AF5 - Financial Planning Process > Redmill Deck > Flashcards

Redmill Deck Flashcards

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1
Q

List the six steps of the financial planning process (ISO 22222).

A

1) Establish/define the planner relationship; 2) Gather data and determine goals; 3) Analyse/evaluate status; 4) Develop/present the plan; 5) Implement recommendations; 6) Monitor the plan and relationship.

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2
Q

List five FCA best practices for Know Your Customer.

A

1) Consider future goals/aspirations;
2) Assess circumstances over time;
3) Gather extensive information and check at least biannually;
4) Recognise differing ATR for couples;
5) Record existing plans and build them into recommendations.

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3
Q

State the benefits to a client of using an authorised financial adviser.

A

Problems/goals identified; research and budgeting support; assess existing arrangements; tax planning and wrappers; ATR/CfL assessment; tailored recommendations; clear suitability; ongoing service and higher consumer protection.

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4
Q

What is capacity for loss?

A

The client’s financial ability to absorb losses if they occur.

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5
Q

What is attitude to risk?

A

The level of risk a client is willing to take and their comfort with fluctuations and potential losses.

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6
Q

Why should an adviser not rely solely on a risk profiling tool?

A

Answers may need discussion; tools differ; clients may misinterpret; may be unsuitable for zero capacity for loss; risk can differ by objective.

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7
Q

Name the 10 main investment risks

A

Taxation, Inflation, Default/Provider & Political, Diversification, Liquidity, Systematic/Non-Systematic, Interest Rate, Credit, Currency, plus additional: Political, Property & Health.

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8
Q

State four limitations of using an asset allocation model.

A

Doesn’t recommend tax wrapper/ignore tax; charges not considered; questions may be irrelevant; different models/assumptions change; needs review; based on historic data.

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9
Q

What is stochastic modelling in investment planning?

A

A technique using asset allocation to forecast a range of possible returns and probabilities, helping clients choose portfolios.

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10
Q

Define active fund management.

A

Seeks to outperform the market via stock/fund selection and timing; information intensive; higher costs; performance not guaranteed.

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11
Q

Define passive fund management.

A

Targets market-average returns via tracking and periodic rebalancing; lower intervention and costs; typically slightly underperform benchmark after fees.

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12
Q

What is the core purpose of an investment platform?

A

Provide access to a wide range of collective investments and wrappers (ISA, SIPP, bonds), consolidate holdings online with valuations and allocations.

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13
Q

Give five benefits of appointing a discretionary fund manager (DFM).

A

Professional active management; potential higher returns; regular reviews; bespoke objectives; no need for ongoing client involvement; consolidated info; wider options; tax allowances utilisation.

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14
Q

Give five drawbacks of appointing a DFM.

A

Higher charges; no performance guarantee; service may vary; lack of client control; may invest in unacceptable sectors; may not provide tax advice; tax-efficiency not always considered.

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15
Q

Name three advice fee charging methods.

A

Fund-based (% of assets), Time-based, Fixed.

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16
Q

Give three advantages of fund-based fees.

A

Easy to understand; ease of payment via provider; planner has incentive to grow assets.

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17
Q

Give three disadvantages of fund-based fees.

A

May not reflect time/complexity; separate charges needed for tax/insurance; not fully transparent year-on-year.

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18
Q

Give three advantages of time-based fees.

A

Familiar/comparable; aligns to work/complexity; charges don’t rise just because values rise; budgets agreed.

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19
Q

Give three disadvantages of time-based fees.

A

Perceived to reward inefficiency; may deter client contact; paid from personal funds and subject to VAT where advisory.

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20
Q

Explain how a lifetime cashflow modeller works.

A

Projects current situation with assumptions; identifies shortfalls; tests effect of recommendations.

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21
Q

List key factors/assumptions to discuss for cashflow modelling.

A

Targets/expenditure; terms/longevity/NRD/mortgage; budget/income/inheritance; ATR/CfL; growth assumptions; charges/fees; inflation/earnings; wrappers/tax allowances.

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22
Q

List risks of relying solely on cashflow modelling.

A

Assumptions may be wrong; estimates require reviews; circumstances change; linear returns; tax rules may change; market/political/liquidity risks; wrapper limitations.

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23
Q

How many qualifying years are needed for the full New State Pension?

A

35 years of NIC or credits.

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24
Q

What is the minimum number of qualifying years to get any New State Pension?

A

10 years.

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25
Do you build State Pension entitlement from a spouse's NIC record under the new system?
No, it's individual.
26
How can EEA work history affect UK State Pension entitlement?
EEA NIC-equivalent payments can credit towards the Single Tier Pension.
27
How have New State Pension increases been applied recently?
By the 'triple lock' – higher of CPI, average earnings growth, or 2.5%.
28
What is the small pots rule value limit for occupational pensions?
Up to £10,000 each, unlimited number from unconnected schemes.
29
Are small pots tested against the Lump Sum Allowance (LSA)?
No, small pots payments are not tested against the LSA.
30
Can small pots be paid from crystallised or uncrystallised funds?
Yes, from both.
31
What is a lifestyle pension strategy?
Automated de-risking from higher-risk assets to lower-risk as retirement approaches, targeting annuity, cash lump sum, or drawdown.
32
Name two advantages of lifestyle pensions.
Risk management near retirement; convenience via automatic adjustments; tailored to retirement option.
33
Name two drawbacks of lifestyle pensions.
Assumes fixed retirement date; potential missed growth; one-size-fits-all; may misalign with goals.
34
What is a lifetime annuity?
A contract where an insurer pays guaranteed income in exchange for a lump sum from un/crystallised funds.
35
Who might a lifetime annuity suit?
Low ATR or capacity for loss; need guaranteed income; don't want to manage investments; long life expectancy; medical conditions may qualify for enhanced rates.
36
Which options affect annuity income?
Frequency, guarantee period, annuity protection, survivor's pension, escalation.
37
What determines annuity rates mainly?
Long-term bond (gilt) yields and longevity expectations.
38
How do interest rates affect annuity rates?
Lower interest rates correlate with lower gilt yields, reducing annuity rates.
39
What is an impaired life annuity?
Higher rate due to lower life expectancy; fully underwritten using medical evidence or specialised mortality tables.
40
What is an enhanced annuity?
Higher rate for lifestyle factors (smoking, diabetes, obesity) via points-based underwriting.
41
What is a short-term annuity?
Annuity up to 5 years bought using drawdown funds; guaranteed income paid by insurer; taxed as recipient's income.
42
How are dividends taxed initially?
Paid gross; first £500 taxed at 0% under the dividend allowance (individuals only).
43
State dividend tax rates by band.
Basic 8.75%; Higher 33.75%; Additional/trustees 39.35%.
44
What is the Personal Savings Allowance (PSA)?
£1,000 for basic-rate, £500 for higher-rate, £0 for additional-rate taxpayers.
45
State interest tax rates by band (post-PSA).
Starting rate 0% (within first £5,000 of taxable income only); Basic 20%; Higher 40%; Additional/trustees 45%.
46
Explain the starting rate for savings.
If non-savings income < £17,570 (PA £12,570 + £5,000 band), savings income taxed at 0% within band; band reduces £1 per £1 of excess non-savings income over PA.
47
How much tax-free income could a basic-rate taxpayer receive via allowances in 2024/25?
Up to £18,570 combining PA £12,570, starting rate band £5,000 (if applicable), and PSA £1,000.
48
What is the Marriage Allowance?
Transfer up to 10% of PA (£1,260) from a non-taxpayer to a basic-rate spouse/civil partner; not available to higher/additional rate or for refunds.
49
What is the ISA subscription limit?
£20,000 overall per tax year.
50
Are ISAs taxable for income tax and CGT?
No; proceeds are free of income tax and CGT.
51
Are ISAs outside the IHT estate?
No, ISA value is included in the estate for IHT (unless invested in BR-qualifying assets).
52
Can ISA savings from previous years be transferred without affecting the current limit?
Yes.
53
What is a continuing ISA on death?
Deceased's ISA remains tax-free until estate administration, ISA closure, or 3 years and one day.
54
What is Additional Permitted Subscription (APS)?
Surviving spouse can invest an amount equal to the deceased's ISA value (at death or transfer) in addition to their own allowance; can be used in specie or cash within time limits.
55
Name chargeable events for investment bonds.
Death, assignment for money's worth, maturity, partial surrender above 5%, full surrender.
56
How do 5% withdrawals work?
Up to 5% per year cumulative are tax-deferred; tax due when gains arise (e.g., on encashment).
57
How are bond gains taxed for higher/additional rate taxpayers?
Further 20% (higher) or 25% (additional) may be due; top-slicing relief can reduce tax; gains are savings income so PSA/starting rate may apply.
58
What is the legal structure of a Unit Trust?
A trust with a trustee as legal owner, manager for day-to-day running; FCA-authorised for public marketing.
59
What are income (distribution) units?
Units paying income (dividends/interest) to holders; paid net of expenses or deducted from capital depending on policy.
60
What are accumulation units?
Income retained/reinvested, increasing unit price; same taxation as income units.
61
What is the ex-distribution (xd) date impact?
Prices rise before xd with accrued income and fall after payout; seller gets income paid during xd period.
62
What is an equalisation payment?
Extra amount with first distribution to compensate income included in purchase price; treated as capital (adjust base cost for CGT).
63
How is income from funds taxed depending on asset mix?
<60% fixed income: treated as dividends; >60% fixed income: treated as interest with PSA rules.
64
What CGT rates apply on disposal of units?
18% basic-rate; 24% higher-rate; after AEA £3,000 (2024/25).
65
What is the 30-day rule for bed and breakfasting?
Must wait 30 days between sell and buy to reset CGT base cost; alternatives: Bed & ISA, spouse/civil partner buy, similar fund.
66
What is an OEIC?
An open-ended investment company with ACD and depositary; FCA-authorised; can offer umbrella funds and share classes.
67
State advantages of OEICs over Unit Trusts.
European similarity/easier sales; different share classes; umbrella funds enabling strategy changes without CGT.
68
Are Investment Trusts open or closed-ended?
Closed-ended (share price set by supply/demand).
69
Define premium/discount for Investment Trusts.
Premium: price above NAV; Discount: price below NAV; discount widening reduces returns, narrowing boosts.
70
What is gearing in Investment Trusts?
Borrowing to invest; can magnify gains/losses; increases risk.
71
What are typical charges for Investment Trusts?
Older ~0.5%; modern 1–1.5% plus possible performance fees and other costs 0.2–0.5%.
72
Which structures are listed on a stock exchange?
Investment Trusts (PLCs); Unit Trusts and OEICs are not.
73
What are typical valuation frequencies?
UT/OEIC daily; Investment Trust monthly/weekly/daily depending.
74
What is permanent gearing allowance?
Investment Trusts can gear up to 100% permanently; UT/OEIC 10% temporary.
75
What is a mirror will?
Each partner leaves everything to the other and then to chosen beneficiaries; survivor can change their will later.
76
State the checklist for a valid will.
Testator >18, sound mind, no pressure; written; signed; witnessed by two independent witnesses (not beneficiaries/spouses).
77
What do executors do?
Administer estate: collect debts, pay tax, distribute assets; get grant of probate; manage any will trusts.
78
What is the IHT rate and NRB in 2024/25?
40% on value above NRB £325,000; can reduce to 36% if ≥10% of net estate to charity; transferable between spouses/civil partners.
79
Name assets qualifying for Business Relief.
Certain business assets incl. unquoted trading company shares, EIS/SEIS/AIM shares (subject to conditions).
80
How do lifetime gifts affect IHT?
PETs reduce NRB if death within 7 years; CLTs incur 20% lifetime tax over NRB and may incur further tax if death within 7 years.
81
State taper relief percentages for failed PETs/CLTs.
Death 0–3y: 0% reduction; 3–4y: 20%; 4–5y: 40%; 5–6y: 60%; 6–7y: 80% (applies to tax, not the gift).
82
List common IHT exemptions.
Spouse/civil partner (if UK-domiciled); charity; wedding gifts (parents £5k, grandparents/parties £2.5k, others £1k); annual £3k (+carry-forward 1y); small gifts £250; normal expenditure out of income; maintenance/education.
83
Define a Gift with Reservation (GWR).
A gift where donor retains benefit (e.g., living rent-free in gifted home); asset remains in the estate.
84
How can life insurance fund IHT?
Write WOL policy in trust (often JL2D) for expected liability; beneficiaries/executors can use proceeds to pay IHT without selling assets.
85
What is a 7-year decreasing term assurance used for?
To protect recipients of PET/CLT during the 7-year risk window or protect estate NRB used by gifts.
86
Define joint tenants vs tenants in common for IHT.
Joint tenants: passes to survivor, IHT exempt if married/civil partners; TIC: passes per will/intestacy; same IHT rules apply.
87
What is a deed of variation?
A document to alter an inheritance within 2 years of death for IHT/estate planning; only affected beneficiary needs to agree; can apply to intestacy.
88
Why place life policies under trust?
Avoid probate delays; potential IHT mitigation; distribute per wishes; protection from creditors; premiums may use exemptions.
89
What is a bare (absolute) trust?
Simple trust where beneficiary has absolute right; transfers are PETs; value in beneficiary's estate; beneficiary liable on failed PET.
90
What is an interest in possession (IIP) trust (post-2006)?
Beneficiary entitled to income; generally treated like discretionary trusts for IHT unless disabled person's trust or created on death (IPDI).
91
What is a will trust with IPDI?
Life tenant (survivor) gets income/use for life; assets then to remainderman; included in estate on second death; spousal exemption applies; RNRB may apply if direct descendant.
92
What is a nil-rate band discretionary will trust?
Leaves assets up to NRB into discretionary trust to avoid wasting NRB on first death; usually no periodic/exit charges if under NRB; RNRB not available.
93
What is a discretionary trust?
Trust where trustees have discretion over capital/income; CLT for IHT; subject to 10-year periodic (max ~6%) and exit charges; beneficiaries have no rights.
94
Compare absolute vs discretionary trust on beneficiary rights.
Absolute: beneficiary cannot be changed and can demand assets; Discretionary: beneficiaries can be changed and cannot demand assets.
95
Who pays income tax in a bare trust?
Beneficiary at their rates using personal allowances.
96
What are trustee income tax rates for IIP trusts?
Basic rate (8.75% dividends or 20% interest). Non-taxpayer beneficiaries can reclaim; basic-rate payers no further liability.
97
What are trustee income tax rates for discretionary trusts?
Dividend 39.35% or other income 45%, with low-income exemption £500 split across settlor's trusts.
98
What CGT rates/allowances apply to trustees?
CGT 24%; trustees' AEA £1,500 split across settlor's trusts.
99
Who counts as a vulnerable beneficiary under FA 2005?
Disabled persons (per specified criteria) and relevant minor children (lost at least one parent).
100
What election is needed for favourable tax on vulnerable beneficiary trusts?
Joint election by trustees and beneficiary within prescribed HMRC deadline; limits trustee tax to beneficiary-comparable liability.
101
What replaced Enduring Powers of Attorney (EPA) on 1 Oct 2007?
Lasting Power of Attorney (LPA).
102
Name the two LPA types.
Property & Financial; Health & Care.
103
When does an LPA become effective?
On registration with the Office of the Public Guardian; Health & Care use only after donor loses capacity unless specified.
104
State basic validity requirements for an LPA.
Donor/attorney >18 and not bankrupt; donor has capacity; prescribed forms; certificate provider; independent witness; can be revoked with capacity.
105
What is the typical OPG fee?
£82 (with £41 for small error correction and resubmission).
106
Why nominate replacement attorneys?
An LPA with no replacement attorneys can become void on attorney's death; replacements ensure continuity.
107
Why do care costs tend to rise faster than CPI/RPI?
They are wage-heavy and broadly track average earnings growth.
108
What investment approach suits capital set aside for care fees?
Low-risk, liquid investments for near-term needs; consider equities only for very long timescales (10y+).
109
What is the only way to guarantee income for life for care?
Annuity (with options like capital protection/guarantee reducing income).
110
What is Attendance Allowance (AA) based on?
Need during day and/or night; paid at two rates; not taxed and not means/NIC tested.
111
What is Carer's Allowance and key limits?
£81.90/week (2024/25) for low-income carers of AA/PIP/DLA recipients; not paid if earnings > £151/week after tax or full-time education; State Pension interaction applies.
112
Outline the investment advice process steps.
Establish goals/time scales; confirm income vs growth; ATR/CfL; emergency funds; tax status; existing investments; ethics/SRI; asset allocation; fund selection/switches; allocate wrappers; implement/monitor/review/rebalance.
113
Why might a multi-asset fund be suitable for a client's ATR?
Diversification across assets/geographies; potential growth; controlled correlations; reduced volatility; active management; regular rebalancing; risk-rated to match ATR; access to specialist investments.
114
What happens to property held as joint tenants if you want to place it into an IPDI will trust?
It must first be severed to tenants in common via a deed of severance.
115
Do trustees of discretionary trusts have personal allowances for income tax?
No; trust income is taxed at trustee rates without personal allowances (subject to low-income exemption).
116
Are ISAs reportable to HMRC by the investor?
No (the provider reports), though investors must supply NI number to provider.
AF5 - Financial Planning Process
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