How to pass RO6: Financial planning practice (2016/17)

Transcription

1 How to pass RO6: Financial planning practice (2016/17) Coniston Press is a trading name of Capital Financial Training Limited, which has no connection or affiliation with the Chartered Insurance Institute (CII). None of the examples in this text purport to be representative of CII examinations. The copyright of all documentation (including electronic documentation) belongs to Coniston Press. No part of this publication may be reproduced, copied or transmitted in any form by any means without the written express permission of the copyright owner. Any illegal use of materials may be liable to criminal prosecution and civil claims for damages. Whilst every effort has been made to ensure the accuracy of information provided, Coniston Press will not accept liability for any claims in relation to loss occasioned to any person acting or refraining from action as a result of any material in this publication. We would welcome enquiries resulting from any of the information in the guide. Any feedback or constructive comments will be very gratefully received 1

2 How to Pass RO6: Financial planning practice Contents Section One: Introduction 3 Section Two: Financial planning process 7 Section Three: Gathering Client information 13 Section Four: Evaluating Client Situations 18 Section Five: Making Recommendations 25 2

3 Section One: Introduction 1.1 Exam format RO6 is a three hour written examination, carrying 30 credits at Diploma level. There are 150 marks available and the nominal pass mark is 55% (82 marks). Results are released approximately six weeks after the exam date. The examination is designed to test a candidate s ability to apply knowledge and skills from the earlier papers RO1 RO5. It is based on two case studies which are sent to candidates two weeks beforehand. The case studies are also available to download from the CII website (Qualifications/Assessment information/supporting exam documents/ro6) usually on a Friday, which will give slightly more than two weeks (i.e. three weekends) to prepare. The questions on each of the case studies will total approximately 75 marks (although this may vary slightly e.g. 78marks: 72 marks). Candidates are not allowed to take the pre released case studies into the examination but will be issued with fresh copies, together with a series of questions to answer and current tax tables. The fresh copies will be identical there will be no amendments or new information. It is worth familiarising yourself with the CII tax tables in advance. The pre-released case studies will state the clients financial objectives and the questions will be largely based on these objectives. It is therefore advisable to look at the client circumstances in advance of the exam and relate these to probable questions and answers. Prepare a list of further information that you would require in order to give advice on each of the client objectives. If a product or other technical issue is mentioned in the case studies (for example, in the October 2014 exam, a client wished to learn about VCTs) then list in advance all of the relevant features, advantages and disadvantages. 3

4 1.2 Exam technique As there are 150 marks available in 180 minutes, think in terms of one mark per minute. Each question part will state the maximum marks available so use this as your guide to allocate time to marks available e.g. if a question part carries seven marks, be prepared to devote up to seven minutes when answering it. Keep your answers concise. There is no requirement for essay/report style answers (unless specifically asked for in a question) and therefore bullet point/single sentence answers will suffice. However, in some cases, there is a danger that a bullet point doesn t always fully explain. In such cases, it s always worth following it up with a second explanatory point. That is, make a statement and then explain it. So, if a question asks you to state relevant factors and carries four marks, then four relevant bullet points may suffice. However, that doesn t usually take four minutes (unless you need to think quite deeply about the question). Take the whole of this time to follow up the points with a further explanation where there is any doubt. If a question, for example, asks you to state relevant factors and there are four marks, don t feel that you have to stop at four. If you have more in mind, and feel they are relevant, state them. The exception to this is where a question stipulates the number of points required. For example, if a question asks you state three benefits and three drawbacks or state six areas then you may not receive credit for exceeding this number. Use subheadings wherever possible as this will allow you then use bullet points. For example if a client is considering whether to stay with an interest only mortgage or switch to capital and interest, then your initial answer could be: Staying with Interest only: advantages: lower monthly payments may be penalty or admin costs for switching can use tax-efficient investments to support may be surplus from repayment vehicle in due course Capital & interest: advantages: guaranteed to repay mortgage if payments met no shortfall investments available for other purposes 4

5 saves interest compared with interest only mortgage can usually make overpayments decreasing term assurance/ CIC cheaper than level term You should then review each point to consider whether it is self-explanatory. If not, add a further explanation. In this case, for example, perhaps explain that it is the reducing balance of C&I that allows decreasing life/cic cover. Do not be afraid to put too much detail; use all of the time allowed. Putting information in tables (for example, when comparing products) may also be timeefficient. Unless clearly a generic question (e.g. on general planning process) always relate your answers to the case studies. Any recommendations must be clearly addressed to the clients specific needs and objectives. There is no negative marking. If you feel that something may be relevant then state it as part of your answer. However, do not try to hedge on this. If you say that something is tax-free and then later describe it as taxable, don t expect any marks for the fact that one of your answers is correct! Only answer the question that is being asked however well explained, there will be no marks for any part of an answer which does not meet the question set. Read all of the questions relating to a particular case study before starting to answer. This will help to prevent duplication in your answers. However, don t be concerned if you do have to repeat a piece of information/question that you gave earlier in your answers. Looking at the questions beforehand may help to reduce the occurrence of this (and therefore save time) but sometimes it is unavoidable. If you believe that something is relevant then write it down. Don t be put off by the fact that it has been mentioned earlier. There is no set order for answering questions. Generally, it is advisable to start with the most straightforward questions as picking up marks from the offset will build confidence. Always state the obvious (for example, if recommending an individual term assurance policy, explain that the death benefit is tax-free). Even though the examiner reviewing your script is a highly experienced financial services professional, make the points as you would for a client. Similarly, fully cover off all the points. For example, describing an Individual Savings Account (ISA) as tax-efficient is too vague. A full explanation will score far more highly. In this example therefore, explain that there is no CGT on gains within the ISA, generally no tax on income. If tax has been deducted at source, it can be reclaimed. If possible, relate it to the case study to demonstrate exactly how much tax (e.g. 40%) will 5

6 be saved. State that it will form part of an estate for IHT on death. This should give you a chance of receiving maximum marks. Show calculations in full. A single mistake will result in a wrong answer but it is still possible to gain most of the marks available if the format and other parts of the calculation are correct. Don t leave anything in your calculator write it down. Common failings in RO6 are: Answers that are not specific to the case study. Therefore relate your recommendations to the client s circumstances. Lack of detail. Where you are making recommendations, ensure that you set out all features, advantages and disadvantages, risks and taxation treatment. It is a requirement that you start each question on a new page and leave 6 lines blank between question parts. However, treat this as a minimum. Where appropriate, leave more space. It may well be that something later in the paper will lead you to go back and add to an earlier answer and leaving space will work to your advantage. Spell out a term in full before using an acronym/abbreviation. For example: potentially exempt transfer (PET). Where you use a technical term, always fully explain it. In our example of a PET, spell out what will happen if the donor dies within seven years and what will be the consequence of the donor living for a further seven years. 1.3 Range of questions The RO6 examination is designed to test across all five learning outcomes of the syllabus: Obtain appropriate client information and understand clients needs, wants, values and risk profile essential to the financial planning process Synthesise the range of client information, subjective factors and indicators to provide the basis for financial planning assumptions and decisions Analyse a client s situation and the advantages and disadvantages of the appropriate options Formulate suitable financial plans for action and explain and justify recommendations Implement, review and maintain financial plans to achieve the clients objectives and adapt to changes in circumstances Questions in the exam will broadly follow the above order. In the following sections, we will look at the types of questions that you may face. 6

7 Section Two: Financial planning process This relates to Learning Outcome One: Obtain appropriate client information and understand clients needs, wants, values and risk profile essential to the financial planning process The initial questions in the examination may be generic questions around: Advice Fact finding The planning process The different types of risk, risk profiling (note: questions on risk, risk profile may be set at the beginning or asked later in the paper) Some examples are as follows: What is the financial planning process? Establishing and defining the client/ personal financial planner relationship Gathering client data and determining goals and expectations Analysing and evaluating the client s financial status Developing and presenting the financial plan Implementing the financial planning recommendations Monitoring the financial plan and the financial planning relationship Explain the benefits of receiving and acting on advice from a qualified financial adviser Identify goals/shortfalls Assess attitude to risk/capacity for loss Budgeting/affordability/cash flow Analyse existing arrangements/circumstances 7

8 Tax planning Research Receive financial plan Ongoing reviews Professional expertise Clarity of explanation Regulated advice/consumer protection State the methods of charging for financial services Fund based charging fees are charged as a percentage of funds under management Time based charging fees are determined by the amount of time spent Fixed fees Contingent fee (payable if client decides not to proceed) What are the advantages and disadvantages of: (a) Fund based charging (b) Time based charging (a) Fund based charging Advantages: Easy to understand Ease of payment (from fund, not client) Planner has incentive to achieve as much growth as possible Disadvantages: Does not accurately reflect time spent (larger portfolios not much harder to administer than small ones) Additional charges will apply for tax planning/insurance recommendations Difficult for clients to quantify the charge from year to year 8

9 (b) Time based charging Advantages: Familiarity (e.g. with accountants) ability to compare Amount of charge is based on amount of work and complexity Can agree fee cap Disadvantages: May reward inefficiency i.e. by spending more time than necessary May lead to worries about cost of reviews Payment will need to be made from personal funds What are planner responsibilities? Disclose status client agreement Agree limitations of authorisation and competence Assess suitability Collect information Prioritise advice What is the investment process? Establish client s goals and expectations Understand client s current financial circumstances Evaluate client s investment aims Recommend asset allocation Fund (or stock) selection/ asset allocation Implementation Note: this type of question will typically carry six marks, which will be covered by the above points. If it were to carry more (or you wish to make certain!) further points could be: timescales, attitude to risk, need for liquidity, use of appropriate tax wrappers, need to review) 9

10 What are the main summary and analysis areas? Current cash flow statement: income and expenditure in terms of amounts and timing Net assets statement Risk assessment and protection Tax position Retirement review Lifetime cash flow projection Estate protection What are the advantages of a current cash flow statement? Shows difference between income and expenditure If excess expenditure, can look to reduce expenses and re-schedule debt. If excess income, opportunities for investment Establishes need for an emergency fund Identifies shortfall if loss of income on the death/illness of a client What are the retirement planning stages? Intended retirement age Income required in retirement Provision for dependants Other assets, future capital sums available Existing pensions/retained benefits State pension entitlement Attitude to risk Project current arrangements to intended retirement age 10

11 Identify shortfalls What is meant by risk profiling? Many advisers use questionnaires to establish a client s attitude to risk. A risk profile sets limits on the extent of maximum loss likely within different timescales (i.e. maximum loss that a client is willing to accept) and can then be directly linked to asset allocation. Questions will seek to ascertain: Attitude to risk Risk tolerance Capacity for risk It will also incorporate factors other than risk, such as liabilities, timescale, spending objectives and existing assets. The results are fed into software to give a risk score which helps an adviser to agree a profile with a client and translate this into asset allocation. Holding investments that carry higher risk than the risk profile may result in unacceptable losses in adverse market conditions; conversely if investments held are lower risk overall that the risk profile, returns may be lower than those that could have been achieved. What is meant by Stochastic modelling? Stochastic modelling estimates ranges in which returns may fall, using a variety of probable outcomes, based on different figures for inflation, growth etc. It indicates which of these potential outcomes are more likely. It is important for a client to understand that in extreme circumstances, actual outcomes may fall outside the range shown. State the possible limitations of using an asset allocation model It takes no account of a client s tax status It does not take into account charges, transaction costs It involves the need for regular re-balancing/reviews with resulting costs 11

12 Re-balancing involves disposal of some of the higher-growth assets and the retention of those which have performed more poorly Client circumstances may change Asset allocation is essentially defensive and may miss out on opportunities offered by less diversification/ more concentration in higher growth sectors What are the advantages/ disadvantages of using a discretionary investment manager? Advantages: Can delegate responsibility to the manager/ no need for ongoing client involvement Professional active fund management on a daily basis Manager will follow the client s individual guidelines and objectives (bespoke service) Can utilise tax exemptions/allowances Regular consolidated statements of investment position Regular reviews Disadvantages: Less control for client Higher charges than passive investment (but may be cheaper than advisory management) May not necessarily consider tax efficiency Delays before discussion/updates 12

13 Section Three: Gathering Client information This relates to Learning Outcome Two: Synthesise the range of client information, subjective factors and indicators to provide the basis for financial planning assumptions and decisions. There are two areas to consider: 1. Errors and inconsistencies in the information given by the clients in the case studies. 2. Identify where additional information is required and ask appropriate questions this will normally carry significant marks in the RO6 exam. 2.1 Errors and inconsistencies Errors are factual. For example: The client believes that her State Pension Age is 65. However, from her date of birth, we can advise that her SPA will be 66 The client believes that he will receive a full State pension. However, he has an insufficient NI contribution record. The client wants to subscribe to a Child Trust Fund for her daughter. However, she will be eligible for a Junior ISA rather than a CTF. Inconsistencies involve objectives or concerns. For example: A client is low risk but has a large concentration of shares in emerging markets (or vice versa, has an adventurous attitude to risk but mainly invests in gilts) A client is concerned about financial protection but has no provision in place When you receive the case studies, review them in advance to see you can pick out any errors or inconsistencies. When answering a question, state the error/inconsistency and then explain why it is incorrect/inconsistent. 13

14 2.2 Additional information Normally, in both case studies, you will be asked what additional information is required in order to give advice on the clients stated objectives. Basically this is a series of questions that you need to ask the client. If it is a couple, then make it clear to whom the question is addressed. Perhaps put your questions under three headings: Joint, Client A, Client B. When you receive the Case Studies, make a list of questions under each objective. The questions need to relate specifically to the clients situation but some typical questions are listed below. (As these are generic examples, with no case study details, for ease we have set all the questions on a joint basis). Adequate income in retirement What level of income would they require in retirement? Would they want the income to be increasing? What capital requirements will they have in retirement? Do they have capital expenditure plans? Have they any expected inheritances? Will they have any future capital sums available? Ethical objections/objectives? Would they wish to use any pension commencement lump sum towards retirement provision? Would they be willing to use non-pension assets towards retirement provision? Will they receive full State pensions? Have they completed forms BR19? What provision for dependants would they like to make? Are their attitudes to risk the same for pension investment as for non-pension investment? Would they require income levels in retirement to be flexible? Would they want guaranteed levels of income in retirement? Have they nominated beneficiaries? 14

15 Do either of them have other pension provision? Do they have a copy of scheme details? What dependant s pension does the existing scheme give? What are current year earnings? What contributions have they made (or have been made on their behalf) in this tax year? Do they have annual allowances which have not been fully utilised in the previous three tax years? Improve the tax efficiency of their current portfolio Are there any other assets? What was the objective of investing in the collective funds/ investment bond? Level of income required, if any? Would X be willing to transfer assets to Y, in order to save tax? What was the original investment in collective funds and the bond? What are the underlying assets with the bond? What yields are being received from the bond and collectives? Have they taken any withdrawals from the bond? Have they utilised their ISA allowances in this tax year? Have they used their CGT exemptions this tax year? Have they made any disposals this year? Do they have any losses to bring forward? Do they have any ethical objections or concerns? Do they expect to receive any inheritances? When does the fixed rate account mature? Are the instant access account and fixed rate account with the same bank? Are there any penalties for making withdrawals from the collectives or the bond? Level of charges on current investments? 15

16 Adequate funding to repay mortgage in 10 years time Interest rate on current mortgage? Early redemption penalties on existing mortgage? Any deal on current mortgage e.g. for a fixed rate term? Likely to move property in future? Is the current mortgage portable? Does it allow offset? Why did they choose an interest only mortgage? Are they willing to use savings/investments to provide additional equity? Budget/affordability for future repayments? Term of future mortgage? Are they prepared to fully fund ISAs? Adequate financial protection whilst children are at school/university Are they smokers? What is the family medical history? Have they ever been rated or declined for insurance? Do they pursue any hazardous pursuits? Are there any other liabilities (in addition to mortgage)? What dependant provision do their pensions offer? How long do they think children will be dependent for? Anticipated cost of children s education? 16

17 Planning to have more children? Would they wish for investments to be used upon death to provide for the children whilst dependant? Income/capital required if ill/disabled for a period of time? What would be the shortfall on either death? If either were to die, would the survivor wish to give up work to look after the children? What is their affordability/available budget? Do they require indexation of benefits? What levels of sick pay, if any, are offered by their employers? Inheritance tax planning Are they in good health? Are they expecting any further inheritances? Have they made any gifts in the last fourteen years? Are they willing to give away assets? Are they willing to disclaim (refuse to accept) any inheritances? Would they wish assets to be used for long term care needs? Who do they wish to benefit from the estate? Do they intend to leave money to charity? What is the value of X s shares in company do they qualify for IHT business relief? 17

18 Section Four: Evaluating Client Situations This relates to Learning Outcome Three: Analyse a client s situation and the advantages and disadvantages of the appropriate options Questions may ask you to: Identify and comment on the client s existing provision Demonstrate your technical knowledge Explain various options and their respective advantages and disadvantages 4.1 Existing provision In relation to a client s objective, briefly state what is currently in place, if anything, and whether or not it meets their objective. If you are asked to comment on retirement, for example, explain what will be provided by an individual s State, occupational and individual pensions. If you are asked to comment on the situation should one person die, explain what will happen to the joint assets, the sole assets of the deceased (under the terms of a will or intestacy), death in service etc. Explain the effect of death on pension funds and ISAs. A question may ask for: shortfalls in provision; or strengths and weaknesses in provision Note: If a question simply asks you to comment on suitability of existing arrangements, you are not required to make recommendations at this stage. You are simply analysing what is currently in place (or not in place). Of course, if a question asks you to comment and make recommendations, then you need to outline shortfalls/disadvantages of current arrangements and explain what solutions can be put in place. When you receive the case studies, review their current arrangements against their stated objectives. Obviously, this will be specific to the case studies, but just to give four examples below: 18

19 Comment on their present situation and identify strengths and any weakness in their taxation arrangements Investment income in X s name is being taxed at higher rates of income tax (40%, 32.5%). It would only be subject to basic rate tax (20%, 7.5%) on the remainder if received by Y. X has used her personal savings allowance; Y has not utilised his personal savings allowance X has utilised her dividend allowance; Y has not utilised his dividend allowance X s total income is 106,000, thus reducing her personal allowance by 3,000 X will continue to be a higher rate taxpayer in retirement and so will have a further tax liability (20%) on her share of the onshore bond if there is a gain on a chargeable event. There would be no further tax liability if all of the bond is in Y s name and any gain falls within within his basic rate band. He could utilise topslicing. Y s shares in her unquoted company may be eligible for Business Relief for inheritance tax. This will be provided that the company is a qualifying company and she has held the shares for a minimum of two years. If so, the shares will not be subject to inheritance tax. Y s shares may be similarly eligible for Entrepreneurs Relief for CGT. If eligible for Entrepreneur s Relief, the rate of CGT will be 10% (up to a lifetime limit on gains of 10m). Assuming that this is a trading company, it would appear that Y is eligible as she has more than a 5% shareholding. They have fully funded their ISA arrangements for the current tax year Comment on their present situation and identify any weakness in their protection arrangements if either of them were to suffer a long term illness or disability There will be an income shortfall if either of them suffers long term illness. Statutory sick pay will not be sufficient. They have no critical illness cover in the event of serious illness or disability They have no income protection insurance in the event of being unable to work as a result of illness/disability The position regarding the viability of A s business in the event of long term illness may be in doubt 19

20 Should B leave his current employment, the group PMI may cease Their ability to continue employment may be in doubt if either of the dependent children suffers serious illness/disability Comment on their present situation and identify any weakness in their protection arrangements if B were to die first B s life policy may already have lapsed, leaving him with no life cover Once his pension arrangement is in place, A can be nominated as a beneficiary of the fund. PMI cover will cease A will receive complete ownership of the house, joint savings account and joint contents/car Under intestacy, she will receive absolutely the sole contents and current account from B, as these fall below 250,000 There will be a significant income shortfall and an inability for A to fund pensions to the same extent Comment on the suitability of M and N s existing investments and recommend any actions that can be taken to improve tax efficiency. There is too much on their joint current account, earning no interest This is significantly more than they need for an emergency fund Most of the money on deposit account is in N s name. As a higher rate taxpayer N has a 500 personal savings allowance (PSA) and will pay 40% income tax on any excess deposit interest. M, a basic rate taxpayer, would have a 1,000 PSA and pay 20% tax on any excess. The equity-based unit trusts and OEICs are all in N s name. As a higher rate taxpayer N pays 32.5% income tax on any dividends in excess of the dividend allowance. M would only pay 7.5% on any excess. 20

21 As they are considering encashing some of the OEICs, which are currently showing a gain, only N will be able to use the annual capital gains tax (CGT) exemption and will pay 20% CGT on any excess. The offshore investment bond is in joint names. On any subsequent gain, N will pay 40% income tax on half the gain, M will pay 20% income tax on half the gain (provided that any topsliced gain does not take M into the higher rate tax band). They have not utilised their ISA allowances in this tax year Recommend: Reduce the balance on current account Most of deposit accounts to be in M s name this will utilise both PSAs and save 20% income tax on any excess. Some of the unit trusts/oeics which are to be retained should be in M s name as this will utilise both PSAs and save 25% tax on any excess Disposal of any unit trusts/oeics should be on a joint basis as this will utilise both PSAs and save 15% tax on any excess Bond should be fully assigned to M and any subsequent disposals should be planned so that, using top-slicing, they remain within M s basic rate band. Assuming PSAs have otherwise been utilised this will mean that only 20% income tax is payable They should use the funds released by the reduction in current account and the disposal of unit trusts/oeics to fully fund ISAs in this tax year 4.2 Technical knowledge Revise any technical areas that are mentioned in the case studies. These may be arrangements that the clients currently have or are considering for the future. Always consider the advantages and disadvantages of an arrangement and relate it, where possible, to the client s circumstances. For example, if discussing a Venture Capital Trust (VCT): 21

22 Explain the: Advantages (professional management, some diversification, income tax relief, no tax on dividends (on up to 200,000 annual limit), no CGT Disadvantages (need to hold normally for five years, poor liquidity, no IHT business relief, chance that investee companies will run into liquidation) Then try to relate it to the client s situation. Does it match their attitude to risk? Does it complement existing investments? For example, if as client has a high attitude to risk but a significant amount of a portfolio in fixed interest securities, then having some investment in more adventurous investments such as VCTs may be appropriate. Example: a self-employed client, who has annual net profits of 90,000, is considering incorporating her business. Explain the: Advantages: (profits left in the business subject to only 20% corporation tax, can pay herself a salary of say 10,000 with no income tax and low NICs, can pay herself further income in form of dividends, no NICs, may look more professional, may be easier to sell business, limited liability, although in practice, would normally be required to give a guarantee) Disadvantages (cost of incorporation, higher accountancy charges, her pay will be through PAYE so more admin, limited accounts available to general public) Then relate it to the client s situation. For example, how much tax and NICs will she actually save in practice? This is particularly important in 2016/17 when - following the change in dividend taxation - such arrangements are less advantageous for higher levels of dividend, than previously. Carry out these calculations in advance of the exam. If undertaking a calculation, show all the steps, with a brief explanation where necessary (e.g. CGT exemption, personal allowance). For an inheritance tax calculation, show what you have included in the estate, what you have excluded and any other assumptions made. For example, if you have assumed that a pension fund is in trust and therefore not part of the estate, state this as an assumption. Similarly, if you assume that unquoted shares will qualify for Business Relief, firstly show this in the estate and then deduct it as a relief. 22

23 4.3 Explain various options and their respective advantages and disadvantages As previously discussed, using sub-headings or putting items into tabular form can save time. Once you have made a list, then consider whether each point is selfexplanatory. If not, add more detail. This also shows the examiner that you understand the topic. (For instance, in the example below, the term mortality cross-subsidy requires more explanation). Note: If you are asked to make a comparison between two products then you must compare them it isn t sufficient to just list the features of each. Comparison of annuity and drawdown Annuity: advantages Simpler to understand than drawdown Lower charges than drawdown Guaranteed annuitant benefits for life No further investment risk (normally) once purchased Can include joint annuitant Mortality cross subsidy (with a conventional annuity, those annuitants who die early will leave funds which an insurance company can use to enhance benefits for those who live longer). Annuity: disadvantages The annuitant may be locked into poor annuity rates The annuity may cease upon death of annuitant(s) No further investment growth potential Joint annuitant benefits have to be selected at outset (circumstances may later change) Drawdown: advantages Decisions re dependants/nominees don t have to be made at the outset; they can be made at a later stage If intention is to purchase an annuity at a later stage, rates may improve Higher death benefits. (usually tax-free on death before 75) 23

24 Potential for investment growth Flexible - can vary income on an annual basis. No need to take income if not required Drawdown: disadvantages More complex Investment risk Higher charges than annuities If intention is to purchase an annuity in due course, rates may fall Mortality drag (i.e. no mortality cross subsidy) 24

25 Section Five: Making Recommendations This relates to learning outcome 4: Formulate suitable financial plans for action and explain and justify recommendations. A common complaint from the Examiner is lack of detail. This may be because candidates are too focused on recommendations only. However, the questions will normally ask you to recommend and justify You need to: Recommend Justify Explain features One approach is to: State where there is a shortfall/problem (don t worry if this has been mentioned earlier in your answer). Make a recommendation Explain how your recommendation is a solution to the problem Add in all relevant features (with a full explanation of each) Example A case study states that a client has no protection plans and in the event of illness will receive a maximum of six months sick pay from her employer. The problem therefore is that if she suffers disability or long term illness, her salary will stop after six months. Statutory Sick Pay may be available but this is at a very low level. There will therefore be a monthly shortfall. The recommendation is that she takes out income protection insurance, with maximum cover (60 65% pre-disability gross earnings), on an own occupation basis, guaranteed insurability, deferral period six months, guaranteed premiums and indexed benefits. The justification is that if she suffers disability or illness, the policy will provide a replacement income which can meet ongoing expenditure. 25

26 The features are: Term of policy: to retirement age. This is because the shortfall will exist until retirement age, at which point retirement provision will provide an income. Once in force, the cover is not renewable and therefore will not be affected by any claims. It may be affected by change in occupation As it is an individual policy, the benefits will be free from income tax and National Insurance Own occupation basis means that the client can continue to claim unless she can go back to her previous occupation. She will not be obliged to take a less suitable job Deferral period of six months: this means that if she is ill, the cover will not start for six months to coincide with her employer sick pay ceasing. Indexed benefits: The amount of cover will increase each year in line with inflation Guaranteed premiums: the premiums will not increase during the period as a result of any insurance company review. They will only increase in line with inflation (as the cover also increases through indexation) Guaranteed insurability: the client will have the right to increase the cover on certain life events such as marriage/ civil partnership or having children. The premiums will increase accordingly but no further medical evidence will be required When answering this type of question, there is often no right or wrong answer. So long as your recommendations are suitable and you have fully explained/ justified them, then alternative answers may be acceptable. For example, for life cover, one candidate may recommend level term assurance, another may recommend a family income benefit policy. Both can receive full marks provided justification is given and features explained 26

27 Section Six: Client Reviews This relates to Learning Outcome 5; Implement, review and maintain financial plans to achieve the clients objectives and adapt to changes in circumstances The final question in a case study may concern a client review When answering the question, always relate it to the specific details in the case study. However, to give three generic examples When conducting the next annual review, what areas would you wish to discuss with J and K? Use of CGT, ISA, pension allowances Investment performance State of health Level of earnings Change in legislation Change in family circumstances Changes in objectives Review progress against objectives Identify key areas relevant to L and M s circumstances when a review should be conducted, other than regular annual reviews Change of health Change in tax/pension legislation Receipt of inheritance or other capital sum End of tax year: Review GCT exemptions, ISA, CTF, pension contributions 27

28 Birth of more grandchildren M deciding to retire Significant change to any of their investments/adverse market conditions Significant change in income/expenditure What areas will you need to review in the event of a client leaving their job to become self-employed? Change in income Change in expenditure Ability to claim more items as business expenses Pension provision - decision re group personal pension Loss of employer benefits ( death-in-service, sick pay. group schemes) Change in tax status Need for capital 28

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