limb or loss of sight.
303
What does Mortgage Payment Protection Insurance (MPPI) cover?
Payments to cover mortgage repayments if the insured cannot work due to accident, sickness, or involuntary unemployment.
304
How long are MPPI benefits usually payable?
Usually 12, 18, or 24 months only.
305
What is the typical deferred period for MPPI?
Often 30 to 180 days.
306
What employment condition usually applies for MPPI cover?
The insured must usually be self employed or employed.
307
Can MPPI be sold at the same time as a mortgage?
No, it cannot be sold at the same time as the mortgage.
308
Who sets minimum standards for MPPI policies?
The ABI and CML.
309
What does Private Medical Insurance (PMI) cover?
The costs of private medical treatment, including consultant fees, investigations, treatment, and accommodation.
310
What type of policy is Private Medical Insurance?
An indemnity policy, meaning it only covers the actual medical expenses incurred.
311
What type of conditions does Private Medical Insurance usually cover?
Acute conditions, not chronic or incurable conditions.
312
What payment feature may apply when claiming on Private Medical Insurance?
The policyholder may have to pay an excess or co payment.
313
What does a basic PMI plan usually cover?
Typically accommodation, drugs, dressings, and doctor’s fees.
314
What additional features might a mid range PMI plan provide?
Longer claim periods and higher limits.
315
What extra features can comprehensive PMI plans include?
Higher limits
Wider hospital choice
Home nursing and private ambulance
Possible alternative medicine or dental treatment.
316
Can Private Medical Insurance policies cover more than one person?
Yes, whole families can be covered.
317
How is Private Medical Insurance treated for tax when paid by an employer?
It is treated as a Benefit in Kind (BIK).
318
What is one key benefit of Income Protection compared with ASU?
The policy cannot normally be cancelled by the insurer.
319
How does claim frequency differ between Income Protection and ASU?
Income Protection can be claimed multiple times.
320
How does the claim period differ between Income Protection and ASU?
Income Protection can pay benefits until retirement.
321
What occupation definition advantage does Income Protection offer?
It can include an own occupation definition.
322
How can Income Protection benefits maintain their value over time?
Through indexation of benefits.
323
What additional claim support may be included in Income Protection policies?
Proportionate benefits or rehabilitation benefits.
324
What premium advantage may apply to Income Protection policies?
Guaranteed premiums.
325
What is a major cost drawback of Income Protection compared with ASU?
It is usually more expensive.
326
What claim timing drawback can apply to Income Protection?
It often has a longer deferment period before payments begin.
327
What key risk does Income Protection not cover?
Unemployment.
328
What death benefit limitation applies to Income Protection?
There are no lump sum benefits or death cover.
329
How does underwriting compare for Income Protection vs ASU?
Income Protection typically involves stricter underwriting.
330
How can a Whole of Life policy help cover an Inheritance Tax liability?
The sum assured is set to match the expected IHT liability.
331
Why should a Whole of Life policy used for IHT planning be written in trust?
So the payout is outside the estate, avoids probate, and can be paid quickly.
332
What tax rule often allows Whole of Life premiums to be exempt from IHT?
They may qualify under the normal expenditure out of income exemption.
333
How can a Whole of Life policy keep pace with increasing IHT liabilities?
Through guaranteed insurability options to increase cover for inflation or rising estate values.
334
What is one key benefit of receiving advice from a qualified financial adviser?
They help identify financial problems, goals, and priorities.
335
How does a financial adviser add value through research?
Clients benefit from the adviser’s professional research and expertise.
336
How can a financial adviser help with financial planning and budgeting?
By providing budgeting support and cash flow modelling.
337
How can an adviser help with existing financial arrangements?
By assessing the suitability of existing investments, pensions, or protection plans.
338
How can a financial adviser improve tax efficiency?
Through tax planning and using appropriate tax wrappers.
339
How can advisers help with investment performance monitoring?
By benchmarking portfolios, monitoring performance, income yield, and diversification.
340
How can financial advice improve investment outcomes?
It can identify shortfalls early and allow swift corrective action, potentially improving returns.
341
Why are ATR and CFL assessments important in financial advice?
They ensure recommendations match the client’s Attitude to Risk and Capacity for Loss.
342
What peace of mind can a financial adviser provide?
Professional management, research, and reduced administrative burden.
343
What structured planning benefit does financial advice provide?
Clients receive recommendations and a structured financial plan.
344
How does working with a professional adviser help with understanding financial decisions?
They provide expert knowledge and clear explanations.
345
Why are ongoing reviews important in financial advice?
To monitor progress and ensure plans remain suitable as circumstances change.
346
How can advisers help clients keep up with financial products and legislation?
By advising on new products and changes in legislation.
347
What protection does regulated financial advice provide?
Consumer protection and regulated advice standards, helping identify potential vulnerabilities.
348
What is the first step when advising a client on their financial situation?
Establish and define the client relationship, confirming the scope of services, products, and fees in writing.
349
What must advisers identify early in the advice process regarding the client?
Any client vulnerabilities.
350
How should an adviser adapt communication methods?
The communication method should suit the client’s needs and preferences.
351
What additional support should be offered if a client is vulnerable?
Allow family or friends to attend meetings and offer flexibility on meeting location, timing, and duration.
352
What key information should be gathered during fact finding?
Immediate and future objectives including retirement needs, views on income types, protection needs, and family provision.
353
Why should advisers establish realistic timescales and priorities?
To ensure financial objectives are achievable and properly prioritised.
354
What risk assessments must be confirmed during fact finding?
Capacity for Loss (CFL) and Attitude to Risk (ATR).
355
What analysis should be carried out on the client’s current financial position?
Review existing investments, identify shortfalls, and obtain BR19 if needed.
356
What should the adviser do after analysing the client’s financial position?
Develop a financial plan and carry out research.
357
How should the adviser present their recommendations?
Present and discuss the financial plan with the client, ensuring understanding.
358
Why might advice sometimes be staggered over several meetings?
To give the client time to consider the information before making decisions.
359
What documentation should be provided to the client?
Key information documents and a suitability report.
360
How should financial information be communicated to clients?
In clear language without jargon.
361
What must advisers ensure before a client proceeds with advice?
That the client fully understands the benefits and drawbacks and has enough information to make an informed decision.
362
What must advisers avoid when presenting recommendations?
Applying pressure on the client.
363
What step follows agreement with the financial plan?
Implement the plan with client permission.
364
What ongoing responsibility does an adviser have after implementing advice?
Monitor the financial plan and review the client’s situation regularly.
365
How can advisers identify vulnerable clients under Consumer Duty?
Through detailed fact finding and discussions about client circumstances.
366
How should advisers adapt their communication and processes under Consumer Duty?
They should fit the client’s needs, for example allowing family involvement in meetings.
367
What information must be provided to clients about products and services?
Clear written information about the product or service.
368
What must be explained clearly under Consumer Duty?
Benefits and drawbacks of the recommendation.
369
How should information be presented under Consumer Duty?
It must be clear, understandable, and free from jargon.
370
What must advisers do to ensure clients understand advice?
Check the client’s understanding.
371
What must clients have before making a financial decision?
Enough information to make an informed decision and understand why the recommendation is suitable.
372
What behaviour must advisers avoid under Consumer Duty?
Applying pressure to the client.
373
What time consideration must advisers provide to clients?
Sufficient time for the client to consider the information.
374
What ongoing support should advisers provide under Consumer Duty?
Be available for further discussion and ensure regular reviews take place.
375
How can advisers help clients clarify their financial goals?
By helping them understand the difference between general aims and specific objectives.
376
What questioning techniques should advisers use during fact finding?
Use open and closed questions to gather hard and soft facts.
377
How should client objectives be structured?
They should be SMART
Specific, Measurable, Achievable, Relevant, and Time bound.
378
Why should advisers identify short term and long term objectives?
To ensure long term needs are prioritised where appropriate.
379
Why should advisers discuss family and dependants when identifying objectives?
Because financial plans may need to provide for dependants or family needs.
380
Why are timescales important when setting financial objectives?
They help determine when funds will be required and influence suitable investments.
381
What does it mean to quantify and qualify objectives?
To estimate the amount of money needed and assess the feasibility of achieving the objective.
382
Why is prioritisation important when setting financial objectives?
Because not all financial goals may be achievable at the same time.
383
What is the purpose of an Investment Policy Statement (IPS)?
To outline the strategy and objectives for managing a client’s investments.
384
What objective types should be included in an Investment Policy Statement?
Whether the client wants income, growth, or a combination of both.
385
Why must the timescale be included in an Investment Policy Statement?
Because it affects asset allocation and investment strategy.
386
What risk information should be included in an Investment Policy Statement?
A statement about the client’s risk profile.
387
What investment structure detail should be included in an Investment Policy Statement?
A statement outlining the proposed asset allocation.
388
What additional considerations may be included in an Investment Policy Statement?
Issues such as ethical or responsible investment preferences.
389
What is the purpose of lifetime cash flow modelling?
To forecast a client’s income and expenditure over the long term.
390
What type of financial summary does cash flow modelling provide?
A year by year summary of cash paid in and paid out.
391
What financial insight can cash flow modelling reveal?
Years where there may be a surplus or deficit of funds.
392
What key inputs are required for cash flow modelling?
Income and capital inputs.
393
What expenditure factor must be included in cash flow modelling?
Expected spending levels and living costs.
394
What assumptions are typically included in cash flow projections?
Assumptions about income growth, capital growth, spending increases, and inflation.
395
How can advisers use cash flow modelling after recommendations are made?
They can update projections to show the impact of the proposed financial strategy.
396
What income factors should be considered when building a lifetime cash flow model?
Current income needs and future income needs.
397
What future financial events should be included in a lifetime cash flow model?
Planned capital expenditure, expected inheritances, and possible downsizing.
398
What existing financial resources must be included in a lifetime cash flow model?
Current assets, current income, and guaranteed income such as the State Pension.
399
What investment assumptions are required in lifetime cash flow modelling?
Growth rate assumptions, interest rate assumptions, and charges.
400
Why must inflation assumptions be included in a cash flow model?
Because future costs and income values are affected by inflation.
401
What client risk factors must be considered in a lifetime cash flow model?
Attitude to Risk (ATR) and Capacity for Loss (CFL).
402
Why must charges be included in a lifetime cash flow model?
Because fees reduce the overall value of investments over time.
403
Why should tax wrappers be considered in lifetime cash flow modelling?
To improve tax efficiency and maximise after tax income.
404
Why must longevity and health be considered in a cash flow model?
Because life expectancy affects how long income must last.
405
Why should market corrections and stress testing be included in modelling?
To assess the impact of potential market downturns on financial plans.
406
Why should advisers consider the impact of death of either client in cash flow modelling?
Because it may affect income, expenditure, and financial planning needs.
407
Why is cash flow modelling only a guide for financial planning?
Because it provides estimates and a snapshot based on current assumptions.
408
Why can inflation assumptions affect the reliability of cash flow models?
Because actual inflation rates may differ from assumptions.
409
Why might growth assumptions make cash flow projections inaccurate?
Because investment returns are not guaranteed.
410
How can personal circumstances affect cash flow projections?
Changes in health, income, or financial objectives may alter outcomes.
411
How can tax changes affect cash flow modelling?
Because tax rules and allowances may change in the future.
412
Why might ATR and CFL assessments affect cash flow modelling outcomes?
Because a client’s risk tolerance and financial capacity may change over time.
413
Why should charges and fees be reviewed regularly in cash flow modelling?
Because costs may change and affect projected outcomes.
414
Why are regular reviews important for cash flow modelling?
Because assumptions and client circumstances need updating over time.
415
What type of errors can affect the accuracy of cash flow modelling?
Input errors or misunderstandings of information by the client or adviser.
416
What is meant by a client’s risk profile?
The level of volatility or investment risk a client is prepared to accept in their portfolio.
417
What happens if investments carry more risk than a client’s risk profile allows?
They may experience unacceptable losses during poor market conditions.
418
What is the downside of choosing investments below a client’s risk tolerance?
They may miss out on higher potential returns.
419
Why can a risk profiling tool be useful when assessing Attitude to Risk (ATR)?
It can identify different ATR levels for different financial objectives.
420
Why are risk profiling tools easy for clients to use?
They are simple and easy to understand.
421
What process advantage do risk profiling tools provide?
They use standardised questions and a repeatable process.
422
Why can risk profiling tools help ensure consistency in advice?
Because they should provide consistent results across assessments.
423
Why might a client have different ATRs?
Because different financial goals may require different levels of risk.
424
Why should an adviser review a client’s existing assets when assessing ATR?
Because current investments may not match the client’s risk profile.
425
How can a risk profiling tool support client discussions?
It provides a starting point for discussion about risk.
426
How can risk profiling tools improve client understanding of investment risk?
They help clients understand risk, risk tolerance, and the relationship between risk and reward.
427
Why should advisers not rely solely on a computer based risk profiling tool?
Because results still require discussion and interpretation with the client.
428
Why might different risk profiling programs produce different results?
Because different systems use different questions and scoring methods.
429
Why might some clients struggle with risk profiling questionnaires?
They may not relate to the questions or understand them fully.
430
What risk exists if clients misinterpret questions in a risk profiling tool?
It may lead to inaccurate results.
431
Why might a risk profiling result be unsuitable if the client has zero CFL?
Because they cannot afford to lose capital regardless of their ATR.
432
Why might clients have different risk levels for different objectives?
Because different goals may have different timescales and priorities.
433
What is the first step in determining a client’s Attitude to Risk?
Both clients complete a risk profiling questionnaire.
434
What factors influence responses to a risk profiling questionnaire?
Timescales, financial priorities, and personal circumstances.
435
What result is produced after completing a risk profiling questionnaire?
A risk score.
436
How is the risk score used in financial planning?
It forms the basis for discussion and helps determine asset allocation.
437
What financial factor must also be assessed alongside Attitude to Risk?
Capacity for Loss (CFL).
438
How is the final risk profile agreed?
Through discussion between adviser and client to agree a suitable level of risk.
439
What is risk tolerance in investment risk assessment?
The willingness to accept a certain level of fluctuation in investments.
440
What is meant by risk perception?
A client’s personal opinion about the risks of investing, based on knowledge and experience.
441
What is risk capacity (Capacity for Loss)?
The actual ability of a client to absorb financial losses.
442
Why should Attitude to Risk (ATR) be reviewed regularly?
Because ATR may differ for different financial objectives.
443
How can investment experience and knowledge affect ATR?
As experience grows, clients may become more or less comfortable with investment risk.
444
How can personal circumstances affect ATR?
Changes in health or lifestyle circumstances may alter risk tolerance.
445
How can income changes or inheritances affect ATR?
Changes in financial resources may increase or decrease willingness to take risk.
446
Why should advisers review fund performance when reviewing ATR?
To ensure current investments still match the client’s risk profile.
447
Why must Capacity for Loss (CFL) also be reviewed alongside ATR?
Because a client’s financial ability to absorb losses may change over time.
448
R06
flashcards
Decks in class (4)
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