Practice Test 3 - Mark & Susan

Question 1

State the additional information you would require in order to advise Mark and Susan on their protection needs.

Answer 1

• State of health/smoker status/family health history.
• Details of any protection policies in place.
• Affordability/budget/expenditure.
• How much of a priority this objective is compared to other objectives.
• Expected retirement age.
• Are they planning any more children.
• Likely age of dependency for children/term of cover/mortgage term.
• Does Susan expect to return to work.
• Any inheritances due.
• Attitude to risk.
• Have they made Wills.
• Expression of wish/nomination.

Question 2

Recommend and justify a suitable product for Mark and Susan to protect their family in the event of death.

Answer 2

Family Income Benefit (FIB)/Level Term Assurance (LTA)/Whole of Life (WOL)
• Joint Life 1st Death/2 x single lives.
• Term until retirement/children no longer dependant/WOL.
• To cover costs of child care upon Susan’s death.
• £260,000 to £650,000/£50,000 - £65,000 per annum.
• To cover outgoings/income needed on Mark’s death/maintain standard of living/breadwinner.
• Guaranteed premium.
• Known cost/known budget.
• Include escalation.
• To offset effects of inflation.
• Waiver of Premium.
• To protect contributions in the event of incapacity.
• Policies to be written under trust/life of another.
• To be kept outside the estate/avoid probate/speed of payment/payment to intended beneficiaries.

Question 3

Mark is considering an income protection or accident, sickness and unemployment (ASU) policy to protect his income in the event of being unable to work.
State five benefits and five drawbacks of using an income protection policy rather than an ASU policy for this purpose.

Answer 3

Benefits:
• Cannot be cancelled by insurer/can claim more than once.
• Can claim for a longer period/to retirement.
• Own occupation.
• Indexation of benefits.
• Can claim a proportionate benefit.
• Guaranteed Premiums.

Drawbacks:
• Usually more expensive.
• Longer deferment period before receipt of claim.
• Does not cover unemployment.
• No lump sum cover/no cover upon death.
• Stricter underwriting.

Question 4

State the factors you would take into account when advising Mark and Susan on building up a suitable deposit for their property purchase.

Answer 4

• The size of the deposit required/Loan to Value.
• When required.
• Clients’ tax status/ownership.
• Affordability.
• Emergency fund required/ease of access/notice period on deposit account.
• Attitude to risk.
• Any inheritances expected/family assistance.

Question 5

Outline and justify the actions that Mark and Susan can take to improve tax efficiency.

Answer 5

• Utilise ISA allowances/NS&I/Junior ISA.
• Annually/by issue.
• Tax efficiency.
• Transfer ownership of deposit account fully to Susan.
• She is a nil-rate tax payer and he is a higher rate tax payer/saves 40% tax.
• Increase pension contributions for Mark.
• 40% tax relief.
• To reduce income and maintain child benefit.
• Make pension contribution for Susan.
• Pension in retirement for Susan/tax relief.
• Incorporate his business.
• To save tax/NICs.

Question 6

State the benefits and drawbacks of Mark and Susan paying £3,000 into Junior ISAs in respect of each of their children to help fund future university costs.

Answer 6

Benefits:
• Potential for growth.
• Tax efficient.
• Range of funds available.

Drawbacks:
• Parents lose control at 16.
• Less funds available for other purposes.
• Might not use for education purposes.
• Shortfall risk.

Question 7

In respect of Mark’s personal pension plan:
State the additional information you would require in respect of the traditional with-profits fund, prior to making a recommendation as to whether or not Mark should switch to an alternative fund.

Answer 7

• Underlying asset allocation/closed fund.
• Annual bonus history/current bonus rate.
• Terminal bonus.
• Principles and Practices of Financial Management/Consumer Friendly Principles and Practices of Financial Management.
• Market Value Reduction/charges.
• Guaranteed bonus/annuity rate.
• Financial strength/solvency/free asset ratio.
• Basic sum assured.

Question 8

In respect of Mark’s personal pension plan:

State three benefits and five drawbacks of Mark utilising this as a repayment vehicle for an interest-only mortgage.

Answer 8

Benefits:
• Higher rate tax relief on contributions/0%/marginal rate.
• Tax efficient fund /Pension Commencement Lump Sum (PCLS).
• Potential for growth.

Drawbacks:
• Only 25% can be taken as a PCLS.
• Shortfall risk/lower returns on with-profits.
• Job change/reduced earnings may render this method unsuitable.
• PCLS not available for other purposes/not available until 55/57.
• Regular reviews required.
• High level of funding/expensive/charges.