Practice Test 2 - Dean single

Question 1

Describe briefly the stages in the process an adviser should follow to advise Dean on investment planning.

Answer 1

• Establish the relationship/disclosure of status/advisor remuneration.
• Establish the client’s goals/expectations/objectives/fact-finding/ethical/affordability.
• Timescales for investment.
• Attitude to risk/capacity for loss.
• Amount of Emergency Fund.
• Analysing the client’s situation.
• Formulating recommendation/develop the financial plan.
• Client’s tax status/situation/use of tax wrappers.
• Fund/stock selection/asset allocation.
• Implementation/recommendation.
• Review/rebalance/monitor.

Question 2

For each of the following, list five benefits and five drawbacks, if Dean were to encash his existing investments to reduce his mortgage balance;

Answer 2

Benefits
• Utilising CGT exemptions/tax efficiency.
• Interest saving.
• Reduces loan amount/enhances equity in the property/reduce loan to value.
• Lower monthly outgoings/increased disposable income/reduce monthly mortgage payments.
• Improved creditworthiness/increased borrowing capacity.
• Reduces investment risk.

Drawbacks
• Penalties/charges on repayment.
• Market timing of encashment.
• Loss of potential investment growth.
• CGT liability on encashment.
• Reduces liquidity/investments maybe earmarked for other reasons/intended purpose.
• Loss of tax efficient wrappers/use of ISAs.

Question 3

For each of the following, list five benefits and five drawbacks, if Dean were to contribute to his ISAs to repay his mortgage.

Answer 3

Benefits
• Investment growth/repay mortgage early/surplus.
• Tax free returns/tax efficiency.
• Dean is a higher rate taxpayer.
• Flexibility of payments.
• Wide investment choice/match attitude to risk.
• Accessibility/Liquidity.

Drawbacks
• Review/rebalancing needed/monitor performance.
• Temptation to spend the money.
• May not repay the loan/shortfall risk.
• Charges/fees.
• Higher interest costs.

Question 4

State the additional information that an adviser would require to advise Dean about his protection needs in the event of long-term or serious illness.

Answer 4

• Family health/smoker status/hazardous pursuits.
• State benefits.
• Budget/affordability.
• Value of property/use of any other assets.
• Income from business when sick.
• Liabilities, excluding mortgage.
• Inheritances.
• Term of mortgage/need.
• Priorities for protection.

Question 5

Describe briefly the benefits of effecting an income protection policy to cover his protection needs;

Answer 5

Income Protection
• Replace income/maintain standard of living.
• Payable until retirement/return to work/to mortgage term.
• Tax free.
• Can be based on own occupation.
• Indexation.
• Business continuity.
• Non cancellable cover/multiple claims.
• Length of deferred period selected to suit circumstances.

Question 6

Describe briefly the benefits of effecting a critical illness policy to cover his protection needs.

Answer 6

Critical Illness
• Tax free.
• Lump sum.
• Can be used for any purpose.
• Business continuity.
• Waiver of premium.
• Possible death benefit if linked to life cover/free death benefit.

Question 7

State the additional information an adviser would require to advise Dean on his retirement planning.

Answer 7

• Income/pension commencement lump sum (PCLS) required.
• Capacity for loss.
• Current value/projection/statement of existing personal pension plan.
• Fund links available/switching options/asset allocation.
• Existing plan charges.
• Inheritances.
• Budget/affordability.
• Ethical considerations.
• State pension entitlement/BR19.
• Use of other assets/downsizing/business sale.
• Any plans to incorporate the business.

Question 8

Explain the benefits to Dean of making the maximum tax relievable pension contribution in the tax year 2017/2018.

Answer 8

• Increase future pension benefits/to meet retirement goal.
• Reduce marginal rate of tax.
• Reinstate personal annual allowance.
• Tax relief.
• PCLS could be used for mortgage repayment.
• Pension usually protected from creditors.

Question 9

Explain how the maximum amount of tax relief will be calculated should Dean decide to make the maximum tax relievable pension contribution to his personal pension in the tax year 2017/2018. No calculations are required.

Answer 9

• He can obtain tax relief on either 100% of his earnings or £107,000 at his highest marginal rate, with a contribution net of basic rate tax or 20% with the basic rate band extended to award a higher rate relief of £40,000 which is the annual allowance less existing contributions, £3,600 or £36,400.
• He can carry forward for only the last year.

Question 10

Recommend and justify how Dean could improve the overall tax efficiency of his portfolio.

Answer 10

• Maximise ISA tax allowance/NS & I products;
• to provide tax free growth/income.
• EIS/VCTs;
• Tax reducer/relief.
• Encash/dispose of unit trust/OEIC;
• to utilise CGT allowances/crystallise any losses.
• Increase pension contributions;
• for tax relief/tax-efficient saving for retirement/reinstate personal allowance.
• Incorporate his company;
• for Income Tax/National Insurance savings.
• Effect an offset mortgage.
• No tax to pay on amount offset.