Identify the additional information that should be considered by a financial adviser when advising Peter and Sally on how they can meet their expenditure during Peter’s sabbatical.
State benefits available
Willingness to transfer more of deposit account to Peter
Income/employment
yield on ISAs/interest rate on deposit account.
what will Peter’s salary be for the 2026/27 tax year?
Job security – Sally.
Expenditure – discretionary and fixed/possibility of reducing expenditure.
Debt/Mortgage – details of premium holiday/option to move to interest only/ repayment penalties.
Financial Protection
Employer sick pay for Sally
Level term assurance policy – monthly premium/cost to rebroke to a decreasing term policy.
Financial help/support from family.
Use of allowances – ISA allowance of £20,000 for tax free income
Details of existing policies
Pensions – willingness for Peter to pause contributions /reduce Sally’s contributions.
Investments – willingness to use to help cover expenditure.
Inheritances expected.
Emergency fund requirements.
Priority – of objectives (new protection products v mortgage repayment v pensions).
Identify the key weaknesses in Sally and Peter’s current financial arrangements.
Reduced income during Peter’s sabbatical may be insufficient to meet monthly expenditure/heavy reliance on Sally’s income.
No CIC/PMI for either.
No IP/ASU protection in place for either.
Loss of employer sick pay for Peter during his sabbatical.
Loss of DIS will result in less life cover for Peter/Sally has DIS.
They are paying some High Income Child Benefit charge.
May be over-paying on life cover for mortgage protection.
Limited affordability to fund new protection products from income over the short term.
Limited pension provision/Peter’s loss of employer pension contributions for a year.
Mortgage may be unaffordable during Peter’s sabbatical.
They have no protection for their two financially dependent children.
Cash holdings are not tax efficient, tax payable on interest at 40% above their PSAs of £500.
S&S ISAs are heavily reliant on UK markets/Peter’s also has no asset diversification - subject to risk of UK market downturn and market downturn.
State the main factors that might influence Sally and Pater’s capacity for loss (CFL).
Income – limited income for 12 months/expenditure/disposable income.
Assets/investments/level of wealth/reliance on these funds whilst Peter is on sabbatical.
Large emergency fund.
Limited pension provision – loss of employer pension contributions.
Timescales – to retirement age and length of dependency of children.
Existing liabilities - mortgage of £160,000.
State of health – they are in good health.
Objectives/objectives of investments.
Lack of financial protection including loss of Peter’s DIS/lack of protection for Sally’s income.
Security of employment and future earnings potential.
Economic environment/market conditions.
State the issues that a financial adviser should consider when advising on the suitability of taking a payment holiday on their mortgage whilst Peter is on sabbatical.
The monthly amount saved and whether outgoings would then be affordable.
Avoids arrears or default.
Will be accruing interest on remaining mortgage during payment holiday.
Payment holiday increases outstanding mortgage.
Can use accessible cash assets to help continue to fund repayment mortgage which saves roll up of interest on mortgage.
Have too much in cash/does not match high ATR.
Mortgage Interest rate likely to be more than net returns on cash savings (Sally paying 40% tax on interest above PSA).
Costs or charges in arranging the payment holiday.
Period for which the holiday is permitted.
Level of emergency fund required.
May be other more suitable options available to reduce monthly costs i.e. switch to offset mortgage or interest only.
Priority of paying off mortgage v financial protection and pensions.
Identify the key factors that Peter and Sally should consider when deciding on an appropriate level of emergency fund.
Current expenditure/planned capital expenditure.
Current income/employment position/job security/future career prospects for Peter.
Peter will shortly be on sabbatical/household income more than halved.
They have two financially dependent children.
DIS benefits are linked to employment will be lost if leave/made redundant/Peter’s will be lost whilst he is on sabbatical.
They have limited other protection arrangements – only a level-term policy to cover mortgage.
They have an outstanding mortgage/mortgage costs.
Any other debts.
Employer sick pay.
ISAs are accessible/pensions available on death.
Excess level of accessible cash fund/reduces prospects for growth.
Support from family/friends/State benefits available.
Identify the main factors that you should consider when formulating a current cashflow statement for Peter and Sally.
Income – Peter’s and Sally’s salaries and investment income.
Expenditure split between:
Fixed e.g., bills, mortgage.
Discretionary e.g., holidays, entertainment etc.
Costs if different options on mortgage i.e., moving to interest only, offset mortgage.
Costs of new protection products policy – premiums for any new or rebroke policies if relevant.
Emergency fund requirements.
Tax and NICs.
Explain to Sally and Peter what a current cashflow statement is and how it could help them with their financial planning.
Shows the impact of reduced salary during Peter’s sabbatical.
Calculates their net income after tax and
highlights shortfall between income (from salary and investment income) and expenditure.
Identifies areas where spending can be reduced e.g. discretionary expenditure which can be reduced or rebroking of level-term policy etc.
Helps assess need and affordability for financial protection.
Determines whether savings or investments/emergency funds needs to be used to meet short-term cash flow needs.
Would help assist with the decision on affordability of mortgage repayments.
Forms the basis for short-term financial planning and budgeting.
Forms basis for future cash flow planning post-sabbatical to meet longer term goals.
Explain the benefits of Sally and Peter taking a payment holiday on their mortgage.
Mortgage may not be affordable whilst Peter is on sabbatical.
Eases short term financial strain.
Maintains savings and investments.
Protects emergency fund, tax benefits of ISA.
Suitable for short term cash flow issues such as Peter’s sabbatical as has only a small impact on total mortgage debt.
Avoids arrears or default.
Won’t impact their credit rating as within the terms of the mortgage.
Allows other important priorities to be met such as ensuring adequate financial protection.
Level-term policy means mortgage will still be covered in full.
Explain the drawbacks of Sally and Peter taking a payment holiday on their mortgage.
Not making use of invested assets.
Not making use of tax inefficient cash funds.
Premium holiday is not suitable for longer term affordability.
Will be accruing interest on remaining mortgage during payment holiday.
Payment holiday increases outstanding mortgage/could extend term of mortgage.
Explain to Peter and Sally how an interest only offset mortgage works and why it may be suitable for them.
Mortgage interest is only charged on the amount by which the mortgage exceeds their cash savings (savings account).
Money in the savings account is accessible but if any is withdrawn, the amount on which mortgage interest is charged will increase.
If money is added to the savings account, the amount on which mortgage interest is charged decreases.
No interest is paid on the savings account so there is no Income Tax liability.
This may be useful as Sally is a HRT/saves 40% tax.
They have £130,000 in accessible cash to use so would reduce monthly payments considerably whilst Peter is on sabbatical.
Less interest is charged over term of mortgage than payment holiday.
Avoids need to use investments to pay repayment mortgage.
They will need a capital sum at the end of the loan to repay the capital in one go.
Their level term policy would better match the debt.
Maintains emergency funds and tax-free status of ISAs.
Recommend and justify the actions Peter and Sally should take to ensure they can meet their expenditure requirements whilst Peter is on sabbatical.
Review outgoings.
- To assess where savings can be made.
Adjust mortgage in line with affordability:
Consider payment holiday.
- Eases short-term financial strain.
-Reduces need to access savings to fund income – maintains emergency fund and tax efficiency of ISAs.
Use ISA allowance – Switch some of deposit holding/NS&I to instant access cash ISAs.
-More tax efficient as ISAs are tax free.
Switch more of deposit holdings to Peter during sabbatical.
-Increase income as less tax on interest – Sally is HRT so taxed at 40% above PSA of £500. Peter will have some personal allowance, will have full PSA of £1,000 and should be able to use 0% starting rate for savings.
Switch NS&I income bonds to higher interest accounts.
-Interest only around 3%, likely to achieve higher interest in bank deposit accounts.
Switch level-term policy to decreasing term policy.
-Likely to be cheaper.
Peter to stop pension contributions during sabbatical year.
-Can make up shortfall and receive 40% tax relief on contributions whilst working.
-Would only receive 20% tax relief whilst on sabbatical.
Use cash funds to supplement income
-To help meet outgoings.
Identify the issues a financial adviser should consider when advising Peter and Sally on improving the tax-efficiency of their financial arrangements.
Current and projected income levels of Peter and Sally.
Marginal tax rates (40% for 2025/26)/allowances.
Peter currently liable to High Income Child Benefit charge.
Both have potential for 40% tax relief on pension contributions for 2025/26.
Peter can continue to make pension contributions up to higher of net relevant earnings for 2026/27 tax year but will only receive 20% tax relief.
Potential use of salary sacrifice.
Cash accounts are not tax efficient/taxed at 40% above PSA’s.
Scope to transfer to Peter for 2026/27 tax year when he will have full PSA and scope to use 0% starting rate for savings.
Offset mortgage would save 40% tax on savings interest.
Use of ISA allowances – they have not used their ISA allowances of £20,000 each in the current tax year.
Identify the factors an adviser should consider when deciding if Peter should continue his pension contributions during his sabbatical.
Affordability.
Priority of pension provision v other objectives.
Tax relief limited to 20% in 2026/27.
Has other assets he could use to fund pensions.
Money tied up until NPA.
Salary when returns to work – could catch up contributions when returns to work/40% tax relief.
Loses potential fund growth on contributions.
He has very limited pension provision.
Has long time period to make up shortfall.
Admin no longer done by employer – will need to do it directly through the pension provider.
Recommend and justify a range of actions for Peter and Sally to improve the tax efficiency of their arrangements.
Switch to an offset mortgage.
-Reduces 40% tax on interest on cash savings.
Switch cash funds to fully use ISA allowances.
-Tax-free income and growth – more tax efficient than deposit funds.
Consider NS&I premium bonds instead of NS&I income bonds.
-Tax free prizes/saves 40% tax on interest above PSAs.
-Average prize rate is higher than interest rate on income bonds.
Sally to increase pension contributions.
Peter to increase contributions for 2025/2026 tax year.
Use salary sacrifice if available.
-Increases pension provision which is limited at the moment.
-40% tax relief on contributions/tax free income and growth.
-40% tax relief and ensures they will receive full child benefit for both children if adjusted net income below £60,000.
-NICs savings.
Switch more of cash funds to Peter’s name whilst on sabbatical.
-Sally is HRT so taxed at 40% above PSA of £500. Peter may have some personal allowance, a full PSA of £1,000 and should be able to use 0% starting rate for savings.
Explain to Sally and Peter if the NS&I income bonds are likely to be suitable in helping them to meet their objectives.
They are accessible should they be needed to top up income whilst Peter is on sabbatical.
However, they have excess held in accessible cash funds/currently have an excess emergency fund – deposit and current account funds appear to be sufficient.
Income bonds taxed at 40% above their PSA of £500.
In 2026/27 can transfer more of holding to Peter to reduce/eliminate tax on interest.
No default risk as through NS&I.
Interest rate only around 3% (variable).
Can achieve higher interest rates elsewhere with full FSCS protection.
Exposed to inflation risk and interest rate risk.
Does not match high ATR.
Likely to achieve higher growth through investing in line with ATR, using ISA allowances.
Identify the information a financial adviser would require, in respect of their mortgage arrangements to assess their continuing suitability for Peter and Sally.
Mortgage
-Term of mortgage.
-Monthly costs.
-Current interest rate, is it fixed, capped, variable?
-Details of mortgage payment holiday e.g. length allowed, how would repayments restart.
-Repayment penalties if switch mortgage.
-Option to move to interest only?
-Willingness to move to an offset mortgage/interest only or take payment holiday whilst Peter is on sabbatical.
Level-term plan
-Amount of cover under level term plan - whether CIC included.
-Current premium.
-Term.
-Any exclusions/loadings.
-Single or joint life/in trust?
Identify the factors you should consider when advising Peter and Sally on their protection needs.
Expenditure/affordability/budget.
Levels of cover needed.
Timescales – dependency of children/planned retirement age/term of mortgage.
Financial dependents – two children, likely dependent for at least 11 years.
Income – Normally not reliant on a single income both have good incomes however Peter’s earnings will cease for a year from June 2026/income from savings.
Suitability of existing level-term cover/does it match term and outstanding balance of mortgage.
Cost to re broke/any exclusions/loadings.
Sally has DIS/Peters DIS will stop during sabbatical – he will have no life cover other than the policy to cover the mortgage.
No PMI, CIC or IP or ASU in place/no protection against ill-health.
Family would rely on State benefits if Sally unable to work whilst Peter is on sabbatical/employer sick pay arrangements.
Health – both in good health/simpler underwriting.
Practical and financial help from family/inheritance expected.
Priorities – priority of this objective over next year.
CFL.
Explain to Sally and Peter why they might consider replacing their existing level term assurance policy with a more suitable policy to protect their mortgage.
Decreasing term (mortgage protection) suitable due to repayment mortgage.
Cheaper premiums may be available for a decreasing term policy.
Help address affordability issues whilst Peter is off work.
They may be over insured/can ensure correct term and sum assured/current term or sum assured may be unsuitable.
Simple underwriting/both in good health.
Could have waiver of premium.
Could add CIC as currently do not have any ill health cover/at lower cost than standalone policy.
Recommend and justify a suitable policy to replace the level-term policy that covers Peter and Sally’s mortgage in the event of death or serious illness.
Decreasing term assurance.
With CIC if affordable
-Pays out a tax-free lump sum to pay mortgage off in full in the event of death or diagnosis of a serious illness.
-Both in good health/ simple underwriting.
-They have no ill health cover currently.
Joint life, first event policy.
-Ensure mortgage is repaid on first death or first diagnosed with a critical illness.
Sum assured – to cover outstanding mortgage.
-Not paying for excess cover as with a level term.
Term – one year.
-Ensures in-line with Peter’s sabbatical.
Waiver of Premium
-Maintains premium in event of illness/ disability.
Guaranteed premiums.
- Certainty of cost throughout term.
In trust
-No delays/no need for probate
Recommend and justify a suitable low-cost product to provide a regular income to support the family in the event of either Peter or Sally’s death.
Family Income Benefit
-Pays out a tax-free regular premium in the event of either death.
-Decreasing term – Low-cost cover.
-In good health so simple underwriting.
Joint life, first event policy.
-Provides cover in the event of either death.
-No delays/payments straight to survivor.
Sum assured – to cover essential expenditure less amount on level term plan only.
-Once Peter starts his sabbatical, he will not have any life cover other than level term cover for the mortgage/Sally has limited cover.
-Ensures family’s essential needs are met whilst keeping premiums to a minimum.
Index Linked.
-Ensure benefits keep pace with inflation.
Term – to meet dependency of children.
-Relatively short term keeps costs low.
Waiver of premium.
-Maintains policy in the event of long-term illness or disability.
-Guaranteed premiums.
-Certainty of cost throughout term.
In trust
-No delays/no need for probate
Explain to Sally the benefits of using an Accident, Sickness and Unemployment (ASU) policy to protect her income rather than an Income Protection (IP) policy in the short term.
Can set up an annual contract to suit immediate protection need whilst Peter is on sabbatical.
Only paying for immediate needs cover so
usually cheaper than Income Protection which is designed as a longer-term protection policy
helping to manage cash flow during Peter’s sabbatical.
Provides additional unemployment cover which is not covered under IP.
Can provide lump sum payments, useful for covering mortgage or essential expenses during short-term income loss.
Less strict underwriting than IP, making it easier to obtain quickly.
Flexible for short-term income replacement, ideal for one year to plug protection need gap.
Can review and consider IP when Peter is working again after sabbatical and budget is increased.
Recommend and justify a suitable product to provide cover for Sally’s income in the event of unemployment or ill health whilst Peter is on sabbatical.
Accident, Sickness and Unemployment.
-Provides tax-free benefits if the insured suffers an accident, sickness or unemployment;
-Simple underwriting as pre-existing conditions are excluded.
Sum assured – income max amount of 75% of income.
-Helps to cover essential expenditure.
Benefit payable for a year.
-One year payment period is in line with Peter’s sabbatical.
-Short term keeps costs low/can be reviewed or changed when Peter returns to work when higher premium for longer term IP policy may be affordable.
Deferred period.
-30 days or in line with employer sick pay if longer to ensure minimal break in income.
Recommend and justify a low-cost protection product that would provide Sally with a regular income in the event of her suffering a long-term illness.
Income protection policy.
Single life basis.
-Provides tax-free income in the event of Sally being unable to work due to illness/incapacity.
In good health should not be unaffordable and simple underwriting.
=Rehabilitation/proportionate benefit available.
Multiple claims.
-Cannot be cancelled by insurer.
Deferred period in line with employer sick pay.
-Ensures no break in income.
Own occupation.
-Widest definition.
-Should not be too expensive as she has a low risk occupation.
Income protected at level to cover essential expenditure.
-To enable them to maintain their standard of living.
No indexation.
-To reduce costs.
Term to end of dependency of children/or less.
-Meets family needs whilst children are still dependent/can set up a short policy to reduce costs further (2 to 5 years also).
Reviewable premiums.
-Reduces costs as less expensive at outset than guaranteed premiums.
Recommend and justify a low-cost protection product that would provide Sally with a regular income to pay the mortgage
Mortgage payment protection policy.
On Sally’s life.
-Provides tax-free income in the event of being unable to work due to illness/incapacity/unemployment.
Sum assured to cover monthly mortgage costs.
-Protects mortgage repayment if neither Peter or Sally have earnings.
Minimal underwriting.
-Quick and easy to set up.
Deferred period 30 days.
-Ensure mortgage is covered as soon as possible.
Short-term cover/cover for a year.
-To provide cover whilst Peter is on sabbatical only. Shorter term is cheaper.
