Practice Test 12 - Simon widower

Question 1

State the additional information a financial adviser would require to advise Simon on establishing his current and future income requirements.

Answer 1

• Current expenditure/capital requirements.
• Any life cover/death benefits for Sally/options on Sally’s Personal Pension/options on Simons defined contribution (DC) scheme.
• Ethical decisions.
• Additional charges.
• Pension/ISA fund investment choice.
• Need for guaranteed income/flexible income.
• BR19/State Pension entitlement/inherited State Pension from Sally.
• Plans to return to work/work part-time/retirement age.
• Other assets/downsize/any inheritances expected/willingness to use current investments.
• Income/generated by ISA/savings funds.
• Mortgage payments/any Early Repayment Charges/remaining term.
• Tax Status/earned income during current Tax Year.
• Capacity for loss.

Question 2

State why Simon should be treated as a vulnerable client and the actions a financial adviser should take, when providing initial advice to Simon.

Answer 2

• Simon has recently become widowed.
• Family member/trusted friend invited to attend meetings.
• Set out explanations in writing/clarity of explanation.
• Give additional time to consider decisions.
• Flexible outcomes.
• No ‘undue influence’.
• Simon’s file should clearly indicate that he will be treated as a vulnerable client.

Question 3

State three benefits and three drawbacks of Simon repaying his mortgage from the proceeds of Sally’s personal pension plan.

Answer 3

Benefits
• Reduces interest payable/reduces outgoings.
• Financial security/peace of mind/debt free.
• Matches his attitude to risk/no investment risk.

Drawbacks
• Lack of liquidity/lose access to capital.
• Poor market timing/loss of potential investment growth.
• Less efficient for Inheritance Tax purposes/reduces amount in tax advantaged wrapper.

Question 4

Explain the tax treatment of Sally’s ISA portfolio following her death and the actions that Simon needs to take to maintain its tax-efficiency.

Answer 4

• ISA wrapper ceases on Sally’s death.
• Any growth/income post death is taxable on Sally’s estate.
• Only available to spouse/civil partner.
• Obtain value of ISA on date of death/Probate value;
• which determines Simon’s Additional Permitted Subscription(APS).
• Simon must register APS with Sally’s ISA providers.
• Transfer holdings/can invest own cash instead to value of Additional Permitted Subscription.
• Treated as previous year’s ISA subscriptions/he retains his own ISA allowance.
• APS can be used up to 3 years from date of death.
• Or 180 days after estate is wound up/180 days for in specie transfer.

Question 5

Recommend and justify how Simon could draw flexible benefits from Sally’s personal pension plan whilst preserving the tax-efficiency of the pension wrapper.

Answer 5

• Flexi-Access Drawdown (FAD).
• Notify Trustees of decision to use FAD within 2 years of Sally’s death;
• to ensure pension remains Inheritance Tax free.
• Can draw lump sums or Income.
• Tax-free as Sally died before age 75.
• Tax-efficient fund.
• Potential for investment growth.
• Simon should nominate successors/his children.

Question 6

Comment on the suitability of Simon retaining the AIM holdings in Sally’s existing ISA portfolio.

Answer 6

• Inheritance Tax efficient/Business Property Relief (BPR).
• Growth investment.
• Diversification/lack of liquidity.
• High risk/does not match attitude to risk/Simon is cautious to moderate.
• Difficult to manage/monitor/complex investment.
• Limited income potential/not income generating.

Question 7

State six benefits of Simon using a platform arrangement for his ISA portfolio.

Answer 7

Benefits
• Reduced administration/all held in one place.
• May be lower fees/ongoing charges.
• Consolidated statements.
• Wide range of funds/switching options.
• Availability of Discretionary fund managers (DFM)/Model Portfolio service.
• Online access.

Question 8

State three benefits and three drawbacks for Simon of retaining Sally’s existing fund choices within her personal pension plan.

Answer 8

Benefits
• Increases diversification.
• Potential for long-term growth.
• Potential for income/dividend income.

Drawbacks
• Investment risk.
• Does not match Simon’s attitude to risk.
• Currency risk.

Question 9

Describe how a cashflow model could be used to assist Simon in planning his future income needs.

Answer 9

• Identifies objectives/targets.
• Quantifies capital/income required to meet objectives.
• Identifies required/expected Rate of Return.
• Inflation assumptions.
• Likelihood of achieving objectives.
• Identifies when Simon will run out of money.
• Structures his finances/gives him a plan.
• Use of tax-efficient wrappers/pension/ISA.

Question 10

Explain to Simon the limitations of cashflow modelling and why he should not rely on this as the sole method of planning his future income needs.

Answer 10

• Provides estimates only/snapshot of current situation.
• Inflation assumptions can be incorrect.
• Growth assumptions may not be achieved/Investment returns not guaranteed.
• Personal circumstances/objectives can change.
• Tax rules may change.
• Attitude to risk may change.
• Charges/Fees can change.
• Regular reviews required.