This article is relevant to anybody who wants to further their career in the financial services and insurance industries, whether you are at Certificate Level or Diploma Level.
With a major exam sitting next week for those of you sitting financial planning diploma or CF5 exams, we decided that we’d concentrate on a general financial planning question for you. Apologies to those of you sitting General Insurance exams – we’ll focus on you another time.
You are authorised to conduct business under the Financial Services and Markets Act (FSMA) 2000 and are qualified to give financial advice. The information provided is accurate and adequate for the purpose of this question.
Read carefully the case history which is based on your notes from a meeting with Fiona and then carry out all the tasks in a, b, c and d which follow.
Case History:
 Fiona is 42 and currently single with no dependants. She is in a long-term relationship with her partner Robert and although they live together their financial arrangements are totally separate.
After 23 years of employment in Human Resources roles, she gave this up two years ago to achieve her dream of running an Alternative Therapies clinic. Her Net Relevant Earnings in the first year of business were £24,000 and this year increased to £28,000. She draws £1,500/month and has a Net Disposable Income of £250 monthly.
Fiona was a member of her last employer’s Final Salary Pension Scheme for 14 years but has made no personal arrangements since leaving.
Fiona has a repayment mortgage on her home of £66,000 which will be repaid in 2020. It is fully protected by a Decreasing Term Assurance providing life and critical illness cover.
Fiona has a Cash ISA into which she contributes £100 per month, and which has a current value of £7,500. She considers this as her emergency fund. She also has other investments totalling £10,000 between Single Company shares (£2,000), an OEIC (£5,000) and Premium Bonds (£3,000).
To help fund the costs of an extension to her property and to allow her to further develop her business, Fiona recently encashed a Bond receiving £18,000. The Bond was taken out over 6 years ago with an investment of £12,000. She is concerned about how this will affect her tax position.
Fiona would like to take an extended holiday at age 50 to tour Australia and New Zealand and estimates that the trip will cost around £8,000.
After 2 years of focusing purely on her business, Fiona now wants to review her financial situation and receive advice on her needs now.
a. |
List in priority order, in relation to affordability, the areas of need which Fiona has. |
5
|
b. |
Calculate, showing all your workings, the tax due on the encashed Bond. |
6
|
c. |
Describe the main features of a Personal Pension Plan. |
9
|
d. |
Explain which areas of need should be constantly reviewed. |
5
|
|
Total Marks for this question
|
25
|
 Here’s our model answer:
a) Income Protection Insurance
Additional Critical Illness insurance for own use
Private Medical Insurance
Retirement Planning
Savings / Investment
b) Original value of Bond 12,000
Encashment value 18,000
Taxable Gain 6,000
Top-slicing:
Bond held for 6 complete policy years, thus 1,000 average yearly gain.
Total income less than higher rate band. Therefore, basic Rate taxpayer so no further
tax to be paid
c) Established and owned by the individual
Contributions attract tax relief at the highest rate of tax paid
Fund grows free of tax on income, although 10% tax already deducted cannot be
reclaimed
Dividend tax credits cannot be reclaimed
Free of all tax on capital gains
Benefits can be taken at any time from age 50 to 75
Up to 25% of the accumulated fund can be taken as a tax free lump sum at retirement
The remainder of the fund is used to provide an income
Income provided is taxed as earned income
d) Income Protection – review benefits as earnings increase
Life Assurance – if Fiona and Robert marry and have joint financial commitments
Critical Illness – is it adequate for lifestyle changes / emerging needs
Pension contributions – need to increase as earnings increase
Savings / Investment – is it adequate for current needs / future plans and wants
Don’t forget that we provide numerous learning resources for CII Certificate and Diploma level exams. Find out more at http://www.brandft.co.uk and navigate to your chosen exam using the menu bar.
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