ifs Level 3 Certificate in Financial Studies (CeFS) 501/0049/X

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1 ifs Level 3 ertificate in Financial Studies (efs) 501/0049/X Risk and Reward in Personal Finance (RR) M/501/8464 Specimen paper: Length of examination: 60 minutes Instructions to learners 1. Open this question paper when instructed to do so. 2. nswer all questions. 3. Use the examination answer sheets provided for your answers. Please do not note your answers in this booklet, as they will not be recorded. 4. Read the instructions on both sides of the answer sheet carefully. 5. efore you leave the examination room you must hand in all the examination materials including the answer sheet and question paper. Information for learners 1. asic silent desktop calculators with + - x / % and memory functions are allowed. Scientific, programmable or calculators with any additional functions are not allowed. The ifs School of Finance is a not-for-profit professional body and registered charity, incorporated by Royal harter. This qualification is accredited by the regulatory authorities for England, Wales and Northern Ireland and is incorporated into the Qualifications and redit Framework (QF) at Level 3-501/0049/X

2 Risk and Reward in Personal Finance Specimen Paper Published by ifs School of Finance, a non-profit-making registered educational charity incorporated by Royal harter. The ifs School of Finance believes that the sources of information upon which the book is based are reliable and has made every effort to ensure the complete accuracy of the text. However, neither ifs School of Finance, the author nor any contributor can accept any legal responsibility whatsoever for consequences that may arise from any errors or omissions or any opinion or advice given. ll rights reserved. No part of this publication my be reproduced in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the prior written permission of the copyright owner except in accordance with the provisions of the opyright, esigns and Patents ct 1988 or under the terms of a licence issued by the opyright Licensing gency Ltd. pplications for the copyright owner's written permission to reproduce any part of this publication should be addressed to the publisher at the address below: ifs School of Finance IFS House 4-9 urgate Lane anterbury Kent T1 2XJ T F E customerservices@ifslearning.com Page 2 of 17

3 Risk and Reward in Personal Finance Specimen Paper Section 1. Which of the following is the least important factor when considering personal financial planning? ttitude to risk. rand image. Resources. Timescales. 2. Which of the following would have the most positive impact on a person's financial plans? budget. debt. deficit. n inheritance. 3. Paul is going to invest some money in five year NS&I fixed-interest savings certificates. Which of the following does not apply to this investment? ll of the money that Paul has invested is safe. If interest rates go up, Paul can still benefit from the increase. The interest Paul will receive is known at the outset. The interest that Paul earns is tax-free. 4. Which of the following is an advantage to an account holder of having an agreed overdraft? It enables the bank to significantly reduce its administration costs. It gives the account holder the flexibility to cope with irregular cash flow. The account holder may incur charges if they exceed their set limits. The bank will charge a fixed rate of interest on the overdraft amount. Page 3 of 17

4 Risk and Reward in Personal Finance Specimen Paper 5. Shona is worried about the length of the wait list for treatment on the NHS and about the cost of receiving private treatment. Which of the following is the most appropriate product for her in this situation? ritical illness insurance. Income Protection Insurance. Life assurance. Private Medical insurance. Page 4 of 17

5 Risk and Reward in Personal Finance Specimen Paper Section begins on Page 6 Page 5 of 17

6 Risk and Reward in Personal Finance Specimen Paper Section ase Study 1 erek has just started studying at a local sixth-form college. He currently receives an allowance of 175 per month from his parents. They will increase this to cover the following expenses, but they are unable to give him any further money. He has calculated that his expenses over a year will be: Socialising 1,200 lothes 600 Travel Pass 260 Mobile Phone 180 ourse books 160 Total 2,400 Whilst his allowance is his only income, his parents will not charge him housekeeping. However, once he starts to earn there will also be housekeeping to pay of 45 per month. erek wants to go on a cricket tour and needs 400 to cover all of the costs; his parents are not keen on him going on tour and will not contribute to the costs. He has found part-time kitchen work that pays 4 an hour and he is able to work 50 hours a month. 6. How much of a monthly increase in his allowance will erek need to cover all of his expenses, excluding his tour costs? Page 6 of 17

7 Risk and Reward in Personal Finance Specimen Paper 7. If he starts part-time work whilst studying, how much will erek be able to save towards his cricket tour each month? Which of the following products is suitable in erek s situation? Life assurance. Occupational pension. Transactional bank account. With-profits bond. 9. If he starts part-time work, which of the following products would also be suitable for erek? bond. cash IS. savings account. unit trust. 10. What would be the most effective way of erek s parents paying him his allowance? acs. ash. heque. Standing order. Page 7 of 17

8 Risk and Reward in Personal Finance Specimen Paper ase Study 2 Olivia, aged 26, has been in her first job for less than a year and is concerned that she never seems to have any money left at the end of the month. She earns 1,200 per month net of income tax and National Insurance. She has student loans totalling 20,000 after taking her education all the way through to post graduate level. She also has credit card debt of 2,500. She has a direct debit set up to pay 75 a month towards her credit card bill and makes student loan repayments of 100 a month, which are taken directly from her salary. Olivia really wants to start repaying more of these debts. She still holds a graduate bank account with an interest-free 1,000 overdraft facility, which she has not used as she feels she has enough debts already. She shares a flat with friends and pays 325 in rent including council tax, and a further 50 for utility bills. Ultimately she wants to buy her own property. Other expenses Monthly ost Mobile phone 25 Groceries 50 Petrol, car maintenance etc 75 lothes 150 Socialising 200 Total ased on the details above, how much of Olivia s monthly income should be left at the end of each month? Page 8 of 17

9 Risk and Reward in Personal Finance Specimen Paper 12. Which of the following would be the best way of Olivia repaying some of her credit card debt immediately and reducing the amount of interest she pays? Stop paying her council tax. Stop repaying the student loan. Take out a personal loan. Use her overdraft facility. 13. Which of the following would be the best advice for Olivia at the moment? o not pay national insurance and utility bills and use this to increase credit card repayments. Keep to a monthly budget and stop using her credit card. Start a savings account and use this to repay her credit card bill in 12 months. Use monthly budget excess to increase repayments of student loan. 14. Which of the following payment methods would be the best way of ensuring Olivia allocates her unspent monthly income to a specific purpose? acs. ash. heque. Standing order. 15. Which of the following financial priorities should Olivia arrange first, once she has resolved her debt repayment problems? Inheritance tax. Life assurance. Pension arrangements. Saving towards a property deposit. Page 9 of 17

10 Risk and Reward in Personal Finance Specimen Paper ase Study 3 Janice and Tom are both aged 30. They have two children, Sophie and Zak. Sophie, aged 5, has recently started school at the family s local village primary school. Zak is only six months old. Tom owns a successful engineering company. His father started the business 30 years ago but handed it over to Tom five years ago due to ill health. Janice used to run her own hairdressing business in the town. Janice sold her business just before Sophie was born and used the money to put towards a larger property, which they moved into four years ago. They live in a large three bedroomed cottage in the centre of the village. It cost 275,000 and is now valued at 330,000. They have an outstanding mortgage of 150,000. They have no pension arrangements. When they retire, they plan to sell their house and move to a smaller and cheaper property, using the money that they make to live off. Tom has enjoyed a large salary since his father left the company and the family have a good lifestyle. part from the mortgage, they have no other debts. They usually have around 1,000 per month left unspent, but this varies. The money has built up in Janice and Tom s joint bank current account because they are both too busy to sort out the family s financial affairs. 16. What should Tom and Janice's immediate financial priority be? To: increase the mortgage because it is much lower than the value of their house. make better arrangements for their surplus cash each month. move to a larger property because they do not have a spare bedroom. sell the property and invest the profit they will have made. 17. What will help them to identify and plan more precisely how much they can afford to save each month? budget. savings account. surplus. n online bank account. Page 10 of 17

11 Risk and Reward in Personal Finance Specimen Paper 18. What is Tom and Janice's main risk regarding their pension planning? That: interest rates may fall. Janice may decide not to return to work. Janice may decide to return to work. property prices could fall. 19. ased on their financial situation, what is most likely to be the minimum amount of life cover that Tom and Janice currently hold? 55, , , , Tom and Janice decide that they should visit someone who can help them to get their finances better organised and to advise them on pensions and investments. Who would be the best person for them to speak to? stockbroker. n independent financial adviser. Someone at the Office of Fair Trading. Someone at their local itizens dvice bureau. Page 11 of 17

12 Risk and Reward in Personal Finance Specimen Paper ase Study 4 George and Elizabeth, aged 45 and 47, have twins aged 12. George and Elizabeth are directors of their own cleaning company and pay themselves an annual salary of 40,000. They have made no pension provision and both want to retire at 65; they do have adequate protection cover. It looks like the twins will go to university and George and Elizabeth are shocked by how much this is going to cost them. They are now regretting not putting some money aside for the twins' education, but they have never had more than a few pounds a month to put away. George and Elizabeth have always lived in the same house, which is now worth 450,000 and they have a mortgage of 100,000. They are considering selling the house to release the capital to invest in the stock market and move into rented accommodation for two years. With the profit they make they will then buy another house and make longer-term investments to fund their financial goals. Once the children have completed university, in ten years, George and Elizabeth would like to go on a world cruise. 21. Which of the following risks is associated with George and Elizabeth's house plans? House prices may fall. House prices may rise. Mortgage rates may fall. The value of the stock market may rise. 22. Which of the following financial products could George and Elizabeth have tried to invest in earlier to help their current situation? onds. erivatives. Investment trusts. Regular savings product. Page 12 of 17

13 Risk and Reward in Personal Finance Specimen Paper 23. What type of risk profile matches George and Elizabeth's plans? Very low. Low. High. Very high. 24. Which of the following long-term products should George and Elizabeth be advised to purchase? Endowment policy. Pension. Reinsurance. Whole-of-life assurance. 25. Which of the George and Elizabeth's plans is the longest term? House sale. Retirement. Twins' education. World cruise. Page 13 of 17

14 Risk and Reward in Personal Finance Specimen Paper ase Study 5 onstantine has just retired from Pear Tree Products at the normal retirement age. She has worked for the company since she left school and has only ever taken her annual leave and a few days sick leave each year. onstantine used to contribute 5% of her salary and the company contributed a further sum to her pension scheme. She had happily contributed to the company pension scheme. She had expected pension payments linked to her salary but the pension payments she is now receiving are not as much as she was expecting. She has met with the company's HR manager who has explained that, although contribution rates were maintained, the company changed to a defined contribution scheme many years ago. onstantine has checked and the company have done nothing illegal. onstantine needs to increase the amount of income she is receiving to cover her daily expenses. She has savings totalling 5,000 and a share portfolio of 25,000. onstantine has looked at her share portfolio and decided that by restructuring it she can create more income and this will solve part of her problem. 26. What type of pension scheme did Pear Tree Products change from? Final salary scheme. Guaranteed annuity. Money purchase. Personal pension. 27. Why might onstantine s company pension be less than she was expecting? nnuity rates were better than predicted. State pensions have increased. The company has not maintained its level of pension contributions. The value of the pension fund was linked to the value of the stock market. Page 14 of 17

15 Risk and Reward in Personal Finance Specimen Paper 28. Instead of investing in shares, which of the following products could onstantine purchase to help her out of her predicament? n immediate annuity. Funeral policy. Growth bond. Income protection policy. 29. To help her address the identified need, the most appropriate shares for onstantine to add to her portfolio are those: from new technology companies. that provide good dividend returns. with a capital growth potential. with a high risk and reward profile. 30. What state benefit is onstantine entitled to? ttendance llowance. Incapacity enefit. Jobseekers llowance. asic state pension. Page 15 of 17

16 Risk and Reward in Personal Finance Specimen Paper ase Study 6 Jean, aged 55, is a teacher at a local primary school. Her husband died three years ago. Two years ago, she decided to move into a bungalow in a nicer part of town. She sold her house for 260,000, which had a mortgage outstanding of 50,000. She repaid the mortgage and bought a bungalow for 375,000. She has no children and has decided to retire early so she can spend more time playing golf. She drives a new car on which she has taken finance, and still has three years to run. Her financial adviser has recommended that she does not start drawing her pension yet, but instead advises her to live on her savings and investments until she is The money which Jean used to finance her property move is most likely to have come from which of the following types of protection cover on her husband? eath insurance. Income Protection Insurance (PHI) Life assurance. Private Medical insurance. 32. Which of the following did Jean most likely use to finance the new car? redit card. Mortgage. Overdraft. Personal loan. 33. What will Jean's main financial priority be over the next five years? orrowing. apital growth. Income. Repayments. Page 16 of 17

17 Risk and Reward in Personal Finance Specimen Paper 34. If Jean needs to borrow money over the next five years, why might a lender be concerned? ecause she: has no regular income. has significant outgoings. is over 55. lives on her own. 35. Jean has the maximum insurance cover available on her car. This is: all inclusive. executive cover. fully comprehensive. third party, fire and theft. Page 17 of 17