A Guide to Financial Planning Recommendations and Statements of Suitability

Transcription

1 A Guide to Developing Business Strategy for Financial Brokers & Guidance One - Unified Voice A Guide to Recommendations and Statements of Suitability Page 01

2 A Guide to Developing Business Strategy for Financial Brokers & Guidance One - Unified Voice A Guide to Recommendations and Statements of Suitability Page 01

3 A Guide to Recommendations and Statements of Suitability Contents About the Authors 02 Introduction 03 Life Cover Calculator and Statement of Suitability 04 Serious Illness Calculator and Statement of Suitability 08 Income Protection Calculator and Statement of Suitability 12 Retirement Calculator and Statement of Suitability 16 Investment Calculator and Statement of Suitability 22 Savings Calculator and Statement of Suitability 27 September Page 2013 Version 1.1

4 A Guide to Recommendations and Statements of Suitability About the Authors Bryan Johnston QFA FLIA Bryan is a very well-known trainer, consultant and coach particularly within Financial Services. His background is in Life Assurance where he started as a very successful broker consultant and his career to date includes roles as Sales Manager, Sales Training Manager and other senior manager roles with Irish Progressive. Bryan left Irish Permanent in 2001 and started his own training consultancy Business and Training Ltd. He has worked with most of the major banks, insurance companies, credit unions, educational bodies and Government agencies providing a variety of technical and interpersonal skills courses including:- Sales Coaching programmes for Banks and insurance companies Using Fact Finds and how different personalities react to risk Providing all the QFA modules for the Institute of Bankers Developing and delivering webinars for the Institute of Bankers Developing and delivering in house and public CPD programmes Dealing with arrears and the MARP process Acting as mediator and facilitator for brainstorming and group sessions Noel Kehoe QFA FLIA MIMI Noel Kehoe is Managing Director of GetDigital.ie, a Marketing Solutions company that specialises in connecting on-line marketing solutions to all other sales and business activities. Their services include coaching, training and delivery of best practise for Website Design, SEO, AdWords, Marketing, LinkedIn, FaceBook, Twitter and YouTube and matching these to what s important for your business. GetDigital.ie has considerable experience in digital marketing and social media and has worked with companies like Yahoo! Search Advertising, Buy4Now, and Confused.com plus many other small and medium businesses at both a local and national level. As an SME themselves, GetDigital.ie understands the need to see a return on investment when money is invested in marketing and they always make sure that on-line activity can be measured, analysed, managed and tracked back to premium income and improving the bottom line result. He has always been closely involved with education and was a Board member of the LIA (Life Association of Ireland) for many years and was President of the LIA in Bryan is still actively involved with the LIA as an editor of its magazine The Professional. He is also member of the Professional Speakers Association and a frequent visitor abroad, particularly to India and Sri Lanka where he has spoken at the Sub Continents version of MDRT a record four times. Page 02

5 A Guide to Recommendations and Statements of Suitability Introduction We frequently get requests for template Statements of Suitability. As you know, these must be personalised for each client but we have been working with QFA trainer and Financial Broker Bryan Johnston to develop a core template which can give you guidance as to how to form relevant and compliant Statements of Suitability for clients. These guidance notes are set out for the six core life and pensions products, namely: Life Cover Serious Illness Cover Income Protection Savings Pensions Investments. Each guidance note has three sections 1) A method for calculating the financial need 2) A structure for the Statement of Suitability 3) A sample Statement of Suitability. We would stress that the sample statement is for guidance only and is not meant as an exhaustive list of the factors you must note that are relevant to your client. Alongside these guidance notes, Noel Kehoe, an IT specialist, has helped us with calculators* that quantify the relevant need. These are designed as ready reckoners and perhaps can be part of an interactive discussion with clients before formal quotations. In tests of these calculators, some Financial Brokers reported that they helped to highlight the financial need more clearly to clients. It should be noted that these methods calculate the ideal cover or relevant contribution to fulfil a financial need. The crucial role of the Financial Broker is to work with the client s budget and priorities to design a practical and workable solution for the client. It may be prudent to note the recommended idealistic cover/ contribution alongside the client s choices in the Statement of Suitability. We hope you find this guidance useful and would welcome your feedback. As is customary with generic guidance we must specifically limit our liability: IMPORTANT NOTICE: This document is an informal guide and is for information purposes only. This document does not purport to represent or offer professional financial or legal advice. This document should not be relied upon to properly satisfy one s regulatory or legal obligations as a professional service provider, or to fully meet one s legal responsibilities or professional duties of care to consumers. If you have any queries or would like further information relating to any of the matters contained in this guide, please refer to your usual professional or legal adviser. * The excel calculators do not contain sufficient information to be used for Knowing the Consumer requirements. Please note that you should use a full Knowing the Consumer document for this purpose. A copy can be found in the compliance section of the PIBA website. Page 03

6 A Guide to Recommendations and Statements of Suitability Life Cover Calculator and Statement of Suitability The idea of this calculator is to help establish how much life cover a person needs. These Statements of Suitability are intended for guidance purposes only. Each Statement of Suitability should be specific to your client s own personal circumstances and should reflect the Knowing the Consumer and suitability requirements; and therefore must not be generic. Step 1 Calculate a person s at risk income. 1. Identify annual earned income that will be lost on death. 2. Identify any other regular income that will stop on death. Step 2 Identify any annual income replacement including: 1. Widow s / widower s or surviving civil partner s pension a. Maximum per week and for each dependent child 2. Savings in mortgage or other loan repayments covered by insurance 3. Any annual pension schemes paid to survivor 4. Consider savings in domestic and living expenses. Deduct Step 2 from Step 1 and this will identify the annual at risk income. Step 3 Consider how long the at risk income needs to be replaced for. This is done by multiplying the annual income by the number of replacement years. This will give a capital sum Could be dependent on youngest child Could be a set formula depending on age Could be for a set number of years. Step 4 Add any existing loans not covered by insurance Add any loans not covered Funeral expenses - 6,500 recommended. Step 5 Deduct any existing life cover Emergency Fund This is a fund that is readily realisable and ideally should be a minimum of three months salary. The Central Bank recommends that firms refer to the need for an emergency fund, to ensure that customers have access to sufficient disposable funds in the event of a requirement for future healthcare needs or other potential unforeseen events. Page 04

7 A Guide to Recommendations and Statements of Suitability Example of how to use calculator: Life Insurance Need Calculation Step 1 - Total Annual Income Name Life 1 Name Life 2 Name of Lives to insured The Income Loss on Death Calculations Life 1 Calculations Life 2 Salary 70,000 50,000 Other Income / Savings in living expenses 0 0 Total Annual Income for Life 1 & Life 2 equals 70,000 50,000 Step 2 - Total Income Gained Income Gained Life 1 Income Gained Life 2 State Benefit Widow/er Pension Children Benefits 13,000 13,000 Annual Pensions 0 0 Other Income / Savings in living expenses 4,000 4,000 Mortgage (Income saved if mortgage protection in place) 12,000 12,000 Other Loans (Income saved if loans insured)* 0 0 Total Annual Income Gain for Life 1 & Life 2 equals - 29,000 29,000 Total Annual Income Risk for Life 1 & Life 2 equals - 41,000 21,000 Step 3 - Total Income Risk Calculate the number of years the Income is at Risk Total Years at Risk Life 1 Total Years at Risk Life 2 Could be dependent on age/s of both spouse/ partner? Could be dependent on age of youngest child? Could be required for a specific known number of years? Annual Income to be protected by Life Cover for Life 1 and Life 2 equals , ,000 Step 4 - Additional Cover Needs Income Needs Life 1 Income Needs Life 2 Add any loans not insured* 60,000 0 After funeral expenses 6,500 6,500 Total Income plus unsecured loans and funeral expenses that need to be protected equals - 886, ,500 Step 5 - Deduct Existing Life Cover Existing Cover Life 1 Existing Cover Life 2 Existing Life Cover for Life 1 and Life 2 equals - 250, ,000 Step 6 - Total Life Cover Recommended for Life 1 and Life 2 equals Life 1 Life 2 636, ,500 Funeral Expenses 6,500 Amount recommended in Irish Times article November pricewatch/2010/04/26/funeral-costs-survive-recessionsdeflationary-grip/#.ujeieiuxuua. * Be aware loans can be for needs which will recur (e.g. car loan). Please note: Analysis assumes return on funds invested equals required rate of increase in income needs. Page 05

8 A Guide to Recommendations and Statements of Suitability Structure of Statement of Suitability Sample of Statement of Suitability Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Dear Client 1. Our meeting 1.1 Your Personal Circumstances 1.2 Your Needs and Objectives 1.3 Your Financial Situation 2. Product or service recommended Life cover family Life cover mortgage loan Unit linked Temporary 3. Product options Indexation Conversion Income benefit 4. Our recommended product Various companies Reasons 5. Risk profile of this product and your attitude to risk N/A 6. Guarantees and limitations Guarantees Limitations Restrictions Dear Client Many thanks for meeting with me on Thursday 15th September. After analysing your personal circumstances from the information you provided me with and the fact find we completed, the following are my recommendations. 1. Our meeting 1.1 Your Personal Circumstances You are married to X with X young children, X and X. You are XX next birthday. You are in good health. You have no life cover except for one policy for 100, Your Needs and Objectives You would like to protect your family s income in the event of your premature death. You would like this cover to last until X reaches 21 and to review this on a regular basis. You would like your cover to be index linked every year. 1.3 Your Financial Situation Your salary is XXXXX and your employment is secure. You have an emergency fund of two months net pay. We have captured all this and more in the fact find completed on 15/09/2012, copy enclosed. 7. Any other oral explanations Page 06

9 A Guide to Recommendations and Statements of Suitability 2. Product or service recommended From the information you have given us we recommend that you effect a life insurance protection product that will last for at least 20 years and potentially longer. We recommend a 20 year convertible term assurance policy for a sum insured of 610,000. This is in line with your personal circumstances and suits your requirements. We recommend that this is reviewed every year. 3. Product options Your premium of 65 per month is guaranteed for the next 20 years. You can opt to index link your premium and cover every year. You can extend your cover beyond the 20 years without any evidence of health; you can do this even if your health deteriorates in the meantime. 4. Our recommended product We are authorised to advise on x life companies and recommend that you effect the 20 year convertible policy with X company as being the most suitable. Their premium of 65 is the most competitive on the market. They allow full indexation on their policy at no extra charge. They are an AA rated insurance company. Summary of recommendations X taking into account our recent meeting and your current needs I recommend the XYZ product as being the most suitable for you. It provides Xx life cover in the event of your premature death The premium is very competitive The premium is guaranteed for.years X company is AA rated. Please read guarantees and limitations section The enclosed Key Features document explains how the policy will work in more detail. Please read this carefully. Yours sincerely I confirm that I/we have read and understand this Statement of Suitability and I/we wish to proceed with this recommendation. Name:. Date: Risk profile of this product and your attitude to risk N/A 6. Guarantees and limitations The premium is guaranteed for 20 years at 65 per month. 7. Any other oral explanations N/A Page 07

10 A Guide to Recommendations and Statements of Suitability Serious Illness Calculator and Statement of Suitability The idea of this calculator is to help establish how much serious illness cover a person needs. These Statements of Suitability are intended for guidance purposes only. Each Statement of Suitability should be specific to your client s own personal circumstances and should reflect the Knowing the Consumer and suitability requirements; and therefore must not be generic. Medical Underwriting! Important Questions to raise with Clients. Do you or your immediate family (parents, brothers and sisters) have any medical history or needs relevant to an application for serious illness cover? A full disclosure of your personal circumstances (including age, health, family health history, etc.) is essential to the re-assessment at underwriter stage of the suitability of recommended products to your personal circumstances and to an assessment of their cost to you. Step 1 Calculate a person s at risk earned income. 1. Identify person s annual earned income. 2. Identify annual amount if any of PHI cover. 3. Identify annual social welfare sickness benefit if any. 4. Calculate annual income at risk after PHI and social welfare. 5. Identify for how many years income should be replaced. 6. Multiply number of years times at risk annual income. Step 2 Identify lump sum needed in event of serious illness including 1. Outstanding mortgage 2. Other debts 3. Modifications to house 4. Sum needed for recuperation 5. Other lump sums needed 6. Total Step 2, i.e. all lump sums 7. Add to annual at risk income. Step 3 Deduct existing cover. 1. Deduct any existing serious illness cover 2. Determine total amount recommended cover. Emergency Fund This is a fund that is readily realisable and ideally should be a minimum of three months salary. The Central Bank recommends that firms refer to the need for an emergency fund, to ensure that customers have access to sufficient disposable funds in the event of a requirement for future health care needs or other potential unforeseen events. Page 08

11 A Guide to Recommendations and Statements of Suitability Example of how to use calculator: Serious Illness Need Calculation Step 1 Calculate Total Income Replacement Needed Name Name Names of Lives to be Insured Income Loss if Serious Illness Calculations Life 1 Calculations Life 2 Annual Income to be replaced 70,000 50,000 Less Income Protection 30,000 0 Less Social welfare payments if any entitlements 12,000 12,000 Annual Income amount to be replaced 28,000 38,000 Number of years Income Replacement required (input figures only) 5 5 Total of Annual Income to be replaced equals 140, ,000 Step 2 Calculate Total Lump Sums Needed Pay part of outstanding mortgage balance or clear in full 100, ,000 Other debts that need to paid 0 0 Modifications to house because of any disability 20,000 20,000 Sum needed for recuperation 20,000 20,000 Other lump sums needed 0 0 Total Lump Sums Needed equals 140, ,000 Step 3 Calculate Total Critical Illness Needed Step 1 - Total Annual Income + Step 2 - Total Lump Sums Needed 280, ,000 Minus any existing Critical Illness Cover 0 0 Total Critical Illness Cover Recommended 280, ,000 Page 09

12 A Guide to Recommendations and Statements of Suitability Structure of Statement of Suitability Sample of Statement of Suitability Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Dear Client 1. Our meeting 1.1 Your Personal Circumstances Dear Client Many thanks for meeting with me on Thursday 15th September. 1.2 Your Needs and Objectives 1.3 Your Financial Situation 2. Product or service recommended 3. Product options 4. Our recommended product Various companies Reasons 5. Risk profile of this product and your attitude to risk N/A 6. Guarantees and limitations Guarantees Limitations Restrictions 7. Any other oral explanations After analysing your personal circumstances from the information you provided me with and the fact find we completed, the following are my recommendations. 1. Our meeting 1.1 Your Personal Circumstances You are married to XX with two young children, XX and XX. You are XX next birthday. You are in good health. You have no serious illness cover. 1.2 Your Needs and Objectives You would like to protect your income in the event of developing a serious illness* as discussed. You would like to receive a lump sum in the event of you contracting a serious illness.* You would like this cover to last for xx years or to age xx. You would like your cover to be index linked every year. * see full list of illnesses and criteria enclosed (Attach full list from the Provider) 1.3 Your Financial Situation Your income is XXXX. Your spouse s / partner s income is XXXX. You are self-employed and taxed under schedule D. You are not entitled to any social welfare illness benefits. Page 10

13 A Guide to Recommendations and Statements of Suitability You are employed and your employer will pay you full pay for. and pay XX for.. You have an emergency fund of two months net pay. We have captured all this and more in the fact find completed on 15/09/2012, copy enclosed. 2. Product or service recommended We recommend a serious illness / specified illness policy. We recommend cover of xxx for xx years. This will pay out a lump sum should you contract any of the xx illnesses as specified in the enclosed booklet. The serious illness / specified illness policy will increase at xxx pa to keep in line with inflation. This is in line with your requirements as outlined in the fact find. 3. Product options Your premium of XX per month is guaranteed for the next XX years. Your premium is reviewable and will be reviewed in... You can opt to index link your premium and cover every year. You can opt to have your benefit escalate each year. You can add a daily hospital payment benefit. You can add broken bones payment to your policy. You can add surgery payment to your policy. Your children aged up to 18, or 21 if in full time education, will be covered at no extra cost for a benefit of XXX. 4. Our recommended product We are authorised to advise on x life companies and recommend that you effect the serious illness / specified illness policy with xxxx. Their premium of X is the most competitive on the market. They offer the following benefits as standard... They allow full indexation on their policy at no extra charge. They are an AA rated insurance company. 5. Risk profile of this product and your attitude to risk N/A 6. Guarantees and limitations The premium is guaranteed for... The policy will only pay out after confirmed diagnosis of one of the illnesses specified in the enclosed document. 7. Any other oral explanations N/A Summary of recommendations Client taking into account our recent meeting and your current needs I recommend the XYZ product as being the most suitable for you. It provides Xx cover should you contract one of the listed serious illnesses The premium is very competitive X company is AA rated. Please read guarantees and limitations section The enclosed Key Features document explains how the policy will work in more detail. Please read this carefully. Yours sincerely I confirm that I/we have read and understand this Statement of Suitability and I/we wish to proceed with this recommendation. Name:. Date:... Page 11

14 A Guide to Recommendations and Statements of Suitability Income Protection Calculator and Statement of Suitability The idea of this calculator is to help establish how much income protection cover a person needs. These Statements of Suitability are intended for guidance purposes only. Each Statement of Suitability should be specific to your client s own personal circumstances and should reflect the Knowing the Consumer and suitability requirements; and therefore must not be generic. Medical Underwriting! Important Questions to raise with Clients. Do you or your immediate family (parents, brothers and sisters) have any medical history or needs relevant to an application for income protection cover? A full disclosure of your personal circumstances (including age, health, family health history, etc.) is essential to the re-assessment at underwriter stage of the suitability of recommended products to your personal circumstances and to an assessment of their cost to you. Calculate person s at risk income 1. Identify annual income that will be lost due to inability to work after an accident / Illness 2. Identify how long income will continue for - weeks / months 3. Identify any employer sick payments and social welfare payments 4. Identify deferred period. Step 1 Calculate a person s at risk earned income 1. Identify person s annual earned income 2. Identify annual earned income that should ideally be replaced, subject to Underwriter s limits. Step 2 Identify any existing income replacement including: 1. Employer payments and for how long 2. Social welfare payments if applicable a. Maximum 188 per week for an individual b. This may be increased for a qualifying adult, e.g. spouse, to a maximum of another per week, children per child (half if spouse working with income over 310) c. Note qualifying PRSI stamps must be paid/ credited in the year of claim; or conditions can be met in recent years d. Disability benefit can be for one year or two years (>260 stamps) and is means tested thereafter, unless you are permanently disabled and qualify for invalidity pension. Deduct Step 2 from Step 1 This will identify the at risk income and the duration of existing replacement income. Page 12

15 A Guide to Recommendations and Statements of Suitability Step 3 Consider how much income needs to be replaced 1. Determine how much income should be replaced by putting figures into the calculator as per example 2. Determine the deferred period (4 weeks, 8 weeks etc.) 3. Determine premium depending on occupation. Emergency Fund This is a fund that is readily realisable and ideally should be a minimum of three months salary. The Central Bank recommends that firms refer to the need for an emergency fund, to ensure that customers have access to sufficient disposable funds in the event of a requirement for future healthcare needs or other potential unforeseen events. Structure of Statement of Suitability Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Dear Client 1. Our meeting 1.1 Your Personal Circumstances 1.2 Your Needs and Objectives 1.3 Your Financial Situation Example of how to use calculator: Income Protection Need Calculation Name Information Calculations Weekly Gross Income 1,350 % income to be replaced 66% Weekly Income to be replaced 891 Employer payments 0 How long will these payments last? 0 Final Weekly income to be replaced 891 Social welfare 248 Total weekly income to be replaced 643 Deferred Period Product or service recommended Income Protection 3. Product options Indexation Conversion Waiver of premium 4. Our recommended product Various companies Reasons 5. Risk profile of this product and your attitude to risk 6. Guarantees and limitations Guarantees Limitations Restrictions Monthly Premium Based on Quotation 7. Any other oral explanations Page 13

16 A Guide to Recommendations and Statements of Suitability Sample of Statement of Suitability Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Dear Client Many thanks for meeting with me on Thursday 15th September. After analysing your personal circumstances from the information you provided me with and the fact find we completed, the following are my recommendations. 1. Our meeting 1.1 Your Personal Circumstances You are married to X with X young children, X and X. You are XX next birthday. You are in good health. You have no disability cover. 1.2 Your Needs and Objectives You would like to protect your income in the event of becoming ill or being involved in an accident and unable to work as a... You would like this cover to last until your normal retirement age of. or until you are able to return to work. You would like your cover to be index linked every year. You need cover to start X weeks after becoming ill or being involved in an accident. 1.3 Your Financial Situation Your income is. You are self-employed and taxed under schedule D. You are not entitled to any social welfare illness benefits. You are employed and your employer will pay you full pay for. and pay for.. You have an emergency fund of two months net pay. We have captured all this and more in the fact find completed on 15/09/2012, copy enclosed. 2. Product or service recommended We recommend a permanent health / disability / income continuance policy with an annual benefit of / weekly benefit of. The policy will commence after? weeks of being ill or being involved in an accident and being unable to work. You are classified as a Class? occupation. In the event of a claim this will not affect your premium. This is in line with your personal circumstances and suits your requirements. We recommend that this is reviewed every year. 3. Product options Your premium of per month is guaranteed for the next years. Your premium is reviewable and will be reviewed in... You can opt to index link your premium and cover every year. You can opt to have your benefit escalate each year. You can insure this premium should you become ill / involved in an accident for an additional premium (waiver of premium). This premium qualifies for full tax relief at your highest rate of tax within certain limits. 4. Our recommended product We are authorised to advise on x life companies and recommend that you effect the income protection policy with xxxx. Their premium of is the most competitive on the market. They are the only company that will accept your occupation. They offer a partial benefit which means that if you go back to work part time you will receive a pro rata payment. They allow full indexation on their policy at no extra charge. Page 14

17 A Guide to Recommendations and Statements of Suitability If you suffer a relapse of the same illness within X months there is no waiting (deferred) period. They are an AA rated insurance company. 5. Risk profile of this product and your attitude to risk N/A 6. Guarantees and limitations The premium is guaranteed for... The policy will provide the benefit after you being ill or involved in an accident and being unable to work, but only after a period of X weeks has elapsed. You will have to provide evidence of your income in the event of a claim. You must have sufficient relevant earnings at the time of any claim to qualify for the benefit or the full benefit. There is no guarantee that tax relief will continue in the future. Any income from this policy is liable to tax, PRSI and USC deductions. The maximum benefit of includes any other payments such as social welfare payments. If you change your occupation you must inform the insurance company and this may affect your premium and cover. Please read guarantees and limitations section The enclosed Key Features document explains how the policy will work in more detail. Please read this carefully. Yours sincerely I confirm that I/we have read and understand this Statement of Suitability and I/we wish to proceed with this recommendation. Name:. Date: Any other oral explanations N/A Summary of recommendations Client taking into account our recent meeting and your current needs I recommend the XYZ product as being the most suitable for you. It provides Xx income replacement in the event of you becoming ill or being involved in an accident and subject to normal claims verification The premium is very competitive The premium is guaranteed for. years X company is AA rated. Page 15

18 A Guide to Recommendations and Statements of Suitability Retirement Calculator and Statement of Suitability The idea of this calculator is to help establish the retirement funding needs of a person. These Statements of Suitability are intended for guidance purposes only. Each Statement of Suitability should be specific to your client s own personal circumstances and should reflect the Knowing the Consumer and suitability requirements; and therefore must not be generic. Retirement cover calculator Step 1 Current income and replacement 1. Input current income and age (the system will calculate the years to retirement). 2. Select retirement age. 3. Identify salary growth expectation. 4. Input the % of income to be replaced (system calculates income requirement in retirement). 5. The system calculates total projected income at retirement and required income in retirement. Step 2 Existing Provision 1. Input retirement income from other sources (rents, company pension etc.) This should be stated in future terms i.e. expected other income in retirement. 2. Identify current State pension (if applicable). 3. Identify expected % increase if any. 4. Identify age at which client is eligible for the state Pension 5. The system calculates estimated state pension at retirement. 6. Input existing pension fund *(current value). Step 3 Total fund needed 1. The system calculates current pension income and shortfall. 2. Identify annuity rate (depending on options joint, escalation, age). 3. The system calculates total fund needed. 4. The system also allows for level annual premium and indexed annual premium. Step 4 Monthly contribution needed 1. Calculate monthly contribution needed to make up shortfall. 2. Growth rate, charges (RIY) and escalation rate can be varied. Emergency Fund This is a fund that is readily realisable and ideally should be a minimum of three months salary. The Central Bank recommends that firms refer to the need for an emergency fund, to ensure that customers have access to sufficient disposable funds in the event of a requirement for future healthcare needs or other potential unforeseen events. * NB system does not calculate state pension deficit of cover if NRA is before state pension age. Page 16

19 A Guide to Recommendations and Statements of Suitability Example of how to use calculator: Retirement Need Calculation Step 1 Current Income & Projected Retirement Income Details Current Income Age Next Birthday Normal Retirement Age NRA Number of Years until NRA Income Growth Projected Income at Retirement % Income required in Retirement Actual Income Required in Retirement Retirement Income Available from other sources 75, % 111,446 66% 73,554 5,000 Step 2 Calculate Total Income Replacement Needed Current State Old Age Pension % Growth in State Pension Age for payments of State Pension Number of Years to State Pension State Pension Entitlements at Retirement Age Total Pension Income Shortfall Annuity Rate Pension Fund Shortfall Minus Any Existing Pension Fund/s Existing Pension Fund Projected Value at NRA using Net Growth Rate Existing Pension Fund Value at NRA Final Pension Fund Shortfall Pension Fund Shortfall minus Existing Pension Fund Value at NRA 22, % ,259 40, % 1,304,065 50, % 132,665 1,171,400 Step 3 Level Premium required to fund Pension Shortfall Tax Relief not shown Years Available to Fund Shortfall Growth Rate Reduction In Yield Indexation Net Growth Rate Fund Required Level Annual Premium Level Monthly Premium % 3.00% 0.00% 5.00% 1,171,400 33, , Step 4 Indexed Premium to fund Shortfall Tax Relief not shown Years Available to Fund Shortfall Growth Rate Reduction in Yield Net Growth Rate Fund Required Indexation Rate Indexed Annual Premium Year 1 Indexed Monthly Premium Year % 3.00% 5.00% 1,171, % 26, , Page 17

20 A Guide to Recommendations and Statements of Suitability Structure of Statement of Suitability Sample of Statement of Suitability Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Dear Client Dear X 1. Our meeting 1.1 Your Personal Circumstances 1.2 Your Needs and Objectives Many thanks for meeting with me on Thursday 15th September. After analysing your personal circumstances from the information you provided me with and the fact find we completed, the following are my recommendations. 1.3 Your Financial Situation 2. Product or service recommended Income Protection 3. Product options 4. Our recommended product Various companies Reasons 5. Risk profile of this product and your attitude to risk Linked to your investment / risk document 6. Guarantees and limitations Guarantees Limitations Restrictions 7. Any other oral explanations 1. Our meeting 1.1 Your Personal Circumstances You are.. You are XX next birthday. You are self-employed and taxable under schedule D. You are a Director of. You are employed by XXX. You are in good health. 1.2 Your Needs and Objectives You will have an income shortfall at retirement. You wish to provide an income of xxx at age.. You have a lump sum of xxxx to contribute towards your pension. You need an income of xxx from this pension investment. You would like to supplement your income in retirement. You are looking for a return in excess of inflation. You want to maximise the tax reliefs that are available. You are investing to meet a target fund of x in x years. You are not willing to take any risk with the capital element of your retirement plan. Page 18

21 A Guide to Recommendations and Statements of Suitability You are happy to take some risk with your retirement plan in order to get a better potential return than deposits. You are prepared to risk xx% of your retirement plan to get a better return than deposits. You are happy with your situation in relation to - Life cover - Serious illness cover - Income protection - Medical expenses insurance. You would like to review at a later date - Life cover - Serious illness cover - Income protection - Medical expenses insurance. 1.3 Your Financial Situation Your salary is xxxx and your employment is secure. You are a higher income taxpayer. You pay tax at the standard rate. You have a surplus of xxx each month. You have other retirement plans worth xxxx. You are currently making contributions to other plans of xxxx per month. You don t have an emergency fund but are currently. You are going to put xxx into a deposit fund as an emergency fund. You have an emergency fund of three months net pay. We have captured all this and more in the fact find completed on 15/09/2012, copy enclosed. 2. Product or service recommended Personal Pensions From the information you have given us we recommend that you effect a personal pension plan of x. This plan allows you to invest in one or more investment funds with exposure to a mix of equities property bonds cash other. These plans are not guaranteed but over the long term may produce a return in excess of deposits. We recommend that you effect a short term deposit account savings plan to ensure you have an adequate emergency fund. This plan grows free of tax. From age XX you may take 25% as a tax free lump sum. The balance can be used to provide a pension for life by purchasing an annuity. Alternatively you can invest the balance into an Approved Retirement Fund which you can draw on subject to taking a minimum of 5% each year. Currently you must put the first 63,500 of your fund into an Approved Minimum Retirement Fund (AMRF) whereby you cannot access this capital until 75; this is scheduled to increase to 119,800 in This is in line with your personal circumstances and suits your requirements. This plan allows you to add life cover / income protection. We recommend that this retirement plan is reviewed at least every year. PRSA From the information you have given us we recommend that you effect a PRSA plan of x. This plan allows you to invest in one or more investment funds with exposure to a mix of equities property bonds cash other. These plans are not guaranteed but over the long term may produce a return in excess of deposits. We recommend that you effect a short term deposit account savings plan to ensure you have an adequate emergency fund. This plan grows free of tax. From age XX you may take 25% as a tax free lump sum. The balance can be used to provide a pension for life by purchasing an annuity. Alternatively you can invest the balance into an Approved Retirement Fund which you can draw on subject to taking a minimum of 5% each year. Currently you must put the first 63,500 of your fund into an Approved Minimum Retirement Fund (AMRF) whereby you cannot access this capital until 75; this is scheduled to increase to 119,800 in This is in line with your personal circumstances and suits your requirements. We recommend that this retirement plan is reviewed at least every year. Company Pension Plan From the information you have given us we recommend that you effect a company pension plan of x, for the benefit of.. Page 19

22 A Guide to Recommendations and Statements of Suitability This plan allows you to invest in one or more investment funds with exposure to a mix of equities property bonds cash other. These plans are not guaranteed but over the long term may produce a return in excess of deposits. This plan grows free of tax. From age XX you may take 25% as a tax free lump sum. The balance can be used to provide a pension for life by purchasing an annuity. Alternatively you can invest the balance into an Approved Retirement Fund which you can draw on subject to taking a minimum of 5% each year. Currently you must put the first 63,500 of your fund into an Approved Minimum Retirement Fund (AMRF) whereby you cannot access this capital until 75; this is scheduled to increase to 119,800 in This plan grows free of tax. From age xx you may take up to 150% of your final remuneration depending on how many years service you have. From the information you have provided me with and assuming your circumstances do not change you could take up to xx% free of tax. The balance of your fund must be used to purchase an annuity. Currently the maximum tax free lump sum that can be taken is 200,000 and includes any payments since This is in line with your personal circumstances and suits your requirements. We recommend that this retirement plan is reviewed at least every year. This plan allows you to add life cover / income protection. 3. Product options This plan allows you to index link your retirement savings each year. This plan is designed as a long term retirement product and generally you will not have access to this fund until at least age xx. These plans allow you to save in unit linked, unitised with profit type accounts that may produce a better return than a deposit account but are not guaranteed to do so. This retirement plan allows you to add additional lump sums to it This retirement plan allows you to switch between different funds at no / xx cost. This plan allows you add xxx amount of life cover. 4. Our recommended product We are authorised to advise on x pension companies and recommend that you effect a retirement plan with xxxxx company. This retirement plan offers the most competitive charging structure of xxxx. The charges applied to the plan are as follows: This company offers the following fund choices - Unit linked - Deposit - With profit - Guaranteed - Passive / Active fund - External fund managers. You can spread your contributions over a number of these funds. This company allows you to switch between funds at no extra cost. We recommend this product as it matches your needs and objectives as stated above. They are an AA rated insurance company. 5. Risk profile of this product and your attitude to risk Important! You have read and we have discussed the document on investment entitled Addressing Investment Risk a guide to approaching investment risk for use by Financial Brokers and their clients. We conducted risk profiling exercises and you agreed your risk profile was medium / high / very high. You understand the trade-off between risk and return and are prepared to accept some risk for higher expected return. Your investment does not provide any capital guarantee. The fund has a current risk rating of 5 on the ESMA 1-7 rating (7 being the highest volatility rating). It has a maximum drawdown (peak to trough fall) rate of 49% suffered in 2007/ Guarantees and limitations The investment is not guaranteed to return your capital or achieve any rate of return. There is no guarantee that the return on this pension policy will match or beat inflation. Page 20

23 A Guide to Recommendations and Statements of Suitability The guarantee on this investment is provided by X bank. Y life company does not undertake to pay your fund in the event of default by X bank. X bank has the following financial status -. Y life company has the following financial strength status. There is no guarantee that this investment plan will provide enough to pay any particular income in retirement. Tax relief and benefit options can be subject to amendment by governments. You will not have access to this retirement plan until aged XX unless you are seriously ill. There is no guarantee that you will get back what you pay in. You may have to wait for up to six months to encash your investment in the property fund. This plan is recommended for a minimum of xx years. Encashment penalties will apply if the policy is surrendered / encashed before five years. These are year 1-3, 5% of the fund, year 4-5, 3% of the fund. I confirm that I/we have read and understand this Statement of Suitability and I/we wish to proceed with this recommendation. Name:. Date: Any other oral explanations N/A Summary of recommendations Client taking into account our recent meeting and your current needs I recommend the XYZ product as being the most suitable for you. You are planning to retire in xx years. It provides Access to xxx funds Tax relief as outlined Your chosen fund is in line with your risk profile You can switch out of this fund at any time X company is AA rated. Please read guarantees and limitations section The enclosed Key Features document explains how the policy will work in more detail. Please read this carefully. Yours sincerely Page 21

24 A Guide to Recommendations and Statements of Suitability Investment Calculator and Statement of Suitability The idea of this calculator is to help establish the investment needs of a person. These Statements of Suitability are intended for guidance purposes only. Each Statement of Suitability should be specific to your client s own personal circumstances and should reflect the Knowing the Consumer and suitability requirements; and therefore must not be generic. Investment Need Financial Brokers are referred to the documents: Addressing Investment Risk A Guide for Financial Brokers Addressing Investment Risk A guide to approaching investment risk for use by Financial Brokers and their clients A guide to investment recommendations and reviews will be published in September Step 1 Client assessment (1) Assess risk capacity by fact find (2) Assess risk preference by profile tool (3) Customer discussion structured by document. From these steps, the Financial Broker will have assessed the risk profile of the client(s) and the client(s) will be aware of the risk-reward trade off and the general nature of investment risk. Step 2 Investment recommendation By this stage, the Financial Broker will have gathered data on the client s overall investments and may have identified a need to invest certain funds. The Financial Broker will know: The objective for the invested funds The target rate of return The client s capacity and preference for risk The importance of capital security to the client The amount to be invested The term of the investment Whether any regular income is needed Whether access to the fund is needed during the term. Items to consider and document: Combine assets for diversification / correlation (0 = independence, 1 implies returns move in lock step). Take a holistic client view what assets does the client have in their pension, company, personal property etc. The risk and return profile of the portfolio must be consistent with the client s expectations and needs. The tax profile of the client and tax structure for the product may be relevant to the most appropriate investment recommendation. Is the investment a one off or is there a series of investments? Regular contribution funds can benefit from volatility whereas drawdown funds (ARFs) can accentuate the negative impact of volatility. Page 22

25 A Guide to Recommendations and Statements of Suitability Define the scope of investible funds you offer e.g. funds offered by life companies in Ireland. Asset and fund selection - consider: The appropriate asset mix. The risk / return profile. The liquidity of the portfolio. Counterparty risk. Active v. passive funds. Single v. multi asset funds. The credentials of the fund provider. The credentials of the fund manager. Charges. Fund size. Return data. Risk data (volatility/ maximum drawdown). Structured fund issues (trackers) the basket, the payoff conditions and capital protection offered. Absolute return issues return and risk data, correlation with other assets, charges and investment process. Document the process and agree a review schedule with the client. Emergency Fund This is a fund that is readily realisable and ideally should be a minimum of three months salary. The Central Bank recommends that firms refer to the need for an emergency fund, to ensure that customers have access to sufficient disposable funds in the event of a requirement for future health care needs or other potential unforeseen events. Structure of Statement of Suitability Important Notice Statement of Suitability This is an important document which sets out the reasons why the product(s) or service(s) offered or recommended is/are considered suitable, or the most suitable, for your particular needs, objectives and circumstances. Dear Client 1. Our meeting 1.1 Your Personal Circumstances 1.2 Your Needs and Objectives 1.3 Your Financial Situation 2. Product or service recommended 3. Product options 4. Our recommended product Various companies Reasons 5. Risk profile of this product and your attitude to risk How the risk profile of the product is aligned with the client s attitude to risk. How the nature, extent and limitations of any guarantee attached to the product is aligned with the customer s attitude to risk. Example of Calculation of growth: Single Premium Investments Name Calculating Single Premium Investments at Maturity Investment Fund Available 50, Guarantees and limitations Guarantees Limitations Restrictions 7. Any other oral explanations Investment Term 10 Investment Growth (Net) 5.0% Investment at Maturity 81,445 Page 23