Financial Planning and Advice Edition 2

Diploma Programme
Financial
Planning and
Advice
Edition 2, June 2017
This learning manual relates to syllabus

version 2.0 and will cover exams from
31 August 2017 to 30 August 2018
Welcome to the Chartered Institute for Securities & Investment’s Financial Planning and Advice study
material.
This manual has been written to prepare you for the Chartered Institute for Securities & Investment’s
Financial Planning and Advice examination.
Published by:
Chartered Institute for Securities & Investment
© Chartered Institute for Securities & Investment 2017
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Fax: +44 20 7645 0601
Email: customersupport@cisi.org
www.cisi.org/qualifications
Author:
Francis Klonowski BA, CFP, Chartered FCSI
Julian Ellis Chartered FCSI FPFS CertPFS (DM) Certs CII (MP & ER), Chartered Financial Planner &
Chartered Wealth Manager
This is an educational manual only and the Chartered Institute for Securities & Investment accepts no
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A learning map, which contains the full syllabus, appears at the end of this manual. The syllabus
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The questions contained in this manual are designed as an aid to revision of different areas of the
syllabus and to help you consolidate your learning chapter by chapter.
Learning manual version: 2.3 (August 2017)

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Financial Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1
Retirement Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
2
Financial Planning Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . 173
3
Glossary and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
Questions and Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
Syllabus Learning Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
It is estimated that this manual will require approximately 180 hours of study time.
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See our section on Accredited Training Partners.
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Please email your comments to learningresources@cisi.org
1
Chapter One
Financial Protection
1. Introduction 3
2. The Role of Insurance 5
3. Life Assurance, Pension Policies and Employer-Based Policies 18
4. Income Protection (IP) 22
5. Critical Illness Insurance 29
6. Long-Term Care Protection 34
7. Regulatory Considerations Relating to Long-Term

Care Insurance (LTCI) 45
8. Bonds 48
9. Sources of Financial Protection 54
10. Other Insurance-Based Protection Products 56
11. Other Protection Solutions 61
12. Business Protection 63
13. Protection Planning and Solutions 66
14. Consumer and Retail Market Factors and Trends

Relevant to Financial Protection 74
2
1. Introduction
1
In this section we will concentrate on the purpose and key features of life assurance and other protection
products, along with the tax implications of investing in life assurance products.
1.1 Relationship between Assets and Liabilities Insurance
Learning Objective
1.2.2 Understand the relationship between insurance and assets and liabilities
Insurance is a contract where the insurer accepts significant insurance risk from the policyholder
(or insured) by agreeing to compensate the policyholder if the insured event adversely affects the
policyholder. The transaction involves the insured accepting a guaranteed (and usually relatively
small) loss, ie, the payment to the insurer of the premium. In return they get the insurer’s promise
to compensate (indemnify) if a financial (personal) loss covered by the contract occurs. The insured
receives a contract (the insurance policy) which details the conditions and circumstances under which
the insured will be financially compensated. The risk transferred in the contract must be an insurable
risk, ie, for a risk to be deemed to be insurable the following conditions must be met:
• There must be an insurable interest in the thing or person being insured (for example, a stranger
cannot be insured).
• There must (potentially) be a large number of similar risks being insured.
• Any losses incurred must be accidental.
• The risk must not be too catastrophic for the insurance company, ie, the possible loss should not be
so great as to ruin the insurance company (reinsurance can be used to meet this requirement).
• It must be possible to calculate the risk of a loss occurring.
Note that the indemnity will be financial only, eg, no replacement of the Mona Lisa can be made, only
the calculated/estimated value.
There are two potential types of policy: liability and asset.
• Liability insurance is one part of the general insurance market which covers risk financing. The
intention is to protect the insured from the risks of being adversely affected by liabilities imposed by
lawsuits and similar claims. It protects the insured if they are pursued by claims that come within the
coverage of the insurance policy. For example, protection if a visitor is injured on their property and
makes a claim.
Liability insurance is meant to give protection against third-party insurance claims. Any payout of
the claim is not made to the insured, but rather to the claimant who actually suffered the loss (they
are not formally included as a party to the insurance contract). It is normal for the policy to exclude
damage which is intentional, as well as contractual liabilities. Whenever someone makes a claim, the
insurer takes over the defence of the claim: it is part of the policy and thus they have the right to do
so. They may also agree to settle a claim out of court if they deem it beneficial. The legal costs of any
defence normally have no effect on policy limits (unless the policy states otherwise).
3
Liability insurance is often a legally compulsory form of insurance for many situations where the
insured may be sued by a third-party (usually for negligence). The most usual types are:
drivers of vehicles
those who offer professional services to the public, eg, doctors, solicitors
manufacturers (product liability)
builders
employers.
Government policy demands that the above organisations/people must have insurance so that if
they are sued there will be money available for compensation: even the insured’s bankruptcy will
not be detrimental to the injured party. This is not necessarily a comprehensive list as the litigious
nature of society means that new policy cover is always being developed:
Public liability – industry and its activities have the potential to injure third parties (members
of the public, visitors, or trespassers, who may be physically injured or whose property may
be damaged). It can be legally compulsory to have liability cover but most organisations have
public liability insurance in their cover, eg, pollution insurance to cover environmental accidents.
Product liability – this insurance is not a compulsory class of insurance in many countries.
However, in the UK the Consumer Protection Act 1987 and the EC Directive on Product Liability
(25/7/85) require those manufacturing or supplying goods to carry some form of product
liability insurance. Pharmaceuticals and medical devices, asbestos, tobacco, recreational
equipment, mechanical and electrical products, chemicals and pesticides, agricultural products
and equipment and food contamination provide good examples.
Employers' liability – policies have been developed to cover any liability that might be
imposed on an employer if an employee is injured in the course of their employment.
In the UK, employers' liability insurance is compulsory, unless the only employee is the owner of
the company (holding at least 50% of the shares), or the business is a family business which is
not incorporated as a limited company.
Insurance may be written on an 'occurrence' basis or a 'claims made' basis. On an 'occurrence
basis', the cover is provided for an event which occurred during the policy period. This means
that a policy that had finished may have to pay out for an event because it was the cause of the
claim and it happened in that policy period. A 'claims made' policy covers any claim that is made
during the period of the policy regardless of when the actual event occurred. This means that if
a claim has not been made during the period of the policy, the policy liability will end.
In financial services, professional indemnity insurance is generally written on a claims made
basis, which means that if the firm stops trading and the policy ceases, customers will not be
protected by the policy.
NB: it should be noted that crime is not uninsurable per se. In contrast to liability insurance,
it is possible to obtain loss insurance to compensate one’s losses as the victim of a crime (eg,
corporate fraud).
• Asset insurance is protection of economic resources. Anything tangible (or intangible) that is
capable of being owned or controlled to produce value and that is held to have positive economic
value is considered an asset. Simply stated, assets represent ownership of value that can be
converted into cash (although cash itself is also considered an asset), eg, a car or a house.
Summary: liability insurance can cover potential litigation whereas asset insurance is for replacement
of the asset (betterment is prohibited unless it is new for old cover).
4
2. The Role of Insurance
1
Learning Objective
1.2.3 Be able to analyse the role of insurance in mitigating personal financial risk
Insurance products have been in existence for more than 600 years. The principal role of insurance is
to protect against the financial consequences arising from the occurrence of the insured event – eg,
theft, fire or accidental damage. In the case of life assurance, this means ensuring financial security for
dependants on the death of the insured person(s) by providing a lump sum, a regular income, or both. It
is designed to meet several aims:
• paying final expenses (for example, funeral, legal)

• paying off outstanding debts (for example, mortgage, loans), and
• providing income to maintain the dependant(s) lifestyle.
It is sometimes used in estate planning to ensure that children have the necessary funds to pay an
inheritance tax (IHT) liability when both parents have died. It is often used to ensure that a business
can survive the death of someone who may be key to its success, or that the business share owned by
the deceased can remain in the right hands.
2.1 Market Factors and Trends

To begin, we will concentrate on the three main types of life assurance policies and the terminology
used:
• term assurance
• whole of life assurance
• endowment assurance.
Throughout these areas, there will be elements of recurring terminology that we will cover first.
The 'proposer' is the person applying to the insurer for a policy.
The 'life assured' is the person upon whose death the payment is triggered.
The 'assured' is the person who effects the policy and is the original owner.
Frequently, the life assured and the assured are the same person, in which case the policy is known as
an 'own life policy'.
However, this is not always the situation, and the life assured and the assured can be different. These
policies are then known as 'life of another policies'.
Most life assurance policies are 'single life', so the death of the life assured will result in the policy pay
out and the end of the agreement.
5
Policies can also be written for two lives assured (which is the most common type of multiple life policy,
although it is possible to write policies for more). Joint life policies are either:
• joint life first death, paying out on the death of the first life assured – commonly used for family
protection needs and for mortgage cover.
• joint life second death policies pay out on the death of the second life assured – commonly used in
whole of life assurance policies to meet IHT liabilities.
2.2 Term Assurance

Term assurance is the most basic, and cheapest, form of life assurance. The sum assured will be paid
out only if the life assured dies during the agreed term. If they do not, no payment is made, as generally
there is no surrender or cash-in value. The policy then expires.
There are five types of term assurance policies that we will briefly cover in this section, and we will look
at how they are structured and their uses and merits.
Level-Term Assurance
We start with the most basic form. The sum assured on a level-term assurance policy does not vary
during the policy term and, once the term expires, the policy expires with no value.
Uses
This type of policy is often used to provide protection for the breadwinner in a family scenario. This may
not be ideal, as most people expect their income to increase and on a level-term policy the sum assured
remains static.
Level-term policies have also been used to provide cover alongside an interest-only mortgage. As no
capital is being paid out, the liability remains the same. This is ideally covered by a level-term policy.
Level-term assurance can also be used for IHT planning when a previous gift may mean all or part of
an estate falls above the nil-rate band (NRB) for a set period (seven years). Although the NRB has not
increased since 2009, an additional NRB when a residence is passed on death to a direct descendant
was added in 2017–18 and this will increase in the future. The basic NRB will remain at £325,000 until
2020–21 but may increase in the future, possibly reducing the IHT liability. It can also be expected that
the estate value will grow, and therefore increasing level-term assurance may not remain appropriate.
An alternative special type of decreasing-term policy – known as a gift inter vivos assurance policy – may
be more appropriate in some circumstances in isolation, or in addition to, a normal term policy.
Example
Stephen has an interest-only mortgage of £250,000 on his main residence with ten years remaining. He
is worried about how his family will repay this debt should he die and asks for your advice with regard to
protecting this debt. He plans on downsizing in ten years and repaying the mortgage at this time.
6
A level-term assurance policy with Stephen as the life assured for a sum assured of £250,000 over a
1
ten-year period would satisfy this need. However, a whole of life policy on maximum cover would also
meet the objective, as the cover would be guaranteed until the ten-year review. Both options could be
compared and considered, along with Stephen’s other life insurance needs and existing cover.
Increasing-Term Assurance
Similar to level-term, except that the sum assured increases. Generally, this increase will be at the annual
renewal, but there are some policies where the increase takes place after a longer set period, eg, five
years.
The rate of the increase differs. Many life policies offer set percentage increases by, for example, 3% or
5%. Other policies increase the sum assured in line with the increase in the retail prices index (RPI).
Some policies offer 'guaranteed insurability options', which allow the sum assured to be increased by
much more substantial amounts (for example, 50% of the original sum assured). These increases are
offered alongside key events in an assured’s life, such as marriage, the birth of a child or a remortgage
for a higher sum. In fact, guaranteed insurability options can arise in many life assurance policies, not
just increasing-term assurance policies.
The initial premium for this type of policy is slightly higher than that for level-term policies, and this
premium increases each time the sum assured increases throughout the term.
Uses
This type of policy is also used for family protection, with the added bonus of being able to offset the
effects of inflation.
Example
In 24 years' time, £1 million of life cover would be worth less then £500,000 of cover in today’s terms,
based on 3% inflation. It is important to ensure the cover maintains its purchasing power.
Renewable-Term Assurance
The renewable option provides the opportunity for the life assured to take out a further term assurance
at ordinary rates, without requiring further evidence of health (known as guaranteed insurability). The
length of the renewed term is normally restricted by the original term, and also possibly by a maximum
age. Each subsequent policy will have the same renewability option, incorporating the restrictions
noted.
The initial premium will be higher than for a level-term policy. When the policy comes up for renewal,
the premium will increase further as it will be based on the increased age of the life assured.
7
Uses
This type of policy is used when there is a definite need for cover, but it is not known how long that need
will last.
Often this may be the case with business insurance scenarios, such as key person protection, where an
employee may be deemed a key person now, but may not remain so indefinitely.
Convertible Term Assurance

This is a term assurance which allows the policyholder to convert it to a whole of life or endowment
assurance contract. This conversion can take place at any time during the policy term, and there will be
no need to provide any further evidence of health.
The initial premium will be higher than that for a level-term assurance, as it carries this greater flexibility.
Significantly, on conversion, the premium will be based on the nature of the new type of life policy, both
of which are much more expensive than term assurance.
Uses
This type of policy is used when there is a current need for term assurance (some kind of cover) but
also the likelihood of a more substantial policy requirement in the future. Ideally, the whole of life or
endowment policy option would be chosen immediately, but there may be an impediment – usually
cost – that is stopping an assured from being able to pursue that route at the outset.
Decreasing Term Assurance (DTA)

These policies have a sum assured which reduces each year by a given amount, decreasing to zero at the
end of the term.
Although the cover is decreasing, the premium remains level. The initial premium will be lower than for
level-term assurance, as the overall liability to the insurer is less. Occasionally the premiums are actually
payable for less than the full term, to try to remove the temptation for individuals to lapse the policies in
the last few years when the cover is relatively low.
Uses
Primarily to cover reducing debts, such as a repayment mortgage.
A special form of seven-year decreasing term assurance (DTA) (a gift inter vivos policy) can be used by
recipients of gifts that exceed the IHT NRB but have a decreasing liability due to taper relief.
Example
Jayne has a repayment mortgage of £400,000 on her main residence with eight years remaining. She
is worried about how her family will repay this debt if she dies so asks for your advice with regard to
protecting this debt.
8
A DTA policy with Jayne as the life assured for an initial sum assured of £400,000 over an eight-year
1
period would satisfy this need. The sum assured on the policy will decrease each year as it is designed to
reduce in line with a typical repayment mortgage as the outstanding capital reduces.
2.3 Family Income Benefit (FIB)

This form of protection gives the beneficiaries a tax-free regular income, as opposed to a lump sum, but
note that some policies can offer the option of a lump sum payment when a claim is made on the death
of the life assured. However, the income will only be paid for the remaining term of the policy, so the
closer to the end of the policy the death occurs, the fewer years income will be paid.
Premiums at standard rates are based upon the sum assured, the term of the cover and the age of the
assured. Insurers will also consider the health of the life assured and any 'risky' hobbies. This may lead
to premiums being 'loaded' (ie, higher than standard), exclusion for identified health conditions or
hobbies, and – in extreme cases – declining to offer cover.
The benefits are:
• a very low-cost method of buying life insurance

• the income is tax-free, and
• no investment fees, charges or tax.
It is said that family income benefit (FIB) is one of the most useful, and best-value, protection products
that can be purchased. It is particularly attractive to anyone who likes to know that their beneficiaries
will receive a regular monthly income and will not have to worry about complex investment decisions
(as they might with a lump sum payout). The advantages of this to someone living off the payout –
perhaps a young widow(er) – are quite significant: for example, if they invest a lump sum to generate
an income, they will have to pay fees, fund charges and possibly tax on income and capital gains. For
those who cannot afford to buy a large lump sum policy, especially if they have a young family and less
disposable income, the FIB can provide significant protection at an affordable cost.
The structure of the plan means that the total amount that can be paid out decreases each year, as the
payments are only made until the end of the policy term.
Example
A FIB plan is set up for 20 years to pay £20,000 a year. If a claim is made after five years, £20,000 x 15
years, or £300,000 is paid. However, if a claim is made after 18 years, £20,000 x 2 years, or £40,000 is paid.
This is why a FIB can cost less than term life insurance, but a family with young children could need a lot
of initial cover.
The income is paid tax-free and does not affect any entitlement to Bereavement Support Payment,
although it may affect entitlement to any means-tested state benefits.
9
Example
Margaret, aged 35, is a non-smoking, single parent in good health who earns £100,000 per annum as an
employee of a plc. She has two children aged four and two.
She has a mortgage and very little savings and would like to make sure that, upon her death the children
have a lump sum left to them to help secure their future. She has asked your advice on taking out life
cover.
Some of the key factors for a financial planner to consider here are:
• How much cover is actually required/how much will the children need per annum to give them the
standard of living Margaret wants for them? A financial planner can work with Margaret to quantify
the amount of cover she needs and recommend a suitable sum assured.
• For what term will cover be required/when are they likely to be financially independent? Margaret
may wish for cover to continue until the children are in their mid-20s because by then they may be
financially independent.
• How will inflation erode the cover over time? Indexation may be required.
• What level of life cover has she through her employer and how might this be used? It should also
be considered what would happen if she leaves her employer in the future as this would reduce her
overall cover unless she has similar cover with a new employer. She may wish to have similar cover
independent of her employer’s death in service benefits.
• Should the policy be placed into a trust from the outset to ensure the proceeds are payable to the
trust rather than to Margaret's estate upon her death? Placing the policy in trust from the outset
would mean the proceeds would not be part of Margaret's estate and therefore not subject to IHT.
• What is her budget for this protection need?
• The children are minors, so how would any money paid out to them be administered until they
reach 18.
• Who would look after the children? – importance of a valid will naming guardians.
• Should there be a Lasting Power of Attorney (LPoA)?
• Life cover isn't enough in isolation – all these other factors must be taken into account.
2.4 Whole of Life Assurance

Whole of life assurance policies will result in the payout of the sum assured on the death of a life
assured, whenever that occurs.
Due to the permanent nature of the cover, and the certainty of a claim as long as premiums are
maintained, the premiums are more expensive than for term assurance policies. Whole of life policies
can in some instances also build up cash-in values, although these can be very low (particularly in the
early years). Certain whole of life policies have been established more as investment than protection
vehicles, and we will look at them later in this section. For the time being, we will put the emphasis on
protection.
There are four types of whole of life assurance policies that we will briefly cover in this section, we will
look at how they are structured and their uses and merits.
10
Non-Profit Whole of Life Policies
1
Non-profit whole of life policies have level premiums, payable throughout life. They pay out a fixed sum
assured, whenever death occurs.
It is possible to obtain products of this nature that cease collecting premiums at a specified age, such as
80 or 85, although the cover continues. The initial premiums will be slightly higher as a result.
Uses
These types of contracts are rarely sold, but have become more popular in the IHT market recently.
They are also the type of policy promoted by direct advertising to the over-50s. The proposal forms for
these tend to be very short, with few medical questions. However, it is common for the sum assured
to be paid out only if death occurs after a predefined period, typically after two years, and there is no
surrender value.
With-Profits Whole of Life Policies

With-profits policies offer the opportunity for the sum assured to be increased by the addition of bonus
payments. These bonuses are not guaranteed but, once allocated, cannot be removed. The level of the
bonus depends on the performance of the life office and its funds, assets and liabilities.
Bonuses that are added regularly are known as 'annual' and/or 'reversionary'. They are usually expressed
as a percentage of the sum assured, and may be simple (based purely on the original sum assured) or
compound (based on the original sum assured plus previous allocated bonuses).
It is possible that another bonus may be added when a policy comes to the claim stage (rather than
surrender). This is known as the 'terminal bonus' and is usually expressed as a percentage of the total
reversionary bonuses.
As mentioned, once a bonus has been allocated it cannot be removed. However, most offices reserve
the right to apply a market value reduction (MVR) factor if a policyholder surrenders the policy, or wants
to switch out of the with-profits fund. This is most likely to be applied during periods of adverse stock
market conditions and poor economic climate. The MVR enables the life office to reduce the surrender
or switch value, in an attempt to apply fairness across all with-profits members (including those who
are remaining in the fund). Bonuses are allocated from surpluses, but during times of market downturns
these surpluses are reduced. If an assured person is allowed to keep their full allocated bonus, it could
impact negatively on those who are remaining in the fund. Therefore, MVRs are generally only applied
in periods of poor market performance, and only on surrender or switching – not on death.
Some companies have MVR limits and MVR-free periods when the MVR does not apply (known as an
MVR window). The Financial Conduct Authority (FCA) has conduct of business rules (COBS 20.2) that
companies must follow when considering MVRs to ensure that with-profit policyholders are treated
fairly.
The amount payable on death on a with-profits whole of life policy is the sum assured plus whatever
profits have been allocated up to the date of death. The premiums are likely to be higher than for a non-
profit policy, due to the potentially higher payout.
11
Uses
As a standard form of whole of life cover, for family protection and IHT planning.
The with-profits format should, in theory, be less risky than a unit-linked approach, as allocation of
bonuses should provide a smoother increase in benefits.
Low-Cost Whole of Life Policies

These are products sold as one policy, but, in effect, are a combination of two policies we have already
considered:
• a with-profits whole of life policy element

• a DTA element.
The policy will pay out a full sum assured on death, based on the combined value of these two elements.
In the longer term, the bonuses added to the with-profits element will increase the payout from that
element, while the DTA sum assured is reducing progressively.
Example
A low-cost whole of life policy provides a sum assured of £100,000. This might be made up of £60,000
with-profits whole of life cover and £40,000 DTA. So, if the life assured dies immediately, there is a
combined payout of the required £100,000. Over the years, bonuses should be added to the with-profits
element, taking it up to, say, £70,000, over ten years. In the same time period, the DTA sum assured will
have fallen by the equivalent amount to, say, £30,000. The sum assured payout on death is therefore the
same amount of £100,000.
It is worth noting that the DTA won't necessarily fall in line with the addition of bonuses. As low-cost
policies have a lower sum assured, bonus additions are lower than for a full policy with a higher sum
assured.
The attraction of these policies is hinted at in the name – they are significantly cheaper than full with-
profits policies. That is because, as we have already seen, DTAs are a very cheap form of life assurance.
The surrender values of these policies, as they are based only on the with-profits element, are even less
than those available on a full with-profits policy.
Uses
They are used for much the same purposes as full with-profits contracts, but at a much reduced cost.
Unit-Linked Whole of Life Policies

We touched on unit-linked policies when looking at term assurance and the same basics apply: the
premiums buy units in a chosen fund, and each month enough units are cancelled to pay for that
month’s life risk. The remaining units stay invested.
12
The key benefit of unit-linked whole of life policies is their flexibility (indeed, they are often referred to
1
as 'flexible whole of life' policies). At the outset, the assured has a choice for a given premium between:
• A standard sum assured – the sum assured which the life office has calculated it should be able to
maintain for that premium based on an assumed fund rate growth.
• A maximum sum assured – where the initial sum assured is higher than the standard one. That
will result in more units having to be cancelled each month to pay for the cover, and so fewer units
remain invested. It is likely, therefore, that at a policy review (usually after ten years and every five
years thereafter) the premium will have to be increased to be able to maintain that level of cover.
• A minimum sum assured – where the initial sum assured is lower than the standard one. That
will result in fewer units having to be cancelled each month to pay for the cover, with more units
remaining invested. The hope is to build up the surrender value or a bit of ‘fat’ into the cover at a
time when a higher sum assured is not required.
• Reviews – policies will have a regular review: the first one is usually at the anniversary, then at
regular intervals afterwards – usually every five years but sometimes annually. Maximum cover may
not be able to be maintained without the need for increasing premiums; therefore, these policies
can become a lot more expensive over time if the same level of cover is required.
• Flexibility – one large advantage of these policies is that cover can be increased (using guaranteed
insurability options), decreased and surrendered at any time.
Uses
The attraction is the flexible level of cover, enabling a high degree of protection in the early years (for
example, when children are still dependent) and less protection with more investment in later life
(when the children should have left home and are independent). These policies are also used for estate
planning to provide a lump sum to pay an IHT liability.
In essence, the maximum cover option is fairly similar to a ten-year convertible term assurance, with
only a small amount of units being actively invested.
It is unlikely that anyone would opt for the minimum cover option at the outset, as there are probably
better ways to invest money if that is the intention.
Example
David has a large estate with an IHT liability estimated to be £2 million. His planner recommends that
he sets up a whole of life policy in trust to provide liquidity on his death to pay the estimated IHT that
would be due on his estate.
David wants a premium that he will be able to afford for the rest of his life, so the financial planner
discusses the differences between a policy with a standard sum assured and a policy with a guaranteed
sum assured.
With a standard sum assured of £2 million, it should be possible to maintain this at the quoted premium
based on an assumed fund rate growth. The policy will have reviews in the future with the first one
being on the tenth anniversary.
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With a guaranteed sum assured of £2 million, the sum assured is guaranteed and the premium is
guaranteed too; however, the premium is higher than for a standard sum assured policy. There are no
future reviews with this type of policy.
Given that David wishes to have certainty about the future costs of the policy he opts for a guaranteed
premium.
2.5 Endowment Assurance

Endowments combine life cover over a specific term (like term assurance), with the guarantee that there
will be some kind of payout (like whole of life assurance). They provide a steady mix of protection and
investment, and are the most expensive form of assurance.
Endowments acquired a bad reputation in the marketplace owing to many policies being sold,
particularly in the 1980s and early 1990s, to repay interest-only mortgage debts. Despite the fact
that ultimate cash-in values are very rarely guaranteed on any form of endowment, there were many
policyholders who were not informed of this fact. Many were then surprised to receive a letter from their
life office informing them there was likely to be a shortfall in their endowment funding, and therefore
they would not be able to fully repay their mortgage if they kept premiums at the existing level. The
'endowment mis-selling scandal' then followed.
Endowments are still sold, as they do have some advantages. However, the word endowment is so
tarnished that it is rarely used in the product name, with alternatives such as regular savings plans
proving more acceptable.
We will look at five types of endowment assurance policies in this section, looking at how they are
structured and their uses and merits.
Non-Profit Endowment Policies

The most basic form, with level premiums and a payout of a fixed sum assured on maturity or earlier
death.
Uses
These are now very rarely sold. These types of endowments are expensive, as the premium paid has
to be sufficient to provide the required sum at maturity without the benefit of any investment-related
bonuses and would generally be inefficient in today’s market. However, older policies may still be found
when reviewing a client’s existing provision.
With-Profits Endowment Policies

These guarantee that the sum assured will be paid out on death or on maturity at the end of the
term. In addition, there are likely to have been reversionary bonuses added during the term, and the
possibility of a terminal bonus added at maturity. In theory, therefore, the eventual payout should meet
a mortgage requirement (if there is one) and provide an excess payment.
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Uses
1
Due to the nature of the payouts, these are comparatively expensive and are rarely purchased.
Low-Cost Endowment Policies

These operate in much the same way as low-cost whole of life plans, with two different policies operating
under the structure of one:
• a with-profits endowment element or a unit-linked element, and

• a DTA element.
They guarantee to pay out the full sum assured on death. However, there is no such guarantee on the
maturity of the plan, as that will depend on the bonuses added to the with-profits endowment element
throughout the term. Often, they rely substantially on the terminal bonus payout, to determine whether
the amount required will be met.
Example
A low-cost endowment might be set up with an overall sum assured of £100,000, made up initially of,
say, a £60,000 with-profits endowment and a £40,000 DTA. After 24 years and 364 days of a 25-year term,
the bonuses added to the with-profits element might only have taken the value up to, say, £90,000 – a
bit short of the amount required. However, on maturity the next day a terminal bonus of, say, £20,000
might be added, providing sufficient funds to repay the debt and benefit from a reasonable surplus. The
terminal bonus is however not guaranteed.
The attraction of these policies is that the initial cost is a lot less than that for a full with-profits
endowment.
Uses
Sold a lot in the 1980s and 1990s to repay interest-only mortgages at a (seemingly) reasonable monthly
cost.
Often surrendered early, for example when people moved houses and changed their mortgage deal and
term. This provided extremely poor value for money, with very low surrender values in the early years
(often a lot less than the premiums paid).
It became popular to sell these policies on the traded endowment policy (TEP) market, as the original
life assured was likely to receive a higher benefit than by simply surrendering the policy to the life office.
These were sometimes known as 'second-hand' endowments.
Low-Start Endowment Policies

Low-start endowments are a development of low-cost endowments, but have a lower initial premium.
That is because the premium rises, typically for the first five to ten years of the policy, and then settles
at a higher figure than would have been the case under a low-cost endowment for the remainder of the
term.
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Uses
These policies were originally aimed at professional people who could realistically expect their income to
increase at a reasonable rate across a short period of time, for example, solicitors, doctors, accountants.
Unfortunately, due to lower initial premium, they were often sold to individuals whose income was not
likely to rise, or certainly not by as much as was required to keep up with the payments. These would
typically be individuals taking on a large mortgage and having to keep their costs as low as possible.
Again, a lot of these policies were therefore surrendered early, providing a minimal return to the assured.
Unit-Linked Endowment Policies

These operate in a similar way to other unit-linked policies. The fund choice selection is often wider than
for whole of life policies, as it is more of a pure investment product.
The maturity value of the policy will always be the bid price of the units, so they are very transparent
(particularly in comparison with an alternative such as a low-cost endowment). As a result, if the maturity
value reaches the amount required to, for example, repay a debt, the policy can be stopped immediately
– saving premiums having to be paid in the future. However, this assumes that the fund performance is
such that it reaches the required amount, which has certainly not always been the case.
Uses
Unit-linked policies in general offer greater transparency and so could appeal for that reason.
The possibility of early repayment of a debt is also attractive.
Along with other forms of endowment, the surrender values in the early years are very low, owing to the
high level of initial charges. Despite this, many unit-linked endowments have been surrendered early.
The Second-Hand Endowment Market

A market has developed in the purchase of second-hand with-profit endowment policies. This started
in the late 1980s when a few market makers were established to specifically deal in this market; since
then the market has increased considerably. TEPs have become attractive to both UK and international
investors, pension funds and offshore investment funds as well as specialist investment trusts. TEPs are
attractive because, in buying a mid-term policy, the investor purchases a product with a guaranteed
value which includes the basic sum assured, plus any bonuses already attached. At the same time,
the policy is exposed to a fund which invests in equities and property, so it also has some element
of inflation-proofing. A TEP also has the benefit that all initial charges have already been paid by the
original policyholder.
The seller may decide to sell a with-profits endowment policy prior to maturity for a number of reasons,
eg, a change in circumstances, such as divorce or change in mortgage requirements. Individuals have
found that selling such a policy is more beneficial in terms of the sum received rather than surrendering
it back to the insurance company.
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2.6 Taxation Treatment
1
Learning Objective
1.2.8 Be able to evaluate the taxation treatment of life assurance and pension-based protection
policies including: capital gains tax (CGT) and life assurance policies; inheritance tax (IHT) and
life assurance
2.6.1 Life Assurance and Capital Gains Tax (CGT)

A gain made under a UK life assurance policy is not subject to capital gains tax (CGT) unless it has at
any earlier time been acquired by any person for actual consideration (eg, policyholder may have sold
the bond to someone wishing to buy it as an investment).
In such circumstances the aim of the CGT legislation is that any gains made on the bond after it has been
sold should be chargeable, just as gains on any other type of financial instrument that might be held as
an investment are chargeable.
The effect therefore is that a bond is exempt from CGT in the hands of the person who takes it out,
and anyone who acquires it from the original policyholder by way of a gift, or an unbroken chain of
gifts. Once 'actual consideration' has been given for the bond, the exemption is lost and any gain on a
subsequent disposal is chargeable. The capital gain would be calculated by deducting purchase price
from disposal proceeds. Receipt of the sum assured or surrender proceeds would both count as disposal
proceeds. In addition, premiums paid by the new owner would be deductible as would any incidental
costs of acquisition or disposal.
2.6.2 Tax Relief and Life Assurance

Tax relief on premiums for individual life policies (except certain employer-based policies (see Section
3)) has not been available for many years. The last to lose it was pension term assurance policies for
individuals in 2006. You may come across polices written before then on which tax relief is still given.
2.6.3 IHT and Life Assurance

The proceeds from a life assurance policy are payable to the estate of the deceased (life assured), or to
the estate of the policy owner. This means the proceeds form part of an individual's estate and therefore
could be subject to IHT.
If the policy is written with a trust – usually a flexible power of appointment trust – the proceeds do
not fall into the policyholder’s estate and are therefore not subject to IHT. Apart from protecting the
proceeds from inheritance tax, the trust also allows the proceeds to be paid immediately to the named
beneficiaries without waiting for probate to be granted.
Trustees are appointed from the creation of the trust, which is usually at the time of taking out the life
policy. It may be later if the policy was not written in trust from the outset; this often happens when
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the adviser is reviewing a client’s policies and deems it appropriate to do so. Trustees would normally
include the policyholder themselves, plus at least one other who will administer the claim on the
policyholder’s death.
NB: one trustee is sufficient to administer the claim on death. The more trustees that are appointed, the
more complicated the claim process as all are required to sign the claim form. The named beneficiaries
may also be trustees; in fact this can make the claims process easier.
3. Life Assurance, Pension Policies and Employer-

Based Policies
Learning Objective
1.2.7 Be able to analyse the range, structure and application of life assurance, legacy pension-based
and employment-based policies to meet financial protection needs including: types of policies,
comparative costs, benefits and advantages; cost and premium calculation factors; legal
requirements, ownership, uses and relevance of trusts; underwriting and claims: issues and
processes; terminal illness benefit; assignments, surrenders, paid-up policies, claims; employer-
sponsored benefit schemes
1.2.9 Be able to analyse the range, structure and application of life and health insurance policies
and options to meet financial protection needs including: types of policies, features and uses,
comparative costs, benefits and disadvantages; definitions, exclusions, premium calculation
factors; underwriting and claims: issues and processes; taxation treatment; group policies;
employment-based income protection
3.1 Employer-Based Life Assurance
3.1.1 Life Assurance or Death in Service Cover

Life assurance, or death in service cover, is a benefit that is normally offered as part of an employer’s
benefits package. Historically, these have been only offered alongside a workplace pension scheme
(WPS): however, in today’s market, they tend to be offered in stand-alone format, as part of a flexible
benefits package, for many employees. Employers are able to use economies of scale to purchase
life cover for pension scheme members at a considerable discount to the price that would be paid
if individuals were to purchase the same benefits on their own. Additionally, due to increases in life
expectancy, the cost of life assurance has decreased. Employees need to be wary, however, of the
implications of changing jobs, as the cover is rarely allowed to continue. Individual life policies after
leaving an employer will be based on age and health at that time. Likewise, employees need to be aware
that even if a new employer has a death in service scheme available, it may be that the individual’s
required level of cover is above any medical free underwriting limits. This is becoming more of an issue
in the current fluid job market of the UK.
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One consideration is to ensure that the life cover benefit does not cause the total pension benefits
1
to exceed the Lifetime Allowance (LTA) for employees: otherwise any excess above the LTA will be
subject to a 55% tax charge.
To avoid this, the life cover is now more commonly provided through 'excepted' life policies such as
relevant life policies. Like death in service, the payouts from these are tax-free, the premiums are tax-
relievable for the employer, and the premiums are not taxed as a benefit in kind on the employee.
Above all, the amount paid out on death is not tested against the LTA, and therefore is not subject to the
55% charge. One potential disadvantage is that relevant life policies can only be written on a single life
basis, so premiums may be higher.
Another development has been that insurers set a price for life cover by looking more closely and taking
into account individual risks. An employer will generally find that a lower premium is payable if:
• the proportion of women in the workforce is higher than men

• the average age of the workforce is low
• the workforce is involved in a lower-risk occupation(s), and/or
• the workforce is based in an area where life expectancy is high (there remain significant differences
across the UK).
3.1.2 Life Assurance in a Defined Contribution (DC) Environment

As employer contributions to defined contribution (DC) pension schemes (more on this in Chapter 2)
tend to be lower than in defined benefit (DB) schemes, and greater flexibility has arisen in possible
benefits, employers have found it cost-effective to increase life cover protection. As premiums have
reduced, employers have opened up life cover to employees who are not in workplace pension
provision (WPP) – with DC schemes in particular, employees may prefer their own private provision.
Additionally, life cover of up to ten times salary is offered by some employers to encourage employee
retention. Even set levels of life cover that increase with seniority have started to be offered.
In order to offer life cover benefits tax-free, these must be paid through a registered discretionary trust.
Employers do not need to establish their own trust, they simply agree to participate in the life office’s
master trust. It is separate from the WPP, thus enabling this benefit to be offered to employees who are
not scheme members.
3.1.3 Life Assurance – the Pitfalls

As discussed above, greater flexibility and lower costs have made offering life cover for employees an
attractive option for employers. There are, however, some areas to consider. Group life assurance policies
are generally available without the requirement for each employee to have a medical examination or
medical evidence first: this is called the free cover level (ie, free of medical underwriting) and becomes
higher the larger the scheme. Some higher-earning employees or those with medical complications may
face restrictions. If a firm has many employees on long-term sick leave, then a change in life assurance
provider or type of cover may be difficult.
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3.1.4 Life Assurance – the Costs
Taking all the issues outlined above into consideration, the exact premium paid will vary. However,
generally, an employer providing cover of four times earnings should pay in the region of 0.25–0.5% of
the payroll. Regular reviews are recommended, as cost savings may be made since premiums across the
industry are generally reducing.
DC pension schemes do not usually include pensions for dependants after the scheme member’s
death. Within a DC environment, the methods for providing such a benefit will be paying the value of
the fund plus any additional life assurance if it was taken out.
A tax-free lump sum rather than a regular pension (which is taxable) is often preferred and much easier
to understand for employees, and provides an immediate benefit to dependants.
3.2 Uses and Relevance of Trusts

Trusts provide a method of protection of assets by keeping them separate from the person or body that
has settled them. As a result, they no longer belong to the original funder and therefore are an effective
vehicle for protecting the asset from a deterioration of the settlor’s financial position, eg, if an individual
became bankrupt, any assets set aside for dependants could be seized for creditors.
Equally, trusts can be very useful in ensuring that a benefactor’s wishes are enacted, as separate persons
can be appointed as trustees to oversee the use of the assets, which can be any type of belongings. If the
beneficiaries are children, then the trustees can run the affairs of the trust until the beneficiaries come of
age. However, with some trusts, such as discretionary trusts, the decisions regarding who benefits from
the trust assets – and when – are up to the trustees.
There are different types of trusts for different uses and circumstances. For example, interest-in-
possession trusts are used to ensure the trust income is paid to one beneficiary – known as the 'life
tenant', and said to have a 'life interest' – while the capital would be paid to a different beneficiary on
the death of the first, known as the 'remainderman' or 'capital beneficiary'. Discretionary trusts, on the
other hand, may name beneficiaries but give the trustee the power of bestowing any or all of the capital
and income to the beneficiaries. During a donor’s lifetime, gifts of assets into certain trusts such as bare
(absolute) trusts will be regarded as potentially exempt transfers (PETs). PETs fall outside the donor’s
estate for IHT purposes as long as:
• the transfer is made by an individual

• it was made on or after 18 March 1986
• it was made to another individual or specified trust, and
• the donor survives for seven years after the date of the transfer.
However, if the gift is to a discretionary trust and/or most types of interest-in-possession (IIP) trusts
since 22 March 2006, then the transfer is known as a chargeable lifetime transfer (CLT). In 2006 trust
law changed in order to prevent their use as tax avoidance schemes. The Finance Act 2006 introduced
a 20% tax rate above the NRB for all lifetime gifts into discretionary and most IIP trusts. (The rate is half
the charge that applies to chargeable transfers on death.) Ten-year periodic as well as exit charges on
discretionary trusts were also introduced.
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Life assurance policies, where the benefits are transferred in trust, are not usually considered to be
1
PETs. The payment of premiums to a life policy in trust could be a gift for IHT purposes unless the
premium was exempt via an IHT exemption (for example, the annual £3,000 per annum gift allowance,
or – more likely – gifts out of surplus income). Where a policy provides benefit on an either/or basis, ie,
benefit payable in the event of critical illness or death – the policy should be written under a split trust
arrangement. A split trust allows the life assured to receive any critical illness benefit while ensuring that
any death benefit is held in trust for the nominated beneficiaries.
3.2.1 Trusts and IHT

Trusts can be used to ensure that life insurance policies provide the maximum potential benefit for those
to whom they are paid out. This can be particularly well illustrated by looking at the likely outcome of a
situation in which a life insurance policy is paid out without the use of a trust.
When this occurs, the policy will be paid into the estate of the deceased individual. If this individual
is a homeowner, it is possible that this will either create or increase a liability for IHT. IHT is currently
payable on assets over £325,000, and is levied at a rate of 40%. Thus, if the estate of the individual totals
more than this figure, their heirs will lose 40% of all, or at least part, of the life insurance payout. The IHT
threshold is currently frozen until 2020–21.
When a life insurance policy is written in trust, however, the outcome is potentially very different. Under
this arrangement, the money that is paid upon the death of the policyholder is not counted as part
of their estate. Rather, it will pass directly to the intended beneficiaries; these will be detailed in the
document used to establish the trust (the trust deed). Because the money has bypassed the estate of
the policyholder, it will not be subject to IHT. It can also be paid out without waiting for probate, so the
beneficiaries may receive the money more quickly.
3.3 Underwriting
When an individual applies for life, critical illness or income protection (IP) cover the insurer will make an
assessment of the risks through a process known as underwriting. Through this they determine whether
the individual is eligible for insurance cover, and how much the premium will cost.
Insurers carefully assess each application, taking into account the level of risk associated with the
assessment factors listed below.
3.3.1 Age
The cost of buying cover rises as the person gets older because the risk factors increase.
3.3.2 Health
Certain medical conditions carry a greater risk of death or disability. Typical conditions include raised
blood pressure, high cholesterol, heart disease, diabetes, stroke or cancer. Some conditions like back/
joint problems, or anxiety and depression are especially significant when applying for disability cover.
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3.3.3 Build
Overweight people are more likely to suffer major diseases such as diabetes and heart disease. The
medical profession sets out recommended guidelines for an individual’s ideal body mass index (BMI). If
a person has a high BMI ratio insurers may have to increase their premium or in certain circumstances
insurers may not be able to offer cover.
3.3.4 Family History

Certain conditions, such as coronary heart disease and some types of cancer, tend to run in families.
While these conditions are not always hereditary, their presence in the family may increase – statistically
– the chance of someone developing the same condition.
3.3.5 Hazardous Activities and Occupations

Some jobs or hazardous activities carry an increased risk of accidental death or disease. Examples
include underwater diving, mountaineering, private aviation, working at heights and certain duties in
the armed forces.
3.3.6 Smoking, Alcohol and Drugs

Using tobacco products, non-prescription drugs and alcohol consumption over the recommended
limits are well-recognised risks. Applicants who haven’t used any tobacco products in the last 12 months
will pay lower premiums, as they are less likely to suffer the health problems associated with smoking.
3.3.7 Residency and Travel

Living or travelling abroad, including past or potential future travel or residency, may influence an
underwriting decision.
4. Income Protection
Learning Objective
1.2.10 Be able to analyse the range, structure and application of income protection insurance to meet
financial protection needs including: types of policies, features and uses, comparative costs,
benefits and disadvantages; definitions, exclusions, premium calculation factors; underwriting
and claims: issues and processes; taxation treatment
Having looked at life assurance products, we will now study the insurance solutions that provide
benefits in the event of the ill health or incapacity of the life assured.
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An insurance company essentially takes on an individual’s risk in exchange for a premium. The aim of an
1
insurance company is to mitigate the risks it is exposed to and to make profit. This is achieved by selling
a volume of policies and spreading the risk of any losses among many policyholders. Furthermore, the
premiums are invested both in conventional securities and in hedge funds. Prices can increase as stock
market returns vary and costs of hedge fund products increase. Costs also increase particularly for
health insurance as populations live longer and, as a result, suffer age-related chronic health issues and
therefore make greater levels of claims.
4.1 Types of IP Policies

There are long-term and short-term IP policies available. Long-term plans are designed to pay out when
poor health is the issue. Covering the insured until they recover, die, draw retirement benefits/reach
a specified age or the policy reaches its expiry date, whichever is the earlier. Shorter-term policies are
designed to protect a mortgage, bank loan or other payment, often in the event of temporary crises
such as unemployment and redundancy as well as health issues.
Whereas critical illness cover (CIC) is designed to provide a lump sum benefit, IP insurance is designed to
provide a regular income following an illness or accident leading to an insured person being unable to
work. This income continues until the insured recovers and is able to return to work, reaches a specified
age (the policy expiry date), retires or dies. If the insured does recover and return to work, the insurer
cannot normally cancel the cover based on the fact they know their risk has been increased, as long as
the insured continues to pay premiums; however, this depends on the cover selected at the outset. This
is why this form of cover was previously known as 'permanent health insurance' (PHI), and is preferable
to general insurance such as accident and sickness cover where the insurer can cancel cover at renewal.
Uses
An IP policy can benefit almost anyone who is working.
For an employed person, the benefit can be tied in with any sick pay they receive from their employer.
For a self-employed individual, the deferred period might have to be shorter, but the need might be
greater, as it is possible that an illness could lead to all income ceasing.
Some firms also offer IP cover for ‘homemakers', conscious that an illness can lead to greatly increased
costs if the partner who normally looks after children and the home becomes too ill to do so.
4.2 IP Premiums
There are three types of IP premiums available:
• Reviewable premiums – a reviewable premium means that premiums may start off relatively low,
but will be reviewed in the future and may increase every few years or so. In some cases, the premium
may be reviewable every year, or every five years, to take into account changing circumstances.
• Renewable premiums – renewable premiums are a variant of reviewable premiums, and are
reviewable whenever the policy is due for renewal.
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• Guaranteed premiums – guaranteed premiums tend to be more expensive than the other two
options, but are fixed for the life of the policy, which may be as long as 25 years or the maximum
term offered by the insurer.
IP insurance premiums are affected by a number of different factors including:
• amount of benefit required

• length of cover – (see Section 4.9.1)
• age
• estimated retirement age
• smoker status
• occupation
• length of deferred period
• increasing or level cover
• type of cover (eg, own occupation/any suited occupation)
• medical history.
Insurance premiums have not taken account of an individual’s gender since the European Union (EU)
gender equality rules came into force in 2012.
There are many factors that impact on the premium for IP in addition to the standard ones of age and
amount of cover. Examples include:
• The choice of deferred period – standard deferred periods (the period before any income is paid
out) are 4, 13, 26 and 52 weeks. The longer the deferred period, the cheaper the cover. The choice
should tie in with any possible sickness benefits paid by the employer (eg, full salary three months;
the individual should also have a contingency fund sufficient to meet normal outgoings during the
period when no income is received).
• The occupation of the insured – occupations are commonly split into classes, typically 1–4, with
Class 1 being the least risky, admin-based jobs and Class 4 being skilled workers in hazardous jobs.
Some occupations are simply too risky and are excluded altogether.
• The type of incapacity cover – some insurers offer 'own occupation' cover where the insured will
be paid if they are unable to undertake their own occupation. Others offer the less attractive 'suited
occupation' or even 'any occupation' options where the insured will only be paid the benefit if they
are unable to perform a suited occupation, or any occupation whatsoever.
The underwriting for IP is a lot stricter than for life assurance, and frequently certain pre-existing
conditions (such as knee or back problems) are either excluded outright, or subject to a moratorium.
The lower the price of the policy, the greater the limitations and restrictions on the protection offered,
unless the policy is offered via an employer or membership organisation, which benefits from bulk-
buying discounts.
4.2.1 Important Factors to Consider When Considering a New Policy or

Reviewing an Existing Policy
1. Incapacity is defined on one of the following four bases, where the policyholder is incapacitated if
they are unable, following illness or accident, to perform:
• Own occupation – their own occupation and are not working in another job.
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• Suited occupation – an occupation suitable to them given their education, training and
1
experience.
• Any occupation – any occupation at all.
• Activities of daily living (ADLs) – a number of defined functions, such as dressing and
undressing, washing, eating, climbing stairs, shopping and cooking. The policy will define the
number of functions and their definitions.
2. Benefit limits – nearly all policies limit the benefit payable to some percentage of the policyholder’s
pre-incapacity earnings. 'Earnings' may include bonuses, overtime and commissions: the insurer
would normally consider this over the 12 months preceding the claim, though some may take an
average over a longer period to determine the benefit payable. The limit is usually around 55–70%
of gross earnings, but could be less for high earners.
3. State benefits – any state benefits payable may reduce the maximum benefit, and benefits from
any other policies may also reduce the maximum.
4. Deferred period – the time between a valid claim and the commencement of benefit payments.
The deferred period chosen has a significant influence on the cost of a policy: the longer the
deferred period, the lower the premium.
5. Proportionate benefit – if the policyholder recovers their health, but can only return to work in a
lower-earning capacity, many life offices will pay a reduced benefit.
6. Residence – the IP policy will only be valid while the policyholder is permanently resident in the
area defined in the policy. The area will be at least the UK, probably the EU or Western Europe and
could include the US and other developed countries. Most policies will allow holidays and temporary
residences outside of these areas.
4.3 Typical Exclusions of IP Plans

As with all types of insurance, most IP policies will have a list of exclusions. These commonly include
incapacity/illness caused by:
• infection due to, or caused by, HIV/AIDS (with certain exceptions)

• normal pregnancy and childbirth
• self-inflicted injury
• criminal acts committed by the policyholder
• misuse of alcohol and/or drugs
• failure to follow medical advice.
4.3.1 Pre-Existing Medical Conditions

If the applicant has a pre-existing medical condition, such as back pain or a stress-related disorder, and
the insurer does not offer a moratorium, they cannot claim on the IP plan if they are unable to work in
the future because of these conditions.
Different providers can have significant differences in their policy conditions.
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4.4 IP Confusion
The whole area of IP can be very confusing, particularly as there are many insurance products that go
by a similar name but offer significantly different cover. For example, IP insurance is also commonly
confused with a significantly different product called payment protection insurance (PPI), which can be
very misleading.
PPI differs from IP as it covers unemployment as well as poor health. However, its main drawback is that
it only pays out for a maximum of 12 months, or in some cases 24 months: if the insured suffers from a
long-term illness or injury, they could still find themselves without a source of income for many years.
To complicate matters further, PPI is also commonly known as:
• accident, sickness and unemployment insurance (ASU)

• loan protection insurance (when it is used specifically to protect a loan)
• mortgage payment protection insurance (MPPI) (when it is used specifically to protect a mortgage)
• income payment protection insurance (when it is used to protect a person’s general lifestyle).
IP insurance must not be confused with CIC. They are not to be seen as 'either/or', but rather as
complementary. It would be quite feasible to be claiming on one without being able to claim on the
other at the same time. However, critical illness policies do not pay out for the same illnesses as IP
insurance, and vice versa.
For example, a serious injury or a medical condition, such as depression, may lead to an extended
period off work, and therefore result in an IP claim. However, they would not be covered by a critical
illness policy if the person is not totally disabled, or the illness isn’t one of the defined 'critical illnesses'.
Conversely, the person may be diagnosed with a serious illness, such as heart attack or cancer, resulting
in a critical illness claim, but return to work and therefore be unable to claim under an IP policy.
Critical illness policies are also designed to pay out a capital sum, whereas an IP plan pays a regular
(monthly) income.
4.5 Applying for IP Insurance

Although IP insurance offers better value for money than any form of PPI, it can take longer to arrange,
as applicants have to be underwritten individually at the outset.
Applicants must answer a detailed health questionnaire and may also have to undergo an independent
medical examination with a doctor in their area if further information is required from the underwriter.
As a result, the application process can take several weeks to complete.
4.6 Taxation of IP Insurance

The tax situation of IPI policies is interesting, because the benefits are totally free of income tax where
the premium has been paid by the consumer, but the benefits are taxable in the hands of the consumer
where the premium is paid by the employer. For this reason, and to provide an incentive for individuals
to stop watching daytime television and return to work, the maximum level of cover is restricted to
between 50% and 75% of the insured’s pre-incapacity gross earnings. Again, different insurers have
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different rules, some incorporating state benefits and some not (there is no FCA rule relating to benefits,
1
but rather it is an industry standard adopted to avoid creating a ‘moral hazard’, which might render a
policy illegal).
Example
Sophia earns £40,000 pa gross. She works in a managerial role, and has no hazardous pursuits. If she
were to suffer a long-term accident or illness, her employer would continue to pay her salary for a short
time, but after her deferred period Sophia would receive £24,000 pa (60%) tax-free from her IP insurance
policy.
From a planning perspective, we would need to know what her normal outgoings are, what other
income she might receive, and how much she has in savings to cover emergencies.
4.7 Group IP Insurance
4.7.1 What is Group IP Insurance?

Group IP pays a proportion of an employee’s salary if they are off work due to accident or illness for a
prolonged period. Having group IP gives both employer and employee peace of mind during what can
be a difficult time.
Sickness and absenteeism can place an enormous strain on company financial resources. Group IP helps
the employer to manage long-term sickness more effectively. At the same time employees feel that they
have the support of their employer during a very stressful time.
Employers may continue to pay employees during a time of sickness but the exact length of time is
discretionary. There comes a point when the employer has to make the decision to cease payments
to the employee, which can be very awkward, especially if the employee has been a long-standing
member of staff who has contributed much to the success of the company.
4.7.2 Who Benefits from Group IP?

The employer offering the policy benefits in the following ways:
• Employer/employee relations are strengthened in that both feel supported by each other.
• The company can provide financial assistance to employees at a reasonable cost.
• The company can manage the cost of sickness and absenteeism more effectively.
• The premiums for the policy enjoy tax relief on contributions.
• Company pension scheme contributions and employer NI contributions can also be included.
• The company can benefit from policy provider rehabilitation schemes.
The employee benefits in the following ways:
• continued sick pay when it is really needed

• support and reassurance from the employer
• a rehabilitation scheme provided by the insurer
• no benefit-in-kind tax liability.
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4.7.3 Product Features
Group IP can be set up with a deferred period of 13, 26, 28, 41, 52 and 104 weeks. The longer the deferred
period, the lower the premium. Typically the cost of providing group IP is usually between 0.5% and
1.5% of payroll, but largely depends on the type of business. White-collar workers are cheaper to insure.
The policy is very flexible in how it is set up. Indexation, pension contributions, NI contributions and
salary limitations can be included. Most policies offer minimal administration set-up and normally it is
only the higher earners in the company that need medical underwriting.
4.8 Employment-Based IP
Unemployment Cover Limitations
Any IP plans covering unemployment/redundancy have limitations. There is usually, for those taking out
a new policy, an initial exclusion period before they are eligible to receive benefits. This always applies
to redundancy cover and is typically around 90 days. Against that, the policyholder may be entitled to
three months’ notice before being made redundant anyway.
• The unemployment/redundancy section of such a policy may be a waste of money for the self-
employed, as they cannot make themselves unemployed or redundant.
• If the policyholder has any hand in making themselves unemployed, the cover does not apply.
• Contract workers on short-term contracts are not covered for end of contract.
• Seasonal/casual work is not protected by IP plans.
4.9 Summary
Who Should Consider IP Insurance?
IP insurance should be considered by those who:
• are employed and know that their employer will only pay their full salary for a limited time in the
event of accident or illness
• are self-employed and know that without the ability to work, their income will cease
• have dependants who rely on their income
• have a lifestyle that they will not be able to maintain without a regular income
• do not have sufficient savings to draw from, except perhaps for only a limited time.
4.9.1 How Long Is the Income Protection Benefit Period?

Once a successful claim has been made, the benefit will be paid each month/week until the earlier of:
• a return to health enabling the policyholder to return to work

• reaching the specified retirement age/termination date, or
• death of the policyholder.
The policyholder can also continue to receive the benefit payments if they return to work but in a
reduced capacity. This is known as proportionate benefits.
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Example
1
Let’s assume that the policyholder’s benefit amount is £30,000 per annum and some kind of accident/
illness occurs that stops the policyholder from carrying out the duties of their occupation. The
policyholder may take a part-time job that pays a salary of £10,000. IP insurance recognises that the
policyholder is still unable to earn their normal salary due to the nature of the accident/illness, thus the
gap between the part-time salary and the original benefit is filled by the insurance company: £20,000
per annum. The policyholder still receives £30,000 per annum.
4.9.2 How Many Times Can Claims Be Made?

IP policies allow the policyholder to claim as many times as necessary. During a claim period, monthly
premiums are waived by the insurance company but the policy remains in force. If the policyholder
returns to work but subsequently suffers another accident or illness which prevents them working, the
benefit resumes after the deferred period.
5. Critical Illness Insurance
Learning Objective
1.2.11 Be able to analyse the range, structure and application of critical illness insurance to meet
financial protection needs including: types of policies, structure, comparative costs, benefits
and disadvantages; market developments for critical illness insurance; definitions, conditions,
exclusions; terms and amount of cover – factors, assessment; premium calculation factors;
underwriting and claims: issues and processes; claims; taxation treatment, use of trusts; group
policies; interaction of critical illness insurance and life assurance
5.1 Critical Illness Cover (CIC)

The history of critical illness cover (CIC) is relatively short, having first been developed in South Africa in
the 1980s. The concept is to pay out a lump sum on the diagnosis of one of a number of specified critical
illnesses (also occasionally referred to as dread diseases).
The list of illnesses covered by life offices differs, but the majority of claims are made from the assured
contracting cancer or suffering a heart attack or stroke.
There is a set of standard definitions, which most insurers have adopted.
When CIC started to be marketed in the UK in the late 1980s and early 1990s, most policies were whole
of life-based and attached to life assurance cover. The market soon changed to offer term-based
solutions, with CIC operating as a stand-alone benefit. This stand-alone nature introduced the concept
of the survival period, with the life assured having to survive after diagnosis by, say, 14, 28 or 30 days
before the claim is paid. This supports the notion that CIC is survival insurance.
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Most CIC policies are now reviewable policies. This means that premiums are only guaranteed for a
fixed period of the overall term, say for the first five years. Due to the ever changing advancements
in the medical profession, this is an important safety net for life offices. With diagnosis techniques
becoming progressively more advanced, the likelihood that an illness covered under the policy will be
diagnosed earlier than anticipated is growing, leading to earlier payouts for insurers. It is important to
note that policy reviews do not look at the health of the individual life assured, but at general medical
advancements. A number of providers use the Association of British Insurers (ABI) definitions for critical
illness, which means that in some cases the condition has to reach specific criteria before benefits will
be paid by the insurer. In addition, some providers also offer ‘buy-back’ cover, which enables someone
who has been diagnosed with a critical illness to have a limited level of post-claim cover when they
would ordinarily be considered to be uninsurable.
A CIC payment is not a chargeable event and so there is no income tax liability. No transfer of value is
involved either and so there will be no IHT liability.
Uses
The primary purpose of CIC is to provide a capital sum to meet certain needs that may arise after a
serious illness: for example adapting the house, adapting/purchasing a different vehicle/additional
medical care/recuperation costs/a contingency fund for unforeseen expenses.
Over the years it has commonly been used to protect a debt, particularly a mortgage: this could be
either on a level or decreasing basis.
At least one life office is marketing CIC as ‘retirement protection’, based on the concept that suffering a
critical illness could seriously impair an individual’s chances of building up a sufficient retirement fund.
CIC is also commonly used in business protection insurance.
Example
Shannon is concerned that in the event of a critical illness she would require a lump sum to help her
repay her mortgage and fund her lifestyle. Having worked with her financial planner she takes out a
critical illness policy for a sum assured of £500,000 over a term of 20 years (to her expected retirement
age).
Should she be diagnosed with a serious illness she would use the capital from a successful claim to
clear her mortgage of £50,000, to provide capital should it be required to make changes to her home to
help make it more comfortable to live in throughout the illness. She would then plan on investing the
remaining capital to provide her with an income to support her lifestyle.
5.2 Group Critical Illness

Generally, critical illness insurance cover is thought of as being an insurance product taken out by
individuals, couples and/or families. However, CIC can be taken on the life of another by a business/
company; this is normally known as key person insurance and/or group insurance. The principles are
the same in that the critical illness plan will pay out a tax-free lump sum on the diagnosis of a specified
critical illness after a defined survival period.
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For an employer, group CIC provides:
1
• Benefits package – this can be an attractive addition to someone’s salary, aiding in recruiting and
retaining high-calibre and key members of staff.
• Affordable employee benefit – most life companies will offer the cover at a discounted rate.
• Financial support – provides a means by which a company can provide financial support to its key
employees. Also, this can ease the pressure on a company regarding how it can maintain long-term
financial assistance to its employees.
For an employee, group CIC provides:
• financial protection – providing a lump sum of money at a time when it is needed most
• peace of mind – easing certain stresses while they are going through treatment
• feeling of being valued – such a benefit paid by the company makes the employee feel what they
do is appreciated, earning their loyalty.
5.3 Critical Illness Policies – Critical Illness and Life Cover

Group critical illness insurance is normally aimed at larger organisations, giving them the ability to
offer additional attractive benefits. The majority of insurance companies offering group critical illness
insurance will want the company to have at least 50 employees. This is because they offer the CIC at
competitive discounted rates and in most cases with more generous underwriting.
The cover is still assessed in the same way and the cost will be dependent upon:
• sum assured
• term of the plan
• details of person insured such as:
age
smoking status
leisure pursuits
occupation
health, and
family history.
As with any other critical illness insurance applications, the information will be underwritten and an
offer made accordingly.
Key person insurance is something that smaller businesses may wish to consider as they are less likely
to be able to acquire group critical illness insurance. Smaller businesses may also be more reliant on
specific members of their staff, in that, should they suffer a critical illness and be off work for any length
of time, it will have a detrimental effect on the business. With smaller organisations it is not always
viable to move staff to cover other employees’ work – there may simply be no one to spare. Key person
insurance will provide the same kind of protection as group critical illness. It will take the financial
stress and worry out of losing a vital member of staff temporarily. It will provide a means of financially
supporting that employee and the possibility of employing a temporary person in their absence. A lump
sum paid to the company could also help to replace potential loss of profits through losing a key person.
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Critical illness life insurance is a form of contract taken out with an insurance company that, providing
the monthly premiums are maintained, will pay out a tax-free lump sum on the diagnosis of a specified
critical illness. In addition to this, life insurance can be added to a plan and this will also provide life
insurance to go alongside critical illness. This is called life and critical illness. See below an example of
how, for one family, a critical illness policy became a crucial asset to them:
Example
A working couple set up home together and started a family. The wife, Abigail, took maternity leave
from her job and at the same time the husband, Ethan, decided to become self-employed to achieve
more flexibility with his time with the prospect of a young family in mind. Unfortunately, after the baby
was born Abigail was diagnosed with breast cancer. Suddenly the couple were thrown into turmoil, with
a new baby, bills, Ethan setting up in business and the stress and worry of Abigail’s health and well-
being.
Cancer is one of the core critical illnesses covered by insurance companies selling critical illness
protection and offering a critical illness quote. The other core illnesses included are heart attack and
stroke. The majority of insurance companies today cover a vast variety of other critical illnesses, but this
will vary between providers and policies.
Fortunately, at the time of getting their mortgage for their home the couple had taken out decreasing
CIC. Therefore the family received a tax-free lump sum of £70,000 from their critical illness cover. This
paid off their mortgage leaving them some spare funds. Ethan was able to delay his plans for the
business to help look after the baby, home and Abigail. The financial help that they received from having
CIC meant that a lot of stresses and worries were taken out of their lives, giving them the opportunity to
put their energies into the more important things such as Abigail’s recovery and the baby.
The alternative scenario to the above, if the family had not taken out any form of protection in the
form of mortgage CIC, could have been quite different. They might have lost their home owing to not
being able to meet the mortgage payments. The business might not have been able to go ahead due
to financial strain, but then Ethan would have had to get back into employment. This, along with the
added strain of looking after a new baby and fighting cancer, does not bear thinking about.
The above illustrates the practical way a joint CIC plan can protect a family’s income.
Because critical illness insurance cover pays out only when an illness or event specifically listed in the
policy happens, it is vital to get the most comprehensive policy possible. A basic plan is normally the
cheapest and can cover the most common critical conditions, ie, stroke, heart attack and cancer, but a
comprehensive plan covers many more conditions including loss of sight, total permanent disability
and hearing loss, which cheaper policies may ignore.
It is vital when taking out critical life cover to disclose all health conditions, past and present.
Critical illness policies usually contain certain exclusions. Exclusions vary between insurance companies.
Each key features leaflet provided by a financial adviser or insurance company will list the exclusions of
that particular policy.
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The most common exclusions are as follows:
1
• aviation
• criminal acts (committed by the assured)
• drug abuse
• failure to follow medical advice
• hazardous sports and pastimes
• HIV/AIDS
• living abroad
• self-inflicted injury
• war and civil commotion.
Some insurance companies allow the policyholder to increase the level of cover annually to keep up
with inflation; the premium will increase accordingly. The policyholder is notified in advance, and may
decline the increase.
The insurance company may also allow the policyholder to increase the cover on the occurrence of
specified certain events – for example, getting married, having another child – without providing further
medical evidence. This is known as 'guaranteed insurability', and normally restricted to a percentage of
the existing cover. On taking up this option, the premium will also increase in line with the increased
cover provided.
In addition, some policies also provide a level of critical illness benefit in the event of a child of the
policyholder being diagnosed with a critical illness; this does not usually reduce the level of critical
illness benefit payable on an event affecting the life assured.
Other insurance companies may allow an increase in cover at any time, but the policyholder will
generally need to provide up-to-date information (for example about health) before the insurance
company decides whether to allow the extra cover.
5.4 What Is the Cost?

For most policies a regular premium must be paid, either every month or once a year, and the amount
of cover that can be bought depends on the premium that can be afforded. The size of the premium
depends on the applicant’s age, health, occupation, whether or not they smoke, the amount and type
of cover needed and the duration.
Over the life of the policy, the premiums may increase. Any possible increases, and the reasons for them,
will be explained in the policy’s key features leaflet. Some companies offer policies which guarantee
never to increase the premium during the term of the contract.
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6. Long-Term Care Protection
Learning Objective
1.2.12 Be able to analyse the range, structure and application of long-term care insurance to meet
financial protection needs including: political environment, social care policy, national factors;
main product types and features; cost and other factors, options and choices; available
resources, impact and consequences; immediate needs provision; long-term care planning
process; legal considerations, Power of Attorney; home income plans/equity release
6.1 The Politics of Care

Long-term care is now covered by the Care Act 2014. This brought fundamental changes to the care
system. The Act sets out responsibilities for local authorities to ensure that people receive the care
services they need, can get information and advice to make decisions and provide the appropriate
services for those people to choose from. It encourages independence and well-being and aims to give
greater control and influence to those in need of support.
The Act set out general responsibilities for local authorities. These are:
• promoting individual well-being

• preventing needs for care and support
• promoting integration of care and support with, for example, health services
• providing information and advice
• promoting diversity and quality in provision of services
• co-operating generally
• co-operating in specific cases.
An individual may be able to get care and support from their local authority to help them to live as
normally as possible. The local authority must carry out an assessment of a person’s need for care and
support as well as an assessment of a carer’s need for support. If any of the assessed needs meet the
eligibility criteria then the local authority must consider how to meet these needs. Even if a person’s
needs do not meet the eligibility criteria, the local authority must make available written advice and
information about how their needs could be met, reduced or prevented.
If a person has eligible needs then the local authority must work with the person, their carer and others
interested in their welfare to prepare a care and support plan (or a support plan for carers) and help the
person decide how they are going to have their support needs met.
The steps of the assessment process are:
• The local authority does a care needs assessment to identify what help is needed.
• The care plan sets out recommendations about a person’s needs and whether or not residential care
is required.
• A personal budget is calculated to assess the cost of the care.
• A financial assessment is carried out to work out how much the individual should pay towards the
care home fees and how much the local authority will cover.
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The financial assessment will consider:
1
• income, for example a pension
• savings
• investments
• state benefits or other financial support
• expenses, eg, paying bills or rent.
The financial assessment is a means test which has a set of rules for testing which results in the decision
as to whether or not a person qualifies for assistance from the local authority.
There are no fixed rules for working out how much a person should contribute because all local
authorities operate different means test systems.
A person will generally have to pay for the full cost of care if their 'capital' (savings or investments) is
worth more than:
• £23,250 in England
• £24,000 in Wales
• £26,250 in Scotland.
Capital of less than £14,250 is fully disregarded for charging purposes. Capital between £14,250 and
£23,250 (in England) is assessed as an assumed income. For every £250 or part of £250 above £14,250, a
person is treated as having an extra £1 a week income.
Certain capital is partly or fully disregarded in the financial assessment. For example, investment bonds
with life assurance elements are disregarded. There may be a temporary disregard for personal injury
payments. Personal possessions are disregarded unless they were bought with the intention of avoiding
residential care charges.
Sometimes capital can be included even if the person does not have it. For example, an unclaimed prize.
Deliberate deprivation of assets will result in the possible inclusion in the calculation.
Some of an individual’s income may be disregarded. For example, the mobility components of Personal
Independence Payments, Attendance Allowance and Disability Living Allowance.
The person’s income in a financial assessment is looked at on a weekly basis to assess how much the
Local Authority should contribute to its care fee costs.
When income is assessed for care, each person is given a Personal Expenses Allowance (PEA).
The PEA is the minimum amount of income allowance that individuals are allowed to keep when in
social care to pay for:
• personal items
• newspapers
• treats
• toiletries.
35
This is technically deducted from any assessed income.
Care Fees PEAs by country are:
• England £24.90 per week

• Northern Ireland £24.90 per week
• Scotland £25.80 per week
• Wales £26.50 per week.
6.2 State Assistance

This section mainly describes what applies in England. Other parts of the UK may be significantly
different.
According to the Money Advice Service (MAS) (May 2017) and the Paying For Care, a report by healthcare
specialists Laing & Buisson in 2013–14, depending on where in the UK you live, care homes can cost an
average of:
• £29,270 per year for a residential care home, or

• £39,300 per year if nursing is required.
Other state assistance can help, although it is limited. For example, there is Attendance Allowance, a
payment of £55.65 (lower rate) or £83.10 (higher rate) per week, which is payable tax-free (as at May
2017).
If a person has a disability or complex medical problem, they might qualify for financial support from
the NHS continuing healthcare (CHC) service. As part of the financial assessment, the individual will be
assessed for CHC. The actual amount is dependent on where a person lives in the UK. In England, the
CHC is £155.05 per week for people assessed after 1 October 2007. For those assessed prior to 1 October
2007, and who were receiving the higher-rate band at that time, the amount is £213.32. This is payable
directly to the care home to be offset against fees. This funding is not subject to financial means testing.
Homeowners with savings below the £23,250 threshold can claim a 12-week property disregard where
the value of the property is excluded from the financial assessment. This could mean the ability to access
some state funding for this limited period. The downside involves dealing with the local authority and a
certain amount of form-filling but the support could be worth a few thousand pounds.
Assets which fall below a lower limit (£14,500 in Scotland, £14,250 in England and Northern Ireland,
£23,750 in Wales) are ignored. Normally the individual will pay £1 a week for each £250 of assets
between the lower and upper limits. Also they will have to pay any occupational pension plus their State
Pension (SP) to the council (as well as any benefits they may receive). They are allowed to keep £23.90 a
week (£24.50 in Wales) for personal expenses.
Personal care is only available in Scotland and is £171 per week. Should a resident qualify for personal
care, they are no longer eligible to receive Attendance Allowance.
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6.3 Paying for Care
1
This section mainly describes what applies in England. Other parts of the UK may be significantly
different.
As mentioned above, state benefits can be limited, particularly where homeowners are involved, and,
owing to the fees involved in long-term or nursing care, pension benefits will not be enough for many
individuals to fund the care.
With any jointly held assets, the local authority will include 50% of these in assessing the assets for
the person needing care. For financial planning purposes, therefore, it can be better to hold assets in
separate names as far as possible.
Many believe that homeowners can be forced to sell their properties. This may not actually be the case;
however, if there is no other method for funding care, the local authority may take legal action to gain
funding for a vulnerable person requiring care.
If the client wishes to keep the property and no other savings are available, there are other options such
as letting the property to generate income. However, this is taxable and is often not sufficient to cover
the funding shortfall, in which case additional income must be found.
The local authority deferred payment scheme may be able to help and will pay towards care in return for
an interest-free charge against the property that must be repaid on death. The property may still have
to be sold to repay the debt.
If a property is sold or if there are other savings available, there are a number of options that could be
utilised. The options vary, the simplest being keeping the funds in interest-bearing cash accounts and
gradually spending the capital. In a low interest rate but inflationary environment, however, the risk that
the funds become depleted to a level that the current care home becomes no longer affordable is ever
present.
Alternatively, in exchange for a lump sum payment, a care fee annuity may provide a sufficient
guaranteed tax-free income for life. This should help ensure that fees can be met for life and also protect
any remaining capital. The risk here is that no capital is returned on death.
6.4 Long-Term Care Insurance (LTCI)

There are basically two types of long-term care insurance (LTCI):
• immediate care LTCI – this can be purchased at the time the client actually requires the care, and
• pre-funded LTCI – purchased in advance, and only used should care be needed in the future.
6.4.1 Immediate Care LTCI

This can be purchased at any age and at the point of care being required.
The immediate care plan is purchased with a lump sum, and pays a regular income until death: the
income pays for the care provision, and is tax-free if it is paid direct to the care home.
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The premium paid depends on the following:
• the amount of income required

• if income is required to increase, for example, with inflation
• the age of client, and
• the state of the client’s health.
The individual will be assessed medically to determine how much they must pay for their chosen level
of income.
6.4.2 Pre-Funded LTCI

Currently there are no pre-paid plans available in the market: however, you may come across clients
with existing plans.
This can be purchased in advance at any age, but some policies impose a minimum age of 40 or 50 for
receiving the plan benefits.
The policy will pay out a regular sum if care is needed. It commences when the client is no longer able to
perform a number of ADLs, such as washing, dressing or feeding themselves without help; or because of
mental incapacity. The funds paid out are tax-free.
Some existing policies may be linked to an investment bond, which is intended to fund the premiums
for the insurance policy. These policies involve more investment risk and, in some cases, can use up the
client’s capital.
Payments for the policy can be regular monthly premiums or a single lump sum premium. In either case,
the insurance company usually reviews the plan every five years or so and the premiums may then rise,
even in the case of single premium policies. Premiums again depend on age, sex and the amount of
cover chosen.
6.4.3 Legal Issues

Giving Away Property and Savings
As already mentioned in Section 6.2 above, in order to qualify for free care for the elderly, the individual
cannot have assets (including property) above £23,250 (£24,000 in Wales and £26,250 in Scotland);
otherwise they must pay for care in full and use personal assets to do so. (If outside England please study
the law in the country concerned.)
An avoidance technique is to gift away property or savings to another person in order to qualify for
financial help from the local authority. This is strictly prohibited and the local authority can, when
assessing someone’s eligibility for funding, look for evidence of deliberate or intentional deprivation of
capital such as a property. Deliberate deprivation occurs when someone transfers an asset out of their
possession in order to put themselves in a better position to obtain funding; it usually happens when
they give away assets or change ownership shortly before needing care. If the local council believes that
this has occurred it may try to claim the care fees back. However, good planning in advance – while the
person is in good health – can help to mitigate these issues, eg, holding assets in separate names (as
above).
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Powers of Attorney (PoAs)
1
In England and Wales someone giving another person the power to act on their behalf is called the
donor; the person chosen to act is called their attorney, and more than one can be selected.
• An Ordinary Power of Attorney (PoA) is created for a defined period of time if the donor is going
abroad or for some other reason and wants someone to have the authority to act on their behalf.
The authority can be general or limited to specific affairs. It will normally end either at the set time
(or by the request of the donor by using a deed of revocation). It will automatically be revoked if the
donor loses mental capacity.
• The Lasting Power of Attorney (LPA) was introduced by the Mental Capacity Act 2005 on 1 October
2007, replacing the Enduring Power of Attorney (EPA). It enables individuals to appoint attorneys to
look after their property and financial affairs, and also to make decisions about health and personal
welfare; it comes into effect when they lack the capacity to make these decisions themselves). The
attorney(s) can only use the LPA after it has been registered with the Office of the Public Guardian
(OPG); the LPA needs to be registered immediately with the OPG, as it has to be signed by the donor
with capacity to do so.
The LPA can be arranged through the OPG website by downloading the forms to complete, sign,
and witness, or through a solicitor, which will incur additional legal fees.
In Scotland the person who gives another person the power to act on their behalf is called the granter:
• A General Power of Attorney is usually created for a period of time if the granter is going abroad
or for some other reason and wants someone to have the power to act on their behalf. The
authority granted can be general (or limited to specific areas). A General Power of Attorney ends
at the specified time or upon the request of the granter (using a deed of revocation) and will
automatically be revoked if the donor loses mental capacity.
• A Continuing Power of Attorney allows the granter to appoint a legally authorised person to look
after their property and financial affairs should they become incapable of doing so themselves at
some point in the future. It remains valid after the granter has become mentally incapable and must
be registered to be effective.
• A Welfare Power of Attorney allows the granter to appoint attorneys to make decisions about the
health and welfare of the donor in the event of mental incapacity. It may be revoked using a deed of
revocation at any time, either before or after registration, while the granter still has mental capacity
or in the event they regain it. It can be combined into a Continuing and Welfare Power of Attorney.
Differences between EPA/LPA

Looking at England in more detail:
Any EPA made before 1 October 2007 continues to be valid, even if it was registered after that date.
Since October 2007 it has been replaced with property and financial affairs LPAs – see below.
• Enduring Power of Attorney (EPA):

An EPA came into effect as soon as it was made.
It allowed an individual to appoint someone else ('the attorney') to look after their property,
money, and financial affairs on their behalf.
It can only be registered (with the OPG) when the donor is unable to act for themselves.
This could result in a period during which the donor is actually incapable while documents are
prepared and before the registration takes place, leaving the client in a vulnerable position.
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One option is to have documents prepared and kept safely, perhaps with a solicitor, so that the
registration can happen quickly when required.
However, an attorney can begin acting for the donor prior to the registration: for instance, if the
donor begins to experience difficulties in managing their own affairs but still has capacity to act
on their own behalf. Either the donor or their attorney would have to show signed copies of the
EPA to the bank or financial institution in order for the attorney to act.
An EPA can’t be changed: it can only be cancelled, or replaced with an LPA.
• Lasting Power of Attorney (LPA):
An LPA cannot come into effect until it is registered with the OPG.
It can be registered at any time after it has been made, and the attorney will not be able to act
until it has been registered. In reality, it is advisable to register it as soon as it has been made: if
the donor subsequently became incapacitated it would not be possible to register the LPA as
the donor must sign it at the point of registration – and in order to do so they must have full
mental capacity.
There are two types of LPA: property and financial affairs, and health and welfare (detailed
below).
Up to five people can be listed to be informed by the OPG when it is registered. This ensures that
trusted individuals, who are separate from any attorneys, are informed that the donor’s affairs
are to be taken over by someone else if the donor becomes incapable. They have the power to
object.
Similarities between EPA/LPA

• Both have to be made while the individual is still capable of giving consent to someone else to
manage their affairs.
• Normally the attorney will only take on the running of the person’s affairs at the time they become
incapable. However, with both EPAs and LPAs there are circumstances in which an attorney can take
on this power prior to the person losing the capacity to act for themselves.
• An independent person has to sign a formal certificate stating that the donor has fully understood
the implications and has not faced any pressure to sign.
• Attorneys have to act in the donor’s best interests; they can be guided by the donor’s wishes but do
not have to be bound by them.
Setting up a new LPA

Any number of attorneys can be appointed. The donor chooses whether any of them can act separately,
known as 'jointly and severally', or if they have to agree and act together, known as 'jointly'.
The donor can decide to allow them to act separately on some things but together on others. The
general advice is to keep matters simple and consistent; jointly and severally is better, so that any of
them can act independently.
There are two separate types of LPA: property and financial affairs, and health and welfare. The donor
can make one or both, but because each type has very different purposes it is normal to do both.
Each LPA has to be registered separately. The property and financial affairs LPA can be used as soon as it
is registered; the second can only be used once the donor loses capacity to make decisions.
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While most people use a solicitor to make the LPA, individuals can download and complete the
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forms themselves (from the OPG website https://www.gov.uk/government/organisations/office-of-the-
public-guardian).
A property and affairs LPA gives the attorneys powers to manage all the donor’s money and property: for
example, managing a bank account, paying bills, arranging benefits and selling the home. Restrictions
can be imposed on the attorney’s powers: for example, it could prevent them from selling a second
home which the donor has already bequeathed in a will.
If the donor has a partner, it is advisable to hold bank accounts and investments in separate names, as
any joint accounts will be frozen when either party loses capacity until the PoA is fully enacted.
The donor has the choice to state whether they wish any attorneys to act before the loss of capacity to
act or only after that. Some people are happy for an attorney they trust, for example, a relative to take
over their financial affairs at an earlier stage.
If a person giving an LPA wants to include the use of a discretionary investment manager to manage
their investments, then the LPA must specifically include that power.
A health and welfare LPA allows the attorney to make decisions about such things as medical care,
moving into a care home and life-sustaining treatment. The LPA form must have clear instructions on
whether any attorneys can make life-or-death decisions about the donor’s medical care.
Again, limits may be set, such as religious considerations relating to medical treatments. Any such
requirements, also known as advance decisions to refuse treatment, must be separately signed and
witnessed. Personal welfare LPAs are like living wills but have the force of law and cannot normally be
amended in any way by attorneys themselves, by relatives, or by doctors.
6.5 Home Income Plans

Home income plans (also known as equity release (ER) schemes) come under the umbrella term of
lifetime mortgages.
A cash sum is released from the owner’s property and this is used to buy an annuity which in turn pays
out a monthly amount. Part of this is used to pay the interest bill of the loan, and the remaining balance
can be used for an income. The original loan is then repaid when the property is sold, or the owner
moves into a care home.
The advantage of a home income plan over a roll-up mortgage is that, as the interest is repaid every
month, the loan does not increase over the years.
6.5.1 The Current Problem with Home Income Plans

The amount of money that has to be released from a property is determined by current annuity rates.
For a home income plan to be feasible, it must provide enough to cover both the interest as well as a
monthly income, so for most people this may mean releasing a large proportion of the equity. Because
annuity rates are so low, home income plans are normally only an option for those aged 75+.
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An Example of a Home Income Plan
Christine is aged 80 and wants to release some money from her property to give a monthly boost to her
present pension income.
She releases £45,000 using a home income plan with an interest rate of 6.5%.
The £45,000 is used to buy an annuity, with the first £243.75 of each monthly income instalment paying
the interest on the mortgage.
Christine receives the balance of around £200 every month.
She dies ten years later; the house is sold, the lender is repaid the loan amount of £45,000, and the
equity balance is paid to Christine’s estate.
Note that over the ten-year period Christine paid around £29,200 of interest.
Advantages of Home Income Plans

• Regular income for life – because an annuity is bought with money released from a property, an
income is provided for life, even if you live to 101 or more.
• The original loan won’t grow – part of the income the annuity pays goes towards paying the
interest bill on the loan. This means that, unlike a roll-up mortgage, the loan won’t grow over time
and hence any increase in the value of the property can be passed on to beneficiaries.
• Regulated – it is regulated and monitored by the financial regulator, the FCA.
• Specialist lenders – the chosen lender should subscribe to the professional body, the Equity
Release Council (formerly Safe Home Income Plans or SHIP), which includes a 'no negative equity'
guarantee for borrowers: any lender who is not a member should be avoided.
Disadvantages of Home Income Plans

• Annuity rates are low – this means that these loans are usually only available to people over the
age of 75.
• Annuity rates are often fixed – this means that over the years inflation will erode the value of any
income.
• The annuity bought may not be the best available rate – even though annuity rates are low,
there is still a tremendous difference between the best-paying ones on the market and the worst.
The equity release firm may force the individual to buy their annuity, which is of a low value.
• State benefits may be affected – money received to equity release could seriously alter the amount
of benefits or state support the client is able to collect. It is critical to research this matter further.
• Income tax may be affected – although the original cash is paid out tax-free, if this money is used
to generate an income, further tax may have to be paid.
• Sheltered accommodation – many ER providers won’t lend against warden-assisted sheltered
housing or retirement flats.
• Early repayment penalties – trying to cancel the deal at a later stage may result in early repayment
penalties.
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6.6 ER Schemes
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ER is a way of accessing money tied up in a person’s home (the equity). However, there are strict rules
as to how it can be done and those who can use it. Generally, it is only available to those who are 55 or
over.
Depending on various factors including the property, the individual’s age and marital status, the amount
that can be raised will be between 20% and 60% of the market value of the house. This is because the
lender or reversion company is taking a risk on house prices and does not know when it will get its
money back, as it cannot sell the property until the individual dies or moves into care.
There are two types of ER scheme: lifetime mortgages and home reversions.
6.6.1 Lifetime Mortgages

A lifetime mortgage applies when an individual borrows money secured against their main residence,
while retaining ownership and responsibility for maintaining it. Interest is charged on the borrowings
which can be repaid or added on to the total loan amount.
When the individual dies or moves into long-term care, the home is sold and the money from the sale
is used to pay off the loan. Anything left goes to the individual's beneficiaries. If their estate can pay off
the mortgage without having to sell the property they can do so. If there is not enough money left from
the sale, the beneficiaries would have to repay any extra above the value of the home from the estate.
To guard against this, most lifetime mortgages offer a no negative equity guarantee. With this guarantee
the lender promises that the individual (or their beneficiaries) will never have to pay back more than the
value of the home. This is the case even if the debt has become larger than the property value.
6.6.2 Types of Lifetime Mortgages

There are two different types with different costs:
• An interest roll-up mortgage – the individual receives a lump sum or is paid a regular amount,
and is charged interest which is added to the loan. This means there are no regular payments, as the
amount borrowed, including the rolled-up interest, is repaid at the end of the mortgage term when
the home is sold.
• An interest-paying mortgage – the individual receives a lump sum and makes either monthly or
ad hoc payments. This reduces, or stops, the impact of interest roll-up. Some plans also allow the
individual to pay off capital should they so wish. The amount borrowed is repaid when the home is
sold at the end of the mortgage term.
Advantages
• Depending on the provider, the money can be released as a guaranteed monthly income or a lump
sum.
• The individual can stay in their home for as long as needed.
• The loan is only repaid on death or the sale of the property.
• There is the potential to benefit from any future increases in the value of the property.
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• Fixed interest rates prevent interest spiralling out of control.
• Many schemes guarantee the total debt cannot exceed the value of your property.
• When the house is eventually sold and the debt is paid off, there might be money left over to
provide some kind of inheritance.
• The equity released on your main residence is tax-free.
• ER schemes can help to reduce Inheritance tax liability.
Disadvantages
• It might affect an individual’s entitlement to benefits, or support from the local authority, as any
money released through ER is likely to affect the assessment of capital and income.
• Any inheritance passed on at death will be reduced and depending on the interest roll-up may
mean there is nothing left from the sale of the home after paying off the mortgage.
• They can be inflexible if circumstances change.
• The lender’s permission may be needed for someone else, such as a relative, carer or new partner,
to move in.
• The borrower might need to pay arrangement, valuation and legal fees.
• The lender might not allow the transfer of the debt to a smaller property.
• The seller will still have to keep the buildings insured and the home in good condition.
6.6.3 Home Reversion Scheme

A home reversion scheme is similar to a lifetime mortgage but with a major difference. Instead of
borrowing money and being charged interest, part or all of the property is sold.
With a home reversion scheme, all or part of the property is sold at less than its market value in return for
a tax-free lump sum, a regular income, or both, and the seller remains in the home as a tenant, paying
no rent.
When the home is eventually sold, the reversion company gets their share of the proceeds of the sale.
Like lifetime mortgages, there are advantages and disadvantages to these schemes:
Advantages
• The individual will be able to meet the cost of their care.
• They will be able to stay in their home for the rest of their life, or until they move permanently into
care.
• The equity released on a main residence is tax-free.
• It can help to reduce any potential IHT liability.
• Only part of the property needs to be sold, leaving the rest towards an inheritance.
• The capital raised could purchase an immediate need care plan to deliver a regular income to pay
for care.
Disadvantages
• It might affect an individual’s entitlement to benefits, or support from the local authority, as any
money released through ER is likely to affect the assessment of capital and income.
• Any inheritance passed on at death will be reduced and won’t include the part of the home sold.
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• The amount paid by the reversion company will be considerably less than the full market value of
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the property.
• If the plan is finished early and the individual needs to buy back the share sold at full market value
the price could be a lot more than it was sold for.
• A home reversion scheme is likely to be poor value if the person dies shortly after taking it out,
though some schemes give families a rebate within the first few years.
• A home reversion provider can be inflexible if circumstances change. Not all ER schemes are
portable from one home to another and an individual will usually need the provider’s permission for
someone else, such as a relative, carer or new partner, to move in.
• The seller will still have to keep the buildings insured and the home in good condition.
7. Regulatory Considerations Relating to Long-Term

Care Insurance (LTCI)
Learning Objective
1.2.13 Understand the regulatory considerations that apply to long-term care insurance: affordability,
suitability, appropriateness; Financial Conduct Authority’s (FCA’s) ‘packaged product’/retail
investment products regime; role of Financial Ombudsman Service and Financial Services
Compensation Scheme; training and competence requirements for long-term care insurance;
provision of pre- and post-sales information; claims handling rules; convertible products
7.1 The Financial Services and Markets Act 2000 (FSMA)

The sale and marketing of all LTCI is a regulated activity under the Financial Services and Markets Act
2000 (FSMA) and therefore subject to regulation by the FCA.
LTCI products (ie, LTCI investment bonds and immediate care annuities) are defined as designated
investments under FSMA rules and subject to full conduct of business (COBS) regulation as packaged
products. The sale and marketing of these products is also subject to full COBS regulation.
LTCI is becoming an increasingly important area of advice, as a result of changing demographics

and consumer needs, such as rising life expectancy, individuals spending longer in retirement and
diminishing pension returns.
It is a regulatory requirement that any adviser wishing to provide advice in this area must hold an
appropriate qualification.
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7.2 The FCA Approach
The generic consumer risks identified by the FCA in relation to all products are:
• Complexity of choice – the range and complexity of different products makes like-for-like
comparison difficult. It increases the risk of confusion for consumers and the importance of
access to reliable information and advice. For example, consumers have to choose between a pre-
funded product and an immediate care policy, between a regular and a single-premium policy;
between an investment-based and a pure protection policy, and between policies which pay out in
different circumstances. Even within specific products, there are more choices to be made, eg, with
investment bonds, consumers have to choose the degree of capital protection they want to have.
• Consumer profile – consumers are typically older, though not necessarily vulnerable, when they
buy LTCI products. They will invariably be private customers. The average age at purchase is 67 for
pre-funded policies, and over 80 for immediate care policies. While customers tend to be relatively
wealthy (particularly in terms of assets), they are likely to have a limited (even reducing) income
stream, which could make any significant future increase in their premiums potentially problematic.
It is also reasonable to assume that most claimants will be elderly, probably in poor health, and in
some cases mentally impaired.
• Interaction with state benefits – there is a complex relationship between state benefits and
LTCI, as the level of state benefits to which the consumer is likely to be entitled will be a factor in
determining how much cover it would be prudent to take out. There is a real risk of consumers
finding themselves over-insured. This requires a detailed knowledge of the relevant legislation and
of regional variations in the state benefits available, as these differ across England, Wales, Scotland
and Northern Ireland. Ill-informed advice (or the absence of advice) could result in an inappropriate
level of cover (excessive or shortfall). State benefits and the cost of care are also subject to change
over time, so advice and information should be regularly updated.
• Training and competence – in order to be able to give comprehensive and reliable advice, LTCI
advisers (and their supervisors) require specialised knowledge of the complexity and variety of
products available, the interaction with state benefits, relevant law (including inheritance and tax
law), and care costs and provision.
• Third-party involvement – unlike most other financial products, with LTCI there is both a personal
and possibly an economic reason for those considering buying LTCI to inform a third-party of their
intention. There is an evident risk that at the time of claim the policyholder may be physically or
mentally impaired. So, interested third parties (eg, close relatives and those with potential LPAs)
ideally need to be involved.
• Long-term nature of commitment – LTCI is, by definition, a long-term commitment. Switching
products will often not be a viable option and, in the case of immediate care annuities, will not be
possible because of the nature of the product. It is therefore crucial that the right product decisions
are made at the point of sale to avoid detriment further down the track.
• Product costs – LTCI products are relatively expensive and they are generally bought by middle
to high income/net worth individuals. Costs vary widely between providers, because the market is
relatively new and there is only a limited claims history against which to price the policies.
The range of products available also makes value-for-money comparisons difficult. There is therefore a
risk that unless consumers shop around, they may not get the best deal.
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7.3 Product-Specific Risks
1
The product-specific risks in relation to pre-funded policies (LTCI pure protection contracts and LTCI
investment bonds) include:
• Reviewability of premiums – most pre-funded policies, including single-premium policies, include

a review clause (typically every five or ten years). This means that a consumer can face subsequent
demands for significant additional lump sum contributions (for single-premium policies) or
significant increases in levels of premium (for regular-premium policies). This will often be at a stage
when customers are likely to have a limited retirement income. Some may find that they simply
cannot afford to pay the higher premiums, and may accept a reduced level of cover or allow the
policy to lapse as a consequence, just when they might need to benefit from it. The likelihood of
consumer detriment is therefore very high.
• Information after the point of sale – policyholders cannot assess for themselves how the
underlying investment is performing against the rate of projected growth assumed by the insurer.
At present, insurers do not voluntarily provide information about investment performance, and they
do not remind policyholders, as a matter of course, of the need to review their cover regularly to
ensure that it will produce the benefit they require.
• Claims handling – claimants are, in general, likely to be in poor health and they may be represented
by a third-party. Prompt and sensitive handling of claims on pre-funded policies is therefore
particularly important.
• ADLs – pre-funded policies are normally triggered by the failure of a pre-agreed number of ADLs.
Most insurers define these in a broadly similar way (based on the ABI Code). But there are some
differences, both in the number of ADLs that customers must fail in order to trigger a claim and in
the way they are defined. This can make comparison of different policies difficult when deciding on
which product would be the most suitable.
When dealing with LTCI claims, companies should aim to agree and meet each valid claim as quickly
as possible. If a claim is not regarded as valid, the company should inform the customer as quickly as
possible. Companies should conduct all necessary claims processes in a sensitive manner, taking into
account the circumstances in which the claim for benefits arises. Employees and company agents
should respect the dignity of the customer at all times.
Companies will provide an appeals procedure for use in the event that there is any dispute with a
policyholder over the validity of a claim for benefit. Wherever possible, companies will aim to resolve
any dispute in relation to a new claim before the time at which the customer believes benefit payments
should commence. Where any dispute arises in relation to continued entitlement to benefits which
are already being paid, the company should provide at least one month’s notice of any withdrawal of
benefit. Companies will remain subject to the jurisdiction of the Financial Ombudsman Service (FOS).
Information about dispute and appeal procedures will be provided in relevant printed material relating
to LTCI including the key features document (KFD). This will contain information sufficient for the
customer to identify the person who is responsible for making decisions on the validity or otherwise
of claims on the policy. These details, including details of the FOS, will be brought to the customer’s
attention separately in the event of any dispute or potential dispute arising.
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7.3.1 Claims Handling
• Liaison with customers – firms should keep the retail customer reasonably informed about the
progress of the claim and explain why a claim is being rejected or accepted only in part and offer to
provide the explanation in writing. Keeping customers informed about the claims-handling process
and the reasons for rejection is a simple way to ensure customers feel that they are being treated
fairly.
• Complaints – all staff should be encouraged to consider complaints positively and it is optimal for
complaints to be dealt with by a dedicated complaints-handling team. The number of complaints
is less important than the way in which they are handled and how the firm subsequently acts,
particularly in looking at how it might improve its claims-handling processes.
• Outsourcing – insurers cannot contract out of their regulatory obligations and should take
reasonable care to supervise their outsourced providers. Firms should have proper systems and
controls through service level agreements (SLAs) and risk management processes to manage the
risk posed to their business by such arrangements.
7.3.2 Convertible Products

The FCA rules ensure that consumers of convertible products (such as critical illness and IP insurance)
which can provide LTCI cover at a later stage are appropriately protected by the LTCI regime. But where
these are structured as two separate contracts and conversion is optional, the requirement for the
adviser selling the first contract to be LTCI-qualified has been removed.
7.3.3 Financial Services Compensation Scheme (FSCS)

The FSCS protects consumers when UK-authorised financial services firms fail: it can compensate
customers of those firms if the firm has stopped trading or does not have sufficient assets to meet
claims. It is governed by the FCA and the Prudential Regulation Authority (PRA): the latter covers claims
relating to deposits, general insurance, and life assurance. The scheme covers 100% of the claims arising
from death or incapacity.
8. Bonds
Learning Objective
1.2.8 Be able to evaluate the taxation treatment of life assurance and pension-based protection
policies including: qualifying and non-qualifying life assurance policies, offshore life assurance
policies; taxation of life funds (onshore and offshore); tax on income and distributions
8.1 Tax Treatment of Onshore Bonds

Investment bonds have a different tax treatment to other investments. This can lead to some valuable
tax planning opportunities. The life office that has issued the life assurance bonds has already been
subject to tax at the basic rate. This means that fund income that is not already taxed in the UK, such
48
as interest or property income, is taxed at the fund level at 20%. Similarly, capital gains are also subject
1
to the same level of tax. Hence, any further proceeds from the bonds to investors do not carry personal
liability to CGT or immediate income tax.
Essentially, note that an investor can withdraw up to 5% each year of the amount paid into the bond
without paying any tax on it. This allowance is cumulative and any unused portion of the limit can be
carried forward to the future. The maximum limit to this carry-over allowance is 100% of the amount
paid into the bond. Higher-rate taxpayers are liable for tax above the basic rate, but they can defer their
withdrawals of up to 5% to the time when they retire and have a lower tax position.
However, advisers should bear in mind that certain events during the life of the bond may trigger a
potential liability. Tax liability can arise if any of the following changeable events occur:
• death
• transfer of legal ownership
• withdrawal of more than 5% of the annual allowance
• cashing in part or full value of the bond.
8.1.1 Tax Treatment of Offshore Bonds

Offshore bonds are located in offshore locations such as Dublin or the Channel Islands. These products
offer growth on their funds that is largely free from any tax within the fund (though not on withdrawal).
8.2 Qualifying Policies

Broadly, a life assurance plan will be qualifying if the following apply:
• The policy term is ten years or more.

• Premiums are payable annually or more frequently.
• It is subject to an annual premium limit of £3,600 payable in a 12-month period.
• The sum assured is not less than 75% of the premiums payable over the term.
• Premiums paid in any one year are not more than twice those paid in any other year.
• Premiums paid in any one year are not more than 1/8th of premiums paid over the term
Please note:
• The annual premium limit applied from 6 April 2013.

• The annual premium limit is an aggregate amount that generally applies to all qualifying policies
held by an individual.
• Qualifying policies issued before 21 March 2012 are protected policies, and, as such, will not usually
be affected by the annual premium limit.
Life assurance policies all have tax to pay within the fund, which can restrict growth. The actual nature
of UK tax, taken as corporation tax, can be very complex, but the net result is that funds are assumed to
have paid tax at 20%. The advantage of a policy meeting the qualifying rules is that there will not be any
more tax to pay, regardless of the tax status of the life assured on policy maturity or earlier death.
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This was, and is, the appeal of endowments. They are always sold as qualifying policies and benefit from
being free of income or CGT in the hands of the policyholder after ten years, or three quarters of the
term if that is sooner (ie, a 12-year policy qualifies after nine years).
Unlike individual savings accounts (ISAs), however, these policies can be written in trust. This is less of an
attraction for endowment (ie, not protection) policies, where the life assured is generally intended to be
the beneficiary. Whole of life plans, when used for protection purposes, are also qualifying policies and
it often makes sense to write these in trust for other family members.
For joint life second death whole of life plans, taken out to cover an IHT liability, it is crucial that the
policy is subject to a suitable trust.
8.3 Non-Qualifying Policies

In Section 8.2, we saw some of the rules for a life assurance plan to be qualifying. One of these is
that premiums are paid regularly (annually or more frequently). As a result, any single-premium life
assurance plan will be non-qualifying, which impacts on its tax treatment. Despite this, single-premium
life assurance bonds (SPLABs) play an important part in the UK investment environment, as they offer
something different from other collective investments already covered.
Unlike qualifying policies, non-qualifying policies are liable to additional tax. This additional tax liability
is an income tax liability not a CGT liability.
As with qualifying policies, onshore SPLABs pay tax within the fund, equivalent to 20%. Non-taxpayers
cannot reclaim this tax, as it is part of the product structure. Basic-rate taxpayers have no further liability.
Higher-rate taxpayers, however, will have an additional liability of 20% of the chargeable gain (see
below), or 25% if they are additional-rate taxpayers.
Significantly, this liability will only be measured when specific events occur and not on an ongoing
annual basis. These events are known as chargeable events. The main chargeable events are:
• Death.
• Assignment for money or money’s worth.
• Maturity.
• Excess withdrawal (over a specified limit).
• Surrender.
The list above forms the mnemonic DAMES – this is a method for memorising chargeable events.
When a chargeable event occurs, a chargeable gain is calculated. It is this that we will explore next.
An individual investor in a SPLAB is entitled to withdraw 5% of the original investment per annum,
with no immediate tax liability. In the chargeable events list above, this is therefore the specified limit
on partial surrender. The reason why it is termed a partial surrender is that these withdrawals are not
officially classed as income, although they may be used by an investor as such.
The 5% available withdrawals are cumulative and so, if they are not used for a number of years, an
investor may be able to make a large withdrawal and not have an immediate tax liability (subject to a
maximum withdrawal of 100% of the original invested amount).
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Example
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Harry invested £50,000 in a SPLAB just over nine years ago. He has never made any withdrawals. As he is
now in the tenth policy year, he is allowed ten 5% withdrawals without an immediate tax liability. He is
therefore able to withdraw up to £25,000 on this basis.
As we can see from the list of chargeable events, a partial surrender over the permitted limit will result
in an immediate tax liability. So, if Harry withdrew £35,000 rather than the £25,000 he is entitled to, it
would be a chargeable event and a chargeable gain would have to be calculated. Whether Harry has any
additional tax to pay would depend largely on his tax status at the time of the chargeable event.
'Top slicing' relief can help to reduce the tax liability on any excess. To calculate this, the excess is
divided by the number of complete years that the SPLAB has been held (or since the last chargeable
event, if more recent). The amount of the profit slice is added to the holder’s taxable income. If any part
of the profit slice falls into the higher-rate (and the additional-rate, where applicable) tax band, it is
taxable at the difference between higher/additional rate of income tax and the basic rate of income tax.
For offshore policies, there is no deduction for basic-rate income tax.
The total tax due is then calculated by multiplying this amount of tax on the profit slice by the number
of complete policy years that the bond has been held (or by the number of complete policy years since
the last chargeable event, if more recent).
Top slicing can reduce the amount of tax liability if none of the taxable income, before the profit slice,
would have been subject to tax above the basic rate.
Example
Harry has withdrawn £35,000, which is £10,000 above the amount allowed. He has made this gain over
nine years, so he is into his tenth policy year. When top-slicing a partial surrender, we are able to use
part-years. So: £10,000/10 = £1,000 slice.
This is then added to Harry’s taxable income (ie, after allowances) for that tax year.
If we firstly assume he has taxable income of £30,000:
• £30,000 + £1,000 = £31,000

• This is below the basic-rate band for 2017–18 of £33,500
• Therefore Harry has no additional tax to pay.
If we then assume he has taxable income of £37,000:
• £37,000 + £1,000 = £38,000

• This is £4,500 over the basic-rate band for 2017–18 of £33,500
• This £1,000 is taxed at 20% = £200
• We then need to multiply by the number of part-years the plan has been running
• £200 x 10 = £2,000
• Harry will have an additional tax liability of £2,000.
NB: If Harry had a taxable income of £160,000 then the tax rate would be 25% not 20%.
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The same basic concept applies to a full surrender, although the calculation is slightly different.
Example
Let’s assume that Harry has never taken any withdrawals, but instead chooses to totally surrender the
SPLAB in the tenth policy year. The surrender value is £62,000 (based on his investment of £50,000).
When top-slicing a full surrender, we use full policy years in the top-slicing calculation. So:
• (£62,000 – £50,000)/9 = £1,333.33.
This is then, again, added to Harry’s taxable income for that tax year.
If we again assume he has taxable income of £30,000:
• £30,000 + £1,333.33 = £31,333.33

• This is still below the basic-rate band for 2017–18 of £33,500
• Therefore Harry has no additional tax to pay.
• £37,000 + £1,333.33 = £38,333.33

• This is £4,833.33 over the basic-rate band for 2017–18 of £33,500
• This £1,333 is taxed at 20% = £266.67
• We then need to multiply by the number of full years the plan has been running
• £266.67 x 9 = £2,400, which is Harry’s tax liability on the surrender.
A similar calculation on full surrender can take place if the assured has previously taken partial
surrenders within the 5% limit.
Example
Let’s assume that Harry took a £25,000 withdrawal, as he was entitled to, in the tenth policy year. He
then took no further withdrawals, but chose to surrender the plan fully in July 2015 after 18 years, with
the policy value sitting at £55,000.
His chargeable gain is:
• (£55,000 (policy value) + £25,000 (untaxed withdrawals)) – £50,000 (original investment) = £30,000.
Remember, when top-slicing a full surrender, we use full policy years in the top-slicing calculation. So:
• £30,000/18 = £1,666.66.
This is then, again, added to Harry’s taxable income for that tax year.
If we firstly assume he has taxable income of £30,000:
• £30,000 + £1,666.66 = £31,666.66

• This is under the basic-rate band for 2017–18 of £33,500.
Therefore Harry has no additional tax to pay.
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1
• The £38,000 already sits above the basic-rate band for 2017–18 of £33,500
• The full £1,666.66 is taxed at 20% = £333.33
• We then need to multiply by the number of full years the plan has been running
• £333.33 x 18 = £6,000, which is Harry’s tax liability on the surrender.
In this last example there was absolutely no point in top-slicing. When an investor is already a higher-
rate taxpayer, on a chargeable event, all you need to do is multiply the chargeable gain by 20%:
• £30,000 x 20% = £6,000.
One last point to make is that, when a chargeable gain is assessed following a chargeable event,
that particular gain will not be part of any future calculations. For example, when Harry took a partial
surrender of £35,000, £10,000 was assessed, as that was over his entitlement of £25,000. That £10,000
figure will not form part of any future chargeable gain calculation, although the £25,000 will.
8.4 Using Non-Qualifying Policies as Investments

There is a continual debate in the financial services industry about the use of SPLABs as investments as
opposed to, say, unit trusts and open-ended investment companies (OEICs). Despite the fact that they
may be invested in roughly the same types of assets, their tax treatment is very different.
SPLABs pay more tax into the fund, and, in isolation, that would appear a good reason for using the
more tax-efficient unit trusts and OEICs, as the fund should grow more quickly.
Non-taxpayers can never reclaim the tax paid in SPLABs, whereas they can do so if invested in interest-
bearing unit trusts/OEICs.
Withdrawals from SPLABs do not count as income: they can therefore be very tax-efficient for higher-
rate taxpayers.
Owing to the ability to defer a tax liability, a canny investor can wait for an appropriate time to create
a chargeable event. The most obvious example is to invest in a SPLAB when earning well and falling
into the higher-rate tax bracket. Then, once income has decreased into the basic-rate tax bracket – eg,
following retirement – create a chargeable event by surrendering the policy (or part-surrendering
above the 5% cumulative amounts) and have no further tax liability due to top-slicing.
The proponents of unit trusts and OEICs argue that the ability to limit tax from these types of products
is more under the investor’s control, ie, through the use of CGT allowances and ISA wrappers, and
therefore the above arguments carry little weight. Even if they pay CGT, it is a lower rate than income
tax.
These types of policies are exempt from individual CGT in the hands of the original investor. Some
policies, mainly qualifying, are sold on (assigned to a new owner) and it is possible these will be liable to
CGT in the future.
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As with qualifying policies, non-qualifying policies can be written in trust to help avoid an IHT liability.
Indeed, many SPLABs written under trust have helped reduce IHT liabilities.
9. Sources of Financial Protection
Learning Objective
1.2.5 Understand the range and limitations of state, local authority and other welfare benefits
including: State Pension and Pension Credit; housing, rent rebates, mortgage repayment and
Council Tax benefits; incapacity, disability, sickness and maternity benefits; social care provision;
Universal Credit and other tax credits
1.2.6 Be able to evaluate the impact of incorporating state and other welfare benefits into a financial
plan
9.1 Income Protection (IP)

Jobseeker’s Allowance (JSA) (previously Unemployment Benefit) has existed in the UK since before the
First World War, when mass unemployment reared its head for the first time. In the slump that followed
that war, the number of people receiving the benefit rose to two million, which, as the population was
20 million fewer than today, was a far greater proportion of the available workforce. Today the amount
of JSA that is paid out to unemployed people is dependent on how long they have been out of work and
on their circumstances.
The name change to JSA was a deliberate attempt to change the image away from the idea of a
payment for being unemployed towards a payment to encourage looking for work. Under the age of 18,
JSA is not paid unless there are circumstances that make life very difficult. Those over 18 years old and
under retirement age can get JSA if they are out of work, capable of doing it, and can prove that they are
actively seeking work.
There are two forms of JSA, income-based and contribution-based, both of which have lower payouts
for people between 18 and 24 years old than for those over 24. Income-based JSA is reduced if a person
has savings of more than £6,000, and those with over £16,000 are not allowed to receive it at all.
Universal Credit has replaced six existing benefits in certain parts of the country, with a simpler, single
monthly payment if someone is out of work or in receipt of a low income. Universal Credit replaces:
• Income-Based Jobseeker’s Allowance

• Income-Related Employment and Support Allowance (ESA)
• Income Support
• Working Tax Credit
• Child Tax Credit, and
• Housing Benefit.
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Universal Credit has been gradually rolled out throughout the UK, and was targeted for completion by
1
2017.
To qualify for Universal Credit a claimant must:
• be 18 or over
• be under State Pension age
• not be in full-time education or training
• not have savings over £16,000.
The level of Universal Credit is reduced if a person has savings over £6,000 or earns enough money to
cover basic living costs. A partner’s savings or income will be taken into account even if they are not
eligible for Universal Credit. To claim a benefit without savings or a partner’s savings or income being
taken into account, an application for ‘new-style’ JSA or ‘new style’ ESA should be made.
9.2 Mortgage Repayment

In the case of loss of income resulting in financial difficulties, including being unable to cover mortgage
payments, state provision is very limited.
To get even limited mortgage help, the claimant must be eligible for income support or income-based
JSA, Pension Credit or income-related employment and support allowance.
Qualifying for Help

To qualify, a claimant must be working less than an average of 16 hours a week and earning a low
income, and any partner must not be working 24 hours or more a week. Neither can have more than
£8,000 in savings.
Even if a claimant qualifies for the full benefit, it will cover only the interest on the first £200,000 of
the debt – and only up to a predetermined rate – regardless of whether the actual mortgage interest
rate is higher. There is no help given towards repaying the capital part of the mortgage debt, or any
endowment or other linked savings policy. If Pension Credit is the reason for the claim, the limit is
£100,000. The payment commences 13 weeks after a claim is made and the maximum payment period
is two years.
The scheme is called Support for Mortgage Interest (SMI).
SMI cannot help pay:
• the amount borrowed (only interest on the mortgage is paid)

• anything towards insurance policies linked to the mortgage
• arrears.
Since 1 October 2010 the standard interest rate has been set at the Bank of England’s published monthly
average mortgage interest rate. As at June 2017, the interest rate used to calculate SMI was 2.16%.
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If the actual interest rate is lower than the standard rate used to calculate SMI payments, ie, more SMI
is paid than is needed to meet the mortgage payments, the overpayment can only be credited to the
mortgage account.
To qualify for SMI, a person must be claiming one of the following:
• income support
• income-based JSA
• income-related ESA
• Pension Credit
• Universal Credit.
It should be noted that SMI was due to be incorporated into the new Universal Credit system that is
currently being introduced in the UK.
9.3 State Benefits in Financial Planning

When assessing the client’s existing cover and the need (or not) for further cover, it is essential to
take into account any state benefits to which they may be entitled. Generally, these may fall into two
categories:
• Potential benefits – benefits which may become payable on certain events such as death,
incapacity, or retirement. This may also include Child Benefit (if not taken now because of the tax
charge, it may become payable if one partner died or was ill) and Attendance Allowance (in the
event of needing care).
• Existing benefits – benefits currently being received. If these are means-tested, it is also important
to know if they would continue – for example if a partner died and the survivor received a life
assurance payout.
If these are not included in the financial plan, the plan itself is incomplete: it is also possible that the
client may be left either under- or over-insured.
10. Other Insurance-Based Protection Products
Learning Objective
1.2.14 Be able to analyse the main features of other insurance-based protection policies: personal
accident and sickness insurance; private medical insurance, hospital plans and dental insurance;
payment protection insurance – mortgage, credit
10.1 Private Medical Insurance (PMI)

The market for private medical insurance (PMI) has grown by trying to meet the requirement for
treatment of acute conditions.
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There are many different types of PMI, from budget plans with low costs, high excesses and limits on
1
cover, to comprehensive plans which are the most costly but which provide the fullest cover. There are
also hospital cash plans, which pay a fixed cash sum for each day spent in an NHS hospital, plus fixed
cash sums for specified treatments including optical and dental treatment.
To try to keep costs down, the initial underwriting process is often fairly cursory. However, this is on
the condition that pre-existing medical conditions won’t be covered. Sometimes this is based on a
minimum time period, such as two years.
PMI is a general insurance contract subject to insurance premium tax (10%).
Uses
For anyone who would like more control over the timing of medical procedures for acute illnesses.
Also for those who don’t want to be treated in a NHS hospital but would prefer a private room with
treatment in keeping with the surroundings.
Dental plans are fairly common due to their affordability.
10.2 Private Health Insurance in the UK

Private health insurance in the UK is used by people as a support to the facilities provided by the NHS.
With the rise in life expectancy there are a large number of people using NHS facilities, which can mean
that there are waiting lists. Regrettably, in some cases any delay in treatment can worsen the problem
(or even cause more complications). This is where private health insurance in the UK can help to provide
medical care to their clients.
There are numerous insurance companies in the UK who offer health insurance policies: while each
tends to have relatively unique plans, they can be divided broadly into:
• package
• choice of cover
• limited cover (or the budget).
In order to attract clients they can offer discounts, eg, a month’s free insurance or lower premiums if
there has been no claim in the past years.
The premium can vary greatly. Also, it is obviously impossible to know which illnesses are going to affect
the individual in the future. The main difference is that package plans do not permit the client to select
the areas to be covered. Choice of cover plans, however, allow the individual some say in the areas
covered by the health insurance.
A limited cover plan is targeted at people who rely on the NHS but wish to have private health insurance
in case some specific long-term illness hits them.
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The premium to be paid is based on many aspects: generally, comprehensive plans have higher
premiums whereas limited cover plans are cheapest. The premium can also be reduced by paying an
excess. An alternative can be a 'shared risk' plan, which is where the insurer pays up to a specified level
and the client then pays the rest of the amount.
Anyone applying for private health insurance in the UK is expected to give details of their past medical
history (plus details of any ongoing medical conditions). This also helps decide the premium. As a rule
the younger and healthier the person, the smaller the premium.
Normally private health insurance providers do not cover medical conditions existing at the time of
starting the policy. However, some insurers have moratorium plans in which the client need not reveal
current or past medical conditions. The provider is willing to accept this risk by stating that for the next
two years (for example) if no medical treatment is needed for any previously existing medical condition,
cover will be given for those conditions.
There are also plans for the elderly, outpatient treatment only, in-hospital care, convalescence care,
travel medical insurance, expatriate plans, cancer care, dental insurance, children and for providing
income in the case of long-term illness.
10.3 Hospital Plans

• This type of policy is designed to provide a cash benefit to the policyholder if they need treatment
either as an inpatient or outpatient at a hospital (caused by covered accident/illness/disease).
• Many of the plans will provide cover up to age 65 (assuming you continue to pay the premiums).
Cover needs to be reviewed (and updated) periodically to ensure it remains adequate for the
holder’s needs.
• Typically premiums are payable monthly. If any premium is not paid on the due date, cover will stop
on that date if the premium is not received within 30 days.
• All benefits are paid income tax-free under current legislation but may be subject to inheritance tax
or other taxation.
• Inpatient benefit is usually a payment of a fixed sum (set in the policy) for each night spent in
hospital (the number of nights (again set in the policy)).
• Outpatient benefit is for scheduled visits to a hospital as an outpatient for a reason covered by the
policy.
• Recuperation benefits may also be included, ie, on discharge from hospital after being an inpatient.
10.4 Dental Insurance

Most people have to contribute towards the cost of dental treatment. PMI does not necessarily cover for
dental treatment; if it does so, it is probably limited. There may be restrictions on amounts paid, what is
covered, or possibly a total exclusion (especially if there has been no regular dental check-up).
10.4.1 Dental Policies – What Are They?

These charge a premium for an insurance policy which may cover selected individuals or all the family.
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Cover
1
These tend not to be standard policies. Every insurer will offer different policies and cover. Some will
offer choices as to what is covered. In a dental plan the normal rules covering health insurance tend to
apply. Some policies are called NHS cover (ie, they only cover the costs of NHS treatment). However,
many will cover the costs of private treatment. The main aim of dental insurance/dental plans is to offer
cover for preventative and/or minor/major restorative dental treatments. However, they will set limits
to costs and types of cover. Some plans can offer cover for dental emergencies and accidents anywhere
in the world.
Restrictions
Most UK providers only provide cover if the patient has good teeth to start with and no work that needs
doing. They may even demand regular visits to a dentist.
Normally they will not cover:
• cosmetic treatment
• orthodontic treatment
• dental implants
• sports injuries unless a mouthguard is worn.
10.5 Funeral (Burial) Plans

A funeral plan is simply a plan in which the policyholder has prearranged funeral arrangements covering
either burial or cremation, ie, it is prepaid. The premium can be a single payment or in instalments over
one year or even longer terms. Flexibility is the key to the plan, both in the payment terms but also in
what is actually included in the plan.
It is a way for the person to plan for the future and to ensure they get what they want and impose no
cost on their estate or family. It can be perceived as similar to buying life insurance or making a will. One
reason for the plans increasing in popularity is the rising cost of funerals. By buying a funeral plan, the
costs can be frozen.
10.6 Payment Protection Insurance (PPI)

Payment protection insurance (PPI) can cover monthly loan repayments if a client’s salary drops due to
accident, sickness or unemployment, for a fixed period of time.
PPI will pay out a sum of money to help cover monthly repayments on mortgages, loans, credit/store
cards or catalogue shopping payments.
This means that the insurance company will pay the monthly repayments (or a percentage of them) on
the individual’s behalf for a fixed period of time if a claim is made. It is sometimes known as Accident,
Sickness and Unemployment (ASU) insurance, account cover or payment cover.
PPI has recently been at the centre of mass mis-selling claims. The cause of this was due to it automatically
being added to such things as loans, without giving due care to see if the policy was suitable for the
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purchaser. The worst examples of this involved sales of the products to the self-employed, who had no
ability to claim a benefit. In addition, many insurers were charged by way of a single premium charge
added to the total loan, the issue being that a customer may have paid for something that would not be
appropriate in a change of circumstance.
10.6.1 How the Client is Covered

This will vary depending on the sort of repayments the policy is designed to protect, and on the terms
of the particular policy.
The following benefits are typical for different types of PPI cover:
• Mortgage – covers monthly mortgage repayments for a set period of time. The maximum number
of monthly repayments that the insurance company will make is usually 12, but it can sometimes be
24. This means that after this period the client will have to pay the monthly mortgage repayments
themselves.
• Credit and store cards – generally pays off a percentage of the outstanding balance or the
minimum payment each month for up to a year. Check which option is being offered. This means
that the client may still have to pay any balance left after this time. The insurance typically only
provides cover for the amount owed when a claim is made, and not any balance built up after this.
• Loans – covers monthly repayments for the loan – generally for 12 or 24 months. After this period
the client will have to pay the monthly loan repayments themselves.
If the insurance for any of these products contains life insurance, then the cover will generally pay off
the balance of the debt covered if the client dies. If the claim is for disability, the monthly repayments
may be paid to the end of the life of the loan.
10.6.2 The Main Features

All policies are different, so it is vital to double-check with the provider selling the product whether it
includes the features required. PPI is almost always optional: loans should not be refused if the applicant
decides not to purchase PPI.
• PPI only pays out for a set period of time, usually 12 months.
• Many policies will not pay out for the first couple of months after a claim is made, and some may not
backdate any payments. This may mean the client needs to consider how to cover these repayments
before the policy starts paying them.
• To claim on the unemployment part of the policy, typically, the individual must have been employed
continuously by the same company for the last 12 months on a permanent contract.
• The policy may not cover the self-employed.
• It may not be possible to make a claim for a pre-existing medical condition.
• Stress or back complaints, and possibly other conditions, may not be covered, even if the individual
is unable to work because of them. This should be checked before the policy is taken out.
Prior to taking cover, the firm should provide a policy summary. This should set out the key features
and benefits, as well as any significant or unusual exclusions or limitations. For example, one of the
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significant limitations in some policies is the ability of firms to increase the amount of premium payable
1
and reduce the amount of cover by giving the client notice.
Like all insurance, PPI policies will generally include a number of exclusions or conditions that will
prevent a claim on the policy, for example being employed on a temporary or contract basis, or if the
individual becomes aware they may become unemployed when taking out the policy.
Additional exclusions may apply which will prevent an individual from being able to purchase a PPI
policy, eg, if the person:
• is under 18 or over 65
• does not reside in the UK, or
• works less than 16 hours a week.
10.6.3 Costs
Interest rates and annual percentage rates (APRs) for loans, mortgages and credit/store cards do not
usually include the cost of the PPI policy, so comparing interest rates on their own will not be helpful in
deciding about PPI cover.
The cost of the insurance must be quoted separately from the cost of the loan, over the life of the policy.
It is normally possible to pay via a single upfront premium, or regular monthly premiums. The single
premium can be added to the loan, thereby increasing the total borrowing; a regular premium is a set
amount paid each month.
The quote should provide a monthly figure for the PPI and the total premium for the lifetime of the
policy, whether it is for a single or regular premium. A single premium is normally added to the loan;
therefore, interest is charged on the insurance too. Normally, the most cost-effective option is in the
form of a regular premium, as interest is not charged on this.
11. Other Protection Solutions
Learning Objective
1.2.1 Be able to analyse the areas of personal income and family income, capital protection needs:
health, incapacity, accident; income, mortgage and other debt; death, asset protection
11.1 Asset Protection Trust

An 'asset protection' trust is a term which covers a wide spectrum of legal structures. Any form of trust
which provides for funds to be held on a discretionary basis falls within the category. Such trusts are set
up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary.
Such trusts are therefore frequently proscribed or limited in their effects by governments and the
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courts. Asset protection trusts are increasingly used by the elderly wishing to protect their assets should
they require the services of a care home in the future.
The asset protection trust is a trust that splits the beneficial enjoyment of trust assets from their legal
ownership. The beneficiaries of a trust are the beneficial owners of equitable interests in the trust assets,
but they do not hold legal title to the assets. Thus this kind of trust fulfils the goal of asset protection
planning, ie, to insulate assets from potential claims of creditors without concealment or tax evasion.
In order for a trust to provide asset protection and be able to legally insulate assets from claims of
creditors it must be irrevocable, meaning that the settlor has no legal power to revoke the original
instructions or change the beneficiaries unless a discretionary trust is used. Most asset protection trusts
contain a spendthrift clause preventing a trust beneficiary from alienating their expected interest in
favour of a creditor. The spendthrift clause has three general exceptions to the protection afforded:
• self-settled trusts – this is where the settlor of the trust is also a beneficiary of the trust
• when a debtor is the sole beneficiary and the sole trustee of the trust
• where a court orders the trustee to satisfy a beneficiary’s support obligation to a former spouse or
minor child.
The first general exception, which accounts for the majority of asset protection trusts, no longer applies
in several jurisdictions. Certain nations and certain US states now allow self-settled trusts to afford their
settlors the protection of the spendthrift clause.
11.2 Unit-Linked Products

Unit-linked products invest the savings part of the premiums of the policyholder transparently in
investment vehicles, mostly internal or external funds, and let the policyholder participate fully in the
investment returns of these funds – the upside as well as the downside.
Typically they no longer provide any investment guarantees. However, variable annuities build
investment guarantees into unit-linked products. Variable annuities combine the advantages of
traditional life insurance products (long-term investment guarantees) with the advantages of unit-
linked products.
This of course comes with a price:
• The policyholder has to pay a premium for the additional investment guarantee.
• The shareholder has to manage the substantial risks generated by such products.
Nevertheless, these products have had tremendous success in the US. These products are new to Europe,
except in some locations, where they have been widespread, eg, Switzerland, and have generated a lot
of interest as they can address the weaknesses of the traditional life products.
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12. Business Protection
1
Learning Objective
1.2.4 Understand the areas of business protection needs – small to medium enterprises (SMEs)
1.3.2 Be able to evaluate the current and future needs and priorities for financial protection: SME
business protection needs – business loans, key person, partnership and shareholder protection
12.1 Differences between Personal and Business Protection

Business protection uses essentially the same life, critical illness (CI) and, to a lesser extent, individual
protection products as are used for individual protection. Premiums depend on the amount of cover
required and the ages, genders, occupations and medical histories of the individuals being covered.
Business protection products tend to be highly flexible. Insurers will, for example, normally allow life
assurance payouts to be made in instalments to aid cash flow and avoid corporation tax liabilities. Most
will also allow risks to be placed on cover immediately, before the completion of the underwriting
process. This can be especially useful in a management buyout situation if negotiations are kept secret
until the very last minute but cover is then required instantly.
12.2 The Three Main Categories of Business Protection Cover

1. Loan protection insurance – this can be taken out against a business loan or overdraft to cover the
business against the death or illness of someone on whom it is dependent for repaying the loan.
But this field is heavily dominated by the banks and, even though in theory there are re-broking
opportunities for intermediaries, there is anecdotal evidence to suggest that banks can review
overdraft facilities from businesses that switch insurance cover away from them. Many of the better
opportunities for intermediaries to add value are likely to be in key person, cover or in shareholder
or partnership protection cover.
2. Key person cover – this can provide a business with a cash injection in the event of a key employee
dying or becoming too ill to make a contribution. The cover, which is typically established for up to
a five-year term and which can be increased or decreased at any time, is written on the life of the key
person but the premiums are paid by the employer, and any money that becomes due in the event
of a claim becomes payable to the business. The costs to a business of losing a key person could
be devastating and even threaten its very survival, so key person cover is intended to pay for any
resulting loss of profits and the costs of finding and training a suitable replacement. It should ideally
include CIC as well as life assurance. It may also include IP. This can provide added security, as IP will
pay out for conditions such as stress and bad backs that are not covered by CIC, but will significantly
increase the costs.
3. Shareholder and partnership protection – when a key person is a director or a partner, there are
also additional succession planning issues to be considered. There is the possibility that a sick or
deceased person’s share of the business could pass to a dependant who is unable to contribute to
the running of the business, which could cause considerable disruption. It is therefore important to
ensure that the remaining directors or partners can maintain control of the company by buying out
a sick colleague’s share or buying out the share of a deceased co-director or partner, or one who has
suffered a serious illness.
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There are three essential elements, each one of which must be in place:
• Will – each director or partner must have a valid will, leaving their shares to chosen beneficiaries.
• Legal agreement – a cross option agreement must be drawn up, giving the option to the
remaining partners or directors to buy the deceased’s interest from the beneficiaries, and giving
the beneficiaries the option to sell the inherited shares. Please note this must be an option, not
an agreement, in order to keep the valuable IHT exemption of Business Property Relief (BPR) on
the company shares. If either party exercises their option, the other party must comply.
• Life cover, and if affordable, CIC. This will be for the agreed value of the shares/partnership
interest. It must be written in trust for the other directors/partners. If CIC is included, this would
be a 'split' trust so the sum assured may be paid out to the other directors rather than the
individual who suffers the illness.
12.3 The Tax Implications

The premiums of a key person policy will normally be a tax-deductible expense if they meet what have
become known as the Anderson Rules, set in 1944 by the then Chancellor of the Exchequer, Sir John
Anderson.
Anderson said the treatment for taxation purposes would depend upon the facts of the particular case
to:
‘determine the liability by reference to these facts. I am, however, advised that the general practice in
dealing with insurances by employers on the lives of employees is to treat the premiums as admissible
deductions, and any sums received under a policy as trading receipts, if:
• The sole relationship is that of employer and employee – ie, it only applies to direct employees of the
company – not employees of a subsidiary. Generally if the employee is also a director with more than
a 5% shareholding in the company, the policy will not qualify for tax relief.
• The insurance is intended to meet loss of profit resulting from the loss of services of the employee –
ie, a loss of profits caused by the loss of a key person. If it is taken out for loan purposes it does not
qualify as it is for capital purposes rather than loss of profits.
• It is an annual or short-term insurance – ie, up to five years. A five-year renewable policy is also
normally accepted.
Thus the policy must meet the loss of profits resulting from the loss of the key person and should not,
usually, be for a term of more than five years, and the life assured should not have a significant interest
in the business. This does not automatically mean that any policy payouts made to the business are
treated as trading receipts. Each case is determined on its own merits with much depending on whether
the receipt is considered to be capital or revenue.
Partnership protection premiums are not tax-deductible, irrespective of whether premiums are paid
for by the partnership or the partner. The situation is, however, less straightforward with shareholder
protection for limited companies. Premiums may be tax-deductible by the company, although they may
be taxable on the shareholder. With partnership and shareholder protection the proceeds are normally
tax-free, although the tax implications will reflect the method of partnership or shareholder protection
chosen.
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12.4 Existing Arrangements
1
Existing arrangements should be reviewed before any new cover is established, as the existing cover
could be used in addition to new cover or the existing arrangements may need to be replaced by new
cover. It is important to note that the existing cover should not be cancelled until the new cover is in
place so that the individuals are never without cover for a period. The consequences of inadequate
existing cover are shown in Section 13.1.
Example
Your discussions with the two directors of a small limited company have highlighted the fact that their
existing key person protection for the two of them would no longer be enough. It was taken out when
they were first employed by the company and the cover has just gone up with inflation each year, with
no proper review until now. Also, it covers them for death only: when you mention CIC they decide this
is something they should include.
You must then decide whether to set up additional policies for the extra life cover, or begin new ones for
the entire amount. Is there any 'guaranteed insurability' with the present policies that would allow them
to increase the cover without medical evidence? You must also decide whether new policies should be
taken out to include both death and critical illness cover, or whether the latter should be on a stand-
alone policy. While cost will be one consideration, it also depends on whether both of them can still be
insured at standard rates.
12.4.1 Other Products

There are a number of products which provide for the needs of small businesses and property owners.
These policies provide for:
• property damage
• loss of rent
• equipment breakdown
• terrorism
• employer’s liability
• property owner’s liability.
Additional protections cover:
• Inflation protection – an automatic increase of 15% added to the declared value to allow for
inflation during the period of insurance. Sums insured are also automatically index-linked to make
sure that the client has the right amount of cover at all times.
• Average waiver – waiver of any rights for under-insurance in respect of any building which has had
a valuation survey completed by a Royal Institution of Chartered Surveyors (RICS) approved valuer
that is within three years of the date of loss.
• Contract works – automatic cover for the temporary or permanent works executed or in the course
of execution at the premises.
• Legal expenses – protects a business against legal costs and expenses relating to employment
disputes, contract disputes and tax investigations.
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• Crisis containment – the reputation of a business is of vital performance to its continued success
so, should there be any unfortunate event causing significant personal injury or damage to
property, the policy will pay the costs of securing the professional services of a public relations and/
or marketing organisation.
• Website protection – website promotion and information is an invaluable asset to business
performance and so in the event of malicious damage preventing access, loss of data or impact
upon the reputation of the business, cover extends to include the cost of repair or replacement of
the website and associated security improvements.
• Force majeure – is French for greater force. Otherwise known as an act of God, it is present in
insurance contracts to cover events that either party could not have reasonably expected when the
contract was entered into, or events which are outside the control of either party. An area of concern
is that there are often increases in the use of force majeure as a mechanism to get out of a contract
during times of economic instability. It is worth noting, though, that if an insurance company or any
other company invokes a force majeure clause without justification, the other party may make a
claim for damages for breach of contract.
13. Protection Planning and Solutions
Learning Objective
1.3.1 Understand the relevant factors for individuals and business clients when it comes to planning
their financial protection requirements: risks and constraints; priorities; range and suitability of
solutions; consequences of inadequate protection
13.1 Risks Associated with Inadequate Protection

Before a client takes out a life insurance or other protection policy, the adviser should be aware of the
following potential gaps in coverage:
1. Decreasing coverage – there are policies where the face value decreases over the term of the life
insurance. This may be suitable for some clients but not all.
2. Unsure coverage – a life insurance policy has specific terms of coverage. For instance, beneficiaries
of those who die by their own hands may not be able to claim death benefits. The specific claim
conditions of any life insurance policy must be carefully read.
3. Inadequate coverage for disability – even if a policy provides both life and disability coverage,
the level of disability benefits that can be claimed must be checked as well as under what types of
circumstances disability coverage can be enforced.
4. Inadequate face value – an insurance policy should cover the client's and their family’s needs for at
least a year. It should be increased further if there are high levels of debt to be repaid.
5. No withdrawal option – some life insurance policies with a potential cash value component allow
withdrawal of money after a certain period of time. However, some insurance policies – especially
those with a very low premium – will not return any money. All those years of payments will then be
lost.
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6. Depreciated value – if an insurance policy with an investment component is purchased, part of
1
the payments will be used to invest in high-yield accounts and a percentage of the proceeds will be
returned to the policy. Poor investment decisions by the insurance company could leave the client
with a depleted policy and face value.
7. No death benefits – if the policyholder dies and the beneficiaries begin claims procedures,
insurance companies may still refuse to pay if the policyholder omitted an important piece of
information from the insurance application form. The concept of 'utmost good faith' (uberrimae
fidei) applies to all forms of insurance, and insurers, and may enable insurers to refuse to pay
benefits on the grounds that the policyholder was not entirely honest with the company.
8. Wrong beneficiary – If the policyholder does not update the name of the beneficiary given at the
time of purchasing the policy, the wrong beneficiary may benefit or the original beneficiary may
have already died so no one is able to claim.
9. Loss of benefits or severe depreciation for one unpaid premium – it is vital to know the
consequences of missing one premium payment. It is possible that the penalty is that beneficiaries
could lose the death benefits or that these benefits will be significantly reduced after just one
missed premium payment.
10. Not enough to retire on – typical life insurance provides cover in case of death. While the cash
value equivalent of such a policy may be withdrawn in full upon maturity or converted to an annuity
plan, this still does not make a life insurance policy a good retirement plan. It is designed to provide
the most benefit after death.
13.1.1 The Advice Process

Before making any recommendations, the client’s overall position needs to be fully assessed:
• Quantify their needs – both income and capital.

• Gather all the data.
• Analyse what they currently have – this is not just a matter of listing the existing arrangements,
they must be analysed to show how far they meet the client needs.
• Be careful about recommending replacements – health may have changed, policies may be more
expensive, so they might not be able to obtain same level of cover. May need top-up rather than
replacement.
• Mention underwriting – new provider needs to determine if they are insurable and at what rate;
existing cover will be taken into account.
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13.2 Current and Future Capital and Income Needs
Learning Objective
1.3.2 Be able to evaluate the current and future needs and priorities for financial protection:
family and personal protection; key person, partnership and shareholder protection; existing
arrangements
13.2.1 Family Protection

Family protection is the very foundation of financial planning, and for most people it is, or should be,
their first priority.
A person’s needs vary according to their circumstances and will change throughout their life. Family
protection incorporates the consideration not just of life assurance needs, but also of IP insurance,
critical illness and related areas, such as LTCI and PMI.
The state provides certain financial benefits when a person becomes incapacitated or dies. However, for
most individuals and families these benefits will be too low for them to maintain their current standard
of living.
There is a clear need for the members of a family responsible for providing the income, or the care of
children, to be covered against various circumstances which could reduce or eliminate their ability to
continue to provide support to their family.
The death or incapacity of any member of the household who has a responsibility, particularly spouses
who are not engaged in paid work as they look after children, should be considered for protection. For
example, if they become unable to care for any children the result may well be that the other partner can
no longer devote as much time to work and the family’s income overall may suffer. Extra expenditure
could be incurred in terms of childminding and housekeeping as well as many other areas.
Unless the family’s financial situation is protected against such eventualities, there is a high risk of
significant reduction in living standards as a result of death or disability.
It is important to find the right life assurance, both the right type and especially the right level of cover. A
thorough review of the client’s personal circumstances will help decide which life cover is most suitable
for a family’s needs. The extent to which an individual will need to protect their income will reflect the
extent to which the income is dependent upon continued health or survival.
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13.3 Suitability and Product Types
1
Learning Objective
1.3.3 Be able to evaluate the relevant factors in selecting appropriate solutions taking account of:
similar types of products; client needs; current and future affordability; co-habitation, marriage,
civil partnership, birth of child; property purchase; separation and divorce; work, going overseas,
retirement; basis of ownership (proposal); suitability of trusts; implications of insurable interest;
advice for small businesses; importance of regular reviews
13.3.1 Planning Process – Background

Discussing death and disability hardly ranks as a favourite activity for most people. But failure to plan
adequately for the financial consequences involved could mean unnecessary hardship for the client
and their dependants. And if you demonstrate it as a financial plan, they are less likely to see your
recommendations as simply 'selling insurance'.
Protection – or risk management, or whatever other term you use – should be treated as a financial
planning exercise. It is not a product sale. No less than retirement planning and investment planning, it
is all about ensuring the clients have sufficient resources to meet their objectives.
The adviser must properly assess and analyse the client’s needs and current provision: otherwise it is
impossible to justify the recommendations.
Protection is also for life: it does not end at their chosen retirement age, or when a child finishes
university.
13.3.2 Planning Process – Death

What is their financial exposure if one of them dies?
It is tempting to jump right in and start analysing the provision they already have, eg, 'they have a joint
life policy that would repay the mortgage'. Forget this for a moment and first set out their actual needs:
this will make it much easier to identify where those policies fit in with the overall picture.
Capital Needs
These may be subdivided into separate types:
1. Debts/liabilities – do they have any debts that they would ideally like to be able to repay on death:
mortgage, credit cards, other loans?
2. Other needs
• Begin with the immediate expenses – such as funeral and legal.
• If they have their own business, they may incur other professional expenses to wind it up and
sort out tax affairs.
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• A contingency sum should also be considered for the survivor, in case of any unforeseen
expenses.
3. What is the total capital required?
Income Needs
Net income required:
• This could be estimated from current outgoings, deducting any that will no longer apply and
allowing a percentage reduction for others, such as food and holidays.
• Alternatively, it may be a figure given by the clients.
• Are there likely to be any additional outgoings – childcare, housekeeping?
• Is there any planned expenditure in the future – private school, university?
Income Available
You now need to consider the net income available to the survivor (if you only know gross income you
will have to allow for tax).
Some of these would be immediately available:
• continuing earnings
• payments from life cover (income only, eg, FIB)
• state benefits – Widowed Parents’ Allowance; Child Benefit
• spouse’s pension (from an occupational defined benefit scheme).
Others may be available from some future date:
• State Pension
• annuity
• occupational pension.
It is important to see this over the whole of life, not just what is available now. Too often the mistake is
made of just considering the income available today, compared with the amount needed, to determine
the additional need. But this doesn’t take into account the income that may become available in later
years, and therefore gives a misleading picture of the survivor’s financial security. It also fails to take into
account the effects of inflation on both income and capital.
Capital Available
• existing life assurance
• death in service benefits
• pension funds
• savings and investments.
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Assessing the Need
1
You are now in a position to assess the real level of cover required:
1. Capitalise the income shortfall – what capital sum would be needed in order to provide the income
required in order to ensure the survivor is financially secure for the rest of their life?
2. Add on the capital needs (such as loans, funeral).
3. Deduct the capital available
You now know the sum required in order to provide financial security.
You are then in a position to decide the most appropriate way of providing those funds, whether
through a lump sum (eg, term assurance, whole life), or a regular income (FIB), or a combination of both.
13.3.3 Planning Process – Ill Health/Incapacity

The financial planning process is similar to that of death. The whole purpose is to:
1. help the client decide what they would like their financial position to be in such an event (ie, their
needs/objectives)
2. help them to see their position if such an event occurred today (their 'financial exposure')
3. recommend the best way of making up any shortfall.
Income Needs
1. What net income is required? This could be estimated from current outgoings, deducting any that
will no longer apply.
2. Alternatively, it may be a figure given by the clients – after all, they may require an income that just
isn’t enough to maintain their current lifestyle.
3. Are there likely to be any additional outgoings – childcare, housekeeping?
4. Is there any planned expenditure in the future – private school, university?
Capital Needs
This may be subdivided into separate types:
1. Debts/liabilities – do they have any debts that they would ideally like to be able to get rid of on
death: mortgage, credit cards, other loans?
2. Other capital needs – is there any impending or planned expenditure, eg, house refurbishment?
3. If they have their own business, they may incur other professional expenses to wind it up and sort
out tax affairs.
4. A contingency sum should also be considered, in case of any unforeseen expenses.
What is the total capital required?
Critical Illness
It is important to understand both the purpose and the application of critical illness insurance.
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Background
1. The first critical illness policy was launched in South Africa in 1983, devised by heart surgeon
Dr Marius Barnard. It stemmed from his experience of seeing the financial hardship of patients
following diagnosis and treatment of a critical illness: the types of illness, such as cancer and heart
attack, that were invariably life-changing.
2. Their financial resources were squeezed from both ends: the cost of medical treatment increased,
while there was a decreasing ability to earn the money needed for their monthly outgoings.
3. This often forced them to make sacrifices – such as removing the children from private school, and
selling the house – and, in the worst cases, going bankrupt.
4. The financial stress impacted further on their health, prolonging the recovery process.
Purpose
1. Right from the outset this product was always intended to meet a capital need: it was never
intended to provide income. This distinguishes it from life assurance, and means the level of cover
recommended will not be the same.
2. It will not pay out at the same time as IP:
• first, it is possible to be diagnosed with a serious illness but not be off work long enough to claim
on IP; conversely, it is conceivable that the individual could be off work and claiming IP, without
it being one of the critical illness types.
• second, it pays out on diagnosis whereas IP will only pay if the person is unable to work beyond
the deferred period.
3. For the same reason, it should not be seen as an 'either/or' with IP.
4. Recent years have seen a growing trend to recommend it alongside life cover for a mortgage. While
this is commendable, the recommendations overlook the personal needs that were considered
when the product was first launched: for example, adapting the house or car, extra medical care,
and recuperation care, or just a contingency sum for any unforeseen expenses.
5. Also, mortgage cover tends to be decreasing in line with the outstanding mortgage capital: whereas
personal needs will rise with inflation.
Income Available
You now need to consider the net income available.
First, the income immediately available:
• continuing earnings from partner or spouse

• payments from own employment, eg, full salary for six months
• state benefits: if you are going to omit these because you believe it is difficult to claim, be prepared
to back this up with evidence to that effect
• existing health cover.
Then the income available from some future date:
• State Pension
• annuity
• occupational pension
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As with planning for death, it is important to see this over the whole of life, not just what is available
1
now – taking into account the income that may become available in later years, and the effects of
inflation on both income and capital.
Capital Available
• existing ill health assurance [critical illness)
• savings and investments.
The latter is important as you are assessing what the client’s 'financial exposure' is if they suffered ill
health today, and that means utilising all available resources. This will demonstrate how long they could
manage on those resources, and confirm whether or not they are likely to run out of money. How you
utilise those resources will be part of the recommendation.
13.3.4 'Back-Testing' the Recommendations

Once the solutions are decided, they should be back-tested before recommending to the client:
• Will the recommended policies themselves pay out when required?

• Will the recommended sums assured be enough to ensure they are unlikely to run out of money?
• Are the policies affordable within the client's budget/disposable income?
• Have trusts been included for life policies where appropriate, so benefits are paid outside the estate?
13.3.5 Importance of Regular Reviews

There is a high chance that a client’s life will change during the many years from employment, house
purchase, marriage, birth of children, change of career to retirement and death. Jobs, salary, priorities
and commitments are all prone to change and all of these can affect the client’s protection needs and
planning. So, it is best to keep on top of changes by reviewing the client’s plans on a regular basis.
Example
When you first meet the clients, they are married with one child, they have a mortgage of £120,000, and
both work full-time. Five years later, their household income has increased owing to one of them having
been promoted, while the other changed jobs. They are about to move to a larger house and increase
their mortgage to £180,000. Will the original IP be enough? Will the life cover set up five years ago be
enough to meet their capital and income needs? Do their employers provide any benefits that were not
available previously?
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14. Consumer and Retail Market Factors and Trends
Relevant to Financial Protection
Learning Objective
1.1.1 Understand the key consumer attitudes, retail market factors and trends which are relevant
to financial protection: health and morbidity; longevity and mortality; employment; product
design and development; access to advice and/or insurance cover; compensation and consumer
protection
14.1 The Consumer Is King

Customer attitudes and approaches to financial planning products and services have changed, certainly
in the last generation, and in the last decade since the proliferation of the internet. The financial
literacy of clients has generally improved, as has access not only to financial product information and
comparisons but also to the experiences and views of other clients on consumer review sites. Attitudes
to debt and financial protection products have also changed since the credit crunch began in 2007. A
more negative attitude to debt has emerged, with a cautious approach to spending and a greater focus
on life assurance and other protection products.
A trend has emerged where consumers seek access to personal advice, but on their own terms. Many
people are not overly bothered about adviser status, as long as they get the help they need and feel
confident that the adviser has done a good job. Many consumers will do their own research to get a
better understanding of a product before or after seeing an adviser. Advice now often just means the
consumer having somebody to contact, often to discuss quite a simple point and to be reassured that
they are doing the best thing.
This model is quite a way from the detailed client fact-finding and regular reviews that many advisers
use today, or would wish to adopt in response to the Retail Distribution Review (RDR). This suggests that
the industry needs to explore further how a basic or simplified advice model might work for consumers.
HM Treasury (HMT)/the FCA published its Financial Advice Market Review (FAMR) in March 2016. FAMR
addresses the issues of affordability, access to advice and redress available to customers in the light of
these consumer trends.
It is important to appreciate that the RDR concerned itself with retail investment products only and had
little impact on the advice given and sale of pure protection products which contain no investment
element, such as term life insurance. Advisers can still receive commission from life assurance companies
for advice given, in the same way as they can receive commission for advising on house or pet insurance.
Sadly, not all of those who need, or could benefit from, advice will seek or receive it, owing to widely
held perceptions of the financial services industry or to the fact that many consumers do not see the
need to pay for financial advice.
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14.2 Time Is Money
1
People’s perceived simplicity about their needs feeds through into the value they place on financial
advice. The need to seek advice is not clearly understood by many consumers owing to misconceptions
often caused by direct advertising campaigns, such as those offering term assurance without advice,
which are perceived by the consumer as being cheaper. In addition, the industry has not managed to
separate out clearly the costs of advice from the cost of product implementation. This still has some way
to go as a next step after the RDR owing to the complexities of issues, such as adviser regulation, other
levies and professional indemnity (PI) insurance, being based mainly around product recommendations
and implementation.
14.2.1 Innovation Need Not Be Complicated

To create more choice and to differentiate themselves from the competition, financial services providers
have designed a range of products and services. Arguably, these appeal more to the distribution channel
than to the end customer. What the industry regards as innovation may often prove highly complex for
the people the products are being sold to. It is a sobering thought that many of the reviews of past sales
led by regulators have had complex propositions at the root of the problem, leading to poor marketing
and product literature or bad advice.
The days when investment product charges were largely concealed from consumers are fortunately
long behind us, and following the introduction of the RDR, insurers can no longer incentivise choice
through adviser remuneration structures, as investment product providers no longer pay commission
to advisers. However, while the industry has made some well-intended and genuine attempts to
improve consumer understanding of its products and services, the terminology that we use can still be
bewildering, and perhaps there is a need for consumer education, together with the use of clear English,
when naming products.
The way consumers describe products and services gives us some revealing insights. For example,
when consumers are asked about IP, many speak about the risk of being made temporarily redundant
or unemployed. Only a few see the true meaning of the term: that it relates to the risk of loss of income
due to long-term incapacity. This is not surprising, given that the product name makes no reference to a
long-term benefit, payment duration or incapacity. Once the concept of protecting income against the
risk of incapacity on a long-term basis is understood, it is found to be valuable and useful. If nobody is
there to explain what exactly a product does, what will make the consumer seek it out? We need to be
far clearer about what is and what is not covered.
IP is just one example of where our product labelling can be improved. Much has been done already,
but we still need to do more to make products and propositions clearer and easier to understand.
Consistent messaging and simplicity are the key to keeping consumers engaged, along with stressing
the need for people to take action themselves. Moving our consumer base from being largely passive
in its insurance-buying habits to becoming engaged and informed retail buyers is our most pressing
challenge.
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14.3 Relationships – Keep the Flame Burning
As advisory firms have tried to move their models upmarket, many low- to middle-earners and their
families have been driven away from access to advice and towards financial exclusion.
There has been too little debate about re-engagement with a market that is, quite possibly, under-
insured, has inadequate provision for retirement and which has become disengaged.
Many clients will own protection policies that may or may not still be appropriate to their circumstances.
A significant proportion of these policies may no longer be available to new clients, but it is in the
interest of the adviser to understand their features, cost and benefits in order to best advise on whether
they need cancellation, continuation or re-broking. For this reason, the syllabus refers to these legacy
products.
14.4 Mind the Gaps

Swiss Re’s Term and Health Watch 2012 reports significant increases in the UK Life Assurance Protection
Gap; the difference between the amount of life cover people hold and the amount they need stands at
£2.4 trillion as at 2011. Every UK adult has an average personal protection gap of around £50,000.
The Term and Health Watch 2012 report also found that the Income Protection Gap has increased by
46%, from £130 billion annual benefit to It is said that family income benefit (FIB) £190 billion annual
benefit between 2002 and 2012. The number of people insured, either through their own policy or
an employer-sponsored scheme, is somewhere between 3.5 million and 4 million. But according to
consumer research, up to 11 million people think they have it. This finding is consistent with similar
research carried out in 2004. Perhaps we should be less surprised that people avoid buying cover if
they think they already have it – which, in itself, may be fuelled by confusion around what the product
actually is and does.
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End of Chapter Questions
1
1. List three of the unit-linked whole of life policy premiums that an assured can choose from.
Answer reference: Section 2.4
2. What important factors need to be considered when considering an IP insurance policy?

Answer reference: Section 4.2.1
3. Who benefits from group IP?

4. What are the responsibilities of local authorities in relation to long-term care for older people?
Answer reference: Sections 6.1
5. Briefly describe the different types of PoA.

6. Explain what a spendthrift clause is.

7. List the potential gaps in coverage an adviser should consider before a client takes out a life
policy.
8. What will a family protection review enable a family to decide?

9. What income needs should an adviser consider when looking at their clients’ financial exposure?
10. What is the 'true' meaning of IP?

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Chapter Two
2
Retirement Planning
1. Background 81
2. Types of Pension Schemes 81
3. Defined Benefit (DB) Schemes 88
4. The Key Characteristics of Defined Contribution (DC)

Pension Schemes 97
5. State Pension Schemes 106
6. HMRC Tax Regime 114
7. The Development of Pensions 125
8. Pensions Law and Regulatory Compliance 128
9. Auto-Enrolment Legislation 142
10. The Introduction of Pension Flexibility 145
11. Financial Planning and Advice for Retirement 149
12. Taking a Retirement Income 162
13. Decumulation Factors to Consider 166

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Retirement Planning
1. Background
The first organised pension scheme was established in the 1670s for Royal Navy officers. Since then there
have been many changes to pensions, with the pensions we know today evolving through numerous
2
pieces of legislation in the 20th and 21st centuries. Some notable Acts and dates include:
• The Finance Act 1921 – this was the first Act to introduce tax relief on pension contributions.
• The 1946 National Insurance Act – introduced a contributory State Pension (SP) for everyone.
• The 1995 Pensions Act – set up regulatory and compensation schemes offering further protection
to members of occupational pension schemes.
• 6 April 2006 – known as ‘A-Day’, a single pension tax regime was introduced and this replaced eight
previous regimes.
• 2010 – the gradual increase in State Pension Age (SPA) from age 60 to 65 for females began and
notice of increase in SPA for all up from 65.
• 1 April 2012 – introduction of automatic enrolment.
• 21 December 2012 – gender discrimination on annuity rates made illegal.
• 6 April 2015 – pension freedoms introduced.
• 6 April 2016 – single-tier SP and Lifetime Individual Savings Account (LISA) introduced.
2. Types of Pension Schemes
Learning Objective
2.1.2 Understand the main types and methods of pension provision: State Pension benefits; defined
benefit (DB) schemes; defined contribution (DC) schemes
2.1 Introduction
Pensions have evolved from being relatively straightforward methods of accumulating resources where
individuals could retire at the end of a working life into a myriad of complex-sounding and seemingly
illogical tax shelters with a variety of titles which seem deliberately designed to confuse even pension
experts, let alone the general public. This evolution has arisen as the three main types of pension scheme
developed both separately and also became increasingly intertwined in the post-World War II years.
In the immediate post-war years, there were essentially three types of pension: the state, occupational
schemes and retirement annuity contracts (RACs):
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All three regimes were distinct and separate.
Over time, legislative and tax changes have been introduced which blurred the distinctiveness of the
three regimes. Examples are:
• Additional voluntary contributions (AVCs) (a type of defined contribution (DB) pension) which
were introduced for members of occupational defined benefit schemes to improve their eventual
pension benefits.
• ‘Contracting out’ of the State Earnings Related Pension Scheme (SERPS) using an Appropriate
Personal Pension was introduced in 1988, which meant that individuals could fund a defined
contribution (DC) scheme using a rebate of National Insurance contributions (NICs).
• From 1988, employers could also contribute to an individual’s personal pension.
This led to greater integration of all three regimes, with added levels of complexity as HM Revenue &
Customs (HMRC) attempted to limit the use of the tax reliefs associated with pensions.
As layer upon layer of new legislation was introduced, notably the Pensions Reforms of 1988, Pensions
Tax ‘Simplification’ in 2006 and pension freedoms in 2016, the pensions landscape became increasingly
complicated.
In October 2012, automatic enrolment (auto-enrolment) started whereby employers have to auto-enrol
their eligible workers into a pension scheme. So that the system was not overwhelmed, employers were
given ‘staging’ dates, the date on which their scheme has to start. The date the business was given
depended on the size of business and some other factors.
You should also note that there is no longer any default retirement age. While many schemes still have
age 65 as the age of retirement, no one can be forced to take the pension at that age. What might also
be relevant is a person’s SPA.
There is no limit to how much a person can put into a pension scheme or the value of the pension
scheme. However, there are tax limits which result in a tax charge. A tax charge may be payable if
contributions exceed the annual allowance (or tapered or the money purchase annual allowance
(MPAA)) or the value of the pension exceeds the Lifetime Allowance (LTA). The process of building up
a pension pot is called ‘accumulation’ and the process of taking the pension benefits on retirement is
called ‘decumulation’.
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2.2 State Pensions (SPs)

Despite many attempts to try to get individuals to take more personal responsibility for their pension
income, the state remains a major provider.
2
We will look at both State Pensions (SPs) in more depth, to establish an understanding of this
important form of pension provision.
The Basic State Pension (BSP) was first introduced to Britain in 1908 under the government led by David
Lloyd George. When introduced, it was designed to provide approximately 20% of the average earnings
at age 70. The percentage was not too bad but, as life expectancy in 1908 was about 49, the minimum
age requirement was a few years too high for many!
The SP has seen a number of changes over its 100-year life, and will continue to see them.
The most recent development, in April 2016, has been the introduction of a new SP which has no
earnings-related element. This has meant that the SP has been separated from the non-state regimes.
This does not, however, mean that matters are any simpler. But, you will have to know about both the
new and the old system as both will continue to operate depending on the age of your client.
2.2.1 The Old Basic State Pension (BSP) (Pre 6 April 2016)
Old SP applies to a man born before 6 April 1951 and a woman born before 6 April 1953. This pension
can be deferred and the rules will apply to a person born before those dates even if they take the SP
after 6 April 2016.
To get the full BSP, the individual requires a total of 30 qualifying years of NICs or credits. For 2017, the
full pension is £122.30 per week. On top of this an individual may be eligible for the Additional State
Pension (ASP). There is no fixed amount of ASP. ASP will be paid automatically if a person is eligible. How
much an individual will receive depends on their earnings, NICs and whether they contracted out for
some or all of the time.
2.2.2 The New State Pension (SP) (Post 5 April 2016)

A new SP came into effect on 6 April 2016. It is a single tier (ie, just the one element) and applies to
a man born on or after the 6 April 1951 and a woman born on or after the 6 April 1953. In 2017, the
pension is £159.55 per week. Individuals will need ten qualifying years to get any SP and 35 qualifying
years to get the full pension.
There are transitional provisions for those who have built up qualifying years or credits prior to 6 April
2016, to ensure that they will not receive a lower pension amount than they would have received under
the previous system rules, so long as they meet the new ten-year minimum qualifying period.
When an individual reaches SPA figures will be calculated under the system. The amount that the
individual would have got under the old rules will be compared to the amount that they can get if the
new system was in place at the start of their working life. They will then receive the higher of these two
figures will be paid. This starting amount will include a deduction if the individual was contracted out
under the old system.
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An individual will be able to increase their pension up to the full level, at the rate of 1/35th of the full rate
(£4.56 to the nearest penny) for each additional qualifying year after 5 April 2016.
2.3 Defined Benefit (DB) and Defined Contribution (DC)

Schemes
2.3.1 Workplace Pension Schemes (WPSs)

Workplace pension schemes (WPSs) have been in the news over the past few years, as pension liabilities
began to feature greatly in the financial health of a company. The statement, for example, that British
Airways is a large pension provider, with a small airline business on the side, is a slight exaggeration, but
you get the idea.
WPSs have long been seen by employers as a key employee benefit, helping build loyalty in a firm and
rewarding that loyalty with, in effect, deferred pay. The cost associated with DB schemes is beginning to
be seen by many as too expensive, and is less flexible to a more mobile workforce. One major problem
was Financial Reporting Standard 17 (FRS17) which states the accounting treatment for retirement
benefits such as pensions. It replaced SSAP 24 ‘Accounting for Pension Costs’ and Urgent Issues Task
Force (UITF) Abstract 6 ‘Accounting for Post-Retirement Benefits other than Pensions’.
The main requirements of FRS17 are:
• pension scheme assets are measured using market values

• pension scheme liabilities are measured using a projected unit method and discounted at a
corporate bond rate (based on a bond with a credit rating of AA)
• the pension scheme surplus (to the extent it can be recovered) or deficit is recognised in full on the
balance sheet
• the movement in the scheme surplus/deficit is analysed into:
the current service cost and any past service costs; these are recognised in operating profit
the interest cost and expected return on assets; these are recognised as other finance costs
actuarial gains and losses; these are recognised in the statement of total recognised gains and
losses.
These requirements have had a major impact on company balance sheets and have meant many have
looked again at the type of scheme on offer to employees.
There are two key structures of WPSs:
1. defined benefit (also referred to occasionally as ‘final salary’)

2. defined contribution (also referred to occasionally as ‘money purchase’).
WPSs are mostly constituted as trusts. Almost all DB schemes are trust-based but a decreasing
proportion of DC schemes are trust-based.
Below we consider WPSs only. Later, we consider other types of pension schemes.
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2.3.2 DB Schemes
The benefits from DB schemes are a promise to pay a pension based on the:
• years of service, in the pension scheme, of a member
2
• member’s final pensionable salary (or some derivation of this)
• scheme’s accrual rate.
Example
Gareth joined XYZ ltd when he was 44 and, having served a one-year probationary period, was allowed
to join the company’s WPS. He is soon to retire at age 65, and has a salary of £33,000 pa plus £7,000
bonuses for sales. The Occupational Pension Scheme is a ‘60th’ scheme that bases pensions on basic
salary only. His estimated pension benefit is therefore:
(£33,000 x 20) / 60 = £11,000 pa
Exercise 1
Emma has worked for Example ltd for all of her career spanning 31 years. She joined the company’s
defined benefit 60th scheme after a one-year waiting period and her current salary is £30,000 pa.
Calculate her estimated pension benefits:
See the end of this chapter for the answer.
Some schemes, generally in the public sector, such as the National Health Service (NHS) scheme, provide
a tax-free cash payment in addition to the pension entitlement. Other schemes allow tax-free cash to be
taken, but only via commutation, ie, forsaking some annual pension for a lump sum amount.
The funding of DB schemes is complicated because the scheme promises the member a level of
benefits that has to be met in the future. This is a hard objective to achieve, as the vagaries of long-term
investments play a big role in the success or failure of the scheme funding, but the promise remains. The
risk is therefore predominantly carried by the employer, as they are committing themselves to a promise
to pay for an unknown period of time, because they do not know how long the member will live, post
retirement.
Many schemes are contributory where, for an employee to be a member, they have to contribute a fixed
percentage of salary say 5% pa. Some, more generous schemes, are non-contributory.
There are now strict rules that govern the safekeeping of pension funds, so that they are not used to
prop up an ailing company (as was the case with the Mirror Group in the 1990s – the Maxwell pension
scandal, see news.bbc.co.uk/1/hi/business/1251019.stm), and to try to ensure, as far as possible, that
the scheme funding is sufficient to meet the liabilities. The ownership of the scheme assets lies with the
trustees, who must safeguard the assets on behalf of the members.
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Workplace DB schemes are also committed to statutory increases in pension entitlements. This impacts
individuals who leave a DB WPS but have built up preserved benefits. They do not lose these benefits.
Indeed, there is a statutory requirement on the DB scheme to revalue the pension to retirement, at
least trying to ensure the salary keeps pace with inflation. In addition, at retirement, there are statutory
requirements on DB schemes to increase the actual benefit amounts being made, again in an attempt
to ensure they at least match inflation. All of these statutory requirements add to a DB scheme liabilities,
and therefore its costs.
The advantages and disadvantages of a DB scheme can briefly be summarised as follows:
Advantages Disadvantages
Member knows roughly what they will receive Scheme carries all the investment risk
Member benefits from statutory revaluing to Scheme must appoint trustees, actuaries and
keep pace with inflation auditors and formalise costing structure
Helps retention of staff for an employer, Scheme must contribute to compensation
particularly as such schemes are becoming rarer schemes, adding to costs
The member does not have any of the investment If the employer goes bust, the scheme may
risk enter the Pension Protection Fund and the
promised pension might be reduced
You can see from this very short comparison that the advantages of a DB scheme lie mainly with
the member and not the employer. As a result, in the recent past, we have seen many trustees of DB
schemes reacting by trying to reduce costs.
Examples of this practice are:
• closing the scheme to new members, and therefore just maintaining their liability to members who
joined before a certain date
• closing the scheme to all members, which is a more drastic approach to the one above
• reducing the accrual rate, say from a 60th scheme to an 80th scheme
• increasing the normal retirement age, so the pension will be paid for a shorter period
• altering the definition of final salary – there has been a growing trend for career average schemes,
which use the average of the revalued earnings for an individual over the whole of their period in
the scheme, rather than just the final, probably highest, salary
• insisting on an increase in employee contributions
• reducing pension increases to the statutory minimum, if the scheme paid higher discretionary
benefits in the past.
2.3.3 Defined Contribution (DC) Schemes

With a DC WPS, the only known factor is the initial amount that is invested on behalf of the member.
From then on, there are many uncertainties, from the performance of the fund the money is invested
in, to the level of charges applied by the provider, to the annuity rate that will be available at retirement
when the fund is converted into income.
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Because DC WPSs come under workplace scheme rules, trustees must still be appointed, but their role is
less significant as far as the funding of the scheme goes. They have no liabilities to meet in a DC scheme
that has been done simply by paying the contribution. The risk associated with the ultimate scheme
benefits is therefore transferred almost entirely to the member.
2
The statutory revaluation requirements that apply to DB schemes do not apply to DC schemes. If a
member leaves the scheme, the possibility of the benefits increasing will rely greatly on the performance
of the fund that the member is invested in. If the member wants to ensure their pension benefits
increase in retirement, they will have to incorporate an escalation option in their annuity. They can do
this, but the initial annuity will be greatly reduced (by some calculations, by so much that it will take
roughly 12 years for the income level to match the amount that could have been taken immediately as
a level pension, and a further eight years to have actually received more money overall from the annuity
provider).
The advantages and disadvantages of a DC scheme can briefly be summarised as follows:
Advantages Disadvantages
Employer knows exactly where their Member carries all the risks, investment and
commitment ends annuity
Good fund performance could lead to higher Poor fund performance could lead to lower
benefits benefits
Helps retention of staff for an employer Unknown benefits – so hard to plan ahead
Pensioner could run out of money if they
Lower costs for an employer to run
access pension flexibly
Easy access to pension following pension
freedoms
Most DC schemes are invested on a monthly basis as a percentage of monthly salary. Also, members do
not have to wait until annuity age, but can opt for income drawdown plus a 25% lump sum.
Exercise 2
Michael is 55 years old and plans on retiring at age 60. His only pension provision is his DC pension
scheme that his employer offers. He has a low attitude to risk and, in an effort to maximise his retirement
fund before he buys an annuity at age 60, he has decided to invest into a fund that is invested fully into
a US equity fund. Why might this investment approach be unsuitable?
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3. Defined Benefit (DB) Schemes
Learning Objective
2.4.1 Understand the key characteristics of DB pension schemes: structure, characteristics, attributes
and benefits; taxation treatment; main types, variations and hybrids; rules and operation of DB
schemes; funding methods and issues; eligibility criteria and top-up options; roles of trustees
and scheme reporting; employer covenant; roles of Pension Protection Fund, The Pension
Advisory Service (TPAS) and Pensions Ombudsman Service; funding, valuation and reporting;
certainty of retirement income; principal risks
A DB scheme is where members are promised specific benefits at a specific age according to the rules
of the scheme. Each member is normally required to make contributions and these do not change
unless the member wishes to purchase additional benefits. The responsibility of meeting the benefits
for the members lies with the employer, so if the pension fund suffers a fall due to poor investment
performance, the employer must meet the additional costs of providing the retirement benefits. DB
schemes were often referred to as ‘final salary’ schemes, but as some now operate on the basis of
providing benefits that relate to average earnings over a period before retirement, eg, the NHS scheme,
or average earnings over the whole of a member’s employment, they are also referred to as career
average schemes. This can reduce the scheme’s liabilities at times when earnings rise sharply.
A DB scheme may change the level of employee contributions for new members and it may have to
change the level of employer contributions as a result of:
• investment performance and its effect on scheme assets

• changes in the demographics of scheme members including mortality rates
• impacts of salary level changes
• regulatory or legal changes.
3.1 Member Benefits of DB Schemes

• DB pensions are normally index-linked.
• Part of the pension taken at retirement can be as a tax-free lump sum.
• On death in service, the member’s beneficiaries receive a lump sum payment with a dependants’
pension also being paid.
• Should the member be unable to continue to work due to critical or chronic illness, early retirement
with a significant proportion of pension benefits may be possible.
• Employer contributions to the member’s retirement pot are considerable.
• The purchase of extra pension credits may be possible.
A new issue which is likely to affect DB schemes is the European Union’s (EU’s) intention to apply
Solvency II type rules to DB schemes.
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3.2 Hybrid Schemes

A typical ‘hybrid arrangement’ is an arrangement which offers money purchase benefits but underpins
a member’s entitlement with a minimum defined benefit. There are other variations, but whatever the
options, only one type of benefit(s) will ultimately be provided.
2
Normally, at the point benefits are drawn or entitlement arises under a hybrid arrangement it ceases to
be a hybrid arrangement, and will either be treated as a money purchase arrangement or a ‘defined
benefits arrangement’. If the benefits provided are money purchase or cash balance benefits then the
arrangement will become a money purchase arrangement. If the benefits provided are defined benefits
then the arrangement will become a defined benefits arrangement.
3.3 Career Average Revalued Earnings (CARE) Schemes

Career average revalued earnings (CARE) schemes run in a similar way to defined benefit final salary
schemes, but with differences in the way that your ‘pensionable earnings’ are calculated.
A CARE scheme is typically run, on behalf of the employer by the Board of Trustees, who are responsible
for all aspects of the scheme. This includes paying out benefits to retired members. Daily management of
the scheme is typically done by the Scheme Administrator, who reports to the Board of Trustees.
A CARE scheme normally offers you an income in retirement based on a proportion of your average
earnings, after adjusting these for inflation, during the whole period of membership of the scheme.
The pension scheme’s rules will define what is meant by ‘earnings’. For example, some schemes don’t
count additional earnings, such as overtime, commission, bonuses or the value of benefits in kind (other
benefits that are not paid as cash).
The scheme may also only count a proportion of your weekly or monthly wage or salary. The amount
of your earnings that are used towards calculating your retirement benefits is often called ‘pensionable
earnings’.
As a member, you build up a fraction (the accrual rate) of your career average revalued earnings for
each year of membership of the scheme. Typically, this fraction may be 1/60th or 1/80th of your career
average revalued earnings (for each year of scheme membership), although other fractions may be used,
as specified in the scheme rules, so you should check these.
Source: The Pension Advisory Service
3.4 Rules and Operation

A DB scheme is governed by a trust and the trustees hold the trust property for the benefit of the
scheme members. The trustees govern the scheme in accordance with law and the requirements of the
relevant legislation (Pensions Act 1995 and Pensions Act 2004).
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The scheme will have its own set of rules and these rules provide an attraction to scheme members
who can predict with some certainty what their pension will be. The scheme rules will include some key
information including:
• The normal retirement age (NRA) – the age at which the member stops contributions and
members usually take benefits.
• Eligibility to join the scheme – scheme rules will specify who is eligible to join and when they can
join. Some schemes can have different categories of membership and different levels of benefits
for each scheme. It is quite common for a scheme to have a minimum age and probationary period
before a member can join the scheme. The period of service is therefore the member’s period of
membership of the scheme.
• Employer contributions – employers have an open-ended commitment to provide benefits to
employees in the future. There is a cost involved in providing the benefits; therefore, the employer
must contribute, usually annually, to the scheme. The scheme’s actuary will calculate the level of
contribution required on a regular basis and this is usually reviewed every three years (known as the
funding rate).
• Accrual rate – the scheme rules will define the rate at which scheme benefits accrue for each year
of pensionable service. The rules could be for example 1/60th of pensionable remuneration for each
year or of pensionable service up to a maximum pension of 40/60ths.
• Pensionable remuneration – some schemes will use basic salary as the figure to be used when
calculating retirement benefits; however, other schemes may include, for example, bonuses,
overtime and commission.
3.5 Factors which Have Impacted on DB Schemes
3.5.1 Accounting Standard FRS17

FRS17 had a major impact on DB schemes. This standard requires any pension scheme deficits to be
disclosed in company accounts, resulting in a higher risk profile and higher risk rating for the company
concerned. Ultimately, this standard makes for a more transparent view of a company’s risk position;
however, from a company’s viewpoint, any increase in pension fund liabilities or falls in investment
performance (all matters out of its control) are publicly reported, such that the company may have to
pay more for credit or see its share price negatively affected.
3.5.2 Cost Issues

The cost of running DB pension schemes has risen, which has in turn caused companies to change or
consider changing to DC WPSs. Four factors have affected the cost of DB schemes, as follows:
• members living longer

• falls in pension fund values
• loss of advance corporation tax (ACT) relief, which has indirectly reduced investment returns
• compliance with new and more stringent regulatory requirements for pension funds, such as the
need to meet a minimum funding requirement.
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3.5.3 Competition among Employers

Where a number of high profile employers have saved costs by closing DB schemes to new members,
others have noticed that they too can save costs, including reducing employer contributions by doing
the same.
2
3.6 Prospects for DB Schemes
The costs of running such schemes, together with the company-wide impact of any scheme deficits
make these schemes increasingly less popular. However, in the longer term, particularly during difficult
economic conditions, DB schemes may disappear completely unless the government introduces
methods of decreasing the financial burden on employers. Ideas include allowing employers to amend
the level of employee contributions when funding deficits occur, providing additional tax incentives for
DB providers, or even allowing amendments to the guaranteed benefits when good reasons require it.
3.6.1 Pension Buyouts

Pension buyouts have increased in response to a variety of factors affecting DB schemes as touched
on above. For employers offering DB schemes which are increasingly costly or affecting the company’s
accounts negatively, the buyout option is very attractive. There is a concern that if plans by the
Accounting Standards Board (ASB) to apply a risk-free rate to value future pension liabilities proceed,
this will only compound the current issues and create a further decline in the provision of DB schemes.
3.6.2 Top-Up Options

All occupational schemes usually offer the ability to top up pension benefits through AVCs. This is
usually via one of two methods:
1. AVCs on an added-years basis – where it is possible to use AVCs to buy added years of service in
the scheme, the actuary for the scheme will calculate the cost of buying one added year of service.
The actuary is likely to be conservative when making assumptions to ensure the cost of providing
the guaranteed benefits does not exceed the AVCs being paid plus investment growth. Benefits are
usually paid in line with the rules of the DB scheme and can normally only be taken at the same time
as the main benefits from the scheme. Added-years AVCs best suit an employee who is expecting
their salary to increase quite quickly in the future.
2. AVCs on a DC basis – the employer may have set up a scheme to receive AVCs or they may have
a group personal pension arrangement in place. The member’s AVC will be paid into a fund that is
invested until retirement when it is then used to pay an additional pension for the member.
3.7 The Role of Trustees

A WPS does not have to be set up as a trust; most, however, are. The reason for this is that firstly,
there used to be more tax advantages to setting up a WPS in trust, although this is no longer the case.
Very importantly, however, is that by having a WPS set up as a trust, the assets within the scheme are
protected for members and are not the assets of the employer.
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The primary role of any pension trustee is to act in the interests of the beneficiaries, ie, the scheme
members, while acting in line with the trust deed as well as with regulatory and legal requirements.
3.7.1 Trustees’ Duties and Responsibilities

As mentioned above, pension trustees have a duty to act in accordance with the trust deed of the
scheme and with regard to their responsibility to members, and these duties fall into the category of
general duties, together with acting prudently and honestly. There is a requirement for trustees to
maintain their knowledge, particularly in the face of changing pension legislation and/or regulatory
changes.
There is also a list of very specific areas that trustees are responsible for. These include:
1. Contributions – ensuring that the employer pays the right amount of contribution in a timely
manner. If this does not happen, there is a requirement for trustees to act. The rules state:
• contributions deducted by the employer from employees’ pay must be paid into the WPS no
later than 19 days from the end of the month that they relate to
• any contributions made by an employer must be made in accordance with the schedule of
contributions for a DB scheme or payment schedule for a DC scheme.
Should a breach of the rules occur, scheme members need to be informed. If the breach is likely to
have a significant effect on the scheme, the trustees or scheme managers must report this to The
Pensions Regulator (TPR).
2. Payments to members and records kept – the employer must pay the correct benefits to the
correct members in a timely manner and a proper annual report (see point 7 below) with an
auditor’s statement must be prepared. Trustees must ensure that minutes of trustees’ meetings and
decisions made are kept together with relevant details of all transactions and members past and
present. Members must also receive regular statements detailing their benefits.
3. Investment fund – ensuring that the fund has been invested prudently, in line with the stated
investment style, and all legal and regulatory requirements.
4. Professional advice – must be obtained by the scheme and trustees must make sure this happens
and that it is from suitably qualified specialists for each relevant area of investment.
5. Registering and paying the levy – by law, trustees have to register the pension scheme with TPR
and provide certain information about the scheme as well as ensuring that the annual payment to
TPR is made.
6. Reporting to TPR – there are circumstances where trustees must report matters to TPR, for example,
persistent failure by the employer to pay contributions in accordance with the current schedule of
contributions, where the contributions remain unpaid.
There are also circumstances where the scheme’s professional advisers are required by law to
consider reporting trustees, employers or other professional advisers to TPR.
7. The annual report – a WPS annual report must normally be made within seven months of the year
end of the pension scheme. Such a report includes the audited accounts with an auditor’s report
into the scheme, comments from the investment managers, and key legal and administrative
information provided by the trustees.
8. Trustees’ liability – just as with any other type of trust, pensions trustees can be held personally,
jointly and severally liable should a loss occur in the scheme as a result of a breach of trust, acting
without proper authority, failing in one or more of the duties highlighted above or through
deliberate negligence. The employer of the WPS may offer trustees insurance to protect their
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personal assets. Many WPSs also have rules which protect trustees unless the trustees breach
scheme rules deliberately.
9. Other parties – in addition to regulatory bodies, a variety of other parties have responsibilities to
protect the benefits of members of WPSs; these include pension scheme trustees, financial advisers,
2
investment firms and employers.
3.7.2 Pension Scheme Reporting

We have touched on the issue of reporting pensions deficits in a firm’s accounts and the possible effect
this has had on the provision of DB schemes. It is important to note that, in terms of transparency, what
is still missing is the reporting of pension buyout costs. Without this on a firm’s accounts, the danger of
inappropriately risky investment actions remains.
Pension scheme liabilities have an effect on corporate credit ratings, making it more difficult for the
company to obtain credit and making credit more expensive. On the other hand, one could argue that
ultimately the pension deficits exist and the employer is responsible for meeting these and therefore it is
correct and transparent for the company to have these represented in the accounts. One area of concern
is that the credit ratings agencies have actually underestimated pension risk in debt-rating estimates as
they did in the sub-prime mortgage scandal.
3.7.3 The Changing Role of the Actuary

Within the EU, there remain differences between the roles and functions of pension actuaries. For the
purposes of this section, we will concentrate on the countries where the role appears most complete, ie,
the UK, Ireland, Germany and Austria. The role includes:
• actuarial valuation – including minimum funding requirements

• surplus statements
• certification of the contributions payable
• certification of individual transfers
• certification of employer debt on winding-up
• certification of (bulk) transfers in case of mergers and acquisitions
• provision of professional advice and guidance.
However, the role of the actuary has changed since the introduction of FRS17 (and its European twin,
IAS19), in which the yield on long-dated AA corporate bonds is the specified discount rate for liabilities,
and assets are taken at market value without any smoothing adjustment.
There have been numerous and adverse consequences of this move to FRS17. Firstly, DB schemes have
been left with headline deficits even for those schemes that were previously thought to be well funded
in actuarial terms. This has had a knock-on effect on the market for DB schemes, as the size and volatility
of these deficits have caused many companies to close their final salary schemes to new entrants or
even existing members. Arguments that future economic growth is being adversely affected abound,
with companies having to inject capital to remove scheme deficits that could otherwise be used to fund
capital expenditure and research and development.
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3.7.4 Pension Deficits and Equity Risk
A consequence of the introduction of FRS17 has been a much greater emphasis on the investment
approach taken by trustees and investment managers of DB schemes. Unsurprisingly, there has been
a move away from investing higher proportions in equity and property assets towards a liability-driven
investment approach. The added effect of matching liabilities for a longer-living set of beneficiaries has
resulted in more derivative-type investments, which has in turn driven up costs. One alternative, that
some schemes have adopted, is to outsource the entire pension fund to be managed by an insurance
company – again, though, higher cost structures apply.
3.7.5 DB Option Availability
Learning Objective
2.4.2 Be able to analyse the options available from DB pension schemes regarding retirement planning
for individuals: factors to consider and benefits on leaving, early, normal and late retirement;
benefits on ill health and death; switching issues and considerations; public sector schemes;
retirement benefits; leaving benefits; ill health benefits; Pension Commencement Lump Sum
(PCLS) and interaction with pension income; death benefits before and after crystallisation
Retirement Options
When a member reaches the normal retirement age they will be entitled to their pension benefits based
on their years of service, their pensionable salary and the scheme’s accrual rate. The pension will be
taxed as earned income and some or all of the pension will escalate each year in payment. There are
statutory minimum rates of escalation; however, a scheme can pay more than this if they wish.
Different levels of increase apply to each part of a pension.
Pension Commencement Lump Sum (PCLS)

As well as an annual income, schemes can offer a separate lump sum or annual income can be commuted
(reduced) for a lump sum. For example:
• Scheme A has an accrual rate of 3/80ths multiplied by the number of years’ service of final
pensionable salary to calculate the lump sum.
• Scheme B has a commutation rate of 12:1 which means that for every £12 of Pension Commencement
Lump Sum (PCLS) taken, the annual income will be reduced by £1.
Early or Late Retirement

Most schemes allow the member to retire early. If they do then their benefits are calculated at the date of
retirement and then reduced by an actuarial reduction factor. Similarly, some schemes allow members
to retire after the NRA and a late retirement enhancement factor will be applied to their pension, which
would result in an increased pension being payable.
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Ill Health Early Retirement

Scheme rules may allow ill health early retirement to those under 55. The scheme rules will state
how benefits are calculated and it is common for early retirement reduction factors to be ignored or
deducted.
2
Death Benefits
Schemes can pay a lump sum to the members’ beneficiaries in the event of death in service. The lump
sum would be free from tax with the exception of the LTA tax charge of 55% for lump sums paid over
the LTA.
In addition to any lump sum paid to those who die in service there is often a spouse’s/civil partner’s/
dependant’s pension paid too. The scheme rules will state how these benefits are also calculated and it
is common for 50% of the members’ pension to be payable.
If a member died in retirement then their pension would usually be payable for the remainder of any
guaranteed period and a spouse’s/civil partner’s/dependant’s pension paid as a fixed percentage of the
member’s pension at the date of death.
Leaving Benefits
DB scheme rules will contain details of the options available to those who leave the scheme before NRA.
There are usually three options:
1. A refund of the member’s contributions – this is normally only available to those who leave after
three months but before two years of membership. The refund of the member’s contributions will
be taxed at 20% on the first £20,000 and 50% on the remainder.
2. Preserved benefits – normally available when there have been at least two years of service, the
member would be entitled to a minimum level of benefits know as a ‘short service benefit’. The
preserved pension at the date of leaving would then be revalued each year over the period between
exit and the scheme’s normal retirement age.
3. Cash equivalent transfer value (CETV) – this must be offered to anyone who has completed three
months’ pensionable service. The member can transfer their pension away from the scheme into
another pension. The scheme actuaries calculate the cash equivalent transfer value (CETV) which is
a lump sum that would be invested into a new DC pension scheme.
Before transferring a DB pension scheme worth over £30,000, the Financial Conduct Authority (FCA)
requires the member to receive advice from a regulated pension transfer specialist. There is a lot to
consider before taking the decision to transfer and detailed advice is needed to help the member
understand the advantages and disadvantages of a transfer and to help with this a transfer value
analysis system (TVAS) is used.
The TVAS calculates the annual investment return, known as the critical yield, required from a new
pension arrangement to match the benefits available from a DB occupational pension scheme at the
date of retirement, early retirement and/or late retirement. Therefore if the transfer value grows by the
critical yield each year until retirement it will provide a fund that matches the capitalised value of the
DB scheme.
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The TVAS makes a number of assumptions about:
• annuity rates
• inflation
• national average earnings
• revaluation rates
• mortality
• investment returns.
The critical yield therefore is only going to be accurate if all the assumptions become a reality; however,
the critical yield will help to put into context the fact that transferring from a DB pension to a DC
arrangement moves the investment risk from the employer to the member.
If the member has a low attitude to risk and is very cautious when it comes to investing then a critical
yield of 10% is likely to result in the advice being to stay in the scheme. Term to retirement is also an
important factor as the longer the member has to invest then the more likely they will achieve a higher
return from equity-based investments.
Those in ill health may wish to transfer from the DB scheme to access their benefits flexibly, purchase an
enhanced annuity or gift their pension to their family. However, this needs to be considered alongside
the scheme rules which might allow those in serious ill health to fully commute their pension benefits.
Public Sector Schemes
Each public service scheme has scheme rules which set out details of the membership and benefits are
to be provided under the scheme.
Public service schemes are those covering:
• civil servants
• the judiciary
• local government workers
• teachers
• health service workers
• fire and rescue workers
• members of police forces
• members of the armed forces.
They may also include some public body schemes in the future.
Members of unfunded public sector schemes (such as the NHS, teachers and civil service schemes) are
not able to transfer their benefits to access the new flexible benefits. The Pensions Schemes Act 2015
allows the reduction of the transfer value where benefits are transferred from a funded public sector
scheme to obtain flexible benefits.
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4. The Key Characteristics of Defined Contribution

(DC) Pension Schemes
2
Learning Objective
2.4.3 Understand the key characteristics of DC pension schemes: main types of DC schemes and
their legal bases, rules and operation – group personal pensions (GPPs) (employer-established),
individual pension plans (IPPs) (non-employer-established), stakeholder pensions, self-invested
personal pensions (SIPPs); tax treatment; contributions – methods and issues; accumulation,
de-risking and decumulation stages; types of investments; funding, fees, valuation and
reporting considerations; the purpose of a default fund and investment choice; scheme options,
limitations and restrictions
2.4.4 Be able to analyse the options available from DC pension schemes regarding retirement
planning for individual customers: crystallisation options and impact of decisions – including
full and partial crystallisations; transfer issues and considerations; stakeholder pensions; SIPPs
and group SIPPs; death benefits before and after age 75; ill health; leaving benefits; role of the
National Employment Savings Trust (NEST)
The advantages and disadvantages of a DC scheme can briefly be summarised as follows:
• Advantages
The employer has control over pension liabilities and the commitment to make payments is
only as much as the funds available rather than a deficit situation arising out of the employer’s
control.
If better than expected investment performance is achieved, the employee benefits could be
better than expected.
Lower running cost compared to DB schemes.
Less complexity for transferring in other DC pension benefits so helps when a mobile workforce
is suitable.
Employee – limited liability compared to a DB.
Employees have no lock-in to the employer so flexibility to move pension to new employer.
• Disadvantages
There is no promise of a defined benefit for the individual as to what their pension will be; it
all depends on the contributions and investment growth of the pension fund. Thereafter the
individual is at the mercy of annuity rates as well.
Challenges for the individual to plan for retirement when the final pot is unknown and
dependent on investment performance.
Individual and detailed statements required for each member.
Workplace pensions were traditionally a tool to enhance employee retention, particularly for
key teams or individuals. DC schemes are less likely to encourage retention.
There has been a degree of negative press coverage when firms have changed their schemes
to DC from DB. For individuals, the result is greater uncertainty and greater exposure to risk in
planning for retirement.
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4.1 DC Schemes
In contrast to DB pension schemes outlined above, DC pension schemes offer no promises as to the final
pension that a member will receive. Instead, as the name suggests, they simply define the proportion of
earnings that are contributing to the scheme.
Although many employers contribute to DC schemes, it is normally at a much lower percentage of

earnings than in DB schemes. An individual who becomes a member of a DC scheme has to be aware
that their pension will be exposed to investment risk and will depend on investment returns as well as
the amount and timing of contributions made into the scheme. At the point of retirement, the level of
income will be dependent on the annuity rates available too.
4.1.1 Types of Workplace DC Scheme

The different types of DC scheme available include the following:
Trust-Based Money Purchase Scheme

A WPS does not have to be trust-based. However, most are: essentially the assets of the WPS are
governed by a trust and the trustees (rather than the employers providing the scheme) holding the
scheme’s property.
Although the trustees are appointed by the employer, they act independently for the benefit of
members, and part of their duties is to set out some of the initial information in the trust deed, including
retirement age and who can join the scheme. The employer simply agrees what level of contribution
the company will make, and it is part of the role of the trustees to ensure the payments are made. Such
schemes normally, but not always, require employees to make a minimum contribution as a condition
of joining the scheme.
Group Personal Pension (GPP) Scheme

A group personal pension (GPP) is not based on a trust. Instead it is a group of personal pension
contracts. Each one is a personal pension plan (PPP) between one individual and the pension provider;
however, by grouping them together the administration costs are lower for both the employer and
individual members.
A trust is not required, as the employer has no access to the funds within the pension scheme and the
administration is more streamlined and less costly as a result. The employer is still able to set out the
requirements for joining as well as the employer contribution and any employee contributions required.
Any contributions made will be divided into each employee’s individual pension account, and the fund
is likely to be either with-profits or unit-linked. GPPs provide employees with greater flexibility, as they
can take pensions benefits with them if they change employers. Also, as the contract is directly between
the employee and pension provider, the employee can choose their own retirement age.
Stakeholder Pension Plans

These were another new government innovation, launched in 2001 when Tony Blair’s Labour
government was in its first term of office. The idea was to make pension planning accessible for the
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masses, by limiting charges and setting very low minimum premiums. It is probably fair to say the
original objective hasn’t been achieved – a view supported by the fact that a new form of pension for
the masses (National Employment Savings Trust (NEST)) was launched in October 2012.
2
At heart, stakeholder pensions are very similar to PPPs, with basic-rate tax relief given on the contribution
and a tax-free lump sum of 25% of the fund available on retirement. Stakeholder pensions introduced
the idea that people who were not working could contribute, up to a maximum of £3,600 gross per
annum, and still receive tax relief. The minimum age requirement that previously applied to PPPs was
also removed, which introduced a new market of third-party stakeholder pensions, where individuals
could fund on behalf of another. Often this has turned out to be relatives, like parents or grandparents,
funding pension plans on behalf of children/grandchildren.
The government was particularly keen to keep the charges for stakeholder pensions as low as possible.
Initial charges were banned, with only ongoing annual management charges allowed. Even these were
restricted, initially to 1% pa of the value of the fund. Mainly due to pressure from the pension industry,
in 2005 the allowable charges were increased to 1.5% pa for the first ten years of a plan, and 1% pa
thereafter. Most PPPs now follow this structure, although some have kept changes at 1%.
The minimum contribution to a stakeholder pension remains an incredibly low £20 pa. This has stopped
a number of pension providers offering a stakeholder pension option, as it is not commercially viable,
preferring instead to brand their PPPs as stakeholder-friendly. In other words, they are remarkably
similar to stakeholder pensions, but have a minimum contribution of, say, £50 a month or £500 pa.
Since April 2005 stakeholder pensions have had to offer a lifestyling option. This is an investment
strategy whereby the member’s fund is automatically moved away from riskier investments, such as
equities, into more secure investments, such as gilts and cash, as retirement approaches.
Stakeholder pensions must also offer a default fund: a fund into which individuals’ contributions are put
if they make no other fund choice. Default funds can and do vary widely by asset allocations.
4.1.2 Personal Pensions

Many individuals who are self-employed or who work for small employers do not have access to a WPS
or GPP.
There are alternatives, which we will look at now. They are all money purchase (DC) arrangements, so
the benefits are unknown and the risks include investment risk, inflation risk and annuity risk.
Retirement Annuity Contracts (RACs)

Retirement annuity contracts (RACs) were the first form of personal pension planning, and some
individuals still fund them, despite the fact that no new RACs have been sold since June 1988. They
had particular rules about the tax-free cash entitlement but, since A-day, they now closely resemble
the other types of personal pension provision. Probably the main differentiator is that it is unlikely that
contributions can be paid net, with tax relief given at source. This is not a legislative restriction, more a
technology restriction, as many providers’ old platforms that contain RAC details cannot be modified to
collect contributions net rather than gross. Tax relief is still available, so the individual often has to claim
it via self-assessment.
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Personal Pension Plans (PPPs)
Personal pension plans (PPPs) replaced RACs in a wave of publicity in July 1988. The brainchild of the
Conservative government, they were designed to revolutionise the pensions world, with individuals
encouraged to take personal control of their pension planning. Unfortunately, this led to a large number
of individuals being advised to transfer their benefits out of their DB occupational schemes, into the
money purchase world of PPPs. As we have seen, this involved a transfer of risk from the employer to the
individual and it wasn’t long (the early to mid-1990s) before it became clear that in many situations the
individual would have been better off staying with a DB scheme. The subsequent pensions mis-selling
scandal did nothing for the reputation of the industry and cost a lot of money to put right – around £12
billion in compensation was paid out between 1994 and 2002.
Despite this, PPPs remain an integral part of the UK pension scene, creating the basis for what followed
with stakeholder pension plans and, indeed, the basis for pension simplification. A couple of the main
innovations were the concept of pension relief at source on contributions (given at the prevailing basic
rate of income tax), and a tax-free lump sum entitlement of 25% of the pension fund.
Group PPPs also became popular, offered by employers who did not want to set up a WPS (with all of the
resulting paperwork and trustee requirements) but wanted to allow their employees to contribute to a
pension plan via their work. Sometimes the employer would contribute themselves to these plans, and
sometimes they just allowed a source for employees to pay.
A derivation of the PPP format, the appropriate personal pension (APP), also allowed an individual to
contract out of, at the time, State Earnings-Related Pension Scheme (SERPS). This had been allowed
previously, via occupational schemes, but many thousands of people welcomed the chance to try to see
if they could beat the guaranteed nature of the state benefit by investing in stock market funds. As with
many money purchase arrangements, some individuals did better than others!
Section 32 Buyouts
A Section 32 buyout policy allows people to transfer the funds and benefits of their company pension
scheme into a private fund. The scheme allows them to take advantage of the same benefits as the
original company scheme, while adding the individual control of a PPP.
The Section 32 buyout policy differs from a PPP in that individuals can no longer make monthly
contributions to the company scheme once they have transferred their company benefits. They may
only make a single transfer, which is why it is ideal for pension transfers from frozen or existing company
pension schemes.
In order to transfer a company pension into a Section 32 buyout scheme, the pension scheme trustees
must request a full transfer value from their current scheme.
Benefits of a Section 32 Buyout Policy

The benefits of a Section 32 buyout policy are that, unlike setting up a new PPP, individuals are able
to receive the enhanced benefits that come with a company pension scheme, plus it adds a greater
flexibility provided by wider fund management opportunities. Company schemes are often restricted to
a certain number of funds, whereas PPPs have much more choice.
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Drawbacks of a Section 32 Buyout Policy

Once they have transferred the funds into a new policy through the Section 32 buyout policy, people
cannot pay in any additional funds. If they decide to make payments into a pension plan, they must take
advantage of any scheme offered by their new employer, or set up a PPP.
2
4.1.3 Self-Invested Options
The self-invested market has grown rapidly since pension simplification, since some of the key eligibility
rules, particularly for the employed, have been relaxed. There is now a massive market in self-invested
personal pensions (SIPPs), in addition to the self-invested option favoured for years by small family
companies – small self-administered schemes (SSASs). We will take a brief look at these two options,
which are primarily aimed at high earners.
Self-Invested Personal Pensions (SIPPs)

A self-invested personal pension (SIPP) is basically a PPP with wider investment opportunities. The
contribution limits, tax rules and retirement options are the same as we have already covered. There are
broadly three types of SIPP available in the market, with different emphasis on these wider investment
opportunities:
• Full SIPP – these offer the widest range of investment opportunities deemed allowable under
the HMRC Registered Pension Scheme Manual (RPSM), including direct investment in commercial
property and individual listed securities, in the UK and overseas. Residential property is a prohibited
asset along with other investments such as investments in stamps, jewellery, cars, art or fine wine.
• Hybrid SIPP – these are insurance company products, typically offering a choice of the provider’s
insured funds and non-insured investments, with many providers stipulating a minimum investment
to the insured element.
• Deferred SIPP – this is a personal pension written under a SIPP trust. It therefore offers the
opportunity to use SIPP investments on request.
A further difference between SIPPs and PPPs is the charging structure. As already mentioned, most
PPPs are now stakeholder-friendly, operating with a charging structure similar to that specified for
stakeholder pensions. SIPP providers generally have far higher charges, justifying them by the extra
administration required to invest in non-insured funds. This is understandable when the investment mix
is genuinely diverse, as evidenced in full SIPPs. However, many hybrid SIPPs have investments wholly or
largely in insured funds, making them look very similar to PPPs, and it is questionable whether they are
SIPPs at all. Deferred SIPPs generally only make extra charges above the standard PPP rates, if and when
the plan is switched to SIPP mode.
As mentioned, SIPPs are able to invest in commercial property, and another feature that facilitates this
is that they are able to borrow funds. In fact, a SIPP can borrow 50% of the net scheme assets. So a SIPP
with net assets of £200,000 can borrow a further £100,000 potentially to buy a commercial property and
make it an asset of the SIPP. This property is frequently the one out of which the business trades, and so
future rental payments are paid to the SIPP. The SIPP itself will have to pay a commercial rate of interest
on the borrowing.
SIPPs can also be used to help finance an individual’s business, by using SIPP assets to purchase private
company shares.
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Group SIPPs
Group SIPPs are set up specifically to provide SIPPs for a group of people who wish to amalgamate their
pension assets into a single fund for investment purposes. This is often a group of partners or directors
in a business using their combined pension assets to buy business premises; however, it can be used for
other investments too. Each person has their own pension account within the product, but all the assets
are combined into one single fund. It is a niche product which can provide significant benefits for the
right clients.
Small Self-Administered Schemes (SSASs)

Just as SIPPs are a derivation of PPPs, small self-administered schemes (SSASs) originally started as
a derivation of Executive Pension Plans (EPPs); however, SSASs are not regulated by the FCA. These
were popular with company directors of small and medium-sized businesses. SSASs were marketed at
the same type of companies, but with the added extras of the self-investment options and borrowing
facility.
The small nature of SSASs is defined as having a maximum of 11 members. All members have to be
trustees with an equal say in the running of the SSAS and so, in reality, most SSASs have a maximum of
three to four people. They are generally found in family-run businesses that may offer a separate type of
pension plan for the employees, thereby retaining the SSAS element for the directors.
Just as with SIPPs, SSASs are able to borrow up to 50% of the net scheme assets. Often this may be used
for the same purpose of bringing a company’s commercial property under the ownership of a pension
scheme, with the tax benefits (ie, no capital gains tax (CGT)) that the pension scheme attracts.
Unlike SIPPs, SSASs are also able to lend money from the scheme to the sponsoring employer and not
face unattractive tax penalties. There are certain conditions which these loans must meet:
• Not more than 50% of the scheme assets can be lent.

• The SSAS must charge interest at a minimum rate of 1% over the average base rate.
• The maximum term of the loan is five years, which may be rolled over once.
If any conditions are not met, the loan will be an unauthorised payment, which could, ultimately, result
in the SSAS being deregistered.
SSASs can invest in the sponsoring employer, although the extent of this investment has been limited
since ‘A-day’. Now, an SSAS can only invest up to 5% of scheme assets in any one sponsoring employer,
and under 20% of scheme assets where the shareholdings relate to more than one sponsoring employer.
Uses of Self-Invested Options

Sophisticated investors who use the self-invested options to invest in diverse and risk-appropriate
assets can benefit greatly from self-investment. The possibility of getting the business premises that
they operate out of under pension funding rules, is certainly attractive, and makes sense for many. Also,
if an individual has a portfolio of shares and bonds, a SIPP provides a good tax-efficient wrapper for
them.
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However, there are dangers in self-investment. It is a high-risk approach, for example, for an individual
to invest heavily in the shares of their own company, as they are then relying on that company for
income in retirement as well as their working life. It should also be remembered that unlisted shares are
particularly illiquid.
2
Sometimes, particularly since ‘A-day’, there appears to be a certain snob value attached to SIPPs. This
has led to many individuals officially owning a SIPP, but for the SIPP not to contain many (or any)
investments that couldn’t be found in a PPP. Certainly, the FCA is keeping a keen eye on the burgeoning
SIPP market (mainly funded by transfers from PPPs), and has issued guidance to advisers. This focuses
on costs and cost comparisons, and on the need of advisory firms to be able to demonstrate that a
particular consumer genuinely requires investment flexibility and control.
NEST and Auto-Enrolment

The National Employers Savings Trust (NEST) was formed to provide easy access to auto-enrolment and
is covered in Section 9 of this chapter.
4.1.4 Taxation of Lump Sums Distributed on Death – Defined

Contribution Schemes
Any individual can inherit unused drawdown funds or uncrystallised money purchase funds on the
death of the member, where those funds are used to provide a drawdown pension or pay a lump sum
death benefit.
For someone who is not a dependant, there will be a nominee’s flexi-access drawdown (FAD) fund.
In addition, any beneficiary (that is, a dependant or a nominee) with unused drawdown funds on
their death can pass those funds to a successor to be designated to provide a drawdown pension
for that individual (a successor’s FAD fund) or to be paid as a lump sum death benefit. Any number of
beneficiaries may be nominated.
The age at death will determine how the pension death benefits are treated.
Death before 75
A member will be able to nominate any individual (nominee) and payments to that individual will be
made free of tax, whether it is taken as a lump sum or accessed through drawdown, providing the funds
are designated within a two-year period.
Pension benefits must be designated to an income-producing contract, or paid out as a lump sum death
benefit within two years of the scheme member’s death. Otherwise, funds designated to provide a lump
sum will be subject to a death benefit charge based on the respective beneficiary’s marginal income tax
rate.
The pension fund can be taken tax-free, at any time, whether in instalments, or as a one-off lump sum.
This will apply to both crystallised and uncrystallised funds.
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This will not apply to dependant’s annuities and scheme pensions (ie, where the pension is paid directly
out of the scheme assets or paid by an insurance company selected by the scheme administrator).
These will continue to be taxed at the beneficiary’s marginal income tax rate.
Death after 75
DC pension savers will be able to nominate who ‘inherits’ their remaining pension fund. This fund can
then be taken under the pension flexibility regime and will be taxed at the beneficiary’s marginal rate
as they draw income from it. Alternatively, they will be able to take the fund as a lump sum less a tax
charge based on the respective beneficiary’s marginal income tax rate from 6 April 2016.
Taking pension benefits under the age of 55 is possible if an individual is in ill health. The Finance Act
2004 sets out the definition of ill health which a scheme must consider when a member requests their
benefits on the grounds of ill health.
If the member’s life expectancy is less than one year then it is possible for them to commute all their
uncrystallised pensions for a serious ill health lump sum. For this to happen the member must be under
the age of 75, they must have some LTA remaining and each arrangement must be commuted in full
(however not all arrangements have to be commuted).
The lump sum is a benefit crystallisation event (BCE) and is subject to the LTA but no income tax is
due on it.
If the member is 75 or over then the lump sum is subject to 45% tax.
To ensure the payment to the member is not an unauthorised payment the scheme administrator must
obtain from a medical practitioner written confirmation stating that the member has a life expectancy
of less than 12 months.
Leaving Benefits
Until 1 October 2015 a refund of the members’ contributions from occupational DC schemes was only
available to those who are a member of the scheme for less than two years. The refund of a member’s
contributions will be taxed at 20% on the first £20,000 and 50% on the remainder.
Since 1 October 2015 occupational DC schemes must also offer a short service refund where:
• leavers have at least 30 days’ qualifying service

• all the members benefits are non-salary-related.
Where the member’s pensionable service begins before this date the previous requirements for
preservation of benefit continue to apply. Where any of the member’s benefits are salary-related, the
two-year rule above still applies.
Preserved Benefits
In a DC scheme the value of the fund including all employer and employee contributions is simply the
preserved benefit. The member can leave the pension until they wish to access it or they can transfer
the pension to an alternative arrangement. If the member is close to retirement a large factor that may
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influence the decision to transfer or not is the range of income options the scheme offers. For example,
not all schemes will offer FAD and, if this is how the member wants to access their pension, then they
will need to transfer their scheme to a more flexible arrangement that offers FAD.
2
Triviality and Pension Small Pots Payments
A small pot payment can be taken from any arrangement, irrespective of the overall value of the
individual’s pension’s worth. Up to three small non-occupational pensions (such as PPPs) can be
commuted under small pots payments, but there is no limit on the number of occupational pensions
that can be taken under small pots. The following conditions need to be fulfilled to allow the payment
of small pot commutation:
• The member has reached the minimum retirement age of 55 (reduced from age 60 on April 2015).
• Each payment does not exceed £10,000 at the time it is paid to the client.
• The payment extinguishes all member benefit entitlement under the arrangement.
• It should be noted that small pots apply at arrangement level rather than at scheme level. So, the
payments can be made from two/three separate registered pension schemes or from the same
scheme where the payments are made from two/three different arrangements under that scheme.
• With regard to non-occupational pensions (such as personal pensions) only, that the maximum of
three small pot payments is not exceeded.
Please note: small pots do not trigger the MPAA.
The first 25% of the lump sum will be tax-free, with the balance being taxed as pension income.
Commutation of all DB Pension Benefits

Historically, triviality commutation was also relevant to DB and DC schemes, but the introduction of
pensions flexibility for DC schemes, post April 2015, removed the requirement for this option as all
DC benefits can now be accessed as lump sum (regardless of the amount). Post April 2015, triviality
commutation of all pension benefits is only relevant in respect of DB pension schemes.
Under triviality, a defined benefit pension member may commute one or more pension arrangements
as long as they comply with the following conditions:
• The member has reached the minimum retirement age of 55 (was reduced from age 60 on April
2015).
• All the benefits from the pension(s) selected are extinguished by the commutation.
• All commutations must take place within a 12-month period from the date of the first trivial
commutation payment.
• The value of all members’ rights should not exceed £30,000 on the nominated date (the nominated
date can be any date within three months of the start of the commutation period).
The first 25% of the lump sum will be tax-free, with the balance being taxed as pension income.
Although the payment of a triviality commutation is not a crystallisation event, the member must have
LTA available at the point of crystallisation.
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5. State Pension Schemes
Learning Objective
2.5.1 Be able to analyse the structure, relevance and application of the state schemes in relation to
an individual’s pension planning: basic state retirement benefits; additional state retirement
benefits – historic and current; reform of state provision; system of means-tested benefits,
Pension Credit, contributory benefits leading to Basic State Pension; single-tier system of
means-tested benefits and a contributory benefit single-tier pension
5.1 Pre-6 April 2016 SPs

See Section 2.2.1 of this chapter for more information on the BSP. Some of the key points applying to the
BSP are listed below:
• All individuals aged between 16 and 65 (currently) are eligible to build up benefits.
• The SPA is currently 65 for men, and between 60 and 65 for women born after 5 April 1950 and
before 6 December 1953. The retirement ages for both men and women will increase to:
66 between November 2018 and October 2020
67 between 2026 and 2028
68 between 2044 and 2046.
• Individuals affected by an increase in their SPA may have a bespoke SPA.
Exercise 3
Zara and John are twins who were born on 1 October 1952. Assuming they have both worked for the last
40 years which of the following statements is correct?
A. They will be entitled to their SP at the same time

B. Zara will be entitled to her SP first
C. John will be entitled to his SP first
D. Zara’s SPA will be 60 while John’s SPA will be 65
With the changes to the state pension ages, the easiest way to calculate a client’s actual state pension
age is to go to: https://www.gov.uk/state-pension-age
How much an individual gets depends on how many years of NICs they have made over their working
lifetime. To qualify for the full amount they need to have made 30 years’ contributions – either by
working, being credited while caring for a family, or voluntarily paying to make up missed years.
To pay NICs, individuals must earn over the primary threshold (£157 pw for 2017–18). Individuals are
credited with NICs if they earn over £113.00, but less than £157.00 per week.
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The most common examples of NIC credit are:
• receiving certain state benefits, such as statutory sick pay, statutory maternity pay, Jobseeker’s
Allowance (JSA)
2
• being in full-time education between 16 and 18 (note, university years are not credited)
• unemployed men who have turned 60 (without the need to sign on to receive JSA).
Individuals may now be credited with having paid NICs, if they are:
• incapable of work because of illness or disability

• receiving Carer’s Allowance
• getting working tax credit
• doing jury service
• serving a prison sentence for a conviction, which was subsequently quashed
• parents looking after children up to the age of 12, and carers who provide at least 20 hours of care
per week.
The SP is linked to whichever of the following is the highest, the ‘triple lock’:
• earnings – the average percentage increase in UK wages during that year

• prices – the percentage the cost of living increases by that year (consumer price index (CPI))
• 2.5% – fixed-rate increase.
The single person’s maximum SP in 2017–18 is set at £159.55 pw.
Exercise 4
If earnings have increased by 2% and inflation is 0.5% then the SP will increase by how much?
5.1.1 State Graduated Pension Scheme

This is a relatively little-known scheme that ran from 1961 to 1975. It was the government’s first attempt
to compensate employees for the additional NICs paid in comparison to the self-employed, by providing
them with an ASP. It was replaced by the SERPS.
If the member reaches SPA after 5 April 2013, for every £7.50 of graduated contributions paid, the
member will receive £0.1279.
Many occupational pension schemes contracted out of the graduated pension scheme and provided
their members with an equivalent pension benefit.
5.2 State Earnings Related Pension Scheme (SERPS)

The graduated pension scheme was stopped in readiness for a new employee-only SP scheme
introduced in 1978: SERPS. This was to run until 2002.
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Employees who were eligible for SERPS were those who earned over the lower earnings limit (LEL). The
benefit itself was then calculated on an individual’s earnings between the lower earnings limit and the
higher earnings limit (HEL), sometimes referred to as ‘middle band earnings’.
The original SERPS benefit was set at 25% of revalued middle band earnings, with an individual’s best
20 years of earnings counting. It was soon clear that this was too generous, and so, in 1988, it was
announced that those eligible employees retiring after April 2000 would have their SERPS benefits
reduced to 20% of revalued middle band earnings, with lifetime average middle band earnings counted.
The percentage benefit has been reducing on a sliding scale from the 25% figure before April 2000, to
20% for those retiring after April 2000.
5.3 State Second Pension (S2P)

State Second Pension (S2P) replaced SERPS in 2002, and extended the eligibility a little. Employees
who earn over the LEL are still eligible, but they are joined by carers (who meet certain requirements),
and disabled individuals entitled to state benefits as a result of their disability.
S2P is earnings-related (similar to SERPS). To ensure that the principal aim of government was met,
that is that low and non-earners received a greater benefit from S2P, there were originally three bands
of accrual. To accommodate three bands a low earnings threshold (LET) and a secondary earnings
threshold (SET) were introduced in addition to the LEL and upper earnings threshold (UEL) that were
used for SERPS. Since 6 April 2010 there have been two bands.
• Band 1 – LEL to the LET.

• Band 2 – LET to upper accrual point (UAP).
From 6 April 2012, it is no longer possible to contract out of S2P using a money purchase or appropriate
personal pension/stakeholder plan, meaning it is currently only possible to contract out of S2P using a
final salary scheme.
The aim of S2P is very much to help the lower-paid, certainly in comparison with the SERPS benefit. The
key to this was the introduction of a LET, a notional figure of earnings used for those earning above the
LEL but below the LET.
To achieve this there were originally three bands of accrual.
5.3.1 Before 6 April 2010

The three bands of accrual were:

• Band 2 – LET to the SET.
• Band 3 – SET to the UEL.
• Band 1 – benefit accrues at a rate of 40% (twice what SERPS provided). As previously mentioned
those earning less than the LET are treated as though they had earned the LET.
• Band 2 – the accrual rate is 10% for earnings within this band (half what SERPS provided).
• Band 3 – benefit in this band accrues at 20% (the same as SERPS).
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Note – the LET was announced each year by the government in the same way that the LEL and UEL are.
The SET is calculated separately using these figures and is the sum of (three times the LET) less (two
times the LEL rounded to the nearest £100 rounding down any exact sum of £50).
2
Individuals reaching SPA before 6 April 2009 had enhanced accrual (as previously mentioned) under
SERPS. These transitional arrangements were extended to S2P by increasing the accrual rate in each
band. For individuals with an SPA before 6 April 2009 an additional 1%, 0.25% and 0.5% of earnings was
added to each band respectively. This meant if the individual’s SPA was before 6 April 2009 they would
not have received less under S2P than they would have done under SERPS.
5.3.2 From 6 April 2010 to 5 April 2012

From 6 April 2009 employers and employees with occupational pension schemes contracted out of S2P
received contracted-out rebates on earnings between the LEL and the UAP. Employers and employees
paid NICs at 13.8% and 12% respectively on earnings between the UAP and UEL.
The number of bands reduced from three to two from 6 April 2010:

• Band 2 – LET to UAP.
• Band 1 – benefit accrues at a rate of 40%. As previously mentioned, those earning less than the LET
are treated as though they had earned the LET.
• Band 2 – the accrual rate is 10% for earnings within this band.
5.3.3 From 6 April 2012

From this date the accrual under Band 1 became a flat rate. The level of pension is announced annually
in the Social Security Pensions (Flat Rate Accrual Amount) Order and is £93.60 pa for 2015–16.
The two bands from 6 April 2012 are:
• Band 1 – flat rate.

• Band 2 – earnings between the LET (£15,300) and the UAP (£40,040).
• Band 1 – benefit is a flat rate of £93.60 pa. As previously mentioned those earning less than the LET
are treated as though they had earned the LET.
• Band 2 – earnings between the LET (£15,300) and the UAP (£40,040). The accrual rate is 10% for
earnings within this band.
5.3.4 S2P – the Benefit Calculation

The calculation for the S2P is based on a three-step process.
• Earnings for each tax year from 2002–03 onwards are split across the bands and revalued from the
tax year in question up to the tax year before the individual reaches SPA (earnings in the tax year
before SPA are not revalued).
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• The revalued earnings at SPA in each band are then multiplied by the accrual rate applicable to that
band.
• These revalued earnings are divided by the total number of years in the individual‘s working life
since 1978 to give the S2P benefit. Working life is defined as being from age 16 to SPA.
5.4 State Pension Credit

SP Credit is made up of two elements: Guarantee Credit and Savings Credit. They work in combination
to give each individual in the UK a guaranteed minimum level of weekly income with, possibly, a little
extra based on previous savings.
5.4.1 Guarantee Credit

Guarantee Credit tops up your weekly income to £159.35 for single people and £243.25 for couples (the
minimum income guarantee for 2017–18). To qualify for it, individuals must:
• live in the UK
• have reached Pension Credit qualifying age (the same as SPA) if a woman
• have reached the SPA of a woman born on the same day as them if a man
• have weekly income below £159.35 if they are single and £243.25 if a couple
• if they are a carer, have severe disabilities or certain housing costs, they might qualify for more
Guarantee Credit.
When applying for Guarantee Credit, the government looks at the income. This includes both their basic
and ASPs, any income from other pensions, income from any jobs and any savings over £10,000.
Some benefits, such as housing benefit, council tax reduction and Attendance Allowance, aren’t
included, nor are personal possessions or homes.
5.4.2 Savings Credit

‘To qualify for the extra savings credit, a person or their partner must have reached state pension age
before the 6 April 2016. The government will give people a little extra money to reward them for saving
towards their retirement. This comes in the form of ‘Savings Credit’.
There’s a few criteria you need to meet before you qualify for Savings Credit.
• you have a minimum income of £137.35 a week if you’re single, and £218.42 a week if you’re in a
couple in 2017–18
• you or your partner must be 65 or over
• you must be living in the UK
• you must have made some provisions for your retirement, like savings or a second pension.
The way it’s calculated works like this: for every £1 by which your income exceeds the Savings Credit
threshold (£137.35 for a single person in 2017–18 and £218.42 for a couple), you get 60p of savings credit.
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• So, say you have an income of £122.30 a week from the basic state pension, and an income of £32.05
a week from a private pension, your total weekly income would be £154.35.
• Your weekly income is £17 over the Savings Credit threshold. This means you would qualify for £10.20
a week of Savings Credit.
2
The maximum savings credit you can get per week is £13.07 for a single person and £14.75 for couples.
If your income is less than or equal to the savings credit threshold, you won’t qualify for this benefit.’
Source: http://www.which.co.uk/money/pensions-and-retirement/state-pension/guides/your-state-
pension-and-benefits/pension-credit
The Savings Credit element of Pension Credit closed for individuals reaching SPA on or after 6 April
2016. See Section 5.4.6.
5.4.3 State Pension Forecast

Anyone wanting an idea of their overall SP entitlement can go online and, providing they have signed
up for the Government Gateway Service, can access thepensionservice.gov.uk/state-pension/forecast.
Alternatively, they can write to the Future Pension Centre in Newcastle and ask for a forecast application
form (BR19). The individual can ask for the completed form to be sent to their nominated financial
adviser if they choose.
5.4.4 Post 6 April 2016 SP Reforms

The new rules that apply from 6 April 2016 are listed below:
• Individuals will need ten qualifying years (through contributions or credits) to receive any SP.
• The full-rate of the single-tier pension will be no less than £159.55 per week (2017–18).
• To obtain a full rate single-tier pension, individuals will need 35 qualifying years (through
contributions or credits).
• A higher pension may be payable if the individual has any entitlement to ASP (ie, graduated pension,
SERPS or S2P accrued prior to 6 April 2016).
• Class 1, 2 and 3 NICs will all accrue single-tier pension at the same rate.
Individuals who had not reached their SPA on 6 April 2016 will have had a starting amount – known as
a foundation amount – calculated. The foundation amount was calculated as at 5 April 2016 and will be
the higher of either:
• the amount they would get under the pre-6 April 2016 SP rules (which includes BSP and ASP), or
• the amount they would get if the single-tier pension had been in place at the start of their working
life.
Where an individual’s foundation amount is lower than the full amount of single-tier pension, they may
be able to increase their state retirement income by adding more qualifying years to their NIC record
between 6 April 2016 and their SPA.
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Where an individual’s foundation amount is higher than the full amount of the single-tier pension, the
difference between their starting amount and the single-tier pension is called their protected payment:
• When the individual reaches SPA, their protected payment will be paid on top of the single-tier
pension.
• The protected payment increases each year in line with increases in the CPI.
• In this instance any qualifying years achieved after 5 April 2016 will not add anything more to the
individual’s SP.
At the date of writing, the single-tier pension increased in payment in line with the triple-lock guarantee
introduced in 2010.
Under pre-6 April 2016 rules, an individual’s ASP is revalued up to SPA in line with average earnings and
is then increased in line with the CPI.
Exercise 5
Ria is aged 60 as at 5 April 2016. She has 30 years on her NIC record and has built up entitlement to an
ASP of £50 per week. Based on the 2015–16 rates Ria’s weekly protected payment will be:
A. £9.70
B. £13.65
C. £26.60
D. £155.65
5.4.5 Voluntary NICs

The government is now issuing new SP benefit statements. It is useful for those who need to understand
whether paying Class 3 would benefit them; it is also useful for those who have been contracted out to
understand how much ‘adjustment’ may be made in respect of this.
Class 3A NICs should not be confused with Class 3 NICs. While both are paid on a voluntary basis, they
purchase different types of SP:
• Class 3 NICs allow an individual to increase their number of qualifying years, thereby allowing them
to achieve a higher level of BSP.
• Class 3A NICs were only available between October 2015 and 5 April 2017. They allowed an individual
to purchase a higher level of ASP (ie, the SP paid in respect of graduated pension, SERPS and S2P).
• The new rules from 6 April 2016 do not permit individuals to claim SP benefits based on a spouse’s
or civil partner’s NIC record.
• Any qualifying years gained after the introduction of the single-tier pension will not add further
pension on top of this safeguard amount. Any inherited amount would be paid in addition to the
safeguard amount.
If you would like to read more about voluntary NICs, information is available on the gov.uk website:
https://www.gov.uk/voluntary-national-insurance-contributions/who-can-pay-voluntary-contributions
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5.4.6 Changes Relating to Other State Benefits

Savings Credit
The full rate of the single-tier pension will be slightly in excess of the maximum income provided under
2
means testing. A result of this is the ending of the Savings Credit element of the Pension Credit.
The Savings Credit element of Pension Credit closed for individuals reaching SPA on or after 6 April 2016.
In setting restrictions, protection will be given to these couples who have already been awarded Savings
Credit for the period immediately before and continuing beyond 6 April 2016.
The conditions that will need to be satisfied for a couple in this position to be entitled to Savings Credit
from 6 April 2016 are that one member must:
• have reached the age of 65

• have reached SPA before 6 April 2016
• be entitled to Savings Credit immediately before 6 April 2016
• be entitled to Savings Credit at all times following 6 April 2016.
5.4.7 Changes to SP Death Benefits from 6 April 2016

The Government consolidated payments designed to provide assistance following bereavement into
a new benefit, known as the Bereavement Support Payment. This may be payable if a spouse or civil
partner dies on or after 6 April 2017.
To be eligible, the spouse or civil partner who has died must have paid NICs for at least 25 weeks or died
because of an accident at work or a disease caused by work. The person must be under SPA and living in
the UK or another country that pays bereavement payments.
The amount that the surviving spouse will receive depends on their circumstances. For those with
children under 20 in full-time education, the surviving spouse will receive a first payment of £3,500
followed by payments of £350 per month for 18 months. If the surviving spouse or civil partner does
not have children under 20 years old in full-time education these amounts are reduced to £2,500 and 18
monthly payments of £100. The payment must be claimed within three months of the death although it
will be payable if claims are made up to 21 months but the payments will be reduced.
Remarriage/re-partnering before the end of the 18-month payment period will not mean that any
remaining instalments of Bereavement Payment are lost.
Bereavement Payment, Bereavement Allowance and Widowed Parent’s Allowance still apply if a spouse
or civil partner died before 6 April 2017.
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6. HMRC Tax Regime
6.1 Pension Scheme Taxation
Learning Objective
2.2.1 Understand how registered pension schemes, funds, contributions and benefits are taxed:
taxation of pension schemes and members; taxation benefits of pension schemes; annual
allowance, Lifetime Allowance, special annual allowance and associated charges and relevant
transitional reliefs post-Finance Act 2006; funding/contributions to registered pension schemes
and tax relief provision
6.1.1 Pension Simplification – A-Day

The 6 April 2006 was a momentous date in the history of pension regulation in the UK. Better known as
A-Day it marked the date when the many disparate rules that governed pensions were consolidated
under one regime. Effectively there were eight different pension regimes operating at the time of A-day.
The idea was to start afresh from 6 April 2006. The new rules apply to registered pension schemes. All
old schemes which had previously been approved before A-day were included automatically.
Any amount can be contributed to a pension scheme, but a limit, known as the annual allowance, is now
placed on the total amount of benefit that can build up from tax-relieved contributions into registered
pension schemes each tax year without incurring a tax charge. Any pension input above this will be
subject to a tax charge on the excess payable by the member at their highest marginal rates.
Further updates were made, and for the tax year 2017–18 the annual allowance is £40,000. This applies
to pension savings into a registered pension scheme or overseas pension scheme if either the
individual and/or their employer qualifies for UK tax relief on those pension savings. If the individual
saves more than this amount, they may have to pay a tax charge on the excess. The objective of the
annual allowance charge is to remove the tax relief given to any pension contributions over the annual
allowance.
In simple terms, the tax relief given is based on the tax that would have been paid if the pension
contribution had been taken as income. This means that the charge could be at 45%, 40% or 20% or a
combination of all if the pension contributions fell over these tax thresholds.
If an individual has a pension input amount of more than the annual allowance in a tax year, they
may still not be liable for an annual allowance charge for that year. They can carry forward any annual
allowance that they have not used in the previous three tax years to the current tax year. This amount of
unused annual allowance can then be added to the current year’s annual allowance. This will give them
a higher amount of available annual allowance to offset against that year’s pension input amount.
The three-year carry-forward rule allows an individual to make occasional large amounts of pension
savings without having to pay the annual allowance charge. For example, if the individual is self-
employed and in one year makes a large profit, they could make pension contributions that are larger
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than normal and are also above the annual allowance level. This will depend, of course, on the amount
of contributions that they have been paying in pension input periods that end in the previous three
tax years, and on the amount of unused annual allowance that they have available to carry forward.
2
There is actually no legislative limit on the amount of contributions that can be paid into a registered
pension scheme, either by the member or their employer. Rather, there is a limit on the amount of
contributions paid by an individual that qualify for tax relief. This limit is the amount of the individual’s
relevant earnings (or £3,600 – whichever is the higher). The amount of contribution from an employer
that could qualify for tax relief is potentially unlimited.
The table below shows the annual allowance from A-day to the current year and, as you can see,
governments have reduced this allowance to restrict the amount that can be contributed to a pension:
Year Annual Allowance

2006–07 £215,000
2007–08 £225,000
2008–09 £235,000
2009–10 £245,000
2010–11 £255,000
2011–12 £50,000
2012–13 £50,000
2013–14 £50,000
2014–15 to 2017–18 £40,000
Critics argue that the revision of the earnings limit of tax relief amounts to a disincentive to save for
retirement while others argue that an annual limit of £255,000 was overly generous, benefits only the
very highest earners and that contributions up to this amount are rarely paid. This is partly because
the sum is a substantial one to invest, but also because of a limit on the tax relief an individual will
receive. This will only be received on contributions up to 100% of an individual’s earnings (or the annual
allowance if lower).
Exercise 6
Kirstie earns £105,000 in 2017–18. What is the maximum she can contribute to a registered pension
scheme, and not be subject to a tax charge?
If an individual earns an annual amount in excess of the annual allowance, they can make a contribution
up to their earnings amount and receive full tax relief. However, and it’s a big however, they will also
be subject to an annual allowance charge, which is 40% of the excess contribution over the annual
allowance. For this reason, many providers will not accept contributions in excess of the annual
allowance.
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An important change was announced by the Summer Budget 2015 to restrict tax relief on pension
contributions for those with total income over £150,000.
From 6 April 2016, those with total earnings over £150,000 (known as adjusted income) have their
annual allowance tapered. For every £2 of adjusted income over £150,000, an individual’s annual
allowance will be reduced by £1, down to a minimum of £10,000.
This results in an annual allowance of £40,000 for those with an adjusted income of less than £150,000,
a reducing annual allowance for those with adjusted incomes between £150,000 and £210,000, and an
annual allowance of £10,000 for those with an adjusted income over £210,000.
This was because of the need to improve government tax receipts and because of the high proportion
of tax relief on pension contributions going to the higher earners.
To ensure that the addition of pension savings doesn’t affect lower-paid individuals, there is another
definition of income – threshold income.
Threshold income will normally be the individual’s net income for the year, less the amount of certain
lump sum death benefits paid to the individual during that tax year and less gross pension contributions
paid under the relief at source system.
Those with a threshold income that doesn’t exceed £150,000 less the normal annual allowance for the
tax year won’t be subject to the reduction regardless of the level of their adjusted income. As the annual
allowance for 2017–18 will be £40,000, the individual would need to have threshold income above
£110,000 to be affected in 2017–18.
6.1.2 Valuing Different Pension Plans against the Annual Allowance

We have already established that the current annual allowance is £40,000 for 2017–18, for all registered
pension schemes (the MPAA) will be covered later in Section 10). When dealing with a money purchase
arrangement, it is very straightforward to see how much of this allowance has been used up. With DB
schemes it is not so obvious, as there is no DC as such.
To be able to include contributions to DB schemes in the whole picture, we need to look at the increase
in an individual’s pension entitlement over the course of the year, and then apply a factor of 16 to the
increase. As can be seen from the example simple increases can be valued at more than the annual
allowance, thus the need to be able to carry forward unused reliefs.
Example
Julian works for AUK ltd, which operates a 1/60th DB scheme. At the start of the year, Julian has had 25
years’ service and earned £30,000. At the end of the year he has, of course, increased his service to 26
years and his earnings have increased to £39,000. The calculation to see what contribution is set against
the annual allowance is as follows:
Revised pension entitlement: 26/60 x £39,000 = £16,900
Previous pension entitlement: 25/60 x £30,000 = £12,500
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This is increased by the CPI (let’s assume 3% for this example): £12,500 x 1.03 = £12,875
Increase in pension entitlement: £16,900 – £12,875 = £4,025
Deemed pension contribution: £4,025 x 16* = £64,400
2
*A factor of 16:1 is used to calculate pension input amounts for DB schemes.
6.1.3 Lifetime Allowance (LTA)

There is no limit on the total amount of benefits a pension scheme can provide. However, if a scheme
provides benefits that amount to more value than the LTA, then excess over and above their allowance
is subject to a tax charge. From the 6 April 2016, the LTA is £1 million. Where this is exceeded, the LTA
charge will be applied. The government has announced that this may increase in line with the CPI from
the 6 April 2018.
This will only be tested following a BCE. Simplistically, a BCE occurs when an individual:
• takes a pension or a lump sum

• reaches age 75
• dies
• transfers to a qualifying recognised overseas pension scheme (QROP).
It is quite conceivable for one individual to have several BCEs throughout their lifetime.
The tax charge applicable following a BCE where the LTA is exceeded depends on the way the excess
benefits are taken:
• If they are all taken as income, the excess is taxed at 25%.

• If they are all taken as a lump sum, the excess is taxed at 55%.
Although this suggests income is the better option, it should be considered that the income (after the
charge is taken) is likely to be taxed at 40% or 45%. The net result is therefore about the same.
Valuing Different Pension Plans against the LTA

A similar issue of valuing pension funds to those we looked at above applies when dealing with
DB schemes and the LTA. To value how much of the allowance has been used for money purchase
arrangements you just need to obtain a fund valuation. For DB schemes, there is no fund as such and
therefore there are two more factors we need to be aware of to calculate a deemed fund:
• If the pension is not yet in payment, it is the accrued pension amount x 20.
• If the pension was in payment before A-day (2006), it is the pension amount x 25. (The difference is
to allow for the fact that a cash lump sum may have been taken.)
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Example
Returning to the situation of Julian, a member of the AUK ltd pension scheme, he is in a 1/60th scheme,
earning £39,000 pa with 26 years’ service. His deemed ‘fund’ to set against the LTA will be:
26/60 x £39,000 = £16,900
£16,900 x 20 = £338,000
Example
Jane is 63 years old. She retired from her job as a company director in 2005, and enjoys a pension of
£50,000 pa from this employment. She started to do some consultancy work a couple of years ago, and
is considering starting a new pension plan based on the earnings she receives. She would like to know
what scope she has for pension planning within her LTA.
£50,000 x 25 = £1,250,000 (ignore the lump sum as the pension was in payment before A-day).
Based on the current LTA of £1 million, she has no scope.
6.1.4 Transitional Protection

It was possible for an individual to fund close to, or even exceed, the LTA when it was introduced in April
2006; since then the value of the LTA has increased and decreased over time. The post A-day limits were
therefore perceived as unfair to those who had always stayed within the old limits under the previous
regime(s), but were subsequently exceeding the new limits. As a result, higher allowances were and are
available through various protections and enhancements:
• primary protection
• enhanced protection
• fixed protection
• fixed protection (2014)
• individual protection (2014)
• fixed protection (2016)
• individual protection (2016)
• pension credits and debits on divorce
• non-UK residents or international transfers.
Everyone had three years from A-day (ie, until 5 April 2009) in which to register for primary and
enhanced protection. Let’s examine the two in more detail.
• Primary protection is only available if the individual’s pension rights were valued at more than £1.5
million on 5 April 2006. A ‘Primary Protection Factor’ is then calculated using the following formula:
Total value of benefits at 5 April 2006 – £1.5m

£1.5m
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The result is rounded to two decimal places and can then be added to ‘1’ to be applied to any
existing LTA amount. This will increase the LTA for that particular individual.
Example
2
Karen had combined pension funds totalling £1.8 million in 2006. Her Primary Protection Additional
Factor is calculated as follows:
£1.8m – £1.5m
£1.5m
The additional factor is 0.2. To maintain the value of her primary protection at 2011–12 levels, the
additional factor is applied to the current standard LTA figure or rather in this case, £1.8 million where
this is greater than the current standard LTA at the time of the BCE. So, Karen’s LTA will be £1.8 million
plus 0.2 x £1.8 million (£316,000). So, although the current LTA is £1 million, Karen’s LTA will be £2.16
million.
Although primary protection increases the LTA, it does not guarantee that the total pension
planning an individual made is protected (ie, a fund might grow beyond the underpinned LTA of
£1.8 million).
• Enhanced protection, as its name suggests, does provide full protection for the value of the
whole of an individual’s pension rights. There are a couple of key points to clarify about enhanced
protection:
The combined value of pension funds at 5 April 2006 did not necessarily have to have been
an amount in excess of £1.5 million. An individual could safeguard all future growth, by using
enhanced protection.
However, in return for this additional protection, no further relevant benefit accrual can be
made to registered pension schemes. ‘Benefit accrual’ basically means further contributions to
DC schemes or increases in DB schemes greater than 5% or retail price index (RPI).
• Fixed protection relates to the reduction of LTA from £1.8 million. This could be retained at £1.8
million if the individual applied before 6 April 2014 and requires that no further benefit accruals are
made in future. An individual can’t have fixed protection if they have either primary or enhanced
protection.
• Fixed protection 2014 (FP14) relates to the reduction of LTA from £1.5 million. This could be
retained at £1.5 million if the individual applied before 6 April 2012 and requires that no further
benefit accruals are made in future. An individual can’t have fixed protection 2014 if they already
have primary, enhanced or fixed protection.
• Individual protection 2014 (IP14) allows individuals to retain an LTA based on the value of their
pension savings at 5 April 2014 up to a maximum of £1.5 million, subject to the total value of all
pensions at 5 April 2014 being at least £1.25 million. Future contributions and accruals are allowed.
IP14 must have been applied for before 5 April 2017.
• Fixed protection 2016 relates to the reduction of LTA to £1 million on 6 April 2016. The allowance
could be retained at £1.25 million, but no further benefit accruals can be made in the future except
in limited circumstances.
• Individual protection 2016 relates to the reduction in LTA to £1 million from April 2016. An
individual’s personal LTA can be fixed to the value of the fund at 5 April 2016 or £1.25 million,
whichever is lower. It does not require benefit accruals to cease, but any value above the protected
LTA will be subject to the LTA charge.
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Applications for 2016 protection started in July 2016. Applications for individual protection 2014 closed
on the 5 April 2017.
6.1.5 Tax Relief on Contributions

For an individual to be eligible for tax relief on their pension contributions they must be under 75 and:
• have relevant UK earnings (ie, earned income), and

• be resident in the UK during the tax year, or
• have been resident in the UK at some time in the last five tax years and paid contributions into an
approved/registered pension scheme, or
• be an individual (or spouse or civil partner of that individual) with earnings from overseas Crown
employment that is subject to UK tax.
Contributions from both individuals and employers qualify for tax relief.
The maximum amount which a member of a scheme can have relieved is potentially the greater of:
• the ‘basic amount’, currently £3,600, and

• the amount of the individual’s relevant UK earnings that are chargeable to income tax for the tax
year.
There are three methods for tax relief to be received by individuals and the main two are explained in
more detail below. The first is tax ‘relief at source (RAS)’. This is the method used for most personal plans,
such as PPPs and stakeholder pension plans. The RAS mentioned in the name is immediate tax relief at
the basic rate applied in that tax year. This is currently at a rate of 20%.
Very simply, this means that an individual only needs to contribute £800 to have £1,000 invested on
their behalf.
Tax relief at source is always given at basic rate, despite the fact that the individual paying the
contribution could be a non-taxpayer, a basic-rate taxpayer or a higher-rate taxpayer.
• A non-taxpayer can pay up to £3,600 (gross), £2,880 net, and still receive RAS on the contribution.
• Basic-rate taxpayers receive their correct amount of tax relief immediately.
• Higher-rate taxpayers are eligible to claim back an additional 20% of tax relief. They will have to do
this via their self-assessment tax return.
The second method is the net pay method of providing tax relief. This is the method used by workplace
pension schemes. Here, the pension contribution is paid gross and deducted from earnings before being
liable for income tax. As a result, an individual will immediately receive full tax relief at the relevant rate.
The third method is to make gross contributions and claim the tax relief through self-assessment.
Another consideration to take into account, particularly for self-employed clients or those with family
businesses, is that by employing spouses or taking them into partnership in the business, each spouse
is able to gain the benefit of tax relief on pension contributions and has the benefit of a tax-free
Earnings Allowance. In such circumstances the individual being employed must actually be paid the
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remuneration for the role undertaken – which must be a real job, otherwise the pension arrangements
and tax relief on them may be challenged by the tax authorities.
6.1.6 Retirement Benefits
2
The main purpose of pension planning, particularly from the view of HMRC, is to provide an income in
later life. From April 2010, this ‘later life’ can start at no earlier than age 55 (previously 50 up until 2010).
It should be noted that certain professions/occupations may have a protected pension age earlier than
55, eg, professional sportspeople, providing the individual was a member in 2010.
As far as a lump sum benefit goes, since A-day the norm is that 25% of the fund, or deemed fund, is
available as a tax-free lump sum. There are many old workplace schemes where the member is entitled
to more than 25% of the fund built up before A-day. The rules can be complicated, and this is known as
protected tax-free cash.
6.2 Benefit Crystallisation Events (BCEs)
Learning Objective
2.2.3 Understand Benefit Crystallisation Events
These are the circumstances where there is a test against the LTA. They occur whenever any pension
benefits are taken: for example a lump sum, drawing an income, death before age 75, or transferring to
a qualifying registered overseas pension scheme (QROPS).
There are also Benefit Crystallisation Events (BCEs) for when someone reaches age 75, as all registered
pensions are treated as being fully crystallised at age 75, even if no benefits have been taken.
Currently there are 13 BCEs:
• Taking pensions
BCE1 When funds are designated to provide a drawdown pension.
BCE2 When a member becomes entitled to a scheme pension.
BCE3 When a scheme pension is increased beyond an allowable amount.
BCE4 When a member becomes entitled to a lifetime annuity under a money purchase
arrangement.
• Unused funds at age 75 or on earlier death
BCE5 When a member reaches age 75 under a defined benefit arrangement without having
drawn all or part of their entitlement as a scheme pension and/or lump sum.
–– BCE5a When a member reaches age 75 with a drawdown pension fund (also known as a
‘second crystallisation event’).
–– BCE5b When a member reaches age 75 with unused money purchase funds.
–– BCE5c When a member dies before their 75th birthday, and any uncrystallised funds are
designated to provide their beneficiary(ies) with a drawdown pension within two years of
death.
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–– BCE5d When a member dies before their 75th birthday, and any uncrystallised funds are
designated to provide their beneficiary(ies) with an annuity within two years of death.
• Lump sums
BCE6 When the member becomes entitled to a relevant lump sum.
BCE7 When a relevant lump sum death benefit is paid on the death of the member.
• QROPS
BCE8 When a member’s benefits are transferred to a QROPS.
• Other
BCE9 When certain payments are made to or in respect of a member:
–– Payments of ‘arrears’ of pension after death.
–– Lump sums based on pension errors.
–– PCLS-type lump sums paid after death.
6.3 Tax Treatment of Other Schemes
Learning Objective
2.2.2 Understand other pension scheme types and their tax treatment
6.3.1 Treatment of Employer-Financed Retirement Benefit Schemes

(EFRBSs)
An Employer-Financed Retirement Benefit Scheme (EFRBS) is an unregistered scheme. It replaced the
Funded Unapproved Retirement Benefit Scheme (FURBS). It permits employers to compensate any
employees who do not wish to pay into a regulated pension or non-UK taxpayers.
It is suitable for non-UK residents or UK residents who plan to leave the country at retirement or UK
residents who are planning on staying in the country but who have payments to justify the high levels
of contributions.
Disadvantages
The employer’s contributions are not subject to tax and National Insurance (NI) as payment of the
employee, ie, once the employer is contributing to the pension, the employees will have any tax
deductions in their monthly compensation when it comes to the pension scheme.
Advantages
• The pensioner does not need to buy an annuity at the end of the pension plan, unlike other pension
schemes that still require them to secure an income once the plan ends.
• It is possible to invest in a lot of properties and even take loans from the pension.
Monies held within the EFRBS are taxed as though they are held in a general discretionary trust. There is
tax to pay on income and capital gains, after taking into account the usual allowances.
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A periodic charge for inheritance tax (IHT) will arise on every tenth anniversary of the establishment of
the EFRBS, as for other discretionary trusts. Contributing to an EFRBS has several potential advantages
over contributing salary or dividend to a general discretionary trust. These include a NI saving at the
point of contributing and a deferral of income tax until the point at which benefits are taken. However,
2
corporation tax relief on payments made to an EFRBS is also deferred until the point at which benefits
are taken.
If an individual is not working for the company when benefits are drawn, there is no NI cost when they
access their EFRBS funds. An EFRBS is not as tax-efficient as a registered pension scheme if the pension
allowances are not breached. But the restriction on higher-rate tax relief for pension contributions can
make EFRBSs a viable alternative.
An employer pension contribution to a registered pension scheme will normally receive corporation tax
relief during the year in which the contribution is made. A contribution to an EFRBS, however, will not
receive the corporation tax relief until benefits are drawn from the scheme. This could be several years
later.
Where contributions are paid by a close company in respect of one of the business owners, a charge to
IHT (in addition to any periodic charge that becomes payable) will arise only if the individual dies within
seven years of the contribution being made.
6.3.2 Qualifying Recognised Overseas Pension Schemes (QROPS)

A Qualifying Recognised Overseas Pension Schemes (QROPS) is not subject to any UK taxes, including
IHT. However, it does become subject to taxation in the jurisdiction it is based in (which does not have
to be the same jurisdiction that the client is based in). It is for this reason that countries with low or no
taxation are popular choices for locating QROPS, eg, Guernsey, Jersey and the Isle of Man.
It is also possible to take advantage of the less restricted pension rules in other countries. For example,
in the UK, no one can touch their pension until the legal minimum retirement age. However, if
transferred to a New Zealand rules pension fund, they can take out their pension as a lump sum before
official retirement age. Thus a QROPS offers more flexibility with regard to pension planning. Although
not necessarily popular with the UK government, the EU has sanctioned it.
Any protection an individual may have registered may be lost or reduced. Since 9 March 2017 transfers
will be subject to a 25% tax charge unless both the individual and the QROPS are in the same country,
within the European Economic Area (EEA) or the QROPS is provided by the individual’s employer.
Key Features of QROPS

• Income drawdown – there is no requirement to purchase an annuity even at the age of 75. Income
may be drawn down as the client wishes.
• Taxation on pension income – income is subject to the tax rules of the jurisdiction where the
QROPS is based. In the places that QROPS are usually domiciled, this means no tax is paid.
• Retirement age – this is normally 55, but there is flexibility in case of ill health or at trustees’
discretion (subject to any legislative restrictions). Special provision can also be made for much
earlier retirement for those in specific professions – normally sports-related, such as football players
and boxers.
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• Other taxes – a QROPS is not subject to IHT upon the policyholder’s death, and the funds are also
not subject to CGT or the European Savings Directive (EUSD). Not only does a QROPS sit within a tax
wrapper, there are no LTAs that can be applied. All these benefits make the product very popular for
UK expatriates, particularly as UK-regulated investments are allowed as well as the purchase of buy-
to-let properties in the UK and overseas.
• Other assets – a client who holds other assets in the form of investments, directly or via collective
funds, like unit trusts, can use their QROPS to purchase them, allowing the funds to grow in a tax-
efficient manner and at the same time moving the assets out of their estate from the IHT viewpoint.
6.3.3 Qualifying Non-UK Pension Schemes (QNUPS) – Tax Planning

Opportunities for British Expatriates and UK Domiciles
Qualifying Non-UK Pension Schemes (QNUPS) became available in February 2010 as a result of new
legislation, and again these are suitable for British expatriates and UK domiciles. The ‘Qualifying’ part of
QNUPS means that the overseas pension scheme must meet HMRC’s criteria for pension schemes that
will not attract IHT. The schemes must be based overseas, and need not be in countries that have signed
double taxation agreements (DTAs) with the UK.
The key aspects of a QNUPS are:
1. A client may contribute to the fund without age restriction, even after retirement.
2. Contributions do not have to be from employment income.
3. There is no limit to the size of contributions.
4. There is no annuity required to be taken.
5. Income drawdown is at the client’s choice from the age of 55; it can be deferred but only to the age
of 75 with a maximum of 25% that can be taken as a lump sum.
6. Depending on where the client is resident, income may be subject to income tax.
7. On the client’s death, any assets left in the fund pass to beneficiaries without counting towards IHT.
8. The client may elect to receive income directly in the currency of residence, reducing the risk of
adverse currency fluctuations.
9. There are no requirements for trustees to report to HMRC, except if the fund holds assets that were
originally transferred from an authorised UK pension fund.
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7. The Development of Pensions
7.1 Pension Provision in the Context of Political, Economic,
2
Legal and Social Environment Factors
Learning Objective
2.1.1 Be able to evaluate the social and macroeconomic factors influencing the development of
pension policy: theory and purpose of pension provision in society; role of government, policy
direction, challenges and proposed reforms; employer responsibilities, challenges and impact
on pension provision; demographic trends, longevity and ageing population; financial and
economic factors; incentives, disincentives and attitudes to saving
There are various ways that a person can save for retirement, but what makes a pension different from
other methods are the tax advantages offered. The government uses tax to encourage individuals and
companies to make provision for later life and it has ever since the introduction of the first organised
pension scheme, the Royal Navy officer’s scheme, in the 17th century.
The Government’s main objective in relation to pensions is to ensure that pensioners in the UK can
enjoy an adequate standard of living, without having to fall back on the state. However, given the state
of the UK’s finances and an ever ageing UK population this can prove challenging and has led to the
government taking a number of measures over recent years. This has included:
• increasing the SPA for men and women while equalising the SPA for both sexes
• the introduction of a new SP system
• reducing the LTA and the annual allowance, therefore limiting the amount of tax relief available via
pensions
• to address the lack of private pension provision in the UK, the ‘auto-enrolment’.
Any change the government makes is highly political and has economic considerations; therefore,
pension changes have featured heavily in the national press.
7.2 Global Practices and International Regulatory Impact on

Pensions Planning
One of the key issues when considering pensions planning from an international perspective is
that there are striking differences between countries and regions globally. In the US the majority of
organisations offer employer-sponsored pensions which are not compulsory. In addition, in the US
terms and conditions of employment or benefit plans can often be set by companies unilaterally. This is
different in other parts of the world such as Europe or South America.
The EU’s Transfers of Undertakings Directive (2001) requires all employers to specifically guarantee that
no changes are made to any employer pension schemes, even in the event of the business being sold to
another firm or entity. The buyer of the business must guarantee that all employees continue to enjoy
without change their acquired rights including salary, seniority, pension rights and all other terms and
conditions of employment.
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In the international arena, such differences make the process of financial planning even more complex
and challenging, particularly when considering and reviewing pension provision. Apart from differing
rights and expectations, there are differing taxation regimes and domicile statuses, and consideration
must be given to the country that retirement is likely to take place in and whether there will be many
international moves prior to retirement.
7.3 Pension Liability Differences in Key Geographies

As mentioned in Section 7.2, the type of pension provision can vary between countries. This extends to
the accounting treatment of DB pensions too.
For example, in Germany, future pay increase projections are not included when valuing a pension
scheme for accounting purposes, even though International Accounting Standards (IAS), Financial
Reporting Standard (FRS) and Financial Assistance Schemes (FASs) actually require an allowance to
be made for future pay increases. This difference in treatment not only has a significant impact on the
liability value, but makes DB schemes more attractive in Germany than elsewhere in the EU.
Differences arise in some countries between actual pension scheme rules and custom and practice. In
Brazil, for example, pension benefits locally called ‘leaving service benefit’ are increased for any member
who is made redundant or in some cases leaves the company for another reason. Sometimes this
happens so frequently that an expectation develops for every employee reaching retirement that their
pension value will be increased by the employer.
Not only are there stark differences between approaches to and the valuation of pension benefits, but
retirement ages and provisions for early retirement also vary. In the UK, there is no right to take early
retirement from an employer, but the practice of being able to do so is well established. In France, in
2010, the mere proposal of delaying the state retirement age by two years caused major street protests
and strikes.
Pension liabilities are greatly affected by life expectancy, and in some countries this has risen sharply
and much faster than expected.
7.4 International Retirement Planning

According to the Office of National Statistics (ONS), in the year ending 2015, 300,000 UK residents
moved abroad. The number of expatriates worldwide continues to increase (it is estimated by the World
Bank that up to 5.5 million Britons live abroad), partly as a result of increased levels of international
trade. For example, research from Capital Group shows 77% of FTSE 100 companies revenue comes
from foreign markets and a considerable number of chief executive officers (CEOs) of these companies
are foreign nationals.
Of course it is expected that an expatriate will be well compensated by their employer and given
additional perks and sometimes even a tax-free salary. Individuals in this position have greater choices
of investments as they may not be subject to strict regulatory or tax rules. However, pension planning
becomes a challenge. The key issue is the tax breaks allowed in pension saving and investment or, in the
case of expatriates, the lack of them. UK pensions are not hugely portable overseas. For a stakeholder-
type pension, once a member moves abroad they can only contribute for another five years. The other
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issue is that if a pension is UK-based and the individual decides to retire abroad, the income is subject
to currency fluctuations. Moving to a new pension product in each country not only leaves an individual
with duplicate costs for each pension provider, but means the eventual pensions income can become
fragmented.
2
Additionally, due to differing tax incentives, a number of organisations have moved away from the UK,
which has caused staff to relocate too, eg, WPP plc (Ireland), Lloyds insurance vehicles, eg, Hiscox and
HSBC Group whose CEO moved to Hong Kong.
7.5 Pensions in the EU

The EU has an agreement in place that SP provision is transferable between member states, known as
the EU Links & Information on Social Security (EUlisses). The story on occupational or workplace pension
rights, however, is different.
Since 2005, the European Commission (EC) has attempted to pass a proposal to make pensions fully
portable for anyone working within a member state. This proposal was never fully enacted; rather, a
watered-down version was agreed in 2007 where minimum requirements exist for workers to have
better access to pension rights. It is still the case that in some member states a worker loses pension
rights by changing jobs.
7.6 Multinational Pension Schemes

A company which operates in numerous countries may offer a multinational pension plan, although in
recent years it has become more cost-effective for companies to provide expatriates with an elevated
salary package so, even though the employer may make a contribution, the individual has to find the
right pension planning vehicle.
Pension companies, particularly the multinational ones, also provide company pension schemes which
can be offered by employers to their expatriate staff. These operate in a similar way to international
personal pensions. These corporate schemes can offer a vesting period, so if the employee leaves within
a certain period the contributions remain the property of the employer. The complexity with vesting
periods is that some countries do not allow tax breaks for contributions if a vesting period exists.
7.7 Private International Pensions Provision

Some of the complexities outlined above can turn into virtual impossibilities with the added issues
caused through multiple moves between countries. To keep moving pension provision from country
to country not only has the disadvantage of damaging the continuity of investments but can deplete
the pot through administration costs and adverse exchange rate moves. One solution is a private
international pension which is placed in one domicile (possibly the final retirement destination) or an
offshore financial centre. This may provide the added benefit of no or low taxation on the growth of the
pension pot; however, the fund will be liable to taxation when it is finally drawn as a pension, especially
if it is received in a high-tax country.
There is a further level of complexity in expatriate pensions for US nationals and for other nationals who
go to work in the US, due to very strict taxation rules within the US.
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A number of offshore pension providers are grouped together in well-regulated jurisdictions with
stringent investor protection legislation, such as Jersey, Guernsey, and the Isle of Man. These jurisdictions
have developed responsive regulatory regimes and highly efficient business infrastructures. Dublin and
Luxembourg have also become popular locations for European-based clients.
These types of pension plans are of interest to British expatriates in particular. When a client is no longer
resident in the UK, their pension can be contributed to in the UK for a further five years and for that
period is subject to HMRC’s rules too. Once ten years have passed, the fund becomes subject only to
the rules that the fund has moved to, and this transferred fund is called a QROPS. Importantly for any
expatriate, the location of the QROPS does not have to be the same as the country that the expatriate is
actually resident in, as long as they are no longer resident in the UK.
Just as with a PPP or SIPP/SSAS, there are no penalties if the client takes a break from making
contributions, but, unlike UK-based pensions, there are also no maximum limits as to how much the
client wishes to invest. A QROPS fund may be structured as a managed pension fund, or the client can
choose to self-invest, ie, choose their own investments. The added flexibility can also lead to added risks
taken by the client, so it is vital that even more regular reviews are undertaken by the adviser.
8. Pensions Law and Regulatory Compliance
Learning Objective
2.3.1 Be able to analyse the aspects of pensions law and regulation relevant to retirement planning:
employment law relevant to pensions and the rights of older workers; pensions and divorce;
bankruptcy law and pension assets; The Pensions Regulator’s compliance requirements;
Financial Conduct Authority; pension protection schemes; Pensions Ombudsman Service; The
Pensions Advisory Service; Pension Wise
2.3.2 Be able to interpret the relevant aspects of pensions law and oversight to: trust- and contract-
based pensions; roles and duties of trustees, administrators and professional advisers; roles and
duties of the Independent Governance Committee
8.1 Pensions Law and Regulation

The European Directive 2000/78 EC established a framework for equal treatment in employment and
required the governments of member states to implement laws prohibiting discrimination in the
workplace. This Directive made it unlawful for pension schemes to discriminate against workers or
prospective members of a pension scheme on the basis of age.
With effect from 1 December 2006, trustees must not apply any discriminatory rules under their
scheme and are given powers to amend any scheme rules that are in conflict with the regulations. Any
worker who suffers discrimination on the grounds of age in respect of pensions can bring a claim to an
employment tribunal against the trustees/employer.
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There is however a long list of exceptions to the rules, some of which are included below:
• Employers are allowed to operate qualifying periods for occupational schemes before people are
permitted to join a scheme and different accrual rates for occupational schemes depending on the
2
length of service.
• The employer may set minimum and maximum ages for admission to the scheme, including
different ages for admission in respect of different groups and categories of worker.
• The actuary may take account of the member’s age when performing calculations, such as early
retirement penalties.
• It is allowable to reduce a dependant’s pension where the dependant is more than a specified
number of years younger than the member.
• The employer is allowed to pay different levels of contributions for different age bands where the
intention is to provide comparable benefits for comparable members.
8.2 Pensions Acts

The key Pensions Acts that are relevant to the protection of current members of a WPS are those that
were passed in 1995 and 2004. The Acts were very thorough and detailed when looking at them in their
entirety, but we will concentrate on the key aspects of each.
8.2.1 Pensions Act 1995

It established a new regulator, the Occupational Pensions Regulatory Authority (OPRA).
It required trustees to draw up a Statement of Investment Principles (SIP).
It introduced the concept of a Minimum Funding Requirement (MFR), which had the objective of
maintaining a DB scheme’s assets at least to the point where they covered 100% of the scheme’s
liabilities.
It established a Pensions Compensation Board (PCB) to cover losses, up to 90%, in case of company fraud
and misappropriation of scheme assets. This was a particular reaction to the Mirror Group situation.
Trustees must appoint a fund manager authorised under the Financial Services Act.
Members of large occupational pension schemes (100 members or more) have a right to appoint at least
one third of the trustees. These are designated Member Nominated Trustees (MNTs).
Equal treatment of all persons in workplace schemes is required.
When contracting out of SERPS, a fund has to satisfy a reference scheme test. (Contracting out is now
no longer possible).
The Finance Act 1995 introduced the concept of Limited Price Indexation (LPI), which initially allowed
indexation up to the lower of the RPI or 5%. In this Act, LPI was designed to apply to both DB and DC
benefits in payment.
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It introduced internal dispute resolution procedures which, under this Act, was a two-stage process
starting with a nominated person examining the grievance, and trustees subsequently getting involved
if required.
8.2.2 Pensions Act 2004

This Act established the Pension Protection Fund (PPF), which provides compensation if an employer
becomes insolvent, and they run a DB pension scheme which is underfunded. The details of the PPF are
listed below.
TPR took over from OPRA, extending the previous powers. TPR has specific objectives to protect benefits
under occupational schemes and reduce situations that may lead to compensation being paid from the
PPF. It has proven to be a more proactive regulator than OPRA.
Employers have to consult members before making significant changes to schemes, giving 60 days for
consultation.
It replaced the MFR with the concept of scheme-specific funding. By the turn of the century, the
actuarial methodology involved in the MFR was proven to be questionable and so it was abolished in
2001. Scheme-specific funding was designed to provide a long-term funding standard scheme that had
to be agreed by the trustees and employer. The funding should reflect the specific circumstances of the
scheme.
LPI was reduced to 2.5% for DB schemes and scrapped for defined contribution schemes.
The Act introduced increased SPs for individuals who defer SPs beyond normal state retirement age.
Overall TPR operates with a set of principles that govern its approach, and a concomitant set of powers.
These are as follows:
Principles
• To view risk in a proportionate way.
• To be supportive to trustees, employers and actuaries and help improvements in practice to develop
within the industry.
• To always act in line with the principles of good regulation and taking into account the protection
of human rights.
• To mainly give consideration to the outcomes of members rather than process issues.
Powers
• Prevention – actions by an employer or pension trustees can be stopped where a serious risk
presents itself to the benefits of the scheme members.
• Detection – investigating the reasons for a particular pension-related difficulty arising.
• Education – supporting trustees in carrying out their duties, especially if there is a lack of knowledge
or understanding.
• Remedying breaches – if members’ benefits have been damaged or reduced due to a breach,
ensuring the employer reinstates these.
• Imposing penalties – for breaches, to discourage these in the future and to make clear the
importance of protecting members’ benefits.
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The FCA
The FCA also regulates some aspects of WPSs. The two regulators split their responsibilities along the
following lines:
2
TPR is responsible for:
• registration of schemes
• employer designation
• ensuring compliance of charge-capping for stakeholder schemes.
The FCA is responsible for:
• sales, promotion and any marketing of pension plans

• authorisation of investment firms that run the investment plans for pension schemes
• authorisation of advisers that provide advice on pension plans.
In recent times the pension and retirement income markets have undergone the most profound change
in a generation. Despite the changing nature of the market, the FCA’s objectives remain the same:
‘for consumers to have access to products and services that are well governed and deliver value for
money in competitive markets that work in their interests’.
The FCA has a set of rules and guidance that firms must adapt and full details are found in the FCA
Conduct of Business Sourcebook – https://www.handbook.fca.org.uk/handbook/COBS/
8.2.3 The Pension Protection Fund (PPF)

The Pension Protection Fund (PPF) is a compensation scheme for members of DB schemes, excluding
public sector schemes. To be eligible to fall under the PPF remit, the employer must have become
insolvent after 5 April 2005, and there must be no possibility of rescuing the scheme. Employers that
became insolvent before this date may be entitled to join the Financial Assistance Scheme (FAS).
The PPF levels of compensation depend on the age of the individual. In summary:
• 100% of pension entitlement for members over the scheme’s normal retirement date and those who
have retired on legitimate ill health grounds, regardless of age, and those receiving a pension in
relation to someone who has died.
• 90% of pension entitlement for members who have not yet reached the scheme’s normal retirement
date, subject to an overall monetary cap. For 2017–18 this cap at age 65 is £38,505.61, so 90% of that
is a maximum payment of £34,655.05 pa.
• A spouse’s pension of 50% of the member’s PPF compensation amount.
• Statutory increases in pension, but only for pensions earned since April 1997 and only then at LPI,
with a maximum limit of 2.5%.
From 6 April 2017, the long service cap came into effect for members who have 21 or more years’ service
in their scheme. For these members, the cap is increased by 3% for each full year of pensionable service
above 20 years, up to a maximum of double the standard cap.
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PPF Actuarial Factors and Compensation Cap Factors for Determining PPF Compensation
(examples) from 1 April 2017
Age last birthday Factor Derived cap £

25 0.4458194 17,166.55
55 0.7382643 28,427.32
65 1.0000000 37,420.42
75 1.5140537 58,299.56
Source: http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/Compensation_Cap_
factors_April_2017.pdf
8.3 The Financial Assistance Scheme (FAS)

The Financial Assistance Scheme (FAS) is now managed by the board of the PPF. It covers qualifying DB
schemes. An insolvency event must have occurred in respect of the employer.
The FAS offered assistance to people who lost out on their pension because they were a member of an
under-funded DB scheme that started to wind up between 1 January 1997 and 5 April 2005 and either:
• their scheme began to wind-up and did not have enough money to pay members’ benefits; and the
employer cannot pay the shortfall because it is insolvent, no longer exists or no longer has to meet
its commitment to pay its debt to the pension scheme, or
• they were a member of an underfunded DB scheme that started to wind up after 5 April 2005
but before 22 December 2008 which is ineligible for help from the PPF because the sponsoring
employer became insolvent before 6 April 2005.
The scheme closed to new Notifications on 1 September 2016.
The FAS levels of compensation include:
• 90% of accrued pension entitlement at the date of commencement of the winding-up is guaranteed.
This amount will be revalued up to an individual’s retirement date, but is subject to a cap of £34,229
for entitlements in 2017–18.
• The benefit will be paid from the scheme’s normal retirement date, subject to an earliest payment
date of age 60.
• Payment of benefits based on service after 5 April 1997 will be increased in line with inflation,
subject to a maximum increase of 2.5%.
• There is also provision for a 50% spouse’s or civil partner’s pension.
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8.4 Corporate Bankruptcy
8.4.1 Can a Company Pension Scheme Run Out of Money?
2
It is possible for a scheme to run out of money if it is a final salary scheme. It cannot do so if it is a money
purchase scheme.
Money Purchase Scheme

Contributions (including those of the employer) are invested on the individual’s behalf by the insurance
company or similar. Remember that the eventual pension is unknown in advance because it is relying
upon the fund performance. Thus the scheme can only have a shortfall if there has been fraud or theft.
In such circumstances, it may be possible to recover some of the money through the PPF.
Each member of a money purchase scheme has a separate pension pot which provides their benefits.
Final Salary (or DB) Scheme

As the amount is based on final (or average) salary and the number of years in the scheme, all of the
contributions are placed in one pension pot which provides benefits for all its retired members. This
type of scheme can run out of money if its total investments (which include all contributions made to
date) are less than the amount it has:
• to pay out now

• promised to pay out in the future.
In most cases, if a scheme runs out of money, there is support available to compensate members.
What Happens if the Company Becomes Insolvent?

If the company becomes insolvent, its pension fund cannot be used to pay the company’s debts, ie,
the fund is protected. However, the company may owe the pension fund money. The pension fund is
usually deemed to be an unsecured creditor, but can have a higher preferential status with the employer
in certain circumstances.
There are other creditors below those of unsecured creditors.
Legislation where a deficit in a final salary-related occupational pension scheme winds up and becomes
a debt on the employer. This is designed to improve the protection offered to scheme members when
these events occur. It provides a mechanism for the trustees to take action to pursue the shortfall owed
to the scheme from the employer.
A shortfall in the fund could mean receiving a smaller pension. The individual may, however, be eligible
for financial help from the PPF or the FAS.
In the Case of Fraud or Theft

If a shortfall in the company’s pension fund is due to fraud or theft, the PPF may be able to recover some
of the money from the Fraud Compensation Fund.
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Closing a Final Salary Scheme
The trustees of a final salary scheme are responsible for making sure it does not run out of money. To
limit future costs, the employer or the trustees can do the following:
• Close the scheme to new members, ie, existing members can continue to contribute and receive a
pension on retirement.
• Freeze the scheme, ie, the scheme is closed to everyone and existing members’ benefits stop
building up.
• Wind up a pension scheme at any time. This involves closing down the scheme to everyone and
using its assets for the members’ benefit. If the company remains in business, it would have to
provide access to a suitable WPS under the auto-enrolment rules. It does not have to contribute to
this stakeholder scheme, however.
Help That Can Be Sought

• The pension scheme trustees can give advice about the pension scheme.
• The pension scheme administrator can answer specific questions about their pension.
• The Pensions Advisory Service (TPAS) gives independent advice on general pension rules and
regulations.
• The PPF has powers to regulate the way that company pension schemes are run, and to investigate
pension fraud and badly run schemes.
• The Pensions Ombudsman (TPO) investigates complaints about how pension scheme rules are
applied.
In October 2011, the Court of Appeal upheld a ruling against the administrators of Lehman Brothers
and Nortel Networks which stated that pension funds were an expense and must be paid out before
debts to administrators. The Pensions Regulator (TPR) had ordered Lehman and Nortel to support their
underfunded pension schemes through so-called contribution notices after they filed for bankruptcy.
The schemes had deficits of £148 million and £2.1 billion respectively.
Lord Justice Lloyd said:
‘despite the oddities, anomalies and inconveniences of the decision, it was right not least because the
only alternative would be that the pension scheme liabilities would go into a black hole…The only
alternative to treating [pensions] as a payable expense is that it would go into [a] black hole. That cannot
have been the intention of Parliament’.
The Pension Ombudsman (TPO)

The Pensions Ombudsman’s (TPO’s) role is to investigate (and decide) pension complaints between:
• members of pension schemes (including personal pensions)

• pension scheme beneficiaries
• employers
• trustees
• managers
• scheme administrators.
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It is not a regulator, watchdog, consumer champion or trade body. It is intended to settle pension
complaints, without taking sides. It was established in April 1991 by an Act of Parliament. The statutory
powers and provisions governing it are found in Sections 145–152 of the Pension Schemes Act 1993.
2
Anyone who is unhappy with a decision that it makes, and wants to take it further, needs to appeal to
the High Court in England and Wales, the Court of Session in Scotland or the Court of Appeal in Northern
Ireland. Any appeal must be on a point of law.
Before they will consider a complaint, it is necessary that the complainant writes to those involved
and asks them to respond to the complaint. If the complaint is against the trustees or, managers of
an occupational pension scheme then they should deal with it under the scheme’s internal dispute
resolution procedure (IDRP). TPAS can also help to try and resolve the complaint.
8.4.2 The Pensions Advisory Service (TPAS)

TPAS is an independent voluntary organisation that is grant-aided by the Department for Work and
Pensions (DWP). It provides information and guidance to members of the public on all matters pension-
related including covering personal and company schemes as well as the SP.
TPAS will help any individual who has a problem with a pension, be that a complaint or a dispute with an
occupational or personal pension. The individual must try to resolve the issue with the relevant parties
in the first instance and then TPAS can get involved before the TPO who usually is the final arbiter on
the matter.
Recently TPAS has become the organisation offering telephone guidance via the guidance guarantee.
The 2016 Budget announced that consultations would take place to merge TPAS with Pension Wise, the
organisation which provides face-to-face guidance under the auspices of the Citizens Advice Bureau
(CAB).
Trust- and Contract-Based Schemes

A trust-based pension scheme will be governed by a trust deed and have a board of trustees to oversee
the scheme. Whereas a contract-based scheme is used when the employer wants to outsource the
pension to a third-party who will manage all aspects of the scheme (for example, an insurance company
could use a GPP scheme for the company’s employees).
A DB scheme is always set up as a trust-based scheme but an employer with a DC scheme has the
priority to run this as a contract-based scheme or trust-based scheme. Some of the key differences are
as follows:
• A trust-based scheme typically operates on a ‘net pay’ arrangement which means that an employee
has their contribution deducted from their pay before tax is applied, thereby receiving full tax relief
immediately.
• A contract-based scheme must receive contributions from pay after tax and NICs. The contribution
is treated as being paid net of basic-rate tax and is grossed up by the scheme. The member must
then claim any higher-rate or additional-rate tax they are entitled to via their self-assessment tax
return.
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• A contract scheme is less costly and time-consuming for employers compared to a trust-based
scheme. Trust-based schemes offer their members protection of the trustees and their expertise in
selecting appropriate funds in which to invest their pensions contributions. Admittedly, this level of
protection costs the employer, but may create a better relationship between the employer and the
workforce.
8.5 The Roles and Duties of Trustees and Administrators

The role of a trustee carries important responsibilities. Trustees must be familiar with all documentation
relating to the scheme’s administration as well as having an understanding of pensions and trust law
and sufficient knowledge of the basics of occupational pension scheme funding and investment to
allow them to exercise their duties. Both the Pensions Act 1995 and the Pensions Act 2004 outline
specific responsibilities to trustees, including to:
• maintain audited accounts

• maintain a schedule of contributions
• report obligations to TPR
• draw up a statement of investment principles for their investment manager
• establish a recovery plan if the valuation shows the scheme is not meeting their funding objectives
• hold and invest the assets to achieve the best financial return consistent with security
• act within the provisions of the trust deed
• act impartially at all times and maintain the scheme in the best interest of members
• understand the scheme, it provisions and its background.
For pension scheme administrators, the Finance Act 2004 requires every scheme to have a scheme
administrator. Their duties include:
• registering the scheme with HMRC, reporting events to them and making all returns
• operating tax relief via the RAS method
• providing information to members and others regarding the LTA, transfers and benefits.
8.6 Independent Governance Committees (IGCs)

The establishment of Independent Governance Committees (IGCs) follows the Office for Fair Trading
(OFT) 2013 market study of the DC workplace pension market. The study found that scheme members
lack any direct agent to represent their views and that many employees are not actively engaged in their
pension saving. With the advent of automatic enrolment, this could mean that many may be enrolled
into a default fund without making an active choice.
As a result, the OFT agreed with members of the Association of British Insurers (ABI) that ABI firms
operating workplace personal pension schemes would establish and maintain IGCs to assess and raise
concerns about value for money on behalf of members. The final rules for IGCs were published by the
FCA in February 2015. All providers of workplace personal pension schemes (not just ABI members) are
required to establish an IGC.
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‘Key requirements of independent governance committees:

• IGCs must act in the interests of scheme members and challenge providers on value for money.
• A minimum of five members and the majority, including the chair, must be independent of their
sponsoring firm.
2
• IGCs need to ensure their providers are complying with the 75 basis point charge cap for default
funds.
• They should ensure that default strategies are designed in members’ interests.
• The characteristics and net performance of investment strategies (including non-default) are
regularly reviewed.
• Ensure that core financial transactions are being processed promptly and accurately.
• The benefits of services should be weighed up relative to their cost.
• Indirect charges, eg, transaction costs, should be assessed and transparency improved.
• The chair is responsible for producing annual reports which need to be made publicly available.’
Source: Grant Thornton
8.7 Divorce
Recent statistics (ONS November 2015) estimate that 42% of marriages in England and Wales end in
divorce.
With the rising divorce figures, legislation was introduced to allow courts to not only split the assets of
the couple but also to split pension rights as well (Welfare Reform & Pensions Act 1999).
The divorce settlement in the court can look at pension rights in the following ways:
• balance the pension rights against another asset, eg, the matrimonial home (known as pension
offsetting), or
• arrange that when the pension eventually commences paying, a pre-agreed proportion of it will be
paid to the other party (known as pension earmarking), or
• split the pension at the time of the divorce, thus giving both parties their own pension pot (known
as pension sharing).
It is essential that the value of both spouses’ pensions is ascertained (by requesting the pension
providers to provide current valuations of each pension pot). Each spouse will not have any right to
know what the other’s pension value is unless they give consent.
The spouses have to be told that transferring from a final salary (or career average) scheme to a money
purchase scheme (or PPP) carries a number of risks. The court has the power to issue a court order to
any type of pension scheme, eg, occupational pension schemes (funded and unfunded, approved or
unapproved), personal pension schemes, retirement annuity contracts, and Section 32 buyout plans.
The court will include in its considerations pension plans that spouses are currently paying into, plans
that have been deferred and plans that are already paying an income.
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The only pension arrangements which are considered to be outside the legislation are:
• State benefits.
• Equivalent pension benefits (EPBs) earned between 1961 and 1975. These are non-revaluing
pensions, which were built up when the people was contracted out of the state graduated pension
scheme by their occupational pension scheme.
• Pension rights which arise because the person was a widow, widower (before the present marriage)
or a dependant.
8.7.1 Pension Offsetting

All the assets of the couple are taken into account. The pension benefits are offset against other assets
(eg, the matrimonial home). The person who has the pension rights keeps them for themselves and the
other spouse is given the ownership of other assets, eg, the right to live in the matrimonial home.
Obviously it can be quite difficult to achieve a totally fair split of a couple’s assets by offsetting a pension
pot against some of the other assets. This can be because the pension pot is the largest asset that they
have. Also it has to be remembered that the value of a pension pot will tend to fluctuate more than,
for example, property values. Where offsetting is not producing an equitable result, one or other of the
alternatives can be used.
8.7.2 Earmarking
The concept of pension earmarking was introduced by the 1995 Pensions Act, for divorce petitions filed
on or after 1 July 1996 (or 19 August 1996 in Scotland). In this situation the pension scheme, instructed
by the court, will pay to the ex-spouse either in:
• England, Wales and Northern Ireland, a specified amount of the scheme member’s pension (and/or
lump sum), or
• Scotland, a specified amount of the member’s lump sum only.
The amount is specified at the time of the divorce. However because the payments are periodical, either
party can apply to the court to have the amount varied (because of changed values, circumstances). The
payment is only actually made when the spouse with the pension pot retires, or when they die, if earlier.
Earmarking has not been seen as being ideal because:
• It is not providing a real break in the relationship between the couple.

• It means that the ex-spouse is only able to receive a retirement income when the other party (whose
pension pot it is) actually retires (which may be delayed).
• If the actual divorce settlement says that there is to be a regular payment of a pension (a periodic
payment), what happens on the death of the pension holder? The payments will stop. It can also
stop if the party receiving the earmarked pension remarries. The right to a lump sum under an
Earmarking Divorce Order does not stop on remarriage.
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8.7.3 Pension Sharing

The Welfare Reform & Pensions Act (WRPA) 1999 gave powers to the court to split pension rights
between husband and wife on divorce. The idea is to create two distinct entitlements thus separating
the ex-spouse’s entitlement (specified by the court order) from that of the scheme member. The result
2
should be a much cleaner break. A pension sharing order is issued creating a:
1. Pension Credit member (the ex-spouse), and

2. Pension Debit member (the member).
The Pension Credit (1 above) is based on the scheme member’s CETV. The credit is given as a percentage
of the CETV, not a fixed sum of money. The CETV is calculated on the day before the pension sharing
order is effective, ie, it is likely to be higher or lower than the value given at the start of the divorce
proceedings. The pension sharing order is effective from the date on which the decree absolute of
divorce or nullity is pronounced. However, if it is later, it will either be:
• 21 days from the date of the order, (unless an appeal has been lodged in time), and
• if the appeal is heard, the effective date of the order determining that appeal.
Example
Damien and Marisha have been married for some time. Damien works and has a pension scheme (a PPP).
Marisha has no paid employment (and no pension scheme) as she has been looking after the children.
Following the breakdown of their marriage, they are getting a divorce. Solicitors were instructed in
January and the pension provider (of Damien) has provided, at his request, a valuation as at 31 January.
This shows that his pension is worth at that date £100,000. Damien and Marisha have agreed that a
50:50 split is the most equitable. Therefore, the court order states that the pension provider is to give
Marisha a Pension Credit of 50% of Damien’s pension. Marisha has calculated that means she will get
£50,000 which she can use to start a pension plan for herself. The decree absolute finally comes through
in May: on that date a new valuation is obtained which shows that Damien’s pension has gone up in
value to £105,000, so Marisha actually gets £52,500 as her share. If his pension had instead gone down
in value to £90,000 she would only receive £45,000, as her entitlement is 50% of the value of Damien’s
pension at the date of the divorce.
The Pension Credit can be transferred to a pension arrangement of the ex-spouse’s choosing (Marisha in
our example), the only restriction being that the new provider will accept it.
If no choice is made to transfer it, the trustees/scheme managers can decide if they want to offer the
ex-spouse membership of their scheme in her own right, ie, schemes are allowed to demand that the
ex-spouse transfer out (an external transfer), normally to an insurance contract. However, transfer to a
contracted-out scheme (money purchase, final salary or career average) of any contracted-out Pension
Credit benefits (termed safeguarded benefits) does require the consent of the ex-spouse.
If a transfer-out is not made and the scheme is willing to accept that the ex-spouse remains with them,
then the scheme may make an internal transfer, ie, the ex-spouse becomes a member of the scheme
in their own right. The Pension Credit benefits need not be treated the same as those employees in
the scheme, eg, it can be treated as a money purchase, even though the scheme itself is final salary (or
career average).
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However, Pension Credit members are entitled to receive any normal increase that is awarded to
members with preserved pensions.
Schemes are allowed to charge for handling the administration of pension sharing arrangements, ie,
the costs of administering pension sharing should not be borne by the scheme, other members or the
taxpayer. The scheme must supply details of its charges to the couple at the time of the first enquiry. Any
costs which are incurred because of amending the scheme rules have to be borne by the scheme. Any
costs incurred by a specific divorce order are not covered by the scheme. The National Association of
Pension Funds (NAPF) produces a table of recommended charges to be used as a guide by the industry.
Clients should be made aware that transferring from a final salary or career average scheme to a money
purchase scheme (or PPP) carries a number of risks.
Remember that final salary, career average and money purchase schemes could not be more different:
• Final salary (or career average) schemes provide benefits based on a fixed formula, which refers
to the member’s completed service and earnings, eg, the pension = (service/60) x final salary.
• Money purchase schemes provide benefits which are based on the investment performance of the
pension pot which comes from contributions paid into the scheme, plus the annuity rates available
at retirement when the pot is converted to an annuity.
This results are (normally) very different benefits at retirement.
For example, a financial salary scheme could provide an income of £50,000 per annum, whereas a
money purchase scheme would provide a pension fund that an individual could then use to buy an
annuity or enter drawdown.
8.8 Personal Bankruptcy and Pensions

If an individual is declared bankrupt, they lose control over any assets (property, shares and savings) they
may have. The assets will be disposed of to help pay the outstanding debts by the person appointed to
manage the bankrupt, the trustee. Any pension may be classed as an asset, ie, the trustee may claim the
pension itself and any benefits or payments to help to pay the bankruptcy debts.
8.8.1 Pension Information Has To Be supplied to the Trustee

As the benefits and rights held in the pension can potentially be claimed by the trustee, they will be
scrutinised to see if they can be claimed. The trustee will ask for information about the pension, as
shown:
• the name of all pension schemes that the individual may have contributed to (or their employers if
they were non-contributory)
• the amount contributed (especially in the previous two years)
• the amount received in payments from a pension
• the amount received from a pension as a lump sum.
Failure to supply the information may affect the date that the individual can be discharged from their
bankruptcy (and possibly lead to further court action).
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8.8.2 SP and State Earnings Related Pensions

Fortunately not all pensions can be claimed by the trustee. The ones that cannot be claimed are:
• SP
2
• payments due to you from the SERPS or any similar scheme
• protected rights, ie, the equivalent of SERPS if you contracted out of it.
8.8.3 Other Types of Pension

All other types of pension – whether benefits or rights – might be potentially subject to a claim.
However, whether they are actually claimed or not depends on:
• when the bankruptcy petition (application) was made

• if the pension scheme is approved by HMRC.
For any bankruptcy petition which is dated on (or after) 29 May 2000, where the pension scheme is
registered with HMRC, it is not classed as an asset. However, the trustee can claim any benefits being
received (or that will be received), including any lump sum, but only if the individual has not been
discharged (freed) from bankruptcy.
If the pension scheme is not registered with HMRC, the pension can be classed as an asset. Any lump
sum plus any regular payments due can be claimed by the trustee. They can be claimed whenever the
individual reaches the earliest retirement age allowed by the pension policy. This can happen even if the
pension is payable years after the individual has been discharged from bankruptcy.
8.8.4 If the Pension Can Be Claimed

If the pension can be claimed as an asset, lump sums or regular payments due when the individual
reaches the earliest retirement age allowed by the policy can be claimed. This date can be some time
after they have been discharged (freed) from bankruptcy.
Options to protect the pension, if it is claimed as an asset, are:
• applying to the court for an exclusion order

• coming to an agreement with the trustee
• buying back the interest in the pension policy from the trustee.
8.9 Occupational Pension Schemes

Some occupational pension policies have a forfeiture clause. This clause means that any rights and
benefits are automatically lost if an individual is declared bankrupt. If this happens, the trustee cannot
make a claim on this pension.
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8.9.1 If They Are Already Receiving Pension Payments
If the individual is receiving the payments from a pension, the trustee considers the money to be a
part of normal income. The bankruptcy process means that any income can be used to help pay the
bankruptcy debts (assuming the individual can afford it, ie, they will have enough left for the necessities
of life). The individual can agree to make a contribution from their income towards their debts (an
income payments agreement). Alternatively the court can order them to do it (by making an income
payments order). In either case the arrangement will last for three years.
8.9.2 Future Contributions to a Pension

The individual is still permitted to make contributions to a pension while they are an undischarged
bankrupt. However this should be with the agreement of the trustee, as any spare income that they
have could be used to pay the bankruptcy debts.
9. Auto-Enrolment Legislation
Learning Objective
2.3.3 Understand auto-enrolment schemes, employer duties, contributions and workers opt-in/opt-
out
The auto-enrolment legislation is one of the largest changes to pension rules and savings in generations,
and it is important to understand some of the background to this, as the vast majority of individual
clients will be exposed to auto-enrolment over the current time and future years. This will give rise to an
increase in the need for advisers to be able to give appropriate guidance in the area of pensions.
Auto-enrolment has been designed to encourage a retirement savings culture in the UK. This new
legislation requires all employers to automatically enrol, some or all, members of their workforce
(depending on age and salary level) into a pension scheme that meets certain minimum standards.
Some workers will also have the right to ask their employer to enrol them. Depending on the worker’s
age and salary level, employers may be required to make contributions to this pension scheme, adding
to the contributions made by their workers.
Auto-enrolment is currently in the process of being phased in with the largest employers leading
the way, followed by medium-sized employers and lastly small and micro employers. The size of an
employer’s largest pay-as-you-earn (PAYE) scheme will determine at what point the new duties affect
their organisation. TPR writes to employers 18 months before their staging date.
At present, TPR writes to employers ahead of their staging date to make them aware of their automatic
enrolment obligations. However, when it does this, it specifically mentions one provider, NEST, as
an automatic enrolment option. Some in the industry are calling on TPR and the DWP to do more to
make employers aware of the numerous alternatives to NEST, that may be more suitable for their auto-
enrolment obligations.
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The auto-enrolment requirements were to provide a scheme that meets certain minimum standards.
Both new and established pension providers are competing to be involved in this space.
9.1 The National Employment Savings Trust (NEST)
2
The National Employment Savings Trust (NEST) was established as part of the Pensions Act 2008 and it
goes much further than stakeholder pension arrangements discussed in Section 4. It was established in
response to continued concerns that employees are not saving for their own pensions. The government
estimates that seven million workers are not saving enough for retirement. NEST is a further initiative to
persuade workers in the UK to take ownership of their pension planning.
NEST is an occupational, trust-based DC pension scheme. It will not be a SP, but this type of scheme will
bring an element of compulsion to pension provision for employers. This time the compulsion will be
to contribute, not just provide access, as was the case with stakeholder pension plans – also known as
auto-enrolment.
One of the key differences with the introduction of NEST is that not only do employers have to offer a
qualifying WPS but employees must be automatically enrolled unless they specifically choose to opt
out – this emphasis is new and perhaps a response to employee apathy. Another important difference is
that even small businesses (with two or more employees) are required to offer such a WPS. Importantly,
employers will be able to ‘self-certify’ that their current scheme meets the requirements of the Pensions
Act. If an employee should choose to opt out of the scheme and of work-based pensions saving entirely,
the employer then has no obligation.
As with stakeholder pensions, employers will have to contribute at least 3% of each employee’s earnings
(unless the employee opts out of the scheme) and the employees must contribute 4%.
With an additional 1% via tax relief, each employee will have a total of 8% of earnings paid into the
scheme. In the early stages of implementation of the Act, employers will only have to contribute 1% of
employees’ salary into NEST – rising to 3%. All employees above the age of 22, and with earnings above
£10,000 per annum must be automatically enrolled into NEST or an alternative pension offered by the
employer.
9.1.1 NEST Costs and Restrictions

NEST agreed a loan with the DWP, which has helped it pay for the scheme to be set up. The loan will also
help to pay for running the scheme in the early years, while the membership is still growing.
NEST collects an annual management charge (AMC) from its members. This is set at 0.3% of a member’s
total fund each year. Members will also pay a charge of 1.8% on each new contribution they make. The
initial charge of 1.8% on contributions will remain until NEST has repaid its operational set-up costs
funded by the loan from the DWP.
In view of the effective government support in establishing NEST in competition with other schemes in
the private sector, certain restrictions were placed on NEST in the initial scheme design. The restrictions
were a maximum contribution limit that an employee can make to NEST and a restriction that prevents
employees from transferring their pension plans in and out of NEST.
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The restrictions had been set partly out of fear that employers would choose to ‘level down’ on their
pension promises to their members, and decide to move them from a more generous in-house scheme
to the low-cost NEST alternative. The insurance industry in particular – a competitor to NEST in multi-
employer schemes – had pushed for NEST to serve only the smaller and mid-sized employers for whom
it was designed.
An independent review in 2010, commissioned by the DWP, concluded that the limits should be lifted
in 2017. In 2012, the Work and Pensions Select Committee recommended that the limits on annual
contributions and transfers be lifted ‘as a matter of urgency’, for fears that firms may not be able to use
NEST.
Auto-enrolment may bring another dilemma to planners. The DWP, with enforcement by TPR, has
designed the rules to make sure employers do not encourage employees to opt out of their qualifying
WPS and lose the employer contribution.
Likewise, the FCA will take a very dim view of planners recommending an opt-out and, by default, would
consider this to be against an individual’s interests to do so due to the loss of the level of employer-
sponsored contribution. Many corporate employee benefit firms involved in the establishment of
corporate pension schemes do not offer individual member level advice, and guide individuals to seek
independent advice themselves.
The prevailing economic situation in the UK could see more people considering whether pensions
versus paying down debt is the most appropriate solution for their own personal circumstances. This can
create a challenge to advisers if approached, as it could affect both lower- and higher-paid individuals
who seek individual advice elsewhere, particularly on whether they should opt out of a scheme.
Example
Sean is an example of exactly the sort of client that advisers may come across.
He is aged 42 and married with two children of school age. He earns £75,000 pa, but still finds providing
for his family can be tough. On the horizon, Sean is thinking about how to set aside enough for potential
higher education costs, and about how the family also aspires to one more ‘trade-up’ to their dream
home at some point. Lastly, Sean is thinking seriously about how he will afford to retire comfortably in
the future. He had a tough time following the credit crunch, and a period of unemployment that has
depleted much of his savings.
Long gone are the days when colleagues retired at 55 or even considered early retirement at 50; back
then, they had a generously funded DB company scheme. Sean has come to realise that early retirement
is no longer an option, and 67 is a more realistic age.
He is disillusioned with pensions: high charges, poor performance, and lack of access to his savings if
needed and that £10,000 credit card debt is costing him £1,800 pa to service in interest alone.
It’s no wonder that adequate funding of his pension plan has not been a top priority. Sean’s company
offers a 3% + 3% matched contribution scheme at present and has just written to him about changes
it will be making due to auto-enrolment. He has recently considered opting out completely, to
concentrate on clearing his personal debt.
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9.2 Auto-Enrolment
Auto-enrolment requires employers to automatically enrol eligible employees into a WPS. Eligible
employees are those aged at least 22, under SPA and earning above the income tax Personal Allowance.
Contributions are only payable on earnings above the current threshold of £10,000 pa and on earnings
2
between £5,824 and £42,385. (The employer must contribute when an employee earns £5,824 even
though the employee only starts contributing at earnings of £10,000.)
Employers will also have an ongoing duty to maintain qualifying pension provision for employees who:
• are already members of qualifying schemes, or

• become members of such schemes.
9.2.1 Minimum Contributions

The required pension contributions will apply equally to DC schemes and NEST, and the minimum
contribution must be 8% and the employer has to pay at least 3%. Unless the employer pays more than
3%, the employees must make up the remainder (apart from 1% tax credit). Employers and employees
can, of course, choose to make higher contributions. These new requirements began on 1 October 2012
but the levels of contribution are being phased in more gradually as follows:
• October 2012 to September 2017 – contributions must be at least 2% with a minimum of 1% from
the employer
• October 2017 to September 2018 – contributions must be at least 5% – the employer’s
contribution at least 2%
• October 2018 – contributions of 8% and at least 3% being paid by the employer.
9.2.2 Gradual Introduction of Auto-Enrolment

Although new duties came in from 1 October 2012, the size of an employer’s largest PAYE scheme will
determine the point at which the new duties affect their organisation. TPR will write to employers 18
months before their staging date.
10. The Introduction of Pension Flexibilities
Learning Objective
2.3.4 Understand the pension flexibilities introduced by the Finance Acts 2014–15 and the Pension
Schemes Act 2015 and their impact on retirement planning: eligibility based on retirement age;
available choices: merits and limitations; taxation; fees and expenses
In the 2014 Budget, George Osborne introduced the idea of pension freedom and choice in what
he called the most radical changes to pensions in a century. These proposed changes have been
summarised below:
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• Minimum age to access pensions – the minimum age is being linked to the SPA minus ten years.
For example, the minimum age will transition between 6 April 2019 and 5 April 2020 to age 56, and
between 6 April 2026 and 5 April 2028 to age 57. This proposal appears to have been dropped by the
government for the time being.
• Maximum age of selection – there is no maximum age for accessing a pension. Once an individual
has reached the minimum age of access they may access their pension at any time they choose and
are able to take their benefits via a number of different methods. They may defer accessing their
pension benefits indefinitely.
• Uncrystallised funds pension lump sum (UFPLS) – individuals may take all or part of their pension
funds without establishing a drawdown portfolio or purchasing an annuity. Where this is selected, a
proportion of the payment received will be tax-free (as PCLS) with the remainder subject to marginal
income tax rates, ie, the sum they receive (in excess of any PCLS) will be treated as income for tax
purposes in the year of receipt. The PCLS portion is the lower of 25% of the pension fund and 25% of
the LTA, unless their personal LTA permits a higher amount.
• Flexi-access drawdown (FAD) – crystallised pension benefits that are not commuted via UFPLS or
used to secure a lifetime, or fixed-term, annuity for income will become a FAD pension portfolio if
designated to drawdown. Under FAD, they can select to take an income whenever they wish for as
much as they like with no minimum. The income will be taxable at their marginal rate of income tax.
Since there will be no income limits for FAD, the periodic maximum income reviews which apply to
capped drawdown will not be applicable for FAD. A tax-free cash sum of up to the lower of 25% of
the pension fund allocated to FAD and 25% of the available LTA, unless the member’s personal LTA
permits a higher amount, can be taken when funds are designated to drawdown. The remaining
funds are taxed as income when they are withdrawn.
• Partial selection – it may be possible to split a pension fund into uncrystallised and crystallised
portions to suit personal financial planning requirements. Each portion will then be subject to the
appropriate regulations and tax treatment. However, if any portion of any pension is used for UFPLS
or FAD (once income has been taken), the MPAA replaces the annual allowance.
• Money purchase annual allowance (MPAA) – an individual’s annual allowance in respect of
contributions to DC pension schemes will be replaced by the MPAA should they access DC pension
funds in any of the following ways:
via UFPLS
receiving income above the maximum limit for capped drawdown members (from 6 April 2015,
this causes the arrangement to automatically become a FAD arrangement)
accessing a flexible annuity
once income has been taken from a FAD plan.
It was intended that the level of MPAA would be reduced for the tax year 2017–18 from £10,000
to £4,000. However, as a result of the general election this proposal was left out of the Finance Act
2017. It is therefore unclear whether this will take place in this tax year. In a Statement made on 13
July 2017 by the Financial Secretary to the Treasury, ‘The Government ...expects to introduce a Finance
Bill as soon as possible after the summer recess containing the withdrawn provisions. Where policies
have been announced as applying from the start of the 2017–18 tax year or other point before the
introduction of the forthcoming Finance Bill, there is no change of policy and these dates of application
will be retained. Those affected by the provisions should continue to assume that they will apply as
originally announced’. The carry-forward of unused annual allowances from earlier years cannot be
used to increase the MPAA.
It is important to note that the MPAA only applies to DC pension contributions made by the
individual once one of the events above has triggered the MPAA. The total annual allowance of,
currently, £40,000 (or lower amount if subject to taper) plus any amounts carried forward from the
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previous three years continues to apply to all pension benefits (eg, benefits accrued in DB schemes
and contributions made to DC schemes). Any unused MPAA in a tax year cannot be carried forward.
In the year that the MPAA is triggered, any DC contributions made before the trigger date do not
count towards the MPAA (but do count towards the standard annual allowance).
2
• Guidance guarantee – to help individuals make informed decisions about their pension, the
government has introduced a guidance guarantee that entitles all individuals with an uncrystallised
portion of a money purchase pension to free impartial guidance when accessing their pension
savings. This is officially known as Pension Wise, and includes the option of a face-to-face
conversation about benefit options. Pension providers are required to contact scheme members
six months before their selected retirement date with details, although this information can be sent
earlier if requested. It will not, however, be mandatory for anyone to take such guidance before
accessing their pension savings.
• Annuity purchase – it is still possible to buy an annuity with some or all of the funds from their
pension. Annuity product rules have been relaxed and it is expected that new and innovative
products will be available in the market. Where a PCLS and/or a lifetime annuity (which is not a
flexible annuity) is the only basis of benefit withdrawal used, the annual allowance and carry-
forward of unused annual allowance provisions still apply should they wish to continue to save into
their pension.
• Flexible drawdown – if they were in receipt of a flexible drawdown payment on or before 5 April
2015, their crystallised pension portfolio was automatically migrated to FAD on 6 April 2015.
• Capped drawdown – if they selected this on or before 5 April 2015, it may be maintained as a
framework for taking pension benefits. Capped drawdown allows for an annual income between nil
and 150% of the rates published by the Government Actuary’s Department (GAD) to be selected,
which must be reviewed three-yearly up to age 75 and annually thereafter. If capped drawdown is
the only basis of benefit withdrawal used, the annual allowance and carry-forward of unused annual
allowance provisions still apply should they wish to continue to save into their pension.
The 2015 Summer Budget introduced a number of further changes.
• Pension input periods (PIPs) – any pension input period (PIP) open on 8 July 2015 was closed on
that day. For everyone the next PIP was 9 July 2015 to 5 April 2016. All PIPs are now aligned to the
tax year (6 April – 5 April).
• Transitional rules for the annual allowance – due to the alignment of the PIPs, the 2015–16 PIP
was split into two mini PIPs for the purpose of the annual allowance:
1. the pre-alignment period, and
2. the post-alignment period.
• annual allowance for contributions assessed against:
pre-alignment period was £80,000 gross
post-alignment period was £0, however
unused allowance for the pre-alignment period of up to £40,000 gross could be carried forward
into the post-alignment period.
Recent Developments
• Pension exit fees – from 31 March 2017, early exit charges have been capped at 1% of the value
of existing contract-based personal pensions, including workplace personal pensions. Early exit
charges that are set at less than 1% may not be increased. No early exit charge can be applied to a
new personal pension contract entered into after 31 March 2017. The FCA has said this is to ensure
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people can access their pension pots without being deterred by charges. This is an important step
so people feel able to access their pension savings should they wish to.
10.1 The Tapered Annual Allowance

From 6 April 2016, individuals who have adjusted income in any given tax year greater than £150,000 will
have their annual allowance restricted for that particular tax year, providing that their threshold income
(broadly adjusted income less pension contributions/accruals from all sources) exceeds £110,000.
For every £2 of adjusted income above £150,000, the annual allowance will be reduced by £1 until the
annual allowance is reduced to £10,000.
Adjusted income includes not only income but the value of any pension contributions made by the
individual, their employer or a third-party.
The maximum reduction to the annual allowance will be £30,000, so anyone with adjusted income in
excess of £210,000 will have an annual allowance of £10,000.
10.2 Carry Forward of Unused Annual Allowance

It is possible to make contributions in excess of the annual allowance and not suffer an annual allowance
charge if they have unused annual allowances in the previous three tax years and sufficient UK taxable
earnings in the current year to claim tax relief.
Where an individual has been a member of a pension scheme but has not fully used their annual
allowance in previous tax years, it is possible to ‘carry forward’, or mop up, these unused allowances in
certain circumstances:
• Their annual allowance for the current tax year must be fully used first.
• Any unused allowances from the previous three tax years can then be accessed (earliest year first)
and used.
• Carry-forward relates to unused annual allowance not unused tax relief.
• Any contribution made in the current tax year, even when mopping up previous unused allowances,
will be assessed for tax relief purposes against tax-relievable income in the current tax year. This
means individuals must have sufficient earnings in the current tax year to fully benefit from any tax
relief.
10.3 The Annual Allowance History
Year Annual Allowance

2014–15 to 2017–18 £40,000 *
2013–14 £50,000
2012–13 £50,000
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* As detailed above in the bullet covering ‘Transitional rules for the annual allowance’, it was possible to contribute up to
£80,000 for the 2015–16 tax year depending on the timing of contributions between the pre- and post-alignment tax
periods.
Please note that although it was possible to carry forward an unused pre-alignment period allowance
2
(up to £40,000) to the post-alignment period, for the purposes of the normal carry forward rules as
detailed above, the pre-alignment and post-alignment periods constitute only one tax year (2015–16);
therefore:
• if an individual made a contribution of £40,000 in the ‘post-alignment’ period they will have fully
utilised the 2015–16 annual allowance, regardless of whether the pre-alignment period was fully
maximised
• if an individual made a contribution of £80,000 in the ‘pre-alignment’ period, they will have fully
utilised the 2015–16 annual allowance, as there would have been no facility to carry forward
between the pre- and post-alignment periods
• if an individual made a contribution of less than £40,000 in the ‘pre-alignment’ period, they would
have some capacity to carry forward the unused allowance from the post-alignment period to future
pension input periods (now aligned with tax years), as their 2015–16 annual allowance would not
have been fully utilised.
10.4 Carry-Forward from 6 April 2016

The carry-forward rules will remain the same from 6 April 2016, but should this or any future tax year be
subject to the tapered annual allowance (as detailed in Section 10.1) only this tapered annual allowance
figure (less any contributions made/accruals in the PIP), can be carried forward.
11. Financial Planning and Advice for Retirement
11.1 Retirement Planning Objectives
Learning Objective
2.7.1 Be able to analyse retirement aims and objectives taking account of the following factors:
availability and prioritisation of savings and investments; attitude and expectations as regards
retirement and working in later life; assumptions and impact; conflict with other objectives;
timescales and risk
Pensions affect everyone. But too few people understand them and what is needed for the provision of
an adequate retirement income.
11.1.1 Pension or Savings?

Pensions receive tax relief from the government. This means that part of the retirement income is being
paid for by the state.
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Although they will be taxed on their pension, the tax-free lump sum and the possibility that they will be
paying a lower rate of tax in their retirement make this worthwhile for most people.
There are also some other advantages: for example, if they were to die before they retired, the whole of
their pension fund should be available tax-free for their spouse or dependants.
For most people, the answer is to have some shorter-term savings that are available if they need them
but to have a significant amount in a pension that is available for retirement. Once the money is in a
pension, there is no temptation to spend it!
11.1.2 Perceptions of Retirement and Pensions

Young people are often very much focused on their immediate lives, and surveys suggest they rarely
give any thought to the future beyond the next few years, let alone their retirement years and how
they will fund them. Old age has tended to be perceived as restricted, boring and bleak and not worth
thinking about.
When considering how their spending might alter when they retire, the first reaction, of many, is that
the cost of living will be lower, as they will have paid off their mortgage and will have fewer social
engagements and interests.
The process of applying to join an employer’s pension scheme has been met with enough apathy
that the government has had to impose auto-enrolment. Other barriers are also perceived to exist
for younger individuals. Retirement may be seen as very distant; money pressures, and the longer-
term nature of how long savings are tied up for, may make other more immediate financial needs
more pressing. A number of pension scandals, or employers becoming insolvent, have left negative
perceptions where individuals see other methods which perhaps make higher returns, such as a second
property. A considerable number of barriers to saving in a pension are perceived.
However, people are living longer, the SPA has been increasing and there is a realisation that the
average worker will have to work longer to be able to afford retirement.
11.1.3 The Role of the Employer

We have seen that the government is seeking to place greater emphasis on employers to encourage
their employees to take up membership of pension schemes, such as the introduction of NEST as a
result of the Pensions Act 2008. Stakeholder pensions were the first step and NEST is a further, more
comprehensive version unless the employer certifies that they are exempt, due to having fewer than
two employees (this figure was five under the stakeholder pension) or by having a WPS that meets at
least all the minimum requirements.
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11.2 Alternative Solutions
Learning Objective
2
2.7.2 Be able to evaluate alternative solutions available for pension income and long-term care
requirements: alternative sources of capital including non-pension investment assets; equity
release products; proceeds from sale of a business or property; inheritance; buy-to-let,
individual savings accounts (ISAs), unitised securities, alternative investments; Sharia’a-
compliant solutions
11.2.1 Equity Release (ER) Schemes

Equity release (ER) schemes are a type of product that can provide funds in a tax-free cash sum from
an individual’s home while allowing them to continue living there as long as it is the main residence.
There are two main types, known as lifetime mortgages and home reversion plans. Flexibility to transfer
the plan to another property without penalty is one feature, together with a built-in guarantee that the
property does not fall into negative equity. This means that a proportion of the equity of the property
can still be passed to beneficiaries upon the plan-holder’s death.
11.2.2 Non-Pension Investment Assets

Some individuals choose not to save for retirement via a traditional retirement plan, instead opting for
other methods of funding retirement or relying on state provision. Similarly, long-term care provision
can be funded through other assets such as an additional property, business assets or investments
without the need for specific long-term care products. The key issue in terms of retirement planning is
ensuring that the client understands the implications of using alternative assets to fund retirement, as
these do not offer the same tax incentives as recognised retirement plans, and there are many different
options in types of retirement savings vehicles that afford the choice for the client to tailor for their
needs and have much greater control over the investments within such vehicles (eg, SIPPs).
The adviser must consider the practical implications for a client. No matter how tax-efficient it is to
save for retirement in a recognised scheme or plan, if the client’s disposable income is used on other
priorities, eg, funding a new business, they may simply not be able to afford to fund a retirement plan
at that point in time; indeed the business may be viewed as the future retirement plan. In such cases it
is more of a priority to ensure that the business assets are protected, as the risk to the client is greater.
If the family’s income, retirement plans, long-term care assets and all other assets are all dependent on
one asset – the business – the inherent risk position for the client becomes much greater, and this must
be carefully explained.
11.2.3 Proceeds from Sale of a Business

When a client sells a business, firstly there are tax implications in the form of CGT: the level charged
depends on whether the client has sold the whole actual business or has sold their shares in the
business. On the basis that the size of business allows the client to qualify for Entrepreneurs’ Relief, the
CGT could be 10% on all qualifying gains.
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To qualify, your client must:
• dispose of part or all of their business as a sole trader or partner including the assets which have
been owned
• own at least 5% of the shares and voting rights in what is called a ‘personal company’
• sell shares acquired since 5 April 2013 through an Enterprise Management Incentive (EMI) or sell
assets that were lent to the business.
The business or shares must have been owned for at least one year and for shares the individual had
to be an employee and the company a trading company. If the company or business stops trading
qualification can apply if the sales occur within three years.
However, if the business assets rather than just shares are sold, the CGT charge may be as much as 20%.
The asset must have been owned for at least one year before disposal for Entrepreneurs’ Relief to apply.
The issue here is that, in funding retirement, the sale of a business is not as tax-efficient as a retirement
plan, where contributions are grossed up during the saving period and some benefits are paid with a
tax-free lump sum in the drawdown stage. In some cases the payment received for selling a business is
made in the form of the purchasing company’s shares, and this brings its own challenges in terms of risk
profile and converting these to a steady income stream. Similarly, in funding long-term care, specialist
policies pay out the benefits to fund the care provision tax-free and are more easily workable in cases
where Powers of Attorney (PoAs) are invoked. These policies can be designed to increase payouts in line
with inflationary increases in the cost of care.
While it is not impossible therefore to create long-term funding streams from the proceeds of a business
sale, as opposed to purchasing a long-term care policy, it may be more complex and more costly.
11.2.4 Inheritance
The proceeds of an inheritance could be used to fund either retirement or long-term care. The main
drawbacks relate to the fact that it is impossible to plan when the funds may be inherited and in most
cases it is difficult to plan how much the proceeds may be. For example, a client may inherit from
a parent but the parent’s long-term care costs or ER activities may have considerably depleted the
assets that the client would have expected to receive. The death of an elderly person may provide the
assets to fund the long-term care or retirement income requirements for a spouse. However, the assets
may not be liquid, eg, they may be in the form of property and furnishings and this may not meet
the requirements of the inheritor at that time. A client who inherits may additionally face IHT issues,
depending on whether the deceased made any provision or took any action to mitigate IHT liability;
ultimately this rests in the control of the deceased prior to death and not in the control of the client/
person who inherits. For all of the reasons highlighted in this section, funding retirement or long-term
care solely by expecting to inherit assets is not a sensible option.
11.2.5 Due Diligence and Suitability

As with any type of financial decision, whether investing/saving to provide for retirement or for long-
term care, conducting due diligence on the product or service recommended and ensuring its suitability
for the client’s needs is at the very core of financial planning. Without this, the client could be better
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off never having taken financial planning advice and even better off without making provisions.
Products and services which inherently do not actually provide what the client requires at the time
when it is required put the client in a worse financial position than if they had not paid the premiums/
contributions for the product in the first place. The endowment mortgage mis-selling, pensions mis-
2
selling and more recently the mis-selling of payment protection insurance (PPI), as well as flaws in
structured investment products, are very public examples of the vital importance of due diligence and
suitability especially when they relate to retirement and long-term care needs, when clients are typically
older and more vulnerable either financially, physically or mentally.
11.2.6 Individual Savings Accounts (ISAs)

Individual Savings Accounts (ISAs) are an important method of saving for the future not least because of
the changes introduced on 6 April 2017. There are now four types of ISA plus the Junior ISA (JISA). These
are:
• cash ISA
• stocks and shares ISA
• innovative finance ISA
• Lifetime ISA (LISA).
Overall, the contributions to ISAs are limited to £20,000 in total for the tax year 2017–18 across all types
of ISA except the LISA which is limited to £4,000 per tax year and the JISA which is limited to £4,128.
Although there is no tax relief on the way in, the growth is tax-free and income can be drawn tax-free.
To open an ISA, an individual must be 18 years or over (except for a cash ISA which can be opened at
16) but under 40 to open a lifetime ISA. In addition to the new LISA, ISAs have increased flexibility in
that money can be withdrawn but also put back in in the same tax year without the allowance being
reduced. So, if a person puts in £15,000 and takes out £4,000 they can still put in £9,000 being the
remaining allowance of £5,000 and the withdrawal of £4,000. This only applies to flexible ISAs.
For the LISA, the maximum contribution is £4,000 a year and the government will give a bonus of
25% of the money put in so up to a maximum of £1,000. A LISA can be cash or stocks and shares or
a combination of both. The £4,000 contribution limit forms part of the annual ISA limit of £20,000 in
2017–18.
However, unlike other ISAs there may be a withdrawal charge of 25% of the amount withdrawn. The
withdrawal charge will not apply if it is used towards a first home, the holder has reached age 60, or
the holder is diagnosed as having less than 12 months to live. To qualify for the home purchase, the ISA
must be open for at least 12 months and the house being bought worth less than £450,000 with the aid
of a mortgage. The money must be paid directly to the solicitor or conveyancer. In the tax year 2017–18,
a help-to-buy ISA can be transferred to the new LISA.
11.2.7 Buy-to-Let
Buy-to-let has grown in popularity in recent years, mainly prior to the financial crisis and recession
commencing in 2008. A number of structural issues emerged from the recent financial crisis in terms of
investors in this market accessing borrowings too easily and over borrowing. Another issue has been
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the risk involved, particularly when the property market started to fall although the present difficulties
in obtaining mortgage finance for many have created an increase in demand for residential rental
property.
The economic factors aside, one of the key issues in funding either retirement or long-term care via
buy-to-let investments is the lack of liquidity, eg, not being able to sell a property asset quickly enough
to release capital when needed. It is worth noting that, with enough diversification of rental properties,
it is possible to create a relatively inflation-proof steady income stream; however, the income will be
subject to income tax and the investor will have to be very wealthy to afford a large property portfolio
with little exposure to borrowings. Additional issues could arise on the death of the investor in terms of
IHT liabilities.
In addition, several tax changes have been made in relation to the buy-to-let property market. This
includes a 3% additional tax charge on top of the normal stamp duty land tax (SDLT), and the withdrawal
of tax relief on the interest paid on mortgages on second properties.
11.2.8 Unitised Securities

Unitised securities are commonly used within the underlying investment vehicles for both retirement
planning and long-term care policies. They are useful in diversifying risk, particularly if an individual’s
policy is relatively small. One of the drawbacks of unitised securities is the lack of control the investor
has. This is ultimately an issue of accurate risk profiling – a wealthy investor with a suitably large portfolio
could hold direct investments and still have a well-diversified portfolio within a pension wrapper.
Equally, a wealthy client may be able to afford to fund bespoke long-term care in their own home.
11.2.9 Alternative Investments

Alternative investments include but are not limited to hedge funds, derivatives, property, antiques and
wine. While there is no reason that any combination of alternative investment types cannot be used to
fund retirement or long-term care, the issues of liquidity and, in the case of derivatives and hedge funds,
additional levels of cost and complexity make these investment types alone not ideal.
Sharia’a Pensions and Investments

The key to Sharia’a-compliant investment is the underlying investments that a product is exposed to.
Effectively, there are certain industries or activities that are not permitted for Muslims to participate
in under their religious beliefs. Prohibited investments include alcohol, gambling, pornography and
what may be seen as the exploitation of others. Receiving or charging interest is also not allowed, so
investments in conventional banking and highly leveraged products must be avoided, together with
futures and options or companies that make use of these.
Islamic finance has grown considerably and so have the Sharia’a-compliant pension and investment
funds to meet the demand. The following are some of the more common types:
• Commodity – physical commodity investment is allowed but not speculation on commodities,

although it is permissible to use istisna’a contracts, where the price of a product is agreed in
advance and manufactured for a set date. The use of bay al-salam contracts is another option. These
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are very similar to forward contracts, except that the seller receives the payment immediately while
the buyer receives a discount on the spot price in return for taking on the contract risk.
• Equity – equity funds present challenges, as the level of scrutiny required of what the company
does is immense. A number of funds that operate in specific industries are permitted, but if the
2
underlying companies hold or invest in interest-bearing securities then a proportion of the returns
in the fund must be donated to charity.
• Ijarah – this involves the fund purchasing land/property or equipment and retaining its ownership
but lending it for regular payments. The assets should not be used for activities prohibited under
Islam, eg, making alcohol.
• Murabahah – sometimes called cost plus, the fund purchases assets and sells them on at cost plus
a profit margin. The price inclusive of profit is pre-agreed with the client and therefore there is
normally a fast turnaround of assets rather than long-term holdings.
Advantages
• provide a permissible vehicle for investing in funds (therefore spreading risk) while maintaining
moral duty to follow religious principles
• promote ethical stance as the equivalent niche ethical funds do.
Disadvantages
• far greater costs as a result of necessity to verify Sharia’a-compliance
• lack of traditional hedging techniques permitted, so management of risk poses a greater challenge.
11.2.10 National Savings & Investments (NS&I)

National Savings & Investments (NS&I) products are backed by the government and, as such, are
regarded as risk-free investments. Details of the current terms and product offerings are available on the
NS&I website (nsandi.com/savings).
NS&I is an executive agency of the Chancellor of the Exchequer, and is accountable to the Treasury. It
provides deposit and savings products to the investing public, and in doing so raises funds on behalf of
the UK government. An investor holding an NS&I product is in essence lending to the government.
NS&I offers a wide range of products, from easy-access savings accounts to longer-term investments
and, of course, premium bonds. As the products are underwritten by the government, they are regarded
as effectively free from the risk of default. None of NS&I’s products are subject to CGT, but some products
are subject to income tax. The following are its key products:
Savings Accounts
NS&I offers a range of products aimed at savers, including:
• Investment account – this is a postal-only account. It pays variable rates, and has no set term. The
minimum deposit is £20 and the maximum is £1 million. Interest is taxable and currently pays 0.45%
gross annual equivalent rate (AER).
• Direct saver account – this account offers the convenience of being able to manage accounts
online and by phone. Interest rates are variable, taxable and paid gross. The minimum investment is
£1 with an upper limit of £2 million per person and currently pays 0.7% gross AER.
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Income-Providing Products
• Guaranteed income bonds – NS&I’s product aimed at the investor who is seeking interest income.
These provide a guaranteed monthly income. The minimum holding is £500 and the maximum total
holding £1 million. Offered for terms of one, three and five years, the interest is taxable and paid net.
These are available only to existing customers with maturing investments.
Growth Products
NS&I’s growth schemes include:
• Index-linked savings certificates – these pay a return which is guaranteed and linked to the
inflation rate as measured by the RPI. The minimum holding is £100, and the maximum is £15,000
per issue. Certificates can be bought for terms of either three or five years. Returns are tax-free. There
are currently no new index-linked savings certificates available. These are available for customers
with maturing investments.
• Fixed-interest savings certificates – these pay a fixed rate of return over a period of time, such
as two and five years. The returns are guaranteed for the term and are tax-free on maturity. The
minimum holding is £100 and maximum is £15,000 per issue. There are currently no new fixed-
interest savings certificates available. These are available for customers with maturing investments.
Neither index-linked nor fixed-interest savings certificates are currently available for new investment,
although it is possible to reinvest existing holdings at maturity.
• Guaranteed growth bonds – these provide a guaranteed return on an investment. The minimum
holding is £500 and maximum is £1 million. Choice of terms are one, three and five years, with access
available before maturity subject to a loss of 90 days’ interest. Interest is taxable and paid net. There
are currently no new guaranteed growth bonds available. These are available for customers with
maturing investments.
• 65+ bonds – often referred to in the press as ‘pensioner bonds’, these are a growth product available
to those aged 65 and over. Although not currently available for new investment, existing holders
earn interest on their capital for a fixed term, in the same way as guaranteed growth bonds. Interest
is earned daily, and added on each anniversary. The minimum investment is £500, the maximum
£10,000, and capital can be accessed before maturity, subject to the loss of 90 days’ interest. All
interest is taxable and basic-rate tax is deducted at source. There are currently no new 65+ bonds
available. For customers with maturing investments they can reinvest into a standard guaranteed
growth bond.
Tax-Free Products
Some of NS&I’s products provide returns free of tax (although the returns on these products are not
generally high, also reflecting the fact that they are regarded as very safe). They include:
• Premium bonds, which carry no capital risk (the holder can withdraw their capital in full when they
wish). Instead of earning interest, bonds are entered into a monthly draw in which they could win
their holder up to £1 million (or one of many smaller amounts). The minimum holding is £100 and
the maximum is currently £50,000. The odds of winning are 30,000 to 1.
• Direct ISA – this account is NS&I’s version of the cash individual savings account – a type of scheme
whereby the holder can earn a return free of capital and income taxes. For 2015–16, investors can
pay a maximum of £20,000 in tax year 2017–18 into NS&I’s Direct ISA, earning variable-rate interest
on this free of income tax, currently 0.75% AER. There are no withdrawal restrictions.
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• Children’s bonds – a child’s parent or legal guardian can buy new bonds for them under the age of
16. These run for a period of five years and offer a guaranteed rate of interest (paid daily) from the
outset. Returns are tax-free with no tax liability on the parents. The minimum investment per issue
is £25 and the maximum is £3,000. Access is allowed during the term, subject to the loss of 90 days’
2
interest, and no interest is credited if the bond is cashed in during the first year. The current issue
guaranteed for five years is paying 2.0% AER.
11.3 Investments Available to Meet Objectives
Learning Objective
2.7.3 Be able to evaluate the merits, limitations and suitability of investments available to meet
stated objectives taking account of: when and how retirement may occur; phased retirement;
projected levels of investment risk and return; investment strategy and fund selection criteria;
impact of fees and charges; products and wrappers, critical yield and optimal crystallisation
dates; other sources of non-pension income
Attitudes to retirement have changed, and it is now viewed by many as the beginning of an exciting
new phase of life. It’s not just about how to save for retirement, but what to do with savings once you’ve
retired.
It is vital to meet changing retirement needs – from saving in a tax-efficient way, through tailoring an
investment strategy, to planning for and providing a flexible retirement income.
Individuals can use non-pension savings and investments to form part of their retirement income. For
example, a client might not want to crystallise their pension if the investments within their SIPP have
fallen before retirement; therefore, they could decide to use the capital and income produced from
their ISA until such time as they want to crystallise their SIPP. Having savings and investments in various
wrappers can provided added flexibility at retirement.
11.3.1 Investment Options

A particular feature of using a pension product or wrapper for the purpose of retirement planning is
the tax-efficient environment in which the investments can grow. The various products and wrappers,
such as personal pensions, workplace pensions, SIPPs, SSASs and ISAs, have been covered in detail in
the previous sections. This section concentrates on the mix of investments within such plans to meet
retirement needs.
Pension funds normally comprise a mixture of equities, fixed-interest securities, property investments
and funds, and could include derivatives. The investment options change with the circumstances, risk
tolerance and aims of the individual. However, broadly, the investment approach is to focus investments
on capital growth during the earlier years of retirement saving, moving to reducing risk and a focus on
income when the individual is approaching the chosen retirement age (the last five years or less).
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Examples of investments in pension funds include:
• Medium risk – the fund aims to provide capital growth over the long term. The mix of investments
gives the possibility of high returns from company shares, but with the safety of spreading the risk
over a wide range of assets, including bonds, property and cash.
• Low/medium risk – the fund aims to provide capital growth over the long term with a low level of
risk. The mix of investments aims to achieve a higher level of return than cash alone by investing in
fixed-interest securities.
The asset allocation could move from 75% invested in equities to as little as 25% in equities once the
individual reaches the point of five years before their chosen retirement age.
When selecting funds, it is important to consider the risks associated with the fund, how the fund is
correlated with other funds or investments the client holds and whether the overall risk is in line with
the client’s attitude to risk and capacity for loss. It is also important to measure the expected return of
the portfolio to ensure that it is aligned to the returns required by the client to meet their objectives. For
example, if the expected return is below the return the client requires, they should consider funding the
shortfall through further investment or by taking more risk if appropriate.
The return received from a portfolio will be affected by the overall charges applied to the investments
within the portfolio. The higher the charges applied for investment management and financial planning
advice, the lower the net return to the client. Ultimately it is net return that is important; therefore,
a single focus on low charges is not going to increase the net return of a portfolio if the investments
chosen are poor.
Example
A fund that would be suitable when the investor has less than five years to retirement is a fund that aims
to track the performance of the FTSE Actuaries UK Gilt Index for gilts with an outstanding term of over
15 years. The fund invests in UK government fixed-interest stocks whose performance matches the costs
of buying a pension income.
An alternative approach might be a fund that aims to provide a safe return in line with bank and
building society interest rates, by investing in cash investments with first-class banks and major UK
companies. The fund has very little risk attached to it. It aims to protect values from falling but this is not
guaranteed.
11.3.2 Risk Profiles and Investment Advice

In order to establish the suitability and risk of investments for a client, it is important to calculate the
client’s risk profile, which is made up of two parts:
• risk attitude
• capacity for loss.
These areas can create a mismatch; for example, a client with a large pot of assets might have a low-
risk attitude but have a high capacity for loss, as their wealth means they can afford to take on more
risk than an investor with the same risk attitude but a smaller pot of assets. A contradiction may arise
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where a client prefers the security of cash, which may over the longer term become a high-risk strategy
because of inflation.
In order to capture and reflect the client’s risk profile, a variety of tools are available in the market.
2
Most are question-based, and apply scores to individual answers, then calculate an overall risk score.
This translates to a risk profile, for example cautious, balanced, adventurous, or on a scale from 1–10.
However, risk profile tools are just an aid to assessing a client’s risk profile and capacity for loss and
should not be used in isolation.
Once risk profiling is completed and discussed, a suitable investment fund must be chosen or appropriate
asset allocation decisions made to create an efficient portfolio which maximises the investment return
for the appropriate level of risk. Suitability of advice is very important as an adviser must act in the best
interests of their customer (the best interests rule) and under Principle 9 of the Principles for Businesses,
‘a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any
customer who is entitled to rely upon its judgement’.
One of the results of the FCA’s focus on suitability has been a change in how many life companies and
other pension product providers now offer portfolios which match risk attitudes to asset allocations.
Some also come with automatic regular rebalancing so that the original asset allocation is maintained
and portfolio drift is avoided. This can ensure ongoing suitability and is an ideal solution to help advisers
comply with the FCA requirements, as highlighted in the FCA Pension Switching Thematic Review.
11.4 Initial Planning, Recommendations and Implementation
Learning Objective
2.7.4 Be able to evaluate a structured and transparent process for developing, implementing,
monitoring and reviewing a client’s retirement provision over the long term; initial planning;
recommendation and implementation; ongoing management and periodic review; managing
significant changes to the original strategy; reviewing near, at and beyond the retirement date
Providing retirement planning advice firstly involves discussing with a client their financial needs at and
after retirement, which will then allow their goals to be identified.
A full fact find should be carried out and key information about retirement plans should be identified.
These include:
• when the client would like to retire

• how they would like to retire (for example will they stop working or work part-time for a time period)
• any capital needs at retirement, for example the repayment of a mortgage
• how much income they will need through the various stages of retirement (some clients see a spike
in expenditure in the early years of retirement due to increase time to spend money as well as the
cost of holidays)
• how much income a spouse/civil partner or dependants will require on their death.
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The retirement plan should of course be reconsidered as part of the client’s wider financial plan to
ensure that the client’s other objectives should be met, for example estate planning or long-term care
objectives. Once the planning has been carried out any recommendations should be implemented and
the suitability of any products or investments should be regularly reviewed.
11.4.1 The Importance of Regular Pension Planning Reviews

There is no doubt that joining a pension scheme can be confusing for the client. Pensions are a long-
term commitment. It is highly likely that the client’s life is going to change during the duration of time
they contribute to a pension, which could be 20 or 30 years or more.
Jobs, salary, priorities and commitments are all prone to change, and all of these can have a profound
effect on pension planning. It is vital that the pensions adviser, individually and jointly with the client,
conducts reviews of the pension on a regular basis, at least annually.
It is also vital that financial planners, where necessary, defer to the advice of suitably qualified
investment managers for the construction of investment portfolios.
Changing Jobs and How This Affects Pension Planning

While many may only think about the increase in their salary if they change jobs, it is important to also
think how the pension may be affected. The individual may or may not keep the pension benefits in the
same workplace pension scheme or may move them to a new workplace scheme or personal plan or
SIPP.
An individual who is in a DB (or final salary scheme) may move to an employer with a DC scheme. This
may result in the need for additional pension planning and review, as the investment and longevity risks
move from the old employer to the individual.
Redundancy and Pension Planning

Unfortunately, except for a few chosen professions, few of us can rely on a job for life. And, in times
of economic uncertainty, redundancy becomes more commonplace. Of course, along with a loss of
earnings, redundancy significantly affects your pension planning.
If a WPS member has been a member for less than two years, the contributions are returned to the
member. For a member who has more than two years in the scheme, pension benefits can remain in the
current scheme or be transferred to another scheme.
In the case of employer insolvency, compensation may be available from the PPF, assuming the scheme
was a defined benefit scheme.
On regaining employment, post-redundancy, the scheme benefits may be transferred to a new

employer’s scheme, but consideration should be given to making AVCs to cover the period of
unemployment. A client may be able/willing to use part of the redundancy pay to boost the pension
pot.
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Changing Goals and Pensions

Pensions are a long-term investment and it is possible that pension plans may change after a few
years. Even the retirement process may be gradual or delayed or brought forward, depending on
circumstances.
2
This re-emphasises the need for pension advisers to conduct regular reviews with clients.
11.4.2 At Retirement and Post Retirement Reviews

In the years leading up to an individual retiring, it is of vital importance that they review their financial
plan at more regular intervals. The expected retirement income should be measured against the
required income to identify if the individual’s objectives will be met or if action should be taken
through additional funding or deferring retirement. A key factor in retirement planning is the client’s
attitude to risk. The conventional approach was that as an individual got closer to retirement, this was
likely to decrease to ensure their retirement plan is not dramatically affected by short-term volatility
in investment markets prior to purchasing an annuity on retirement. The more modern approach is to
consider all of their retirement income options, such as an annuity, FAD, UFPLS or phased retirement.
Whichever option is chosen it is likely that the individual would need to continue reviewing their
retirement plan post retirement. For example, if FAD is chosen then the underlying investments will
need to be reviewed to ensure they remain suitable and the level of withdrawals will need to be
monitored to ensure the fund will support the lifetime income requirement.
11.5 Post Retirement Investment Strategies
Learning Objective
2.7.5 Be able to analyse the options and factors to consider as regards developing a post-retirement
investment strategy: eligibility for pension liquidation and/or drawdown; phased retirement
options, benefits and risks; financial provision for care in later life; timing of decisions and
implementation; provision for dependants
At retirement, individuals now have a range of options available to them thanks to the pension reforms
introduced on 6 April 2015. This has been reflected in the reduction in annuity sales and the rising
popularity of drawdown as a means of providing a retirement income.
However, not all schemes offer the full range of pension flexibilities. Older contracts are likely to
only offer an annuity as a means of providing a retirement income; therefore’ if an individual wishes
to flexibly access their pension, they would need to transfer their pension to an alternative pension
scheme offering flexible retirement options.
Earlier we covered the range of retirement income options. In return for the flexibilities offered, an
individual is often taking on risk, for example an annuity provides a guaranteed income for life whereas
a FAD scheme could provide the same income, but the fund could run out during the client’s lifetime if
the underlying investments in the scheme did not grow at the required rate. Some clients may wish to
phase their retirement via part-time work/reduced hours. For these clients, a flexible income could be
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useful until they stop working altogether and they might favour a FAD pension until then. When they
finish work they might wish to purchase an annuity to provide the guaranteed income they require.
It is important that the investment strategy of an individual’s pension scheme is aligned to their plans.
For example if a client is never likely to purchase an annuity, then the traditional lifestyle funds that
de-risk pension investments when the client approaches retirement age may not be suitable. Instead,
investments should be managed to ensure they are suitable for the client’s attitude to risk, capacity for
loss and invested to produce the income yield required to give the client the retirement income they
desire. It is therefore important to regularly review the client’s retirement plan and the investment
strategy being applied.
As the client gets older it is possible their attitude to risk could reduce as they potentially require more
certainty regarding investment performance and income produced. Clients with spouses or dependants
are likely to be concerned with providing them with an income when the client dies. This could be
achieved by purchasing an annuity with guarantees or spouses’ benefits built in or, if FAD is being
used, the remaining fund after the client dies can be left to the dependants to draw income from. Other
reasons to review the investment strategy include when the client decides to draw their SP, if the client’s
health changes, if their circumstances change (for example, the death of a spouse or dependant) or
when they are aligning their overall financial plan to provide for long-term care costs.
As you can see, the need for advice does not stop once income payments have begun. Given the average
life expectancy and the long period during which income payments are usually paid it is realistic to
think that adjustments will be required due to changes in the client’s circumstances, their objectives or
even changes in pension legislation.
12. Taking a Retirement Income
Learning Objective
2.6.1 Be able to evaluate the different ways of taking benefits: reasons for taking or deferring state
retirement benefits; considerations when taking income from a DB scheme; considerations
when taking income from a DC scheme; choosing an annuity – including deferred, single or
joint life, level or escalating, enhanced, guaranteed, temporary; advantages and disadvantages
of different types of annuities; choosing drawdown or partial/lump sum drawdown; running
down the fund versus leaving the nominal or real value untouched
12.1 Deferring the SP

Individuals who reach SPA before 6 April 2016 were able to defer their SP based on the following rules:
• The minimum deferred period was five weeks.

• Their SP was increased by 1% for every five weeks they defer.
• If they deferred for 12 months they had the option of drawing the pension as a lump sum payment.
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• The lump sum was based on the amount of SP payments that were deferred with weekly compound
interest of 2% above the Bank of England base rate.
Individuals who reach SPA on or after 6 April 2016 are able to defer their SP based on the following rules:
2
• The minimum deferred period is nine weeks.
• Their SP is increased by 1% for every nine weeks they defer.
• There will no longer be the option to take the deferred amount as a lump sum.
If an individual has no need for SP income because they have decided to work past SPA, then they could
consider deferring the SP until they need it. There could be various reasons to defer the SP including
there might be no need for it if the client is living off their capital, PCLS and ISAs, or they could be
managing their income tax liability (for example, deferring SP until a point when an individual has
moved from being a higher-rate taxpayer to a basic-rate taxpayer).
Exercise 7
Paul, who was 65 on 7 April 2017, decided to defer his SP for 12 months. In percentage terms and
because of deferment how much more will his pension be when he draws it?
A. 2.5%
B. 3.1%
C. 5.4%
D. 5.8%
If you would like to know more about deferring the SP, information is available on the gov.uk website:
https://www.gov.uk/deferring-state-pension/how-it-works
12.2 Commencing a DB Pension

Every DB pension scheme will have a normal retirement age (NRA). If the client decides to take the
pension before this age it will normally be subject to the discretion of the trustees and any pension
received before the NRA will be reduced by the scheme actuaries. In addition, any late retirement, post
NRA, would be revalued; however, this depends on the scheme rules.
Some schemes offer a separate PCLS. Most however offer a PCLS via commutation of income (for
example, for every pound of annual income given up an amount of PCLS will be given).
Deciding when to commence a DB pension scheme can be a key decision in retirement planning. Given
the often large actuarial reductions applied (now as early retirement factors) individuals might use other
assets (this could include ISAs, DC pensions and cash) to fund their standard of living until the NRA when
they would then access their DB pension.
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Exercise 8
Hayley is entitled to a pension of £12,000 after 20 years’ service in a 1/60th defined scheme. She can
commute part of this pension for a PCLS of 3/80ths of her final pensionable salary for each year of
service. The scheme’s commutation factor is 12:1 and her final salary is £36,000. Calculate her PCLS and
reduced pension.
12.3 Commencing a DC Pension

When an individual has decided it is time to access their DC pension they have to consider the various
options available to them. For example, purchasing an annuity (covered below), UFPLS or FAD. Both
UFPLS and FAD offer a huge amount of flexibility and the option of phasing retirement income can be
used. Phasing is when the member selects a level of income and then sufficient funds are crystallised
and placed into drawdown to provide the income required. By using PCLS this can also provide an
element of tax-free income.
Whatever the income level taken, it is important that consideration is given to the impact the income
has on the remaining fund. In simple terms, if the income taken is more than the growth of the fund, the
fund will erode. Under capped drawdown rules, pension providers were required to provide a ‘critical
yield’ on their illustrations and this showed the investment returns required by a drawdown pension to
match the income that could be provided by a traditional annuity. The critical yield took into account
the additional costs of drawdown and mortality drag. However, under FAD or UFPLS contracts, pension
providers are no longer required to provide a critical yield. This means that without advice and regular
reviews, an individual might find that excessive levels of income could lead to the pension not lasting
their lifetime or that the level of annuity available in the future is low due to the pension not growing at
or above the critical yield.
It could well be that some clients may choose not to take any income from their pension as they may
prefer to leave their pension to their chosen beneficiaries on death. Alternatively, some individuals
might wish to take high levels of income from their pension to repay debt, fund business ventures or
pay for luxuries and this could be part of a financial plan so long as the individual had sufficient other
income to support their expenditure requirements when the pension fund is exhausted.
12.4 Choosing an Annuity

Annuities have been on a downward trend since the early 1990s and, given the introduction of pension
freedoms and choice since 6 April 2015, individuals have more flexible retirement income options.
However, annuities are still the best method of securing a regular guaranteed income for life.
The inclusion of a guaranteed period is a cost-effective option and, since 6 April 2015, the maximum
guaranteed period can exceed ten years with the maximum being subject to the insurance company’s
product features. Another common option for an annuity is joint annuities which are usually set up so
that the income continues on first death to benefit the surviving spouse; however, anyone can be added
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to an annuity at the outset, not just a spouse. The most costly option is the inclusion of an increasing
income by a fixed percentage or linked to an index (eg, inflation). The starting income of an index-linked
annuity can be over 30% lower than a level annuity.
2
The options chosen at the outset by the annuitant have an impact on the level of starting income that
an insurance company is prepared to offer in return for a lump sum.
12.4.1 Other Types of Annuities

As well as the traditional annuities which are gilt-backed, investment annuities are available. These
are more popular in countries like the USA and Australia. With-profits and unit-linked annuities allow
an individual to purchase a regular income and to benefit from any investment growth via receiving a
higher level of annuity. The returns from with-profits annuities are structured to give smoothed returns
for investors.
Short-term annuities offer a regular income for a specific term compared to a lifetime annuity which
is paid until death. An individual can use part of their drawdown pension fund to buy a short-term
annuity contract from an insurance company of their choice. A short-term annuity contract will pay
them a fixed amount each year. The contract can last for up to five years and it does not have to come to
an end when the person reaches age 75.
If a short-term annuity is purchased from a drawdown pension fund, to which flexible drawdown
applies, there is no upper limit on the amount their short-term annuity can pay.
Where a short-term annuity is bought using funds from a capped drawdown pension fund, there is an
upper limit on the amount their short-term annuity can pay them. The amount payable from a short-
term annuity contract plus the amount of any income withdrawal from the capped drawdown pension
fund in a pension year cannot be more than their maximum drawdown pension.
Enhanced annuities offer higher rates of annuity for those with particular medical conditions or
lifestyles. These include smokers, those suffering diabetes and the obese. Underwriting is required for
an enhanced annuity and this will be carried out by specialist insurance companies on a points-based
system. Enhanced annuities therefore offer an enhanced return for those who have a predicted shorter
life expectancy; however, if health is very poor and life expectancy is very short, an individual might
prefer not to purchase an annuity so they can leave their pension to chosen beneficiaries upon their
death.
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13. Decumulation Factors to Consider
Learning Objective
2.6.2 Be able to analyse the available options for drawing pension benefits and the factors to
consider: the role of decumulation and its interaction with mortality, estate planning, taxation
and income levels; suitability of phased retirement; balancing steady versus flexible income;
ensuring money does not run out before death; managing fund for yield or total return;
interaction of taking a retirement with taxation
Each and every client could have a different retirement plan therefore it is key to ensure that the
client makes the best choices for their pensions in retirement. We have already looked at the different
retirement income options and now we will look at other factors that should be considered when
drawing retirement benefits.
13.1 Mortality
Statistics show that life expectancy has been gradually increasing and it is possible to obtain statistics
on the probability of living to certain ages. Therefore, life expectancy must be a serious consideration
as there is a risk of an individual outliving their pension savings. Given the introduction of pension
flexibilities, less people have been purchasing annuities and more have been using UFPLS and FAD as a
means of pension decumulation. The risk here is that only the annuity provides the guaranteed income
for life and the other options involve the need for prudent investment and regular reviews.
13.2 Estate Planning

Retirement planning is just part of a client’s overall financial plan. One of a client’s objectives could be,
for example, to maximise the wealth they can leave to their family upon their death. If this is the case,
then a well-conceived decumulation strategy is required as a client will have to balance the amount
of income they take from their pension with the size of the fund they wish to leave for their family.
Some clients may decide to spend down assets in their estate to supplement their standard of living in
retirement and to leave their pension untouched. The advantage of this strategy is that the estate that
is subject to IHT would be reducing while the pension remains exempt from IHT. The correct approach
here would be to regularly review the client’s income needs and estate planning objectives and find a
balance for them by deciding where their retirement income should be drawn from.
13.3 Expenditure Needs

Clients’ spending patterns in retirement can vary widely. For example, some clients could spend a lot in
the early years of retirement by going on holidays or buying new cars as they could be healthy and able
and want to enjoy their wealth. In later years, they may spend less as they settle into a more steady and
predictable spending pattern. Therefore, it is key to understand what essential expenditure a client will
have and what discretionary expenditure they anticipate. When this is known, it can help to create an
investment strategy for the underlying pension investments.
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13.4 The Investment Approach

Pension assets can be managed in a variety of ways, be that growth, income or both. If a client is
planning on leaving their pension for their family to inherit, then a growth or total return strategy would
seem a sensible approach. However, some clients may wish to maximise the income from their pension
2
fund while preserving the capital value. Clearly it will be important to implement an investment strategy
that matches the client’s objectives for income and estate planning.
A common approach is to divide the pension assets into three ‘pots’ for different time horizons:
• Short-term – this would typically be over a 12–24 month period and would be used for paying
income to the client. The underlying investments would normally be cash or cash-like investments
which are low-risk.
• Medium-term – typically a 5–10 year period and this pot would include investments that will be
disinvested to replace withdrawals from the cash pot. As investments in this pot have a longer time
horizon, they would take the form of a diversified portfolio.
• Long-term – underlying investments in this pot would be invested for over ten years and therefore
would be focusing on long-term growth. Over time, the assets in this pot would move to the
medium-term pot followed by the short-term pot, before being withdrawn as income for the client.
Overall, the investments in the pension should be aligned to the client’s attitude and capacity for loss.
13.5 Taxation
When considering how best to maximise the income available to a client from their pensions, taxation
is a key factor. The client’s full income position should be known, for example, they may have income
from other sources including bank interest, income from investment portfolios or property income. In
addition, the client’s future plans will play a key factor, for example, are they fully retired or are they
planning on finding work on a part-time basis? When will they take their SP or are they going to defer it?
All these questions need to be considered to ensure that a client has the ability to plan a tax-efficient
decumulation strategy from their pensions.
Some clients like to draw tax-free cash on a phased basis from their pension as this provides a tax-free
income. Given the fixed nature of traditional annuities, some clients will benefit from using FAD to allow
them to vary the level of income they take from their pension to keep them within tax thresholds (for
example, ensuring income is all taxed at the basic rate).
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Chapter Exercise Answers
Exercise 1
Emma has worked for Example ltd for all of her career spanning 31 years. She joined the company’s
defined benefit 60th scheme after a one-year waiting period and her current salary is £30,000 pa.
Calculate her estimated pension benefits:
Answer
(£30,000 x 30)/60 = £15,000
Exercise 2
Michael is 55 years old and plans on retiring at age 60. His only pension provision is his DC pension
scheme that his employer offers. He has a low attitude to risk and, in an effort to maximise his retirement
fund before he buys an annuity at age 60, he has decided to invest into a fund that is invested fully into
a US equity fund. Why might this investment approach be unsuitable?
Answer
Given the short time until he needs to convert the pension fund into an annuity (five years) he is
exposing his fund to equities and this could result in a loss if the US equity fund makes a loss over this
period. Given his attitude to risk, the volatility of equities and his close proximity to retirement, he would
be better to invest in low-risk pension funds as these would help preserve his current pension fund until
it is needed at age 60.
Exercise 3
Zara and John are twins who were born on 1 October 1952. Assuming they have both worked for the last
40 years which of the following statements is correct?
A. They will be entitled to their SP at the same time

B. Zara will be entitled to her SP first
C. John will be entitled to his SP first
D. Zara’s SPA will be 60 while John’s SPA will be 65
Answer is B
Because Zara was born before 6 December 1953, she reached her SPA of 62 years and five months on
the 6 March 2015 while John’s SPA will be when he is 65 on 1 October 2017.
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Exercise 4
If earnings have increased by 2% and inflation is 0.5% then the SP will increase by how much?
Answer
2
2.5%, the ‘triple lock’ was introduced in 2010 and guarantees to increase the SP every year by the higher
of inflation, average earnings or a minimum of 2.5%. In this case it will increase by 2.5%. It is possible
that this guarantee will be removed in the future.
Exercise 5
Ria is aged 60 as at 5 April 2016. She has 30 years on her NIC record and has built up entitlement to an
ASP of £50 per week. Based on the 2015–16 rates Ria’s weekly protected payment will be:
A. £9.70
B. £13.65
C. £26.60
D. £155.65
Answer is B
Under the old scheme, Ria would have got £119.30 basic state pension plus £50.00 giving a total of
£169.30. Her entitlement under the new rules would be 30/35 x £155.65 = £133.41.
£169.30 exceeds the new single-tier pension by £169.30 – £155.65 = £13.65. This is her protected
amount. This will be revalued in line with CPI until Ria’s state pension age. Any qualifying years achieved
after 5 April 2016 will not add anything more to Ria’s state pension.
Exercise 6
Kirstie earns £105,000 in 2017–18. What is the maximum she can contribute to a registered pension
scheme and not be subject to a tax charge?
Answer
£40,000 (the current pension annual allowance) plus any unused allowances from the previous three
years with a maximum added together not exceeding her earnings of £105,000.
An employer contribution would be on the same basis of the annual allowance and carrying-forward
of unused allowances from the previous three years, but would not be restricted by her earnings of
£105,000.
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Exercise 7
Paul who was 65 on 7 April 2017 decided to defer his SP for 12 months. In percentage terms and because
of deferment how much more will his pension be when he draws it?
A. 2.5%
B. 3.1%
C. 5.4%
D. 5.8%
Answer is D
SP is increased by 1% for every nine weeks he defers.
1.01 x 52 = 1.0583
9
Exercise 8
Hayley is entitled to a pension of £12,000 after 20 years’ service in a 1/60th defined scheme. She can
commute part of this pension for a PCLS of 3/80ths of her final pensionable salary for each year of
service. The scheme’s commutation factor is 12:1 and her final salary is £36,000. Calculate her PCLS and
reduced pension.
Answer
Hayley will be entitled to PCLS of (20 x 3/80th) x £36,000 = £27,000.
For every £12 of PCLS her annual pension will be reduced by £1.
The reduction in her pension is therefore £27,000 / 12 = £2,250.
Her pension will be reduced to £12,000 – £2,250 = £9,750.
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1. What are the main requirements of FRS17?
2
2. List the advantages of DB and DC schemes.

Answer reference: Sections 2.3.2 and 2.3.3
3. What is the difference between a DB scheme and a DC pension

scheme?
Answer reference: Sections 3 and 4.1
4. What is the annual allowance?

5. What are the measures taken by the government to combat the state of the UK’s finance and the
ever ageing UK population?
6. What is the advantage of an QROPS fund for British expatriates?

7. What is the difference between a 90% pension entitlement for a PPF and an FAS?
Answer reference: Sections 8.2.3 and 8.3
8. Why has auto-enrolment legislation been introduced in the UK?

Answer reference: Section 9
9. Why is it important to review a client’s pension scheme?

10. Describe the three pension asset ‘pots’.

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172
Chapter Three
Financial Planning
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Fundamentals
1. Financial Planning Fundamentals 173
2. Collecting the Client's Information 178
3. Financial Planning Assumptions 199
4. Developing and Communicating Financial Planning

Recommendations 210
5. Implementing Financial Planning Recommendations 225
6. Planning in a Regulated Environment 235

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Financial Planning Fundamentals
1. Financial Planning Fundamentals
Learning Objective
3.1.1 Understand the key purposes of financial planning, and who is involved in the process
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The terms financial planning and financial advice are often interchanged, but they have very different
meanings. Financial planning is an evolving action plan resulting from a cyclical process, whereas
financial advice is a recommendation regarding a financial transaction at a fixed point in time.
Financial planning will often involve financial advice, although it should be recognised that financial
planning need not necessarily involve product recommendations. In some cases, a rearrangement of
the client's affairs may be enough. Financial planning recognises the consequence or knock-on effect
that one action can have upon other circumstances or objectives. It is comprehensive, in that it deals
with a client's affairs in the round, unlike financial advice, which may be restricted to one or two areas of
financial concern treated in isolation.
Financial planning may involve giving investment advice as regulated under the Financial Services and
Markets Act (FSMA) 2000, but this is not always the case. It is possible to produce a financial plan which
does not involve the use of financial products. It is also possible to prepare a financial plan for clients
who are asset and income rich, or for clients who have neither sufficient assets nor sufficient income (this
can often be a case of planning for debt management or damage limitation). It is still financial planning.
This is because, under the Regulated Activities Order, advice must include advice on the merits of the
client buying, selling, subscribing for or underwriting a particular investment. Financial planning may
not include this element.
Often a financial planner will work together with paraplanners in order to deliver a financial plan.
The role of the paraplanner is to assist and support the financial planner. This may involve a range of
different duties including analysing clients' situations, research and drafting the financial plan.
The financial planner is ultimately responsible for client relationships and the delivery of each financial
plan, even if they have delegated parts of these to their paraplanner. The extent of any such delegation,
and the paraplanner's responsibilities, will be agreed by the paraplanner and the financial planner.
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1.1 The Six Step Financial Planning Process
Learning Objective
3.1.2 Know the six-step financial planning process as defined by the Financial Planning Standards
Board (FPSB): establish and define client-planner relationship; collect client data, including
personal and financial objectives, needs and priorities; analyse and evaluate the client's
financial status; develop and present a financial plan and recommendations; implement the
financial planning recommendations; review the client's situation
A financial plan may be very simple or very complex. However, the production of a plan will always
result from following the financial planning process. Financial planning is a cyclical process. It is also
a dynamic process. The Financial Planning Standards Board (FPSB) process includes at least six steps,
which form an ongoing cycle:
Because the financial planning process is cyclical, the plan itself constantly evolves. Assets and liabilities
change as time passes, as do income and the cost of living, often by differing rates or amounts. To
counter these issues, the financial plan includes regular reviews. At review, the client and the financial
planner will revisit the client's objectives and goals to see if they are being achieved and to check
whether they are still relevant. Assumptions and other factors included in the financial plan are also
reviewed, and changed if necessary.
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As well as the financial plan itself, you might need to provide a client with:
• client agreement
• suitability reports
• product information
• key features documents
• illustrations.
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However, it should be recognised that items such as product illustrations, key features documents and
suitability reports may only be required if certain specific product recommendations are being made
and implemented.
As previously highlighted, financial planning itself needn't involve the use of financial products and
need not be a regulated process (although many financial planning practices may still require that
regulatory processes are followed).
Although the financial planner has the ultimate responsibility for managing this six-step process, the
paraplanner is often also heavily involved. Some financial planners prefer that their paraplanners attend
all client meetings, and, in some financial planning practices, the paraplanner may be the first point of
contact for clients' day-to-day queries.
As in any successful professional relationship, the trust between client and financial adviser is
fundamental, especially as we have identified the importance of the relationship being long-term to
take into account changes in the client's personal circumstances. Client trust is covered in more detail
in Section 5.2.
1.2 The Key Components of a Financial Plan
Learning Objective
3.1.3 Be able to analyse the key components of a financial plan to include: client objectives; client
attitudes to risk; financial planning assumptions; analysis of client's financial situation; financial
planning recommendations; action plan; review strategy
The financial plan should be a comprehensive document covering the client's financial affairs in
sufficient detail to be easily understandable. As a rough guide, it should cover where the client is today
(for example, current circumstances), where they want to get to (such as goals, objectives, needs and
aspirations) and how they're going to get there (for example, your analysis and recommendations). As
the client's financial circumstances and/or goals and objectives change, the financial plan may need
to be updated or rewritten. A client's circumstances should be reviewed (and any revisions made to
the financial plan) at least every 12 months. The review should also look at any assumptions and other
factors included when the plan was prepared to check that they are still realistic and relevant. It is
often the paraplanner's responsibility to instigate this review process and to collect updated client
information.
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A review should also be held whenever requested by the client (eg, in the event of a change in
employment, house sale or purchase, receipt of an inheritance and/or birth of a child).
The financial plan itself is a product of the financial planning process. However, it is important to
remember that the process does not stop there. The financial plan is a living document and may be
complex or relatively simple, depending upon the client's circumstances. All plans must be technically
and legally correct at the date of preparation.
The financial plan will generally cover the areas below:
• Cover page – states what the document is, who it is for, when it was prepared and completed (and
who by). May also state the tax year or rates used.
• Contents page – lists the main headings of the document and relevant page numbers of each
section to ease reference. Should include a list of the appendices.
• Introduction – a note on the structure and purpose of the plan and how the plan has come about.
• Objectives and priorities – a statement of the client's objectives and priorities, indicating which
areas the client has asked you to consider and which other areas will be addressed in your next
meeting, where relevant.
• Assumptions – a statement of the assumptions used in the financial plan, along with justification
for those assumptions (where the justifications are lengthy, these may be placed in the appendices).
• Attitudes – an explanation of risk and statements regarding the client's attitudes to mortality,
morbidity and investment risk (some elements may be placed in the appendices). May also include
other attitudinal data.
• Net worth (assets and liabilities) – a summary of the client's assets and liabilities with comments
if appropriate.
• Income and expenditure – a summary of the client's net income and expenditure to establish a net
spendable income figure with comments if appropriate.
• Areas chosen for recommendation – each area for which you make recommendations should
have its own section, including:
current position
objectives
assumptions (if not already covered)
recommendations
summary
action points.
• Other issues – states the other areas which came up, or which you have identified, but for which
you did not include recommendations. Lists each area and what needs to be addressed and states
how, and when, they will be addressed with the client.
• Summary of recommendations – this should include a summary of all recommendations made
(including costs, if relevant) and provide an action plan, summarising all the action points from the
various areas of the plan. It should include information on what happens next, who is responsible for
completing each action and the timescales for completion.
• Reviews – includes information on the purpose and importance of reviews. Recommends an
approach to reviews, including timescales and how, and when, the review will be initiated (ie, you
will write to them to let them know how far in advance will you do this).
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• Appendices – it is important that a financial plan is easily digestible by the client and you should
consider placing any information that may break the flow or complicate the main body of the
financial plan in the appendices. It is a useful section of the financial plan to hold detail that the
client needn't necessarily know, but which should form a part of the financial plan, in case they
want to know more or need to see how figures included in the main body of the financial plan have
been derived. However, reference should be made in the main body of the financial plan to any
information placed in the appendices, so that the client knows where to look for it.
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The appendices might include things such as:
the client's full risk profile
net worth statements (original and revised)
income and expenditure calculations (original and revised)
tax calculations (original and revised)
calculations for specific areas of recommendations
interview notes
client questionnaire.
If too much information is placed in the appendices, the client may be forever flicking back and
forth within the financial plan, and this is likely to break the flow of the plan. However, if too much
information is placed in the main body of the financial plan, the client may suffer from 'information
overload' and lose interest.
As an example, the main body of the plan could include wording along the lines of:
'I have estimated your income tax and National Insurance liability for the current tax year to be £17,246.
This means that you are currently a higher-rate taxpayer. The detailed tax calculation is included in
Appendix C.'
If the client already knows that they are a higher-rate taxpayer and/or broadly agrees with the
estimate of the tax due, there may be no need to see the detailed calculation, whereas if they are
surprised by this information, they may wish to see how the planner arrives at this conclusion and
therefore refer to the relevant appendix.
It is also recommended as a matter of good practice that any client data used is included as the basis
of the plan in an appendix. This is also a requirement if you are producing a plan for the Diploma in
Financial Planning.
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2. Collecting the Client's Information
Learning Objective
3.4.1 Understand how to apply appropriate techniques to: elicit all relevant personal and financial
information essential to the financial planning process; identify differing client needs, financial
objectives and associated timescales; prioritise real and perceived, present and future needs;
meet the know your customer requirement; agree investment objectives, growth, income,
time horizons; determine and agree risk profile; evaluate affordability and other suitability
considerations; ethical, social responsibility and religious preferences
3.4.2 Be able to analyse gaps, errors or inconsistencies in client information, subjective factors or
indicators, including: use of appropriate skills when questioning information or assumptions;
gaining agreement on any reinterpretation
3.4.3 Be able to evaluate and respond to the main drivers underpinning the client's financial needs
and objectives, by prioritising them in collaboration with the client
2.1 Gathering Client Information

Gathering client information is the second stage of the six-step financial planning process.
It is important that, in the regulated environment, advisers are as certain as they can be that they have
acted in the client’s best interests. Advisers who are unable to evidence the collection of sufficient 'know
your customer' (KYC) records will find it difficult to show that, even if they have. Accurate and up-to-date
client information is essential in putting together a financial plan. This information is likely to consist of
a mixture of 'hard facts' (factual information) and 'soft facts' (emotional and aspirational information).
As there is no set structure for obtaining this information, it is the skill of the adviser in ascertaining the
client's particular circumstances which is most important. The client must feel trust in the same way as
the skilled adviser demonstrates empathy.
During the initial discussion to establish suitability of a portfolio or product, an adviser must gather, at
a minimum, the following details:
• personal information – name, address, date of birth, marital status, dependants, health, knowledge
and experience
• employment – occupation, employer's details and benefits or details of self-employment
• income – from all sources
• expenditure – all outgoings including debt or credit card repayments
• assets – property, valuables, savings, investments
• liabilities – mortgage, loans, credit cards
• objectives – what the client is hoping to achieve
• attitude to risk – how much risk they are prepared to tolerate.
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While hard facts can be collected using a fact find or client questionnaire, soft facts are usually gathered
by asking a series of linked questions and recording the client's answers – these responses are usually
recorded as interview notes or similar.
All information received from the client, whether hard or soft facts, should be accurately recorded and
collated in such a way that it can be presented back to the client for verification. Many paraplanners and
financial planners see it as good practice to include all collected client information in the financial plan
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(usually as an appendix) so that the client can point out any mistakes or ambiguities. This information
also confirms the basis on which the financial plan was prepared. If you are preparing a financial plan
for the Diploma in Financial Planning, we would strongly advise that you include all client data as an
appendix.
When working with client data, even if the planner has collected it themselves, they need to be able to
identify any gaps or inconsistencies in the information and take appropriate action to correct these. The
better the quality of the collected information, the easier it is to collate and analyse it.
During the course of the fact-finding and data collection process, it is not unknown for the financial
planner or paraplanner to mishear or misunderstand some of the information that the client provides,
or also, even for the client to misunderstand a question that was asked and to provide the answer to a
different question! While many of these types of mistakes may be corrected during the client meeting,
some may not emerge until the information is analysed after the meeting.
Gaps in the information collected may also become apparent – in each case, it is important that any
gaps and inconsistencies are dealt with, either by looking back through previously collected client
information, or by contacting the client to clarify the identified areas.
2.1.1 Needs, Wants and Objectives

Financial planning is about meeting a client's financial and lifestyle objectives, not the financial
planner's objectives (or the objectives that the planner thinks the client should have). However, during
the analysis stage, the paraplanner and/or financial planner may identify further issues and problems
that the client may not be aware of. These further issues and problems should be clearly stated in the
financial plan, together with any recommendations and actions that the client may need to take to
resolve each issue or problem. Even if recommendations are not being made, such issues and problems
should be recorded so that they can be raised and dealt with at a later meeting. These further issues and
problems could well become objectives after discussion with the client.
In summary, the financial planning needs of clients fall into the categories of the securing and protection
of current and future living standards by protecting income against unexpected or potentially
detrimental events such as illness, accident, redundancy, rises in the cost of debt, and death. Other
aspects include saving for future aspirations, for starting a family, funding education or for retirement
and old age, including the possible long-term care implications. Estate planning and tax-efficient
savings are another crucial strand to the financial planning picture.
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2.1.2 Perceptions of Need
It is important for an adviser to recognise that a client's perception of their needs may be coloured
by numerous factors such as limited knowledge of financial products that are available, lack of
understanding of alternative options or lack of knowledge of these, previous personal experience
and the experiences of family and friends. Perception changes with knowledge and understanding.
The financial adviser plays a key role in both educating clients and, through effective KYC processes,
building a holistic picture to identify real as opposed to perceived needs.
As perception is heavily coloured by experience, clients are, to a certain degree, held back in identifying
future real needs. Again the adviser's role in this process is key, bringing knowledge and experience
built up in dealing with other clients and their experiences as well as a thorough working knowledge of
appropriate financial options.
2.1.3 Risk Profiling

Assessing a client's appetite for risk and matching it to the client's objectives is a fundamental part of
financial planning and the process of KYC. Typically, the higher the risk taken, the greater the financial
rewards. However, the appropriate level of risk can only be realistically selected once a full account is
taken of a client's personal circumstances, including age, level of income, protection needs, level of
debt, their investment time horizons and future aspirations and capacity for loss.
Level of risk is relative to the length of time before returns are required, eg, pension investments may
be more exposed to growth stocks when the investor is far from retirement to maximise returns and
move to greater exposure to income stocks as the investor approaches retirement. Diversification of
investments is key to managing risk exposure, and this is relative to a client's exposure elsewhere,
making it vital to have a detailed record of the client's personal and financial information.
The consequences of a client declining to provide relevant personal and financial information are that
the product recommended is actually of no use and/or the client's exposure to risk is magnified, and the
client should be advised of this.
Example
A client declines to inform the adviser of their personal circumstances. The client has a pre-diagnosed
medical condition, a high level of credit card debt, their job is under threat of redundancy, they hold all
investments in shares of their employer plus a self-invested pension plan holding only the shares of the
employer. The client wishes to purchase payment protection insurance without disclosing their personal
and financial information and perceives their financial position as low-risk due to investing heavily in a
company they know and trust. The company goes into liquidation, the client is made redundant and
the value of the shares becomes negligible. The PPI product purchased is worthless to pay off the debts
as prior threat of redundancy is a common exclusion. The result for the client is not only that they have
paid for a product that does not meet requirements, but, by not informing the adviser of their other
financial information, the adviser has not been able to offer other financial options to diversify the
client's risk profile and they lose income from employment, plus savings from investments including the
entire pension pot.
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2.1.4 Affordability
It is important to know the amount of any available investible capital and any surplus monthly (or
annual) income that the client may have available towards meeting goals and objectives, to ensure that
any recommendations made in the financial plan are affordable and to decide which goals and priorities
should be dealt with in the plan if it is apparent that there are insufficient assets to deal with all of them
at this time.
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2.1.5 Ethical Investment
Ethical investment is an area that has grown considerably in the last 10–15 years, prompted in part by
charity fund trustees seeking investments which match the principles of the organisation or reasons for
its existence – for example, a health charity choosing not to invest in tobacco shares.
Ethical investments have grown in popularity for private investors too. There are, however, two main
considerations to bear in mind when advising a client about ethical investments. Firstly, the adviser
should maintain a focus on what the investment plan is aiming to achieve in terms of capital growth
and/or income provision: the more restrictions that are placed on what the fund can and cannot invest
in, the higher the risk of underperformance.
Some ethical investors specifically invest in companies that act in contradiction to the investor's
principles so that they can vote at the company annual general meetings (AGMs) and influence
decision-making. It is worth noting that companies, particularly in Europe and the US pay greater
attention to matters of social corporate responsibility and are ever keener to at least appear attractive
to ethical investors.
Level of risk is also a consideration: by reducing investment options this can also reduce the level of
diversification in an investment portfolio, which could dramatically increase risk in the fund.
Another key issue has been that what were called ethical funds have underperformed against
conventional investments; many have been replaced by funds which follow a policy of sustainability
and corporate social responsibility, and this market has become larger than the traditional ‘ethical
investment' market. Because of the level of restrictions on ethical funds, the complexity of monitoring
the individual companies and issues around the balance sheets of ethical companies that may be very
new, many investment managers no longer offer ethical portfolios.
Another consideration for investors is to think carefully about how an ethical investment is defined – for
example, if an investor wishes to avoid sectors such as gambling, alcohol and tobacco, does this mean
avoiding investment in supermarkets, hotels and restaurants, where those items are sold/consumed/
take place? Equally, an ethical fund may invest in companies that conduct activities that are against
the investor's principles; for example, a mining company's activities may damage the environment,
but it may have an exemplary employment record, support numerous charitable projects and provide
healthcare for the local community.
In practice, ethical funds operate by giving weightings to areas of corporate social responsibility and
they rank companies according to those weightings. The key principles used by the fund may not
exactly match those of the investor, however, and so it is important that the client is made aware of this.
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2.1.6 Identify Differing Client Needs, Wants, Financial Objectives,
Associated Timescales and Constraints
This is the second stage of the six-step financial planning process. The 'fact find' or client questionnaire
would normally include a list of the client's identified goals, objectives and priorities. Goals and
objectives should be concise and accurate, but should also be qualified and quantified.
The client's stated goals and objectives should not be treated as exclusive – as a financial planner
or paraplanner, you may also identify other issues and problems that, when presented to the client,
become additional goals and objectives. There are any number of potential issues and problems.
For example:
• If a client currently enjoys the use of a company car, they may need to make provision to purchase a
car for example when they retire, or were to change employment (or lose their job) or fall ill and be
unable to work.
• If the client enjoys other benefits in kind and/or death in service life cover, these would cease on
leaving employment or retiring, and it may be necessary to make some provision to replace them.
You should list personal and financial issues and problems which may affect the client in the financial
plan. Some issues and problems may appear in the plan as objectives, others may be noted for future
action and/or information purposes. The key, again, is to ensure that this is stated for the record.
When you come to making recommendations, your objectives need to be broken down into action
points that are SMART: Specific, Measurable, Achievable, Relevant, Timescaled. Ensure that all objectives
are fully qualified and quantified.
Your client's financial plan will need to list the client's precise objectives and their priority ranking. It will
have to include monetary values and constraints such as 'by when' dates where they are known.
Example
Your client Mark has got the following on his mind:
'I am concerned about what would happen to us if I was unable to work due to sickness or if I died.
Although I currently bring home about £4,000 a month, I think we could get by on £2,500.'
'I would prefer to be able to use our accumulated capital, as far as we can towards Laura's education.
Although she is only three at the moment, I would like to send her to a local private school from age 7 to
18. The fees are around £3,000 a term at the moment.'
'Laura may also want to go to university. I would like to cover her fees and give her something towards
living expenses. I guess around £15,000 a year in today's terms would cover it. I hope she will have a gap
year before going to university.'
These objectives may be replayed as follows:
'You wish to provide an income for your family should you fall ill and be unable to work, or in the event of
your death. You feel that, in each case, an income after tax of £30,000 per year, in today's terms, would be
sufficient. You do not wish to commit your accumulated capital towards achieving this objective.'
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'You wish to send Laura to a local private school starting in four years' time, when Laura turns seven
and lasting until Laura is aged 18. Current fees are around £9,000 per annum. You would also like to
help Laura through university by providing £15,000 per annum in today's terms to cover the cost of her
fees and some living expenses. You expect Laura will have a gap year between school and university, so
these costs will start in 16 years' time when Laura is 19 and last for three years. You would like to use your
accumulated capital, as far as is possible, towards funding for Laura's school and university costs.'
3
Although many issues and problems may arise and be identified at the fact-finding stage, others may be
identified during your analysis of the client's situation, requiring further clarification from your client. It
is important to remember that the financial plan is based around the client's goals and objectives, and
not the goals and objectives the paraplanner or financial planner feels that the client should have! If
any changes are proposed to the client's stated goals and objectives, these should be agreed with the
client beforehand. When preparing the financial plan for the Diploma in Financial Planning, you must use
the client objectives that are given to you and not change these, even if it means that the client cannot
achieve all of their goals and objectives.
The additional potential issues and problems that you identify should be included in the financial plan,
but may require further discussion with the client before recommendations can be made to solve them.
For example, in considering Mark's objectives in the above scenario, other considerations could include:
• Mark has stated that he is concerned about what would happen if he fell ill or died – in either event,
would he still want Laura to attend her private school and to ensure that the university costs are
funded?
• Laura's basic school fees are currently around £9,000, but this does not include ancillary costs such
as books, uniforms and school trips. Would Mark like to make some provision towards these?
• University fees increased sharply recently. Comments in the press and from the government have
implied that university fees may rise further in the future. If this were to happen, would Mark wish to
increase the provision above the £15,000 pa in today`s terms that he has stated?
'While I have not made specific recommendations to cover these additional issues and problems, we
can discuss them further at our next meeting and integrate those that you feel are important into your
financial plan.'
If some are easy to solve, then include the recommendations in the financial plan, so that the client can
action them. In real life, some of these additional issues and problems may well become objectives once
they have been discussed with the client.
2.1.7 Prioritisation
The importance of gathering KYC information and building a detailed picture of a client's personal and
financial circumstances, current and future needs and aspirations have been covered in detail and it is
vital to be able to effectively identify them and respond to them while bearing in mind that the client
may not be able to afford to fund each product/service at once. As discussed in earlier sections, a client's
perception of need may be different from the reality, and it is important for the adviser to anticipate
how these needs may change as the client passes through key life events and therefore build a degree
of flexibility into the advice given.
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To identify and respond to the main drivers underpinning the client's financial needs, an impartial
process should be undertaken such as a form of financial profiling which assists the client in thinking
more carefully about their current situation and assists in identifying, discussing, quantifying and
prioritising the client's needs. The biggest priorities should be tackled first, and these are identified by
considering needs in order of their relative importance.
Depending on a client's circumstances, a first priority may be to protect the client's or their family's
standard of living in the event of their death, critical illness or long-term incapacity.
Once protection of capital and income liabilities has been considered, retirement planning can be
looked at and any identified shortfalls in retirement income can be considered and strategies put into
place to minimise the impact or increase the income. Often after retirement planning is considered, the
next area of priority is to look at regular savings and larger investments.
It is important to be aware that, as a result of financial profiling and discussions with an adviser, the
client agrees that they have a specific need, even if the client does not wish to address the need at the
time or may not be able to afford to do so. In such cases, the responsibility of the adviser is to make the
client aware of the relative importance of the requirement, any implications of not addressing the issue,
and any future strategies that could be employed when the client is ready to proceed.
Apart from building an effective KYC record, regular reviews are an equally important aspect of
identifying and responding to clients' requirements. The KYC record is not just about filling forms to
satisfy regulatory bodies. It provides an ongoing and updated bank of information which helps to
structure discussions and ensures that the adviser has a permanent record of the client's financial
position at the point in time when the advice is given. It not only satisfies the requirement of knowing
your customer, but also provides a very useful tool to assist both the client and the adviser in achieving
a consensus on how their relationship will develop, and helps the adviser analyse the impact of external
changes such as taxation or inheritance rules on the client. It highlights important areas of financial
planning which could have dramatic consequences, good or bad, for the client.
2.2 Analyse the Client's Financial Status
Learning Objective
3.5.1 Identify the client's current circumstances, including: assets and liabilities; loans and debts;
irregular capital receipts; any foreseeable changes to their circumstances
3.5.2 Be able to calculate net worth: during lifetime; on death; on specific events such as illness,
disability or retirement
It is important that, in the regulated environment, advisers are as certain as they can be that they have
done a good job for clients. Advisers who are unable to evidence the collection of sufficient KYC records
will find it difficult to show that they have acted in the client's best interests, even if they have.
As there is no set structure for obtaining this information, it is the skill of the adviser in ascertaining the
client's particular circumstances which is most important. The client must feel trust in the same way as
the skilled adviser demonstrates empathy.
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During the course of initial discussion to establish suitability of a portfolio or product, an adviser must
gather, at a minimum, the following details:
• knowledge and experience in the investment field relevant to the specific type of designated
investment or service
• financial situation, and
• investment objectives.
3
The information regarding a client’s knowledge and experience might include the types of service,
transaction and investment with which the client is familiar:
• the nature, volume, frequency of the client’s transactions in investments and the period over which
they have been carried out
• the level of education, profession or relevant former profession of the client.
The financial situation might include:
• personal information – name, address, date of birth, marital status, dependents and health
• employment – occupation, employer's details and benefits or details of self-employment
• income – from all sources.
• expenditure – all outgoings including debt or credit card repayments
• assets – property, valuables, savings, investments
• liabilities – regular financial commitments
• objectives – what the client is hoping to achieve
• attitude to risk – how much risk they are prepared to tolerate
• capacity for loss – how much can the client afford to lose
• aspirations.
The information regarding the investment objectives of a client must include, where relevant,
information on the length of time for which the investment will be held, preferences regarding risk-
taking, the risk profile, and the purposes of the investment.
Once the client information is complete, the paraplanner and financial planner can begin the initial
analysis of the client's circumstances. This is the third stage of the financial planning process.
Preparing a net worth statement and an income and expenditure analysis allows the paraplanner and
financial planner to see the amount of investible capital and surplus income available to meet the
client's goals and objectives.
A full financial planning service will look at the overall lifestyle and financial planning objectives as
fully as possible to ensure that the financial resources are used in the most tax-efficient manner. A
comprehensive plan is required, the objective of which is to help clients to achieve their financial
objectives in each area of financial planning.
To enable clients to achieve financial independence by their desired age requires tailoring a financial
plan to each individual's own circumstances and requirements. This plan is then regularly monitored and
adapted to take into account changes in circumstances.
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Net worth may significantly change because of a change of circumstance, in particular death and at
retirement.
On death, assets which have previously not appeared as an asset, for example a pure protection contract,
will now realise a value. Likewise, death in service benefits will add to the overall value although there is
likely to be a significant impact on cash flow.
At retirement, it is likely that a lump sum will be received from any company or private pension contracts.
Looking ahead allows a financial plan to take account of such events to ensure there are no unexpected
surprises which might lead to a deviation from the plan.
Example Net Worth Statement
Second
First Named Total Worth
Named
Principal private residence £400,000 £400,000 £800,000
Holiday home £200,000 £200,000 £400,000
Investment property £200,000 £200,000 £400,000
Personal possessions £70,000 £70,000 £140,000
Cash savings £25,000 £25,000 £50,000
ISAs £174,500 £120,000 £294,500
Investments £567,321 £250,176 £817,497
Mortgage on investment property –£55,000 –£55,000 –£110,000
Total net worth £1,581,821 £1,210,176 £2,791,997
In addition, they each have life policies which will be added to their net worth if they die and the policy
is still in force.
Second
First Named Total Worth
Named
Life assurance policy £350,000 £150,000 £500,000
Net worth on death £1,931,821 £1,360,176 £3,291,997
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2.2.1 Asset/Liability Establishment and Budget Analysis
Learning Objective
3.5.3 Be able to calculate investible capital or excess liabilities
3.5.4 Be able to analyse income and expenditure as they apply to the financial planning process,
3
including: gross and net income receipts and expenditure; tax and National Insurance; benefits
in kind and other non-cash receipts; calculation of income and expenditure
Investible Capital or Excess Liabilities

The amount of the client's investible capital may be determined using a net worth statement (or balance
sheet). This breaks down the client's assets and liabilities and is effectively a snapshot of the client's
assets and liabilities at a particular point in time. It is, therefore, essential that you state the applicable
date when preparing the net worth statement (this would normally be the date of valuation of assets
and liabilities).
Within the financial plan, it is likely that you will prepare a net worth statement that assumes that the
client (or clients) remains alive. Depending on the client circumstances that you are modelling in the
financial plan, you may also prepare other scenarios.
The ability to prepare a net worth statement is a key skill for a financial planner or paraplanner and
different client scenarios could warrant separate net worth statements, for example:
• on retirement – to identify the assets available to help fund income in retirement and other
objectives
• if the client had fallen ill yesterday – to identify the assets available to support the client and their
family
• if the client had died yesterday – to identify the assets available to support their family and any
related estate planning issues.
The reason for producing different net worth statements to model different client scenarios is that,
depending on the scenario, some assets may or may not be available, and some may have different
values. Each statement should clearly identify the scenario being modelled and its date of preparation.
For example:
• Term assurance policy – a term assurance policy has no value during a client's lifetime but does
have a value on the client's death (assuming the sum assured is paid into their estate).
• Endowment or whole of life policy – an endowment or whole life policy may have a surrender
value today that is substantially less than the amount that would be paid out on death.
• Money purchase or defined contribution pension plan – a money purchase or defined
contribution pension plan may have a significant fund value today, but if the client has not attained
the age at which it can be vested the capital may not be available for general financial planning
(although it may well be relevant for retirement planning). If the client has attained an age at which
it can be vested, the available capital value could be the amount of tax-free cash that the client
could receive together with any other lump sum amounts that are intended to be withdrawn but
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taxed as income. Similarly, if modelling the client's circumstances on death, the value of the pension
fund would be the amount that is paid by way of the death benefit (eg, return of fund).
• Family home – the family home may be regarded as somewhere to live by the client, rather than
as an investment, and therefore may not be seen, in all or in part, to be investible capital, whereas
another client may intend to 'trade down' at retirement, thereby freeing up some of the value of the
family home as investible capital.
While there are no set rules to determine which assets and liabilities should, or should not, be included,
it is important that the client understands why an asset or liability is, or is not, shown on the net worth
statement, and its value. The financial planner and/or paraplanner therefore need to ensure that
sufficient notes are included to assist the client. If there is no mention of a particular asset on the net
worth statement, the client will not know whether you have deliberately excluded this asset or perhaps
just forgotten about (or ignored) it.
Similarly, if the value shown is different to the value the client may expect, this should be covered using
a note – for example: 'I have not included the value of your personal pension funds as these are not available
to you until you attain the age of 55, and even then, only a maximum of 25% of the fund can be taken as a
tax-free cash lump sum with the balance being taxed as income'.
It may also be useful to include post-recommendation net worth statements (that assume that the client
actions your recommendations) in the financial plan as a way of illustrating how your recommendations
have solved the identified issues.
Income and Expenditure

The income and expenditure analysis generally compares the client's incomings and outgoings over a
defined time period (for example, over a tax year). Income includes both earned and unearned, regular
and irregular income.
It is the role of the paraplanner or financial planner to identify each source of income and to determine
how this will be shown in the income and expenditure analysis. All income should be captured,
including, for example, Child Benefit, other benefit payments and pensions, and, in the case of plans for
more than one client, allocated correctly to each person.
For example:
• Earned – income from employment or self-employment.

• Unearned – such as investment income or interest.
• Regular – salary.
• Irregular – bonuses or commission. If the client receives regular capital amounts, these may be
treated, for the purposes of financial planning, as income.
Income should be shown gross (or grossed up) and the client's liability to income tax, National Insurance
(NI) and other taxes, such as the High Income Child Benefit charge, calculated (as these will also form
a part of the client's expenditure), as well as, if relevant, capital gains tax (CGT) on capital receipts
for example. Care should be taken to ensure that the right figures are used for some elements of
expenditure (such as pension contributions) to ensure that the correct levels of tax relief are included
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– if pension figures net of tax relief are shown as expenditure and this tax relief has already been taken
into account in the income tax calculations, tax relief will have been (incorrectly) granted twice.
While the main body of the report should include a summary of the client's income tax situation,
together with any comments, the detailed income tax and NI calculations would normally appear as an
appendix to prevent the client being distracted by detail.
3
The tax calculations are generally used to provide an estimation of the client's tax liabilities, unless of
course the financial planner is completing the client's self-assessment tax return. If the client is looking
for detailed information on their tax affairs, it may be worth considering referring the client to a tax
adviser or accountant. Your tax calculations must, however, be technically correct, and you should
ensure that you keep abreast of changes to the tax system, for example, after the annual Budget. One
benefit of being able to perform basic tax calculations is that you can advise the client whether they are
paying roughly the right amount of tax and NI by checking the figures on a payslip.
You will also have to calculate income tax liabilities, based on the supplied information, for your
financial plan. The income tax and NI (if relevant) liabilities will form part of the income and expenditure
analysis and are needed to calculate the client's net spendable income.
Example Template for Income Tax Calculation

Income tax calculation template for tax year 20XX-20YY
Prepared for: client name

Calculate gross income
Earned income (gross) £X
Benefits in kind £X
Savings income (gross) £X
Dividend income (gross) £X
Other unearned income (gross) £X
Total gross income £X
Less
Charges against income (gross) £(X)
Charges to be deducted for personal and age allowance test purposes £(X)
Statutory total income (used to test for personal and age allowances) £X
Less
Personal allowances* £(X)
Taxable Income £X
Savings income within the above £X
Dividend income within the above £X
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Therefore non-savings income is the balance of total taxable income less savings income
and dividend income
Tax on non-savings income £X
Tax on savings income £X
Tax on dividend income £X
Tax on chargeable gains from life policies £X
Less
Tax reducers, eg, married couples allowance (MCA) £(X)
Total income tax liability £X
Less tax deducted at source £(X)
Add other tax liabilities
eg, High Income Child Benefit charge £X
Total income tax due/tax repayable £X
National Insurance contributions £X
Total income tax, other tax and National Insurance liability £X
Net income ** £X
* Personal allowances may be reduced if adjusted net income exceeds £100,000.

** Net income is total gross income less any benefits in kind, etc, less the total income tax, other tax
and NI liabilities.
If you are making recommendations that change the client's tax position, it may be worth including
'post-recommendation' tax calculations in the financial plan to support those recommendations.
Example Tax Calculations (2017–18)
Example Income Tax Calculations (1)

Michael Smith is employed on a salary of £50,000 pa. In addition, he receives benefits in kind with
a taxable value of £5,500 pa and an annual bonus of £8,000. Michael is a member of his company's
occupational pension scheme and pays a member contribution of 5% of salary. Michael has £20,000 in a
building society account receiving gross interest of 2% pa. He also received dividends of £800.
Calculate Michael's tax liability and net income in 2017–18.
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Income tax calculations for tax year 2017–18

Prepared for: Michael Smith
Salary £50,000
Bonus £8,000
Benefits in kind £5,500
3
Total earned income £63,500
Savings Income (Building Society) £400
Dividend Income £800
Gross income £64,700
Less charges against income (pension contribution) £2,500
Less personal allowance £11,500
Taxable income £50,700
Savings income £400
Dividend Income (Gross) £800
Non-savings income £49,500
Income tax
Non-savings income £0–£33,500@20% £6,700
Non-savings income £33,500–£49500@40% £6,400
Savings income £400@0% £0
Dividend Income £800 @ 0% £0
Total income tax liability £13,100
Less income tax deducted at source £0*
Income tax due £13,100
National Insurance contributions
£0–£8,164@0% £0
£8,164–£45,000@12% £4,420.32
£45,032–£63,500@2% £370.00
Total NICs £4,790.32
Total income tax & NICs (C) £17,890.32
This calculation assumes that Michael's bonus is averaged across the year.
* The interest payable is within the Personal Savings Allowance, meaning that interest from bank
and building society deposits are now paid gross. Basic-rate taxpayers can receive £1,000 of savings
income tax-free, higher-rate taxpayers have an allowance of £500 and additional-rate taxpayers
have no allowance. In this example, deposit interest is therefore tax-free. Dividends are also paid
gross with a dividend allowance (at the time of writing) of £5,000.
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Becky Midler is a self-employed florist. She expects to make profits of £61,500 in 2017–18. She also has a
share portfolio valued at £100,000 which pays dividends of £6,000 pa. Becky pays £400 per month into
her SIPP.
Provide Becky with an estimation of her tax liabilities and net income in 2017–18.
Income tax calculations for 2017–18

Prepared for: Becky Midler
Profits from self-employment (estimated) £61,500

Dividends £6,000
Dividend income £6,000
Income tax
Pension contribution £6,000
Non-savings income £0–£39,500* @ 20% £7,900
Non-savings income £39,500–£50,000 @ 40% £4,200
Dividends £6,000 @ 0%**, £1,000 @ 32.5% £325
Total income tax liability £12,425
Less income tax deducted at source £0
Income tax due £12,425
National Insurance contributions
Class 2 @ £2.80 per week £146
Class 4 £8,164–£45,000 @ 9% £3,315.24
Class 4 £45,000 + @ 2% £100
Total NICs £3,561.24
Total income tax & NICs £15,986.24
Net income £51,513.76
* The basic rate tax bracket is extended by the grossed up pension contribution
* Becky's basic rate income tax band has been stretched by her £6,000 pa gross personal pension
contribution to £39,500.
** From 6 April 2016 a new £5,000 per annum dividend allowance has been introduced. The first
£5,000 of dividend received is tax-free. The tax rate for dividends in excess of £5,000 are for basic
rate taxpayers, 7.5%, higher rate 32.5% and additional rate, 38.1%.
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Terry Brown is aged 71. He receives gross pension income of £13,500 pa (including SPs). He expects to
receive £450 in dividends and £3,500 in gross building society interest during 2017–18.
Based on the above, estimate Terry's net income in 2017–18.
Income tax calculations for tax year 2017–18
3
Prepared for: Terry Brown
Gross pension income £13,500

Building society interest £3,500
Dividends £450
Savings income £3,500
Dividends £450
Income tax
Non-savings income £0–£2,000@20% £400
Savings income £3,000@0% £0*
Savings income £500@0% £0**
Dividend income £450@0% £0***
Total income tax liability £400
Net income £17,050
* covered by the starting rate for savings

** covered by the personal savings allowance
*** covered by the dividend allowance
Similarly, the client's expenditure over the time period should also be shown. This is often captured
using an expenditure questionnaire broken down into different sections (eg, household expenditure,
motoring and travel, holidays).
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Example Income and Expenditure Analysis
Income and Expenditure Analysis – annual position for tax year 20XX-XX
Prepared for: Mr and Mrs A Client
Gross income £
Salary – Mr Client XXXXX
Salary – Mrs Client XXXXX
Building society interest XXXXX
Dividends from quoted shares XXXXX
Child benefit (non-taxable) XXXXX
Total gross income XXXXX
Income tax and National Insurance contributions
Income tax – Mr Client XXXXX
National Insurance – Mr Client XXXXX
Income tax – Mrs Client XXXXX
National Insurance – Mrs Client XXXXX
Income net of income tax and National Insurance XXXXX
Expenditure
House XXXXX
Utilities XXXXX
Housekeeping XXXXX
Motor XXXXX
Travel and leisure XXXXX
Personal XXXXX
Savings and personal insurance XXXXX
Total expenditure XXXXX
Surplus net income XXXXX
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2.2.2 Calculating any Income Shortfall
Learning Objective
3.5.5 Be able to calculate net spendable income, or income shortfall
3
The calculation of net spendable income or income shortfall is relatively straightforward once the
client's surplus (or shortfall) monthly income has been calculated. For example:
After completing a detailed calculation of a client's income, a planner has identified that the client has
an annual net income of £50,000 per annum. The planner has established via fact-finding that the client
spends £53,000 per annum.
Annual net income £50,000

Minus annual expenditure £53,000
Annual income shortfall £3,000
The financial planner or paraplanner can identify ways in which the client could boost net income or
reduce expenditure and these ideas should be noted in the financial plan, and could form part of the
recommendations.
As an example, it may be possible to reallocate assets between partners to reduce tax liabilities – this
can have the effect of increasing surplus income.
Further tax calculations may also be required depending on the client's goals and objectives. These
could include:
• CGT calculations if the client is contemplating disposing of assets or restructuring investment

portfolios
• inheritance tax calculations to model potential IHT liabilities in the event of the client's death.
Although the introduction of the transferable IHT nil-rate band (NRB) has appeared to simplify
inheritance tax planning, paraplanners and financial planners should prepare, for all but the simplest
estates, separate IHT calculations for each partner (eg, on A's death assuming B has died first and on
B's death assuming A has died first). This will ensure that assets such as death in service cover, pension
death benefits and life assurance written under trust are treated correctly.
Again, any immediate ideas to reduce inheritance tax liabilities should be recorded in the financial plan.
This stage of the analysis of the client's circumstances may also raise some further issues and problems,
and, again, these should be recorded in the financial plan to show that they have been considered, even
if a conclusion is not reached at this time.
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2.2.3 Cash Flow Forecasting
Learning Objective
3.5.6 Understand the principles and application of cash flow forecasting and time value of money
As a financial planner or paraplanner, you are likely to need to do several calculations when preparing
a financial plan. While financial planning and cash flow software packages and spreadsheets may be
used, it can often be quicker to use a calculator to perform calculations. Where compound interest
calculations are required, you may struggle if you use a basic type of calculator and are likely to find a
scientific or financial calculator easier.
Among other things, time value of money calculations can help to calculate the following:
• how much an investment will be worth after a certain period of time

• how much is needed to save per month/year to reach a target capital amount in the future
• the effective rate of return investments would need to achieve to ensure a target capital amount is
achieved in the future
• how long it will take before an initial investment grows to a target amount.
The answers to these questions can be used to build the foundations of a financial plan. For example, if
a client would like to save for their child's university education and they know how much money they
need in the future and how many years this is needed, then a financial planner could calculate how
much they need to save per month based on an assumed rate of return. By identifying the amount that
needs to be saved each month, cash can be allocated for this and a plan can be implemented to ensure
the client's objective can be achieved.
2.2.4 Cash Flow Analysis in Planning Scenarios
Learning Objective
3.5.7 Be able to analyse cash flow at key life stages including: current; at retirement; on ill health; on
death
While it is important to determine the current cash flow situation, foreseen or unforeseen events will
have a dramatic impact upon the financial plan and it is important to consider how this may require
changes to the advice.
Marriage
Marriage or civil partnership and the birth of a child each have a combination of effects upon a client's
financial position and future needs. The marriage itself could be a major financial commitment and may
require loans for the wedding and honeymoon and/or travel insurance depending on the personal and
financial circumstances of the couple. Post marriage/civil partnership, there may be a situation where
two incomes come into a household, couples are able to transfer assets between each other with no
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CGT liability arising, and life assurance to protect the finances of each in the event of the other's death
may become a priority; this includes changing the beneficiary on any death in service plans/employer
pension plans. All the possible changes that occur post marriage have an impact on current and future
financial needs.
Cash flow implications are:
3
• two incomes
• accommodation costs – rent or buy
• budget (outgoings) changes , including wedding costs, and
• children.
Children
One further change in circumstance is the birth of a child. In terms of financial and personal protection
needs, this could herald looking at the following:
• potential loss of income

• costs of childcare
• education costs
• house move
• planning for the financial impact of receiving maternity pay as opposed to normal pay including
potential periods of no pay or the cost of early years childcare
• tax credits that may apply
• IHT planning and making provisions in case of the death of one or both parents.
There are a number of insurance options to deal with some of the issues raised above:
• life assurance with a lump sum – written into a flexible trust to provide immediate continuity of
school fees
• critical illness cover – providing a lump sum payment for school fees
• income protection plans – to pay school fees in the event of illness or accident
• monthly benefit plans – to meet the rising cost of school fees
• IHT planning – by writing protection products in trust, any benefit is not subject to inheritance tax
and payments are made more quickly, directly to the school.
As clients' circumstances may differ considerably, many plans can be tailored to individual needs and
requirements.
Clients have the discretion to use the plans in conjunction with other products to suit all their needs.
Plans could be in the form of:
• monthly savings into a tax-efficient offset mortgage account

• tax-free savings into ISAs
• changing existing plans to meet a school fees schedule
• planning to cover any increase in fees from year nine (when a child moves from prep school to
senior/boarding school)
• university fee plans
• converting endowment mortgage plans.
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A bespoke school/university fee plan should consider a variety of circumstances:
• the tax status of client, eg, for non-taxpayers or non-UK residents, offshore investments may be
more suitable
• appropriate diversification of investments and assets
• the use of tax-efficient vehicles where appropriate
• taking account of children's annual CGT allowance
• the appropriate use of trusts
• products that complement protection policies already in place.
Divorce
Divorce requires careful financial planning and organisation, as it involves the legal, personal and
financial separation of two sets of finances that have been previously combined. Financial settlements
may involve reassigning policies and assets and may involve taking on new financial liabilities.
Previously held policies, assets and accounts as well as details of beneficiaries may have to be changed,
disposed of and untangled. Future plans and priorities are also likely to change, effectively requiring a
completely new KYC record to be made up for each client involved.
Retirement
Rather than use the term ‘retirement’, many planners prefer ‘financial independence’, which is where
the client has enough capital and other assets available so that work is optional and their desired
lifestyle is affordable. This way every client has their own definition, image and vision of what ‘financial
independence’ means to them. In essence, the planner seeks to get the client to describe this and then
quantify what is required. This can be as simple or complex as the client wishes.
Once the planner knows what the client needs in real terms to live on comfortably, they can compare
this with the expected state and private pension and other capital resources likely to be available at the
time. A cash flow forecast can then be built, from which the planner can establish whether the client is
on track or needs to allocate more resource(s) or time.
Disability and Critical Illness

Disability and/or critical illness impacts not only on a client's personal options, future plans and quality
of life – it can present serious financial issues. Circumstances must be reviewed and future priorities
discussed and appropriate financial planning effected.
From the adviser's point of view, much is dependent on the nature of the disability and future prospects
for employment, care and the assets of the client. The client may rely on health and/or income
protection policies to cover financial burdens for a period of time; however, these do not provide for the
long term, and other options will require investigation.
Death
The impact of death differs from all the other significant events in that it is final. Different choices
and other alternative strategies can be adopted in financial planning even if planning does not occur
until a very late stage, but if financial planning is not put into place for the event of death, potential
beneficiaries or those for whom the client had financial responsibilities can suffer adverse effects from
the lack of planning.
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On the other hand, the client may be the beneficiary and inheritor, which changes their circumstances
for the better. In this case, present and future priorities may change, their own IHT, retirement,
protection, healthcare and other plans could be affected. There may also be an inheritance tax bill to
pay. All of these aspects require a range of financial planning options to be reviewed.
2.2.5 Gathering Data and its Evaluation
3
Learning Objective
3.5.8 Understand how to obtain relevant information from third parties: identification of missing
information; where and how to obtain further information
Once information has been collected from the client, it is often necessary to follow up to gather further
details not originally captured during the initial discussion and fact-find meeting. This often becomes
apparent on reviewing the information in preparing to write a recommendation letter to conduct
analysis regarding any shortfalls identified. Clients will often have a previous statement which may be
out of date and perhaps are unable to provide copies of policy documents which contain full details of
the current arrangements.
In order to obtain sufficient detail, it is often necessary to obtain a letter of authority from the client
which is sent to a provider together with a questionnaire requesting details required by the adviser. The
letter of authority is often valid for 12 months; it may or may not include an instruction for any servicing
rights to be transferred if there is no present relationship with another adviser, or if the client is planning
to change their adviser.
2.2.6 Investment Review in the Context of the Financial Plan
Learning Objective
3.5.10 Be able to evaluate the performance and suitability of the client's existing investments taking
into account the client's: current financial provision; objectives; risk appetite; capacity for loss;
current and future tax status
Investment Performance
Even if a client has the time, inclination and knowledge to assess the performance of their investments,
most clients do not have the same access to industry knowledge and comparison data that advisers
do. Furthermore, investment markets, indices and funds change quickly and in response to a variety
of economic, regulatory and legal changes as well as internal changes. New products appear in the
marketplace that may be better suited to a client's risk profile, tax status and other financial provision.
It is part of the role of an adviser to be aware of such matters and to ensure the client benefits from
the adviser's continuously updated knowledge of the best choices for the client. Regulatory changes
and the occasional financial scandal may close certain options for clients and open others that were
previously not viewed as suitable: for example, the use of some derivative products to hedge risk was
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once viewed as inappropriate for anyone other than the most sophisticated institutional investors, but
now these are seen as part of a financial solution by certain groups of private investors.
Accurately assessing a client's tolerance for risk and capacity for loss are arguably the biggest issues
when considering wealth management options. The consequences of not understanding attitudes to
investment risk, and the inherent risk within different types of investment, can be severe.
In addition to an assessment, it is vital to encourage clients to spend some time considering their own
thoughts and feelings regarding investment risk. Risk profiling is by definition an ongoing process and
a person's attitude to risk can often change over time. This could be influenced by any one of a diverse
range of factors, such as personality, past investment experience, job security, proximity to retirement,
asset values, family and health issues. It is therefore vitally important to ensure that the adviser is kept
up to date with any changes in a client's outlook to investment risk as this allows a reassessment of how
the client's investments are managed within different asset classes.
3. Financial Planning Assumptions
Learning Objective
3.2.1 Understand the importance of assumptions and their application in the financial planning
process
3.2.3 Be able to analyse the effects that changing assumptions may have on a financial plan
In analysing and calculating client shortfalls and any requirements for additional provisions, calculations
will need to be carried out taking account of current provisions as well as external factors which may
impact on outcomes.
A number of assumptions may need to be made when performing these calculations. Such assumptions
could include:
• future inflation rates

• future expenditure patterns
• rate of earnings increases
• investment and asset growth rates
• school and university fee increases
• annuity and/or pension drawdown rates
• future tax rates
• life expectancy
• future social security benefits.
This list is by no means exclusive and where assumptions are made, these should be recorded in the
financial plan. Some assumptions may have been agreed with the client during the client meeting,
or some paraplanners or financial planners (or financial planning practices) may use a standard set of
assumptions – again, these assumptions should be recorded in the financial plan so that all parties can
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clearly see the assumptions that have been used and on which the recommendations are based. Many
assumptions are likely to change over time and all assumptions should be justified, showing why the
assumption is reasoned, reasonable and relevant to the client's financial plan.
3.1 Compound Interest or the Time Value of Money
3
Learning Objective
3.2.2 Be able to calculate future values of assets, liabilities, income, expenditure, the cost of goals and
objectives in real and nominal terms using assumptions
Novice financial planners often find the mathematics of compound interest daunting and while
everyone agrees it is not easy, the concepts are relatively simple to grasp. This section deals with the
basics of compound interest to the extent that planners can perform future values calculations, using
the functions available in most pocket calculators and widely available in spreadsheet packages such
as Excel. The syllabus does not require the planner to understand how the mathematics works, merely
to apply the relevant formulae to manipulate the three or four variables needed to calculate the fifth,
which is the future value.
3.1.1 Compound Interest

Lump Sums (Not Regular Payments)
In order to calculate the future value of a lump sum, there are four variables involved. These are:
• The present value (PV) – this is the current value of the asset, be it a cash lump sum, an ISA or a
property.
• The number of time frames (n) – in financial planning, the time frames normally used are years or
months.
• The rate of interest per time frame (r) – financial mathematics uses an r value which is a decimal of
one, whereas most of the general public express a rate of interest as a percentage (here we will use
an i% to clarify the difference, which becomes important later on). For example, 4% as an i% value
equates to 0.04 as an r value. It is critical to apply the rate of interest to the correct time frame unit,
ie, month or year.
• The future value (FV) – this is the variable which can be calculated.
The general formula which links the four variables FV, PV, n and r (FV, PV, NPER and RATE in Excel-speak)
is:
FV = PV x (1 + r)n
Given the formula above, the planner can see that if they know three of the variables they can calculate
the fourth. The other three formulae are:
PV = FV/(1 + r)n Used to calculate the discounted value of a future lump sum
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r = (FV/PV)(1/n) – 1 Used to calculate the rate of interest applied
n = log(FV/PV) Used to calculate how many time periods

log(1+r)
Luckily, the planner does not have to be a mathematical genius to be a competent financial planner. The
planner does, however, need to have a financial calculator and a grasp of the concepts of the time value
of money.
If the planner has got a financial calculator, it will have the keys FV, PV, n and i%. Conversely, if their
calculator does not have these keys on it, it is highly unlikely to be a financial calculator. Microsoft Excel
has the functions FV, PV, NPER and RATE.
Exercise 1
What would be the future value of £20,000 in 25 years' time where the prevailing rate of interest is a
constant 5%?
In Excel, select a cell and then select the Function drop down menu (fx). Enter the figures in the relevant
box – remember to use r notation, ie, 0.05 in the RATE box.
The screen should look like this (ignore the PMT and Type boxes for the moment):
Whichever tool is used, it should end up with the answer: –£67,727.10. (NB the minus sign. There is a
convention that where sums invested are positive, the outcome is negative.)
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Example
Michael has £15,000 in an ISA which he has earmarked for his daughter’s wedding. She is only three
years old but he would like to provide for a wedding costing £30,000 in real terms, ie, after inflation and
sees her getting married when she is 25, in 22 years' time. You anticipate the rate of return after inflation
to average 2.5% per annum net of costs. Michael wants to know if the current £15,000 is enough.
PV £15,000
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i% (or RATE (r) using Excel) 2.5%, or 0.025
n (or NPER using Excel) 22
The future value (FV) is: £25,823.57, ie, not enough to meet Michael’s objective.
The present cost of future goals can be calculated using the PV formula repeated from above:
PV = FV/(1 + r)n
This is also known as discounting. Using the example of Michael’s wedding goal above, he asks for an
estimate of how much capital he needs to allocate now to achieve the goal, using the same data. This
requires some manipulation of the data, but using the calculator/spreadsheet, the result is easy to
calculate.
FV –£30,000
i% (or RATE (r) using Excel) 2.5%, or 0.025
The present value (PV) is £17,425.94, which is £2,425.94 more than he has currently allocated.
The Fifth Variable

So far, we have looked only at the investment of lump sums over time. There is a further factor that
needs to be taken into account, which is the effect of money being invested or drawn out on a regular
basis. This is the fifth variable, namely payments in or out, expressed in mathematical terms as PMT. This
adds a further level of complexity, but is critical for a financial planner to understand.
Not all our clients have ready capital to invest, but most have goals that they wish to achieve out of
income and some have regular debt repayment programmes, ie, mortgages. The introduction of regular
payments and receipts into the compound interest equation shows the following:
FV = PV(1+r)n + PMT(((1+r)n –1)/r)
This is not as bad as it looks. The bit in front of the plus (+) sign has been seen before. All that the bit
after the plus (+) sign says is that interest is added to and compounds over each period that the regular
payment is made. Anyway, by now you will have bought, or at least have access to, a financial calculator
or spreadsheet programme. All that the planner needs to know is this: if they know the values of four of
the variables, the calculator will do the rest.
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For example, the client has a fund of ISAs worth £100,000. The expected rate of total investment return
(with reinvested dividends and distributions) is 6.5%, net of charges. The client wants to be a millionaire
in 25 years' time (in cash, or nominal, terms). How much do they need to contribute regularly out of
income now, and at the beginning of each year to achieve this?
The four variables we know are:
FV = -£1,000,000
PV = £100,000
n = 25
i% = 6.5% per annum (r= 0.065)
PMT = ?
Using a calculator, the answer is £8,247.26 per annum.
If the planner got £8,783.33, it is not quite right, because the contribution has been made at the end
of the year rather than at the beginning. This introduces the first layer of complexity in what might
be a straightforward bit of maths. Whenever they build in regular receipts or payments, they have to
specify whether they take effect at the beginning or the end of an interest period. In this case, and
with all savings plans, the payment is made at the beginning of the period. All financial calculators
have a button marked 'BGN' which will appear in the display when payments or receipts occur at the
beginning of each period. If BGN is off, then the regular contribution, receipt or payment is deemed to
occur at the end of the period. In Excel, the relevant box in the drop-down is 'Type'. If left blank or if '0' is
entered, the payment is deemed to be made at the end of the period. If '1' is entered, payment is made
at the beginning of each period.
Examples of payments at the end of each period might be payments to a repayment mortgage, or an
annuity with payments in arrears.
The thing to remember is, if the PMT function is used, always think whether BGN should be on or off (or
a '1' entered in the 'Type' box, if using a spreadsheet).
This leads to the next complication, namely the direction of the cash flows. When we were dealing with
lump sums only, there was generally no difficulty with getting an answer from the calculator. The sharp-
eyed planner, however, would have noticed that if they were calculating a future value (FV), the result
would have been preceded by a minus sign (–). This is because, for most calculators, all payments out
are treated as credits, and receipts are treated as debits. All calculation results can then be judged in the
same way, with negative numbers representing a negative balance and positive numbers representing
a positive balance.
When the PMT function is introduced, the planner has to think whether it is a receipt or a payment. For
a savings plan, PMT is positive, while for an annuity, PMT is negative. In order to change the polarity of
the input, most calculators have a +/– function.
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An easy way to understand this is to construct a cash flow diagram which shows the flow of money
received and paid out over time. The horizontal axis represents time periods, from left to right. Money
received/paid out is represented by vertical lines – above the time axis for money received, below the
axis for money paid out.
For lump sums the diagram looks like this:
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(+) PV
Flow of cash
(–)
Flow of time FV
For calculations involving PMT, the cash flow diagram looks like this:
(+) PV PMT (IN)
1 2 3 4 5
Flow of cash
(–)
Flow of time FV
PMT (OUT)
So with different financial models, there are different cash flows, as follows:
a. Savings plan
PV + (if not 0)
PMT +
FV –
b. Mortgage
PV – (Your debt is the lender’s credit)
PMT +
FV + (if not 0, as paid off)
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c. Annuity
PV +
PMT –
FV normally 0, at the end of life
d. Regular withdrawals from capital

PV +
PMT –
FV + (if withdrawals are sustainable over the term), or FV – (if withdrawals are too high or interest/
growth too low)
Note that time is always positive, but the rate of interest can vary. The effect of any interest payment,
however, depends upon whether the balance at the time of the interest payment is positive or negative.
A positive balance normally attracts positive interest, a negative balance suffers negative interest.
Modelling Different Simple Financial Scenarios

Savings Plans
A simple example to start with. Carlos wants a cash sum of £150,000 in 15 years' time, and has agreed a
real rate of investment return, ie, after inflation, of 4.5%. He hopes to fund it out of his annual bonus and
so pay in once a year. How much does he need to invest at the beginning of each year?
Answer: £6,906.29
15 n or NPER
4.5 i% (r= 0.045)
0 PV
150,000 +/– FV
COMP (BGN On) (Type '1') PMT
If the planner was to suggest that Carlos postponed his vesting by five years, what would then be the
annual savings need?
Answer: £4,575.52
To do this the planner does not need to re-enter all the variables, just the number of periods.
20 n
COMP (BGN On) PMT
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If Carlos then said that he had a further £15,000 which could be invested now, what would the revised
savings requirement become?
Answer: £3,472.04
To do this the planner does not need to re-enter all the variables, just the revised present value.
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15,000 PV
COMP (BGN On) PMT
Mortgage
Lydia wants a capital repayment mortgage of £185,000 repayable over 25 years at a fixed rate of 5.85%
per annum. What is the repayment payable annually?
Answer: £14,266.32
25 n
5.85 i%
185,000 +/– PV
0 FV
COMP (BGN off) PMT
If Lydia wants to pay monthly, the answer is not £14,266.32 divided by 12. Because the number of
periods has changed, the planner needs to change the rate of interest to reflect a monthly amount
which, when compounded over 12 months ends up as 5.85%. They do this using the APP/EFF keys, or
the power key yx. Different financial calculators use differing methodologies for APP/EFF, so they will
use the power key here.
5.85% is the annual effective rate of interest. To calculate the monthly rate they can use the r formula
above.
r = (FV/PV)(1/n) – 1, where FV = 1.0585 and n. = 12. PV = 1
By substitution, r = 1.00475 –1 = 0.00475
This converts to an i.% value of 0.475%
Answer: £1,158.26
300 n
0.475 i%
185,000 +/– PV
0 FV
COMP (BGN off) PMT
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Annuity
How does an actuary calculate an annuity? No one who is not an actuary knows. Apparently it’s a bit
more complex than meets the eye. I believe, however, that we can get a good approximation to an
annuity using time value of money calculations.
For example, Liam, a single male client when he reaches retirement has a life expectancy of 16.5 years.
He wants a level annuity of £15,000 gross per annum, payable monthly in arrears, and the redemption
yield on long-dated gilts is 4.3%. Can you estimate a likely lump sum Liam needs to build up? (Assume
that any costs are offset by the annuity cross-subsidy provided by those who die early.)
Answer: £178,100.47
16.5 x 12 = 198 n
1.043(0.08333) –1 = .00351 = .351 i%
15,000/12 = 1,250 (BGN off) +/- PMT
0 FV
COMP PV
This also works for life assurance cover. If a client has a spouse with the same life expectancy as above
and wants to provide £15,000 of income for their partner, the calculation is effectively the same. The
traditional 20 times the desired income would throw up £300,000 which is over-egging the level of
cover a bit!
If, however, the beneficiary of the life cover had a life expectancy of 50 years, what level of life cover
could you justify?
Answer: £312,326
You only need to change the number of months.
50 x 12 = 600 n
COMP PV
Regular Withdrawals from Capital

One of the key strategies for financial planners is to ensure that their clients do not have too much
capital, which creates an IHT issue, and also ensuring that the money does not run out before life does.
Perfection is when the client ‘zeroes out’, and the cheque to the undertaker bounces.
Here is an example. Jack retires and relies on investment income and capital to support his lifestyle, over
and above his pension income. The expected long-term real rate of investment return, net of charges
and tax is estimated to be 3.5%. Jack has a portfolio of £500,000 and needs an extra £4,000 a month. He
is aged 63 and sees himself living to age 80. Does he have enough capital?
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The answer is NO.
Jack needs the income for 204 months. The calculation tests when the money runs out.
1.035(0.08333)–1 = 0.0028709 x 100 i%

500,000 PV
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4,000 +/– (BGN on) PMT
0 (‘cos the money has run out) FV
COMP n = 154 months
So, how much can Jack draw a month and still see himself zeroing out at age 80?
Answer: £3,232.50
Here the planner needs to change one variable, n to 204, and then solve for PMT.
204 n
COMP PMT
The Difference between Nominal Rates of Return and Real Rates of Return
It is important to note that the relationship between nominal rates of growth and real rates (ie,
discounted for inflation) is not linear, not arithmetic, but geometric.
Many people think that if they subtract the average rate of inflation from the growth rate, they end up
with a reasonable approximation to the truth. By way of example, knowing that a lump sum of £100,000
invested over 25 years at 8.00% would be worth £684,848. (Test it!). If inflation over the same period
averaged 3.00%, and using the arithmetic method, this suggests that the real rate of return might be
5.00% (ie, 8.00%–3.00%).
Applying this rate in practice, using the formula above, the calculation appears as follows:
£100,000 x (1.05)25 = £338,635!
If you remember that mathematics works better using the r value (decimal of one), not the i% value, and
the relationship is ((1+r1)/(1+r2)), rather than (i%1–i%2), you will get answers that make sense.
Thus, 1 plus 0.08 divided by 1 plus 0.03 is (to many decimal places) 1.048543689.
Take away 1 and r becomes 0.048543689.
This equates to an i% value of 4.8543689%.
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Apply this value to the same £100,000 over 25 years and the answer becomes £327,087. The approximate
value overstates the real value by 11.5% of the original £100,000, or 3.5% of the real value, over the
period. As an approximation, it will do, but beware of how inaccuracies accumulate.
Combination Funding
When working towards achieving a particular goal, a planner should not limit themselves to using only
income or only capital. The formula expressed earlier:
FV = PV(1+r)n + PMT(((1+r)n –1)/r)
The plus sign (+) is the indicator that the relationship is linear.
Example
Let's look at an example with Jed who wants to retire in 12 years' time on a net income of £30,000 pa
in today's terms. You may need to perform a number of calculations using Jed's current provisions and
available resources and the assumptions made in the financial plan, including:
• the value of Jed's existing pensions, based on current and future contribution rates
• in 12 years' time:
the gross income (and PCLS, if applicable) that this fund could produce
the value of other investments that could be used to produce income when Jed retires
the value of SPs and other state benefits that Jed may receive in retirement
the value of other income that Jed may receive in retirement
Jed's projected net income in retirement from current provisions and any shortfalls from Jed's
retirement income objective
how any shortfalls may be closed (eg, lump sum and/or regular premium investments required).
A number of different methods can be used for these calculations, including use of a financial calculator,
spreadsheets and/or financial planning or cash flow modelling software. When using these software
packages, however, financial planners and paraplanners should ensure that they understand fully how
the software works and the output produced – it is all too easy for paraplanners and financial planners
to be 'taken over' by software packages and for the software to drive the planning, rather than the
financial planner and/or paraplanner being in control and driving the software!
The power of software is that many packages can produce a large number of 'what-if' scenarios very
quickly; however, the financial planner or paraplanner should ensure that anything that is to be
presented to the client is relevant and easily understandable. Remember, if the planner presents the
client with a number of options covering every eventuality, this is more likely to confuse rather than
inform!
For more information on time value of money you can purchase 'The Time Value of Money Guide' from
the CISI.
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3.2 Assumptions for Investment Portfolio Returns

Assumed rates of investment returns may be given as 1% for cash deposits and 6% for equity returns,
after tax and charges. This scenario helps you to think in more detail about risk.
Example
If Gail has a cautious or modest attitude to investment risk, she can be recommended a portfolio
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containing a mix of cash, fixed interest, property and equities.
If using a combination of asset classes, the assumed overall growth rate will be lower than the highest
assumed asset class growth rate (in this case, equities based on the above) and higher than the lowest
assumed asset class growth rate (in this case cash deposits).
4. Developing and Communicating Financial

Planning Recommendations
Learning Objective
3.6.1 Understand how to develop suitable financial plans for action, and explain and justify
recommendations: make outline recommendations to meet/address client needs, goals,
objectives and other issues or problems where appropriate; draft initial recommendations for
the financial plan; evaluate the advantages and disadvantages of different strategies
4.1 Effective Financial Planning

For financial planning to be effective, it must continually adapt to the circumstances, priorities and
aspirations of the client, which are guaranteed to change due to key life events, career changes,
increasing age, a growing or diminishing family, changes in health and desires or needs. At each step or
point in their life, the client is faced with numerous choices plus some options they may not be aware
of. Providing financial advice to a client continues throughout a working life and does not stop even at
the point of retirement.
We have already considered the issue of prioritisation in matching recommendations to both the
client's financial requirements and their current situation, and that client's perception of their own
needs may be coloured by their own experience which may be limited in the financial services area. It
is vital for the financial adviser to continually update their technical knowledge of what is offered by
the vast array of providers, involving tax, legal and accountancy experts as appropriate. The approach
or charging structures of providers may be of great importance, depending on the client's preferences
and philosophy, for example ethical investment. All of these areas must be considered along with the
complex interplay between one financial solution and another, and any changes instigated by providers,
regulators, tax authorities and governments. Essentially, financial planning is highly complex, and the
role of the adviser is to guide the client to the best solutions by offering best advice and practical advice
– particularly where the client has a limited budget to fund solutions.
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Justify how the recommendations meet the client's specific circumstances, explaining the
recommendations in a manner the client can understand, including, for example:
• explanation of appropriate financial protection products to clients and how they meet client needs
• characteristics, correlation, advantages and disadvantages of different products
• economic context of the advice and significance of main economic indicators
• comparison of the different options available
• interrelationship in estate planning between wills, trust, protection, IHT, CGT and retirement with
investment planning
• explanation of when a previously agreed action is no longer beneficial to the client
• advantages and disadvantages of the proposed approaches
• how the action takes account of future needs
• how the action will be handled, including the need for monitoring and review.
Mortgage planning, investing and retirement planning must also be done in the context of the wider
economic environment. Interest fluctuations as well as rates of inflation have a marked effect on
the future value of savings and on the current or future cost of borrowings. Large increases in the
repayment amounts of borrowings can be very detrimental to a client's financial position. Moreover,
economic factors can affect the stability of a client's income (eg, redundancy) and therefore have an
impact on the client's financial planning requirements. During such periods the client's focus may move
to protection products.
Matching any investments chosen to the economic climate and explaining the rationale for this to the
client also maximises the end result, and if, due to unforeseen circumstances, it doesn't, a clear rationale
for any recommendations made will allow the client to still appreciate that the recommendations were
made with their interests in mind. The integrity of the adviser and of the advice given is of the greatest
importance to the issue of client trust, so it must be made very clear to any client why and how any
recommendations suit their specific requirements as opposed to being seen as a method for the adviser
to generate income. The RDR has highlighted this particular issue, and it is a key reason for the move
away from commission-based adviser remuneration towards a fee-based charging structure for advisers.
4.1.1 How Do I Make Outline Recommendations?

Outline recommendations can be made based on the shortfall analyses and other analyses that have
been performed before starting the preparation of the financial plan. While financial planning need not
involve the use of any financial products, in many cases financial products may be appropriate to meet
the client's goals and objectives. However, in other cases, a simple rearrangement of the clients' affairs
may be sufficient to help them to achieve their goals and objectives. Often, a combination of financial
products and rearranging the client's financial affairs will be used.
Where financial products are being recommended, these products can be referred to generically in the
financial plan – it is not necessary to provide full details of the intended product at this stage, although
the financial plan should state an approximate cost of the premium or the amount to be invested
(with an appropriate caveat for any protection products stating that the quoted premium is based on
standard terms and could increase because of underwriting).
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The cost of any financial products used, together with the rearrangement of the client's assets should
be affordable, based on the investible capital and surplus income figures calculated for the net
worth statement and income and expenditure analysis. The financial plan should look at the client's
circumstances from a holistic viewpoint, rather than treating each issue, goal or objective in isolation.
This will help ensure that the recommendations remain affordable (and that you are only spending the
client's money once).
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When preparing an integrated financial plan, there are a number of other factors to take into account,
including:
• Knock-on effects – any knock-on effects that a particular recommendation may have on other
recommendations should be identified and noted in the financial plan – for example, the payment
of long-term care fees from accumulated assets may have the effect of reducing the value of the
estate assessable for inheritance tax purposes on the client's eventual death.
• Insufficient assets – if the client does not have sufficient available assets to fully meet one or more
goals and objectives, this should be pointed out in the financial plan and details given of what can
currently be achieved, together with proposals on how the shortfall may be closed in the future.
• Meeting objectives – recommendations made should clearly state to the client how the stated
goal or objective is met and any associated risks or problems stated. A lifetime cash flow statement
may help to show how the recommendations meet the stated goals and objectives, as may post-
recommendation net worth statements, income and expenditure analysis and tax calculations.
Certain recommendations may involve the use of both single and regular contributions. It is up to the
financial planner to determine the most appropriate mix between the two for the client. The main body
of the financial plan should be easy for the client to read and follow – it is worth considering placing
detailed and complicated calculations in the appendices to the financial plan, but don't forget to refer
to these in the main body of the plan so that the client knows where to look for them! It may also be
worth providing a summary of recommendations made at the end of each section, especially if your
recommendations take up several pages.
4.2 Bringing It All Together
Learning Objective
3.6.2 Be able to evaluate whether all recommendations are suited to the client's situation and financial
requirements, including: appropriateness and relevance of proposed solutions, products and,
where applicable, providers; alternative courses of action where no suitable product is available;
whether they match the client's agreed risk/reward philosophy; affordability
The financial adviser operates in a complex marketplace and deals with often complex financial issues
for clients and, as each client's circumstances are different, there will inevitably come a time where the
adviser is faced with a situation where a suitable product for a client's needs simply does not exist.
Where no suitable product is available, no recommendation should be made.
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Part of the issue surrounding the provision of advice where no suitable product exists is that of the
potential for mis-selling, especially if the client perceives that an adviser has recommended a product in
order to charge a fee rather than to suit the client.
4.2.1 Matching Risk/Rewards

The fundamental aim of financial planning is to recommend options that meet the client's current and
anticipated needs, allowing them to be able to make use of funds when needed, protect the lifestyle
for the client and their family and achieve this in a manner that is affordable to the client. It may be
suitable to recommend products that are low-cost in the early years such as low-start mortgages where
the product becomes more expensive later when the client's earnings are more likely to be higher.
All options come with a risk, however, particularly any products that contain exposure to instruments
that could decrease in value such as investments, so it is vital that the risk/reward philosophy of any
recommendations matches that of the client.
A client may arrive with a range of investments and products that they have gathered previously. As
mentioned in the risk section, a client could perceive their risk position as low when it is in fact high-
risk. As protection products, income, retirement planning and savings plans could be exposed to the
same or very similar underlying investments, narrowly held investments could mean that the client is
taking a much higher risk position than they realise relative to the overall market. This emphasises the
importance of regular and thorough reviews which include all the facts about each client's financial
situation, including future plans.
Explaining investment risk over the short and longer term is equally important so that the client
understands recommendations and agreement can be reached. The nub of the matter is whether the
client is able to afford the very protection and investment products that match both needs and risk/
reward profile. Where affordability is an issue, priorities must be agreed with the client and all the issues
surrounding the client's current and future needs explained so that the client can make an informed
choice as to which recommendations to defer and the impact of any deferral. This in turn will aid the
client in agreeing what the next priorities are as and when the client's earnings increase.
It should go without saying that a financial plan can only work if the client can afford it, but, often,
this can be forgotten when the plan is prepared. It is also important to ensure that the same money is
only spent once. Once the investible capital and surplus monthly income have been calculated in the
analysis stage, it is worth keeping a running ledger showing what resources are available and what has
been spent – this should help prevent the same money being spent more than once and ensure that the
recommendations made in the plan remain affordable.
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4.3 Estate Planning
Learning Objective
3.6.3 Be able to analyse estate planning and its application in the financial planning process: the
basics of wills and will planning, the events that invalidate wills, deeds of variation and will
trusts, laws of intestacy; Powers of Attorney, including Lasting Powers of Attorney; the types of
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trusts available, their taxation and application
4.3.1 The Rules of Intestacy

When a person dies without leaving a valid will, their estate will be divided according to certain rules
(the rules of intestacy). A person who dies without leaving a will is called an intestate person.
Only married or civil partners and some other close relatives can inherit under the rules of intestacy.
4.3.2 Married Partners and Civil Partners

Married partners/civil partners inherit under the rules of intestacy only if they are married or in a civil
partnership at the time of death.
If there are surviving children, grandchildren or great grandchildren of the deceased and the estate is
valued at more than £250,000, the partner will inherit:
• all the personal property and belongings of the person who has died, and
• the first £250,000 of the estate, and
• half of the remaining estate.
Exercise 2
Mary was in a civil partnership with Alana and they adopted a daughter called Amelia. Mary died
without leaving a will. Her estate is worth £650,000. How much can Alana inherit?
4.3.3 Jointly-Owned Property

There are two different ways of jointly owning a home. These are joint tenants and tenants in common.
If the partners were joint tenants, at the time of the first death, the surviving partner will automatically
inherit the other partner's share of the property. However, if the partners are tenants in common, the
share devolves by will, or if there is no will, the law of intestacy.
Couples may also have joint bank or building society accounts. If one dies, the other partner will
automatically inherit the whole of the money.
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Property and money that the surviving partner inherits does not count as part of the estate of the
person who has died when it is being valued for the intestacy rules.
Exercise 3
Lamont and Aisha are married and own their house jointly as joint tenants. They have a child called
Tamar. Lamont dies intestate leaving the jointly owned flat worth £300,000, and £50,000 in shares in his
own name. How is the estate divided?
4.3.4 Close Relatives

Children
Children of the intestate person will inherit if there is no surviving married or civil partner. If there is a
surviving partner, they will inherit only if the estate is worth more than a certain amount.
Children – where there is no surviving married or civil partner

If there is no surviving partner, the children of a person who has died without leaving a will may inherit
the whole estate. This applies however much the estate is worth. If there are two or more children, the
estate will be divided equally between them.
Children – where there is a surviving partner

If there is a surviving partner, a child only inherits from the estate if the estate is valued at over £250,000.
If there are two or more children, the children will inherit in equal shares:
• one half of the value of the estate above £250,000.
All the children of the parent who has died intestate inherit equally from the estate. This also applies
where a parent has children from different relationships.
A child whose parents are not married/have not registered a civil partnership can inherit from the estate
of a parent who dies intestate. These children can also inherit from grandparents or great-grandparents
who have died intestate.
Adopted children (including stepchildren who have been adopted by their stepparent) have rights to
inherit under the rules of intestacy. But otherwise you have to be a biological child to inherit.
Children do not receive their inheritance immediately. They receive it when they:
• reach the age of 18, or

• marry or form a civil partnership under this age.
Until then, trustees manage the inheritance on their behalf.
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Grandchildren and Great-Grandchildren

A grandchild or great-grandchild cannot inherit from the estate of an intestate person unless either:
• their parent or grandparent has died before the intestate person, or

• their parent is alive when the intestate person dies but dies before reaching the age of 18 without
having married or formed a civil partnership.
3
In these circumstances, the grandchildren and great-grandchildren will inherit equal shares of the share
to which their parent or grandparent would have been entitled.
Other Close Relatives

Parents, brothers and sisters and nieces and nephews of the intestate person may inherit under the rules
of intestacy. This will depend on a number of circumstances:
• whether there is a surviving married or civil partner

• whether there are children, grandchildren or great-grandchildren
• in the case of nephews and nieces, whether the parent directly related to the person who has died
is also dead
• the amount of the estate.
Other relatives may have a right to inherit if the person who died intestate had no surviving married
partner or civil partner, children, grandchildren, great-grandchildren, parents, brothers, sisters, nephews
or nieces. The order of priority among other relatives is as follows:
• grandparents
• uncles and aunts. A cousin can inherit instead if the uncle or aunt who would have inherited died
before the intestate person
• half-uncles and half-aunts. A half-cousin can inherit instead if the half-uncle or half-aunt who would
have inherited died before the intestate person.
4.3.5 Who Cannot Inherit

The following people have no right to inherit where someone dies without leaving a will:
• unmarried partners
• same sex partners not in a civil partnership
• relations by marriage
• close friends
• carers.
However, even if they can't inherit under the rules of intestacy, they may be able to apply to the court for
financial provision from the estate.
If There Are No Surviving Relatives

If there are no surviving relatives who can inherit under the rules of intestacy, the estate passes to the
Crown. This is known as bona vacantia. The Treasury solicitor is then responsible for dealing with the
estate. The Crown can make grants from the estate but does not have to agree to them.
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If they are not a surviving relative, but believe they have a good reason to apply for a grant, they will
need legal advice.
4.3.6 Reviewing a Will

If a client has a will it is important to review their will when a major life event occurs, such as a marriage,
a divorce, a separation, the birth of a child, the death of a relative or a change in your financial situation.
These events may have an impact both on the client's wishes for the distribution of their estate and on
the validity of the current will.
4.3.7 Marriage/Civil Partnership

When a client marries, any will that they may have made previously is automatically revoked. The
only exception to this is if the will states that a marriage is about to take place and contains explicit
instructions that the client intends for the will to remain valid after marriage.
Since the introduction of the Civil Partnership Act in December 2004, members of a civil partnership are
treated in the same way as married couples. When a civil partnership is registered, any will that either
partner has previously made will be automatically revoked.
In Scotland, this law does not apply, and therefore getting married does not automatically mean that
your existing will is revoked.
4.3.8 Divorce
If a client gets divorced or their civil partnership is dissolved, their will does not become invalid, but
many of its provisions would no longer be effective if they pass away before making a new will. For
example, any gift that they had bequeathed in their will to their former spouse or civil partner would
take effect as if they had died on the date their divorce was completed. This usually means the gift
falls back into the estate residue for the benefit of the residuary beneficiaries. If their will states that
everything passes to their spouse, then it would be as if they died intestate (leaving no valid will).
In addition, if in their will they had appointed their spouse as an executor or trustee, after divorce they
would be barred from acting as an executor or trustee after the client's death. (This law does not apply
in Scotland.)
4.3.9 Inheritance Tax (IHT)

Inheritance tax (IHT) is charged on certain transfers of property or 'value' – it is therefore not just a death
duty.
The individual who makes the transfer is known as the donor (or transferor). The individual who receives
the transfer is known as the donee (or transferee).
The concept of domicile is crucial for IHT liabilities. Donors who are domiciled, or deemed to be
domiciled in the UK are subject to IHT on their worldwide property. Donors who are non-UK-domiciled
are subject to IHT on their UK property only.
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IHT Rates
There are three rates of IHT, which are linked to the prevailing NRB in 2017–18 (and until 2020–21). The
rates are:
£0–£325,000 0% (for any cumulative value of transfers)

Over £325,000 20% (chargeable lifetime transfers)
3
Over £325,000 40% (transfers up to seven years prior to death subject to taper relief).
Residence NRB
Individuals who have an estate worth more than the NRB can have an additional NRB when their
residence is passed on to a direct descendant. In 2017–18 the additional residence NRB is £100,000
increasing to £175,000 in 2020–21. The residence NRB can only be used when the residence is passed
to a direct descendant, ie, child (including stepchild, adopted child or foster child) or their direct
descendant.
This additional NRB can also be used when a person downsizes or moves out of a home on or after 8 July
2015 and assets of an equivalent value up to the value of the NRB are passed to a direct descendant:
• £125,000 in 2018–19
• £150,000 in 2019–20
• £175,000 in 2020–21.
The band is tapered for states worth £2,000,000 or more at the rate of £1 for every £2 in excess of this
threshold. A property which was never the residence of the individual does not qualify for this additional
band. Any unused additional threshold can be transferred to the deceased’s spouse or civil partner.
Charities and IHT

Any money left to charity does not count towards the taxable value of the deceased’s estate. If at least
10% of the net (after the personal allowance) estate is left to charity the IHT rate on the rest of the estate
is cut from 40% to 36%.
4.3.10 Types of Transfer

There are four types of transfer that a donor can make.
We will go on to look at each of these in more detail.
Exempt Transfers
These are simply transfers that are not taxed. The following table lists examples of exempt transfers,
along with relevant details and whether the transfer is exempt if made during the lifetime of the donor
only, or during their lifetime and on their death.
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Monetary amount
Type Relevant details
(if applicable)
This exemption can be applied both
during lifetime and on death.
Unlimited if donee is
UK-domiciled Spouses have to be married and not
Inter-spouse (and
common law.
inter-civil partner) £325,000 if donee is non-UK-
domiciled Transfers are exempt, even if the
spouses no longer live with each
other (different to CGT rules).
Gifts on marriage/civil £5,000 from each parent,
This is just a lifetime exemption.
partnership unless from anyone else
Gifts for education and
Reasonable provision This is just a lifetime exemption.
maintenance
Gifts to charities and This exemption can be applied both
Unlimited
political parties during lifetime and on death.
Potentially Exempt Transfers (PETs)

A potentially exempt transfer (PET) is a lifetime transfer by a donor to:
• another individual
• a bare trust
• a disabled trust.
According to HMRC:
‘Most lifetime transfers are potentially exempt transfers (PETs), that is they are only chargeable if the
transferor dies within seven years of making the transfer. But a lifetime transfer may be chargeable as an
immediately chargeable transfer, or a gift with reservation of benefit.’
No tax is charged at the date of the PET, and the transfer does not have to be reported to HMRC. If the
donor survives seven years, the transfer becomes fully exempt and is excluded from any IHT calculation.
Should the donor die within seven years of making the transfer, the tax due can be reduced based on
the following table. This tapering table is based on the tax due, not the value of the PET itself. The donee
is liable to pay any tax due.
Years between transfer and death Percentage of tax due

Up to 3 100%
More than 3 but not more than 4 80%
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Years between transfer and death Percentage of tax due

More than 7 Exempt
Exercise 4
3
Sue transfers £500,000 to a bare trust for her nephew and dies four years and nine months later with
an estate worth £200,000. Her executors only have one NRB available. How much IHT is due upon her
death?
Chargeable Lifetime Transfers (CLTs)

These are transfers that are not exempt or potentially exempt. The most common are lifetime gifts to
trusts, other than to bare trusts and trusts for a disabled person (stated above to be PETs), and transfers
to a company.
Tax on CLTs is payable at 20% on the excess above the NRB at the time of the transfer, with a further 20%
payable on death. There will be no further tax to pay if the donor then survives seven years. If they die
during that period, additional tax will be due, based on the higher death rate, although any tax already
paid will be offset, and the same tapering table applicable to PETs can be utilised.
The rules that apply to PETs regarding the value of the transfer being based on the date of transfer and
not the date of death, also apply to CLTs.
Transfers on Death
IHT is chargeable on the death of an individual, with the tax chargeable as if the deceased had made a
transfer of value equal to the value of their estate immediately before death. The taxable estate is the
individual's assets, less their liabilities. These assets might include the value of life policies payable on
the death of the individual.
There are also certain types of asset that are excluded, including:
• assets situated outside the UK (for a non-UK-domiciled individual)

• unit trust and open-ended investment company (OEIC) holdings where the beneficial owner is a
non-UK-domicile.
4.3.11 IHT Transactions

IHT is charged on certain transfers of property or value. A transfer of value is a reduction in the donor's
estate. Therefore, an interest-free loan that is repayable on demand or on death is not treated as a
transfer of value. It should be noted that commercial transactions between family members or business
partners are closely scrutinised to ensure they are truly commercial.
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The related property rules are very important, as an individual's assets may be related to similar assets
held by their spouse or civil partner. The rules ensure that, when measuring an individual's transfer of
value for IHT purposes, account must be taken of these similar assets held by a spouse or civil partner as
they are treated as being one asset. This is very relevant when spouses/civil partners own shares in the
same unquoted company, as their joint shareholding is looked at to establish the extent of the loss to
the estate on gifting shares away.
Interaction between IHT and CGT

There is considerable interaction between IHT and CGT.
A valuation for IHT and CGT need not be the same for:
• IHT – it is the loss to the estate that is measured

• CGT – it is the asset that is valued.
However, where an asset is valued for IHT on the death of an individual, the same value is used for CGT
purposes. This is then treated as the beneficiary's acquisition cost.
If a disposal attracts an immediate charge to IHT, for example setting up a discretionary trust, CGT hold-
over relief can generally be claimed. Where no hold-over relief is claimed, any IHT liability paid can be
deducted when calculating the gain providing the IHT was paid by the donor.
No CGT hold-over relief will be available for exempt or potentially exempt transfers.
Gifts with reservation are gifts of an asset such as property where the recipient does not enjoy the
possession or the donor continues to retain the benefit of the gift. If the donor dies within seven years
of still receiving benefit of the gift, then the gift is caught for IHT purposes. Not only that, it will still be
treated as being a disposal of assets for CGT purposes and therefore be taxed twice.
IHT Reliefs
We will now briefly look at the reliefs that can apply to IHT. The three main ones we will look at are:
1. Quick Succession Relief (QSR)

QSR is available where property in the deceased’s estate has passed to them by a chargeable transfer
in the five years before their death. The relief is given by reducing the tax payable on the deceased’s
estate, by referring to the amount of tax payable on the earlier chargeable transfer, the benefit that
passed to the deceased on that transfer, and the period between the transfer and the death.
2. Business Property Relief (BPR)

This is a relief for transfers of business property, designed to try to ensure family businesses (for
example) aren’t crippled by having to pay an IHT bill.
BPR is claimed at two rates. The relief is 100% for:

interests in unincorporated businesses, such as sole traders or partnerships
shareholdings of any size in unquoted and Alternative Investment Market (AIM) companies.
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The relief is 50% for:

controlling shareholdings in fully listed companies
land, buildings, plant or machinery used wholly or mainly for the purpose of a business
controlled by the donor (or if the donor was a partner).
BPR is only available if the donor owned the property for at least two years.
3
There are some assets that do not qualify for BPR, including:
businesses that mainly deal in securities, shares, land or buildings, making or holding
investments
where the property concerned is subject to a binding contract for sale at the time of the transfer.
3. Agricultural Property Relief (APR)

Agricultural Property Relief is also claimed at two rates. The relief is 100% for:
owner-occupied farms
land that was let on a grazing licence, or
property that is let on a tenancy beginning on or after 1 September 1995.
The relief is 50% for interests of landlords in most other let farmland.
As with BPR, the relief cannot apply to property that is subject to a binding contract for sale.
4.3.12 Administration of Estates

The IHT payable on the estate of a deceased person is the liability of the legal personal representatives.
The actual tax is due at the end of six months after the person died. For example, if someone dies in
January, the IHT is payable by 31 July.
Historically, personal representatives may well have been forced to take out a loan in order to pay the
tax, as they could not access the deceased's assets until the tax was paid. (Today some banks will accept
instructions from personal representatives to pay the IHT out of the deceased's accounts.) It should be
noted that this facility is not universal, and so IHT loans remain relevant.
If the deceased individual has a will set up to divide the estate between an exempt beneficiary, such as
a charity, and a non-exempt beneficiary, the estate is divided before the tax calculation so that the tax
burden is on the non-exempt beneficiary.
4.3.13 Disclaimers and Deeds of Variation

There are two ways in which the terms of the will (or intestacy) can be varied after death that are
effective for IHT purposes:
• Disclaimers – providing the property has not already been accepted by the beneficiary, the
beneficiary can, within two years of death, complete a written disclaimer. Providing that there is no
consideration in money (or money's worth) in return for so doing, this will not be a transfer of value
for IHT purposes and the property will pass to the beneficiaries entitled under the will (or intestacy).
They have therefore passed the property down a generation without incurring an additional IHT
liability.
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• Deeds of variation – similarly, a deed of variation could be used to vary the terms of the will or
intestacy for family or tax reasons. These are also known as deeds of family arrangement. The deed
must be made within two years of death and, unlike the disclaimer, can actually divert property to
any person or persons nominated by the person giving away their interest in the estate. For example,
a potential inheritance from a parent could be diverted to a favourite charity of the beneficiary's
choice. This would be effective for IHT purposes as if the deceased had left the money to charity in
their will originally. There are some conditions required. There must be no consideration in money
or money's worth; all beneficiaries giving away their inheritance must be over 18 and of sound mind
and must sign the deed. If more IHT is payable as a result of the deed of variation, the legal personal
representatives must also sign the deed.
4.3.14 Powers of Attorney and Gifts

(See Chapter 1, Section 6.4.3 for previous discussion on this area and the differences in different
countries.)
While a power of attorney (PoA) is not a trust, the role of an attorney is similar to that of a trustee since
they act on behalf of and for the benefit of another. An attorney cannot give away the donor’s property
unless there is specific permission granted in the deed. There are two types of PoA which enable an
attorney to make gifts in limited circumstances:
• Enduring Powers of Attorney (EPA) – this is where the donor gives to someone else the power to
manage their financial affairs. The attorney can use the power immediately if that is what the donor
desires. More typically, the donor makes it clear that the power is only to be used if they become
mentally incapable of handling their own affairs in the future. A PoA is normally revoked if the donor
becomes mentally capable but, under the Enduring Powers of Attorney Act 1985, a new type of
power was permitted which continues when the donor becomes mentally incapable and cannot
be revoked. Under Section 3 of the Enduring Powers of Attorney Act, an attorney can make gifts or
create trusts from the donor’s money, where it is a reasonable gift of a seasonal nature or at a time of
anniversary of a birth or marriage to persons related to or connected to the donor or to a charity to
which the donor made, or might be expected to make, gifts. Any other gifts are not allowed without
court approval. No new EPA can be made, but if one was made before October 2007 it can be used.
• Lasting Powers of Attorney (LPA) – the Mental Capacity Act 2005 created a new type of PoA
called a LPA. These replace EPAs and cover welfare matters as well as financial decisions. Existing
EPAs continue to have effect, but new ones can no longer be created. The position regarding gifts
is almost identical to EPAs; therefore, any IHT planning gifts will require permission from the Court
of Protection.
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4.4 The Interrelationship between Product and Objectives
Learning Objective
3.6.4 Understand the requirement to appropriately balance the interrelationship between protection,
saving and investment, and other objectives such as liquidity and retirement
3
The interrelationship between protection planning and products, saving, investment and retirement
planning is a complex one and requires careful management and ongoing review. The relationship is
also affected by the economic cycle and the interest rate environment. Particularly in a low interest rate
environment, a client should be able to get better returns with stock market investments. However,
while these may offer higher returns for their investment, this is not guaranteed. It is advisable to only
invest if funds can be tied up for five to ten years. This should give the investor time to ride out any stock
market volatility.
The earlier a client starts saving the better, as the money has more time to grow. In order to provide
the necessary income in retirement, a client starting in their twenties will be able to save a smaller
proportion of disposable income than those who leave it until their thirties and forties. The right annuity
will vary according to the client's age, state of health and other personal circumstances, for example
marital status. As mentioned in previous sections, the size of a client's assets such as pension fund and
appetite for risk will also affect their preferences.
Critical illness cover pays a tax-free lump sum if the client is diagnosed with one of the designated
critical illness definitions covered by the plan such as heart attack, stroke or certain cancers. This is very
different from income protection, which pays a monthly income if the client is unable to work through
accident or long-term illness that prevents them working including stress. Life assurance pays a lump
sum on the client's death; however, this cover may be provided as part of a retirement plan.
Most assets are liable to CGT on sale, disposition or transfer to another person or into a trust (with
the exception of spouses). This includes shares, property, business assets and personal possessions –
whether they're in the UK or overseas. But some assets are exempt and therefore careful management
is vital.
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5. Implementing Financial Planning
Recommendations
Learning Objective
3.7.1 Know the requirements for compliant and technically correct processes and documentation in
order to implement financial planning recommendations
3.7.2 Know the documentation that must be provided to the client and when it should be provided,
including: what should be included in a financial plan; when and how client acceptance should
be addressed; what should be included in a 'suitability' letter
3.7.3 Understand how the plan and/or recommendations meet the client's specific needs, in a manner
that the client can understand, including: explanation of appropriate financial protection
products to the client and how they meet client needs; appropriateness and suitability;
characteristics, correlation, advantages and disadvantages of different products; economic
context of the advice and significance of main economic indicators; comparison of the different
options available; implications of the different recommendations on other parts of the financial
plan; explanation where a previously agreed action is no longer considered beneficial to the
client; advantages and disadvantages of the proposed recommendations including costs; how
the recommendations take account of future needs; how the recommendations will be handled,
including the need for monitoring and review
5.1 Suitability Reports and the Financial Plan

Rules on suitability apply when firms make personal recommendations related to designated
investments, and when they manage investments. These rules exist to ensure that firms take all
reasonable steps to see that recommendations, or decisions to trade, are suitable for the client. The
rules are based on Principle 9 of the Principles for Businesses.
In order to assess the suitability of an investment decision for any particular client, the adviser should
look at three different elements concerning that client:
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Knowledge + Financial + Objectives

Experience Situation
Experience and knowledge Ability to financially bear Preferences regarding risk-

to understand risks any related investment taking, length of time to
3
in the transactions or risks consistent with hold investment, risk profile,
management of portfolio investment objectives purpose of investment
Suitability does not apply to execution-only business, and, if the client is a professional client, firms can
assume that the client has the necessary knowledge in this area.
Suitability Report
A suitability report must be provided to a retail client if that client has received a personal
recommendation to buy or sell a holding in a regulated collective investment scheme or certain
investment trusts; buys, sells, surrenders, converts or cancels rights under or suspends contributions
to a personal pension plan; elects to make income withdrawals or uncrystallised funds pension lump
sum payment (UFPLS) or by a short-term annuity, or enters into a pension transfer, pension conversion
or pension opt-out. This also applies if there is any recommendation in relation to a life policy but does
not apply in relation to increases in regular or single premiums to an existing contract which has already
received the same type of contribution.
You can better understand the FCA’s approach to suitability at the FCA website – https://www.fca.org.
uk/firms/assessing-suitability
Timing – COBS 9.4.4

FCA guidance on suitability reports explains that a firm must provide the suitability report to the client:
1. in the case of a life policy, before the contract is concluded unless the necessary information is
provided orally or immediate cover is necessary, or
2. in the case of a personal pension scheme or stakeholder pension scheme, where the rules on
cancellation (COBS 15) require notification of the right to cancel, no later than the 14th day after the
contract is concluded, or
3. in any other case, when or as soon as possible after the transaction is effected or executed.
Content of the Suitability Report

There is little prescription in the content of the suitability report except that it must at least specify
the client’s demands and needs (objectives), explain why the recommended transaction is suitable
having regard to the information provided by the client and explain any possible disadvantages of the
transaction for the client.
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There are additional content requirements when the personal recommendation is about income
withdrawals, the purchase of short-term annuities or in relation to UFPLS payments. The requirement is
that the letter should explain the risks involved in entering one of these contracts and set out some of
the possible risks.
A financial plan may contain a significant amount of additional information. However, it will also
signpost additional documentation to support the recommended course of action. This could include
some or all of the following documents:
• an FCA-compliant illustration
• key features document (KFD)
• product marketing literature
• post-sale illustration
• suitability letter/report
• the product provider must also send a cancellation (cooling-off) notice.
The financial plan should also include a detailed action plan highlighting the recommendations and
related actions and explaining the next steps required, who is accountable for implementing those
steps and a target date for completion. This avoids any misunderstanding as to the next steps.
Example Summary of Recommendations
Who needs to When does it need

What is the action?
complete it? completing?
Open separate instant access deposit accounts for each Karl and
Within 2 weeks
of you putting £3,850 into each Ulrika
Check that there is no notice period required regarding Karl and
Within 2 weeks
the reallocation of cash deposits Ulrika
Contact a solicitor to:
• rewrite wills, set up one lasting PoA each and set

up a discretionary trust to receive the imminent
inheritance now (you should obtain details of the Karl and
costs of running such a trust before proceeding Within 2 weeks
Ulrika
with any alteration in your will)
• sever the tenancy of your house from joint tenants
to tenants in common with the shareholding split
50:50
Karl and
Sell your gilts Within1 month
Ulrika
Investigate the suitability of the with-profit and
distribution bonds and recommend disposal if Planner Within 3 weeks
appropriate
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Who needs to When does it need

What is the action?
complete it? completing?
Advise individual
Invest the remaining the balance of your portfolio split
holdings within 2
60% cash and fixed interest and 40% global equities; Planner
weeks, implement
split ownership 50:50
within 1 month
3
Arrange RNLI donations to be under gift aid Karl Within 2 months
Investigate the potential to prepay the remaining
Planner Within 1 month
school fees using the inherited monies
Use a deed of variation to redirect the inheritance from
Prior to the arrival
Jim's estate into a discretionary trust to pay the school Karl
of the inheritance
fees and other items in the future.
When the
Invest the proceeds of the inheritance in the
Planner and inheritance
discretionary trust portfolio once we have discussed
trustees arrives and shares
your attitude to risk for this in more detail.
have been sold
Pay Susannah's school fees as they arise from your From September
Trustees
discretionary trust portfolio. 2017
5.2 Client Trust

The trust relationship works both ways: the adviser must trust the client to disclose all material personal
and financial information in order to be able to provide the correct advice. The client must trust the
adviser to be knowledgeable and up-to-date enough to recommend products and services that actually
meet their goals and aspirations, professional enough to place principles over personal gain, and to
have the highest levels of integrity. The key to gaining and retaining the trust of clients is to keep the
client's needs at the centre of all recommendations and to explain these in terms the client can fully
understand, including the risks involved and to agree any plans with the client rather than dictate them.
Specifically, the adviser has to be able to justify each recommendation by explaining any advantages
and disadvantages of each. Any relationship or correlation between products or services must also be
fully explored and explained – for example, when recommending life assurance products – with the aim
of providing maximum benefits to any beneficiaries. If no consideration is given to estate planning and
IHT issues, then the benefits received by beneficiaries could be significantly reduced.
Mortgage planning, investing and retirement planning must also be done in the context of the wider
economic environment. Interest fluctuations as well as rates of inflation have a marked effect on
the future value of savings and on the current or future cost of borrowings. Large increases in the
repayment amounts of borrowings can be very detrimental to a client's financial position. Moreover,
economic factors can affect the stability of a client's income (eg, redundancy) and therefore have an
impact on the client's financial planning requirements. During such periods the client's focus may move
to protection products.
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Matching any investments chosen to the economic climate, and explaining the rationale for this to the
client, also maximises the end result. And if, due to unforeseen circumstances, it doesn't, a clear rationale
for any recommendations made will still allow the client to appreciate that the recommendations were
made with their interests in mind. The integrity of the adviser and of the advice given is of the greatest
level of importance to the issue of client trust so it must be made very clear to any client why and how
any recommendations suit their specific requirements as opposed to being seen as a method for the
adviser to generate income. The RDR has highlighted this particular issue, and it is a key reason for the
move away from commission-based adviser remuneration towards a fee-based charging structure for
advisers.
5.2.1 Confirming Clients' Understanding of Recommendations

In order to build up client trust, it is vital that the financial planner is able to clearly summarise the
content of any client meeting and what outcomes were agreed, what the adviser will action and what
will be confirmed when the actions have taken place. This helps in matching the suitability of the
products and/or services recommended to the client's needs and in building the relationship between
the adviser and client, as well as helping to avert misunderstandings at future stages, and complements
the KYC information held.
The adviser should document the following:
• introduction including where the meeting was held and when

• confirmation of any current products/plans including their key terms, penalty charges as well as the
benefits, current valuation and/or transfer values
• client's needs analysis
• description of future identified needs if different to current ones
• client's risk attitude
• options offered to the client including benefits and any disadvantages of those options
• agreed action plan
• illustrations with relevant details of products/services agreed upon including costs, ongoing
charges and key terms
• agreed review periods and how the client will be informed/involved
• explanation of what can be done if the client changes their mind and any complaints procedure.
When firms and advisers provide advice or personalised information about packaged products to a
customer, they must provide written details of the key features of the product they are recommending.
The production of this document must be to the same standard as any marketing material with two
elements:
• key features of the product (KFD)

• product illustration (key facts illustration – KFI).
The KFD describes the product in the order of the following headings:
• its aims – a brief description of the product's aims

• your commitment or your investment – what a retail client is committing to or investing in, and
any consequences of failing to maintain the commitment or investment
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• risks – the material risks associated with the product, including a description of the factors that may
have an adverse effect on performance or are material to the decision to invest
• questions and Answers – the principal terms of the product, what it will do for a retail client and
any other information necessary to enable a retail client to make an informed decision.
The KFI must cover:
3
• the premium or investment
• any guaranteed benefits, ie, sum assured
• a projection of the final benefit, based on the FCA-specified assumed growth rate
• the effect of charges
• the commission payable to the adviser.
Clients have often overlooked the extent or importance of a particular need, and it is then the
responsibility of the adviser to point this out, as the professional in this situation. It is not possible to
prevent those clients who choose to ignore this, but advisers need to show that they recognised issues,
highlighted them to the client and that the client has decided not to take up the recommendations.
This all forms part of the details of the ongoing relationship, and is evidence of acting in the client's best
interests at all times.
5.3 Clients not Following Recommendations
Learning Objective
3.7.4 Be able to analyse reasons for not proceeding with a recommendation, and agree with the
client how to proceed
Determining why a client does not wish to proceed with an adviser's recommendations is as important
as the 'know your customer' process and is key to developing and maintaining a long-term relationship
of trust. The process of finding out may not be easy, as the client may be embarrassed to disclose the
true reason – for example it may not be affordable. However, the KYC process depends on the financial
adviser probing the most private financial information about a client. If this is done correctly, the
adviser should not be in the situation of recommending unaffordable products. It is vital for an adviser
to approach fact-finding in a sensitive manner that encourages the client to divulge all the relevant
information, which could be other personal information that holds the vital clues to the motivation of
the client.
It is possible that, as a result of perception or poor press, the client wishes to verify recommendations with
a third party or conduct their own research before proceeding. There may have been a sudden change
in personal circumstances which caused a delay or stop to the client following a recommendation, eg, a
sudden breakdown in a marriage or a death in the family. Another possibility is that either the client or
the adviser or both have failed to be clear and there has been a misunderstanding of the client's needs,
goals or circumstances.
Ultimately, all that the adviser can do is to try and maintain open lines of communication, without
making the client feel pressurised, listen as carefully as possible to what the client is saying and build
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a relationship of trust. Even if a client seeks advice and then decides they have enough information
to approach a product provider direct, if the advice is right, that client is more likely to return to the
same adviser in the future, especially if they then wish to take advice on a more complex product or
transaction.
5.4 Review the Client's Situation
Learning Objective
3.8.1 Understand how the financial plan is to be implemented, serviced and reviewed to meet the
client's objectives and adapt to changes in circumstances
3.8.2 Understand how to conduct financial planning reviews and review meetings, including: purpose
and frequency of reviews; process of reviewing a financial plan; initiating a review meeting and
gathering the data required; what may be discussed at a review meeting
3.8.3 Be able to analyse actions that may be required after the review, including: reassessing and
rebalancing asset allocation; review of existing financial solutions
As we have seen, financial planning is a cyclical process, and it is the regular reviews of the financial
plan that enable this cyclical process. The review process is fundamental to financial planning – without
reviews, it is unlikely that a client will achieve their objectives. Although there is no set interval between
review meetings, it is generally accepted that the frequency of review meetings should be agreed, in
advance, with the client. The client may also ask for a review at any time if their circumstances have
changed, or for other reasons, such as during periods of extreme market volatility and if tax rates change.
Often, the paraplanner may be responsible for ensuring that review meetings take place and that
all client information is updated. It is therefore important that the paraplanner, if this is one of their
responsibilities, keeps an efficient diary system that gives the client sufficient time to update their
information, and for this information to be analysed by the paraplanner and/or the financial planner,
before the review meeting held with the client.
Ultimately, the objective of each review is to tell the client whether they remain on track to meet
their objectives, and, if not, what additional actions may be required. The regular reviews may be an
opportunity to consider whether a client's investment portfolio may need to be rebalanced towards a
target asset allocation.
A financial plan should, generally, be reviewed at least every 12 months, but ad hoc reviews may also
be required if, for example, the client experiences a significant change of personal circumstances. The
review should look at a range of factors including:
• reviewing the previous advice in light of any changes to the client's circumstances and revising
recommendations where necessary
• changes to goals and objectives and the amounts targeted
• reviewing and amending the assumptions used, where relevant, to take account of changing market
conditions, investment returns and future inflation rates
• net worth and income and expenditure
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• asset allocation and client risk profiles (including rebalancing portfolios)

• appropriateness of products and product wrappers held and revisiting the risk appetite and capacity
for loss of the client
• obtaining any documentation that may be required in the review meeting
• checking existing terms of business documentation, etc, and preparing updated documents, where
necessary.
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In some cases, significant changes to one or more of the above may require that a new financial plan is
drafted; in others, the existing plan may be amended and updated. But in either case, it is important that
the client continues to fully understand how the financial plan works and how it will help them to meet
their objectives.
5.4.1 Rebalancing
The risk/reward balance changes over time and is completely dependent on a client's individual
circumstances. A broad principle adopted in managing investments is that when there is a longer-term
timescale, eg, more than five or ten years before funds are required, then higher-growth equities are
more suitable, and bonds and income-generating shares are more suitable when the timescale is less
than five years.
However, this all depends on a client's income requirements during any period of investment. Effective
asset allocation – the process of exposing differing proportions of an investment portfolio to various
asset classes such as growth or income equities, fixed-interest stocks, property assets, derivatives and
foreign investments – depends very much on regular reviews and adjusting the relevant proportions as
both the needs of the client change and the economic cycles move. For example, one of the effective
strategies during the early stages of the financial crisis from 2008 was to be heavily exposed to what is
traditionally considered a defensive low-growth asset class – gold – the price of which increased rapidly.
During times of economic growth and prosperity, high-growth equities may be more appropriate –
again depending on the client's requirements.
5.4.2 Improving the Client’s Current Financial Position
Learning Objective
3.5.9 Be able to analyse gaps in a client's current financial provision and how the client's financial
provision could be improved according to agreed priorities: liquidity; income; growth;
protection; retirement provision; attitude to risk; ethical values
Financial Planning Shortfalls and Budgets

The importance of regular financial reviews has been stressed repeatedly in this chapter with a view to
considering a client's changing circumstances and, in the section above, with a view to considering the
performance of investments and products and whether they are continuing to meet the client's needs.
It is the role of the adviser not only to recommend the most suitable products but also to monitor them
regularly and provide the appropriate advice when a shortfall is apparent.
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We have already considered that by its very nature a financial plan evolves and develops over time
through an ongoing relationship with the client, and, when the budget to fund financial solutions is
scarce, priorities must be agreed upon.
The adviser's recommendations should be based around ways in which the client's finances can be
best utilised, and take into consideration the client's assets, investments, liabilities and income. Just as
analysing the way in which the client spends their funds is also a vital aspect of the financial planning
analysis, including a review of their expenditure in both the short term and over the long term will aid in
demonstrating just how robust the overall financial plan is.
The best financial plans ensure that clients have sufficient liquidity for expenditure requirements and
for unexpected emergencies, that protection is in place in case of death, critical illness or the inability
to work while ensuring that investments are aligned to clients' attitude to risk and are suitable for the
clients objectives, be that income, growth or a combination of both.
Financial Assumptions
Financially related recommendations involve a number of key assumptions which impact financial
planning; these include:
• future inflation (CPI), and

• earnings growth (National Average Earnings (NAE)).
Remember that a plan based on a client's income and expenditure will necessitate an assumption on
growth rates for future price inflation and future earnings growth. Of course, it is entirely feasible to try
out a number of different assumptions and build in differing growth and inflation rates for different
periods in the client's life – eg, if they plan a career break at a certain age or decide on an early retirement
age – but in the end a plan has to be agreed based on one set of assumptions at a time. Again, this point
emphasises the huge importance of regular reviews, partly to test and adjust assumptions as economic
and personal factors change.
The key to making appropriate recommendations is accurately assessing the client's attitude to risk. Risk
raises the possibility that the client may lose some or all of their investment, or that the growth rates
that have been assumed do not materialise. Finding the correct options for diversifying risk while using
products that deliver the best returns is the key to effective recommendations.
Ethical and Environmental Values

Perhaps the best explanation is that traditional investment funds consider mainly economic and
financial performance, while sustainable investments look to achieve good returns at the same time as
looking at the wider issues associated with ethical and socially responsible principles.
It is worth mentioning that issues surrounding corporate social responsibility have become an area
that most companies place some degree of focus on, partly as the issue is mentioned in corporate
governance codes of practice for company directors and partly due to the negative effects of bad
publicity and the potential for legal actions against the company – all these affect the share price, eg,
BP in 2010.
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The following table highlights a number of features a client might like to encourage or to avoid; it shows
the complexity of this type of investment strategy as a company may be involved in certain positively
and negatively perceived activities at the same time. For example, a company may be involved in the
armaments industry but may only make defensive weaponry for UN peacekeepers. Part of the issue here
can be the inability to perfectly match the client's ideals.
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Positive Negative
Animal welfare Animal farming
Community relations Armaments
Companies with good employee records Companies with bad employee records
Disaster relief Deforestation
Healthcare sector Education and training
Fast food companies Energy conservation and efficiency
Food retailers with bad policies (eg, fast food,
Environmental technology
high salt, high sugar, high fat)
Equal opportunities Gambling
Firms with environmental aims Human rights abuse
Healthy eating Military peacekeeping
Water management Oppressive regimes
Positive products and services Ozone depletion
Plant welfare Pesticides
Pollution control Political donors
Food retailers with good policies (eg, organic,
Animal testing
Fairtrade)
Forestry Pollution
Public transport Pornography
Renewable energy projects Third-world exploitation
Sustainable third-world aid Tobacco
Different Shades (but don't forget the profits)

Funds vary according to the weighting given to a variety of aspects of corporate social responsibility,
and some apply less flexible criteria than others. These are often categorised by shades of green: light
green being the loosest criteria and dark green being the strictest. It is important to match the approach
taken by the fund to the principles of the client and the risk profile.
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Examples of the general approach taken with the various funds are detailed below:
• Light green funds – tend to invest in most equity sectors and often reflect the weightings that are
seen in a stock market index. On the whole investing in the UK, Europe and North America, they may
invest in the oil, pharmaceuticals and banking sectors, usually avoiding tobacco, environmental
exploitation, armaments, animal testing or companies with poor human rights records.
• Medium green funds – these are similar to light green but with stricter criteria – albeit there may
still be investments in oil, banks and pharmaceuticals. These funds invest in smaller companies,
although they mainly restrict this investment to the UK, Europe and North America, with limited
exposure to other markets – perhaps through collective funds.
• Dark green funds – apply much stricter ethical criteria and may not have exposure to the oil,
banking and pharmaceutical sectors or a very limited one. Due to the investment limitations and
stricter ethical screening, the investment performance may be affected. The risk profile is also quite
different in that such funds may invest more of the portfolio in smaller companies than in large ones.
• Engagement funds – use a method of positive screening where investments are chosen specifically
because those companies display positive action and set standards in good corporate social
responsibility.
Ethical Fund Managers Have Considerable Power and Influence

The interest that many companies have shown in demonstrating solid standards of corporate
responsibility, such as support for local communities and environmental factors, started, in part, as a
result of the growing power and influence among fund managers with responsibility for ethical and
socially responsible investment (SRI) funds. It is in the interests of any company not to have its share
excluded from such funds, particularly if the number of those funds continues to grow.
For a client, the level of screening used by the fund manager may be of great importance, while
for others investing in a light green fund this may be sufficient satisfaction that they are helping to
influence companies in taking their social responsibilities even more seriously.
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6. Planning in a Regulated Environment
Learning Objective
3.3.1 Understand the scope of the adviser's authorisation including: responsibilities; terms of
business; nature of the advice process; ethical codes; authorised status and listing on the FCA
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register; limitations on the advice the adviser is authorised to give and circumstances in which
client should be referred to a specialist
3.3.2 Understand ethics and codes of practice as they relate to financial planning and financial
planners: professional bodies' codes of practice and ethical codes; continuing professional
development requirements
6.1 Approved Person Authorisation

Currently there are two regimes for individuals holding senior management roles or those who are
material risk-takers who pose a risk of significant harm to a firm or its customers. In 2016, the FCA and
Prudential Regulation Authority (PRA) introduced the Senior Managers and Certification Regime
(SMCR) which aims to increase individual accountability within the banking sector. It focuses on the
most senior individuals in firms who hold key roles or have overall responsibility for whole areas of
relevant firms in dual authorised (authorised and regulated by both the PRA and FCA) firms.
Those not subject to the Senior Managers Regime (SMR) – broadly the individuals in a firm authorised
and regulated solely by the FCA – are subject to the FCA Approved persons regime.
SMR and the Senior Insurance Managers Regime (SIMR) apply to the most senior executive management
and directors who are subject to regulatory approval. The ‘Certification Regime’ (CR) for deposit-taking
firms (excluding credit unions) requires relevant firms to assess the fitness and propriety of certain
employees who could pose a risk of significant harm to the firm or any of its customers. Firms must
allocate prescribed responsibilities across their senior managers setting out their duties. This forms part
of the overall firm management and governance map.
The regulators will only grant approval to persons whom they deem to be fit and proper (and may
withdraw approval they deem the person no longer fit and proper). If the regulators refuse to grant
approval, the matter may be referred to the Financial Services and Markets Tribunal (FSMT).
In assessing fitness and propriety, the most important considerations will be the person's:
• honesty, integrity and reputation

• competence and capability
• financial soundness.
Approved person and senior management status must be obtained from the appropriate regulator prior
to appointment to undertake a controlled function, and the regulator must be informed within seven
days if the person stops performing the controlled function.
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Before hiring a new employee, a firm needs to ensure that credit and Disclosure Barring Service (DBS)
checks are undertaken. This will hopefully uncover those who are financially unsound or have previously
been involved in fraudulent activity.
Approved persons under the FCA are subject to the Statements of Principle and Code of Practice for
Approved Persons (APER). Those subject to SMR and the CR are subject to Code of Conduct (COCON).
6.2 FCA Principles
6.2.1 Statements of Principle for Approved Persons

Principles 1 to 4 apply to all approved persons, and Principles 5 to 7 only apply to those approved to
perform significant influence functions (which tend to be governing, oversight, compliance, actuarial
and management roles within firms, rather than customer functions).
• Statement of Principle 1 – an approved person must act with integrity in carrying out his controlled
function.
• Statement of Principle 2 – an approved person must act with due skill, care and diligence in
carrying out his controlled function.
• Statement of Principle 3 – an approved person must observe proper standards of market conduct
in carrying out his controlled function.
• Statement of Principle 4 – an approved person must deal with the FCA and with other regulators
in an open and cooperative way and must disclose appropriately any information of which the FCA
would reasonably expect notice.
• Statement of Principle 5 – an approved person performing a significant influence function must
take reasonable steps to ensure that the business of the firm for which he is responsible in his
controlled function is organised so that it can be controlled effectively.
• Statement of Principle 6 – an approved person performing a significant influence function must
exercise due skill, care and diligence in managing the business of the firm for which he is responsible
in his controlled function.
• Statement of Principle 7 – an approved person performing a significant influence function
must take reasonable steps to ensure that the business of the firm for which he is responsible in
his controlled function complies with the relevant requirements and standards of the regulatory
system.
6.2.2 Code of Practice for Approved Persons

The Code sets out descriptions of conduct which, in the FCA's opinion, do not comply with the relevant
Statements of Principle. The Code also sets out certain factors which are to be taken into account in
determining whether an approved person's conduct complies with a particular Statement of Principle.
Some may agree that private client advisers, who are in a position of trust with clients and responsible
for their assets, should pay particular attention to perceived breaches of these Principles. The FCA lists
examples of breaches: it should be noted that this is not a comprehensive list of conduct which does
not comply with the Principles, and we would recommend additional reading of the Approved Persons'
Regime (APER) Sourcebook (Statements of Principle and Code of Practice for Approved Persons).
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For example, breaches of Principle 1 include:
• deliberately misleading (or attempting to mislead) a client, the firm or the FCA and/or deliberately
falsifying documents or misleading a client about the risks or performance of investments
• deliberately recommending a product to a customer while unable to justify its suitability
• deliberately preparing inaccurate or inappropriate records or returns in connection with a
controlled function, eg, performance reports, training records or details of qualifications, inaccurate
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trade confirmations
• deliberately misusing the assets or confidential information of a client or a firm, eg, front-running or
churning
• deliberately designing transactions so as to disguise breaches of requirements and standards
• deliberately failing to disclose the existence of a conflict of interest in connection with dealings with
a client.
Breaches of Principles 2 and 3 include:
• failing to inform a customer, or the firm, of material information (eg, risks or charges of investment
products) in circumstances where they should be provided
• not complying with relevant market codes and exchange rules.
6.2.3 COCON Individual and Senior Manager Conduct Rules

The first five rules apply to all individuals within the firm subject to some exclusions and who are not
approved persons. These staff are known as Conduct Rules Staff. The remaining four rules apply in
addition to all senior conduct rules staff members.
• Rule 1 – You must act with integrity.

• Rule 2 – You must act with due skill, care and diligence.
• Rule 3 – You must be open and cooperative with the FCA, the PRA and other regulators.
• Rule 4 – You must pay due regard to the interests of customers and treat them fairly.
• Rule 5 – You must observe proper standards of market conduct.
Senior manager conduct rules:
• SC1 – You must take reasonable steps to ensure that the business of the firm for which you are
responsible is controlled effectively.
• SC2 – You must take reasonable steps to ensure that the business of the firm for which you are
responsible complies with the relevant requirements and standards of the regulatory system.
• SC3 – You must take reasonable steps to ensure that any delegation of your responsibilities is to an
appropriate person and that you oversee the discharge of the delegated responsibility effectively.
• SC4 – You must disclose appropriately any information of which the FCA or PRA would reasonably
expect notice.
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6.2.4 Principles for Businesses
The FCA Handbook includes 11 Key Principles for Businesses (The Principles), which authorised firms
must observe. The Principles apply with respect to the carrying-on of regulated activities, activities that
constitute dealing in investments as principal, ancillary activities in relation to designated investment
business, home finance activity, insurance mediation activity and accepting deposits as well as the
communication and approval of financial promotions.
If a firm breaches any of the Principles that apply to it, it will be liable to disciplinary sanctions. However,
the onus is on the FCA to show that the firm has been at fault.
The 11 Principles for Businesses are:
• Integrity – a firm must conduct its business with integrity.

• Skill, care and diligence – a firm must conduct its business with due skill, care and diligence.
• Management and control – a firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.
• Financial prudence – a firm must maintain adequate financial resources.
• Market conduct – a firm must observe proper standards of market conduct.
• Customers' interests – a firm must pay due regard to the interests of its customers and treat them
fairly. (It is worth noting that the FCA defines customers differently to clients. The term client covers
a variety of parties doing business with the firm, including professional counterparties. The term
customer applies, very broadly, to those clients who are not professionals and who may, therefore,
need protection.)
• Communication with clients – a firm must pay due regard to the information needs of its clients
and communicate information to them in a way which is clear, fair and not misleading.
• Conflicts of interest – a firm must manage conflicts of interest fairly, both between itself and its
customers, and between customers and other clients.
• Customers: relationships of trust – a firm must take reasonable care to ensure the suitability of its
advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
• Clients' assets – a firm must arrange adequate protection for clients' assets when it is responsible
for them.
• Relations with regulators – a firm must deal with its regulators in an open and cooperative way
and must disclose to the FCA appropriately anything relating to the firm of which the FCA would
reasonably expect notice.
6.2.5 Applying the Principles

When the Principles and rules about approved persons and their status were introduced in 2001, a
number of private client advisers, along with others in the industry, were grandfathered to allow
them to continue with their business. Whether an adviser has been grandfathered or has undergone
examinations to allow them to practise as an approved person, the Principles above apply equally.
For clients, when they are dealing with an approved person, it is important they are confident that the
approved person is both competent and trustworthy.
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Training and Competence

In line with the Markets in Financial Instruments Directive (MiFID) Article 5, which discusses the
knowledge, skills and expertise of employees, the FCA has revised its Training and Competence
Sourcebook (TC) and it should now be read in conjunction with the Systems and Control Sourcebook
(SYSC), in which it states:
• ‘A firm must employ personnel with the skills, knowledge and expertise necessary for the discharge of the
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responsibilities allocated to them.' (SYSC 3.1.6).
• This covers all firms, and the revised rules relating to training and competence also apply to firms
where an employee carries on an activity for retail clients, customers or consumers.
Attaining Competence, Appropriate Examinations and Supervision

A firm should not assess a person as competent to carry on any of a specified range of activities until
they have demonstrated competence and passed each module of an appropriate examination.
Firms must not allow employees to do any of the following, without having passed each module of an
appropriate examination:
• certain advising and dealing activities

• acting as a broker/fund adviser
• advising on syndicate participation at Lloyd's; acting as a pension specialist.
Until such time as the employee is deemed competent they must be appropriately supervised. Those
who are supervising employees must have the necessary coaching and assessment skills as well as the
technical knowledge to act as competent supervisors and assessors.
All advisers are required to hold an appropriate qualification that meets the minimum Level 4
categorisation, and this must be obtained within 30 months of starting their role, even if they change
firms within that period. It is also important to remember that certain advice areas require the adviser to
hold additional appropriate qualifications.
When the new RDR requirements came into force on 31 December 2012, firms had to ensure that
their retail investment advisers, who were assessed as competent at 30 June 2009, do not carry on the
following activities unless they have updated their appropriate qualifications or, where applicable,
completed qualification gap-fill:
• advising on securities which are not stakeholder pension scheme or broker funds
• advising on derivatives
• advising on retail investment products which are not broker funds
• advising on friendly society tax-exempt products
• advising on and dealing in securities which are not stakeholder pension schemes or broker funds
• advising on and dealing in derivatives.
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Maintaining Competence
All retail investment advisers must hold a Statement of Professional Standing (SPS) issued by an
accredited body.
The SPS confirms that an adviser adheres to ethical standards, holds appropriate qualifications for their
role (including completion of gap-fill) and has undertaken appropriate CPD during the year. The SPS is
renewable annually.
A retail investment adviser must complete a minimum of 35 hours' compulsory CPD each year that
meets the following requirements:
• at least 21 of the 35 hours claimed must be structured

• there must also be evidence to support the fact that the CPD activity has taken place
• the CPD undertaken must appropriately reference the final examination standards as set out by the
FCA – the standards can be viewed on the FCA's website
• the CPD undertaken must also be relevant to the adviser's role.
Record-keeping
A firm must make appropriate records to demonstrate compliance with the rules in the Training and
Competence Sourcebook, and keep them for the following periods after an employee stops carrying on
the activity:
• at least five years for MiFID business including life policies or pension cases; at least three years for
non-MiFID business
• indefinitely for a pension transfer specialist.
6.3 Professional Bodies' Codes of Practice and Ethical Codes

Members of professional bodies are required to meet the standards set out by the body and a material
breach of the code would be incompatible with continuing membership and could lead to disciplinary
action. To best illustrate a typical code of practice below are the eight principles of the Chartered
Institute for Securities & Investment's (CISI's) Code of Conduct:
Client
1. To act honestly and fairly at all times, putting first the interests of clients and customers and to be
a good steward of their interests and those of counterparties, taking into account the nature of the
business relationship with each of them, the nature of the service to be provided to them and the
individual mandates given by them.
Firm and industry
2. To act with integrity in fulfilling the responsibilities of your appointment and seek to avoid any acts,
omissions or business practices which damage the reputation of your organisation or the financial
services industry.
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Regulator
3. To observe applicable law, regulations and professional conduct standards when carrying out
financial service activities, and to interpret and apply them to the best of your ability according to
principles rooted in trust, honesty and integrity.
Market participant
4. To observe the standards of market integrity, good practice, conduct and confidentiality required or
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expected of participants in markets when engaging in any form of market dealings.
Client
5. To be alert to and manage fairly and effectively and to the best of your ability any relevant conflict
of interest.
Client, colleagues and self
6. To attain and actively manage a level of professional competence appropriate to your responsibilities,
to commit to continuing learning to ensure the currency of your knowledge, skills and expertise and
to promote the development of others.
Client, self
7. To decline to act in any matter about which you are not competent unless you have access to such
advice and assistance as will enable you to carry out the work in a professional manner.
Industry, self
8. To strive to uphold the highest personal and professional standards at all times.
In addition to professional codes, a recent trend has seen professional bodies incorporate ethics into
their examination syllabus and in some cases even offer stand-alone training modules on ethics as part
of their product suite.
6.3.1 Conduct of Business Rules

The FCA’s Conduct of Business Sourcebook (COBS) and Insurance Conduct of Business Sourcebook
(ICOBS) – where pure protection products are being advised upon (Business Standards block) – have
wider-ranging rules and guidance on a variety of activities, many of which directly affect the way firms
deal with private clients.
COBS and ICOBS apply to firms carrying on the relevant activities (see below) from an establishment
maintained by them in the UK. They also apply to a firm's MiFID business carried on from an
establishment in another European Economic Area (EEA) state, but only where that business is carried
on within that state. So, for EEA MiFID investments, COBS and ICOBS rules that relate to MIFID business
do so only where that business is carried on from an establishment in the UK.
Finally, before we look at the detail of the sections of COBS and ICOBS that directly affect advisers, it
should be noted that wherever the rules talk about information being transmitted in a durable medium,
this means paper or any instrument which allows the recipient to store it unchanged for an appropriate
time, ie, on a PC but not on the internet unless it is held in a storage area with the ability to retrieve it.
What follows are only highlights from the COBS and ICOBS Sourcebooks highlighting some of the issues
that you will be expected to know. Reference to other learning material, including the FCA's Handbook
itself, is recommended.
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Activities Subject to COBS
The activities covered are:
• designated investment business

• long-term insurance business in relation to life policies
• activities relating to the above.
Underpinning the conduct of business rules is the 'client’s best interests rule'. This states that a firm
must act honestly, fairly and professionally in accordance with the best interests of its client.
Client Categorisation (COBS 3)

Under COBS, clients are generally categorised as:
• retail
• professional
• eligible counterparties.
The importance of how a client is classified is related to the level of protection that the client can
benefit from, ie, a retail client is afforded the highest level of protection. Sometimes a client may wish to
dispense with this extra protection, and 'opt up' to a higher level and become an elective professional
client. However, it is hard for retail clients to opt up to professional clients, although they can still be
reclassified on a transaction-by-transaction basis.
If clients do wish to opt up, they must be able to meet two criteria from the quantitative test list below
in order to become elective professional clients:
• average trade frequency of greater than ten trades per quarter over previous four quarters
• portfolio worth over 500,000
• has worked, or been involved, in the financial sector for more than one year in a professional
capacity which requires the knowledge of the transaction or service envisaged.
Furthermore, the firm must apply a qualitative test, whereby it assesses the expertise, experience and
knowledge of the client that shows the client is capable of making their own investment decisions and
understanding the risks. The client must tell the firm that they wish to be treated as a professional client
and the firm must confirm compensation rights and protections which may be lost. The client must then
confirm they understand the loss of protections.
For information on ICOBS Client Categorisation please see – https://www.handbook.fca.org.uk/

handbook/ICOBS/2/1.html
Communicating with Clients (COBS 4)

Fair, Clear and not Misleading
Underpinning the rules relating to advisers dealing with clients is the concept that all communications
and promotions are clear, fair and not misleading, which is at the core of the financial promotion rules,
and the information that should be given to clients. Firms must ensure that:
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• if the firm's regulator, ie, the FCA, is named in a promotion, and, where matters are not regulated by
the FCA, that it says so
• financial promotions which deal with products or services where the client's capital is at risk must
say this
• information quoting yields must give a balanced view of both short-term and long-term prospects
• if an investment is complex, it must be clearly explained
• where communications relate to a packaged product, the provider of that product is accurately,
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fairly and clearly described.
Generally speaking, firms have to make sure they do not disguise, diminish or obscure important items,
statements or warnings.
So, for example, when firms outline the past performance of an investment product, they must make sure
that it is not any more prominent than other information, that it covers at least five years or since launch,
and that it shows the effects of charges and commission. With simulated performance, documentation
must say that it is simulated and state on what it is based. Future performance predictions must say on
what they are based, and there must be a prominent warning that such predictions are not a reliable
indicator of future returns.
All firms should ensure that final approval for any financial promotions is given by an appropriate
individual.
Information about the Firm (COBS 6)

All firms are required to provide retail customers with general information about itself, its services,
its reporting to customers, compensation arrangements and how it safeguards client money and
assets. It must also provide the client with information on costs and associated charges including all
fees, commissions, charges, expenses and taxes. It must provide this information in good time before
provision of the service.
Before conducting business with a retail client, it must enter into a written agreement which sets out the
terms on which this will be conducted (COBS 8).
Advising and Selling (COBS 9)

Rules on suitability apply when firms make personal recommendations relating to designated
investments, and when they manage investments. These rules exist to ensure that firms take all
reasonable steps to see that recommendations, or decisions to trade, are suitable for the client. The
rules are based on Principle 9 of the Principles for Businesses.
In order to assess the suitability of an investment decision for any particular client, the adviser should
look at three different elements concerning that client:
247
The specific transaction to be recommended, or entered into in the course of managing must:
• meet the client’s investment objectives

• be such that the client is able financially to bear any related investment risks consistent with the
investment objectives, and
• be such that the client has the necessary experience and knowledge in order to understand the risks
involved in the transaction or in the management of their portfolio.
Suitability does not apply to execution-only business, and, if the client is a professional client, firms can
assume that the client has the necessary knowledge in this area.
Once suitability is established, the content of suitability reports is not prescriptive but they must at least:
• specify the client's demands and needs

• explain why the firm has concluded that the recommended transaction is suitable for the client
having regard to the information provided by the client, and
• explain any possible disadvantages of the transaction for the client.
Dealing and Managing (COBS 2, 9, 11, 12) Conflicts of Interest (SYSC 10)
An important aspect of the rules for dealing and managing is captured in the SYSC Sourcebook
(Systems and Controls) which says that firms must take all reasonable steps to identify conflicts of
interest between the firm and one client of the firm or another. See also Principle 8 of the Principles for
Businesses.
Firms are therefore obliged to:
• maintain effective organisational and administrative arrangements designed to prevent conflicts

• arrange for those producing external-facing investment research to have appropriate barriers in
place to stop this information flowing to other parts of the firm
• ensure that, when conflicts cannot be managed away, they are disclosed
• have and maintain a conflicts policy
• provide clients with the description of that policy
• keep records of where conflicts have arisen.
When considering the conflicts that may arise, how might a client be disadvantaged? Could a conflict of
interest benefit certain clients?
Chinese Walls
SYSC requires firms to establish Chinese walls if an employee holds information which must be withheld
from other parts of the business. Similar to the conflicts policy, the details of this are not prescriptive, so
smaller.
248
Reporting to Clients (COBS 16) Occasional Reporting

The rules on occasional reporting require firms, other than those managing investments, to give
adequate disclosure to clients regarding any orders carried out on their behalf. Specifically a firm must:
• provide the client, in a durable medium, with the essential information concerning the execution of
the order
• for a retail client, send the client a notice, in a durable medium, confirming the execution of the
3
order and such of the trade confirmation information as is applicable
• as soon as possible and no later than the first business day following that execution
• or if the confirmation is received by the firm from a third-party, no later than the first business day
following receipt of the confirmation from the third-party
• supply a client, on request, with information about the status of their order.
Periodic Reporting
Firms managing investments are required to provide periodic statements in a durable medium, unless
such statements are provided by another person. This should happen at least six-monthly, but the client
can request them every three months. If the portfolio is leveraged, a statement must be sent monthly.
(Note MiFID II increases this to quarterly from January 2018).
Why Is Reporting Important for Clients and the firms?

Obviously for clients it means that they can compare and contrast the performance over a given period.
It may prompt them to contact the adviser. For firms, it provides the firm with information about
performance and allows them to monitor their activities against other management information (MI),
ie, is there a connection between decline or increase in clients depending on the performance of its
advisers? Is there a correlation between statement production and increased complaints, or a rise in
new client recommendations? Reporting can be a crucial monitoring tool for a firm's business activities.
Independent and Restricted Advice

There are two types of adviser in relation to personal recommendations and retail investment products:
'independent' and 'restricted', both of which are defined below.
Independent Advice
Independent advice is advice which is unbiased and unrestricted, and based on a comprehensive and
fair analysis of the relevant market. Genuinely independent advice is free from any restrictions that
could affect advisers' ability to recommend what is best for the customer.
Retail investment products include packaged products, structured investment products, all investment
trusts, unregulated collective investment schemes and any other investment that offers exposure to
underlying assets, but in a packaged form which modifies that exposure compared with a direct holding
in the financial asset. Advisers can use panels to help review the market and the FCA does not expect
planners to review the market for a product that does not meet the client's needs and objectives.
249
Restricted Advice
Firms that do not give independent advice but advise on a limited range of products or providers will be
giving restricted advice. They must still meet FCA suitability requirements even if they offer restricted
advice.
If your firm gives restricted advice and chooses to limit the range of products you advise on to a certain
range of investments or providers, there will be some clients for whom this is not suitable. It is not
acceptable for a firm to make a recommendation for a product that closely matches the needs of the
consumer, from the restricted range of products they offer, when that product is not suitable.
Referral to a Specialist
At times financial planners may need to refer a client to a specialist to obtain advice they cannot offer.
This could be for financial planning advice, for example pension transfer advice or for advice from
another profession for example a tax adviser or a solicitor. It is important that all of those involved in
advising a client do so in a collaborative manner to ensure the client is receiving the correct advice. For
example, a solicitor could create a discretionary trust deed, a financial planner could manage the assets
within the trust and a tax adviser could advise on the periodic and exit charges of the trust.
For more information about commission disclosure for pure protection products please see – https://
www.handbook.fca.org.uk/handbook/ICOBS/4/6.html?date=2015-09-01
250
Chapter Exercise Answers

Exercise 1
What would be the future value of £20,000 in 25 years' time where the prevailing rate of interest is a
constant 5%?
Answer
3
Using the formula above, and inserting the values for PV, r and n:
PV=£20,000 x (1.05)25
Rather than multiply 1.05 by itself 25 times (which is what the formula implies), all you need do is enter
the variables into your calculator or spreadsheet, using the input protocols specific to your calculating
tool:
PV £20,000
i% (or RATE (r) using Excel) 5, or 0.05
Exercise 2
Mary was in a civil partnership with Alana and they adopted a daughter called Amelia. Mary died
without leaving a will. Her estate is worth £450,000. How much can Alana inherit?
Answer
After Alana inherits her share of £250,000, the estate that is left is worth £200,000. Alana can have half
of this – £100,000.
Note: if there are no surviving children, grandchildren or great-grandchildren, the partner will inherit:
• all the personal property and belongings of the person who has died and
• the whole of the estate with interest from the date of death.
Exercise 3
Lamont and Aisha are married and own their house jointly as joint tenants. They have a child called
Tamar. Lamont dies intestate leaving the jointly owned flat worth £300,000, and £50,000 in shares in his
own name. How is the estate divided?
Answer
The flat goes automatically to Aisha. This leaves an estate of £50,000 which also goes to Aisha, as it is
worth less than £250,000. Tamar inherits nothing.
Note: if Lamont had owned the flat in his name alone, his estate would have been worth £350,000. It
would be shared out according to the rules of intestacy, that is, Aisha would get the first £250,000. This
leaves an estate of £100,000. Aisha would get £50,000 and Tamar would get the remaining £50,000.
251
Exercise 4
Sue transfers £500,000 to a bare trust for her nephew and dies four years and nine months later with
an estate worth £200,000. Her executors only have one NRB available. How much IHT is due upon her
death?
Answer
As she’s died within seven years, the gift is a failed PET and is included within her estate for IHT purposes:
The gift was £494,000 (£500,000 – 2 x £3,000 annual exemptions). An unused annual exemption can
be carried forward for one year on the death of a person thus providing a maximum of £6,000 IHT
exemption on death.
Considering the two elements (the PET and the estate) separately:
The failed PET

Value of the PET:
• less available NRB

• excess above NRB.
£494,000 – (£325,000) = £169,000.
The failed PET exceeds her available NRB and so bears an IHT liability.
The IHT liability will be £67,600 (40% x £169,000).
As death occurred between four and five years after the gift, taper relief will be available at the rate of
40%.
Therefore, after taper relief, 60% of the IHT liability will be due and the tax will be 60% x 67,600 = £40,560.
IHT is normally payable by the recipient of the gift.
The Estate
The remaining estate of £200,000 will be subject to IHT of 40%, resulting in a £80,000 tax bill.
Total IHT due: £40,560 + £80,000 = £120,560.
252
1. List three of the six steps of the financial planning process.

2. List five areas a financial plan will generally cover.
3
3. What process can be used to qualify and quantify objectives given to clients?
4. What can time value of money calculations assist with?

5. When a person dies without leaving a will, who cannot inherit from their estate?
6. What is the key to gaining and retaining client trust?

7. What is the key to making effective recommendations?

8. List the Statements of Principle for Approved Persons.

9. What are the reasonable steps to identify any conflicts of interest that firms are obliged to
undertake?
10. Name the criteria in the quantitative test list for clients wishing to opt up.
253
254
Glossary and
Abbreviations
256
Glossary and Abbreviations
Glossary Capped Drawdown Pension

A form of ‘income withdrawal’ when a member’s
Actuary
pension is paid direct from a drawdown pension
An independent person who is professionally fund. The maximum income is capped at the
qualified to give advice as to the financial equivalent level of a single life annuity that could
position of a pension scheme. be purchased by the basis amount. There is no
minimum level.
Additional Voluntary Contributions (AVCs)
Employee contributions over and above any Civil Partner
compulsory contributions to a tax-approved A person who has entered into a civil partnership
workplace pension scheme. Tax law limits the with his or her same-sex partner.
total value of contributions that can be made.
Commission
Annual Allowance
Fee paid to a broker or financial adviser for
The maximum tax-relievable amount that can be arranging a pure protection or general insurance
contributed by a member or employer on behalf policy. Usually a percentage of the cost.
of a member in a tax year, before liability to an
annual allowance charge. Commutation (Conversion)
Immediate payment of a single sum to extinguish
Annual Allowance Charge
pension entitlement, either because the scheme
The tax charge levied on a member of one member’s pension is of a trivial value, or because
or more pension schemes, whose total the scheme member has a life expectancy of less
contributions made by the member, or on their than 12 months.
behalf by an employer or other party, exceed the
annual allowance. The excess is subject to the Contracting Out
annual allowance tax charge.
When it was available, in exchange for lower
National Insurance contributions members gave
Annuity
up part or all of additional state pension and
Income from a capital investment paid in a series received extra pension from their occupational
of regular payments. scheme or personal/stakeholder pension instead.
Automatic Enrolment Corporate Governance

Under the Pensions Act 2008, every employer The means by which shareholders/trustees
in the UK must put certain staff into a pension govern the management of a company through
scheme and contribute towards it. This is called the use of voting powers.
‘automatic enrolment’ or ‘auto-enrolment’.
Decreasing Term Assurance (DTA)
Benefit Crystallisation Event (BCE)
These policies have a sum assured which reduces
A defined event or occurrence that triggers a test each year by a given amount, decreasing to zero
of the benefits ‘crystallising’ at that point against at the end of the term.
the individual’s available Lifetime Allowance.
Deed of Revocation
Capital Gains Tax (CGT)
A form where the client chooses to end an
Tax paid on profits realised from selling assets in attorney’s responsibility and withdraw the right
a tax year. In the UK there is an annual exemption for them to act on their behalf.
limit. CGT is paid at rates determined by the
taxpayer’s income tax status.
257
Defined Benefit (DB) • the person’s financial relationship with the
A workplace pension scheme that provides member was one of mutual dependence, or
a range of retirement benefits calculated by • the person was dependent on the member
reference to earnings or service of the member because of physical or mental impairment.
or any other factor but not including those which
Dividend
are money purchase benefits.
A payment made by a company to its
Defined Benefit Arrangement shareholders.
An arrangement other than a money purchase
Domicile
arrangement that provides only defined benefits.
Defined benefits are calculated by reference to In UK law, an individual has only one domicile.
the earnings or the service of the member, and This is the country they regard as their natural
are also known as final salary schemes. home. This is not necessarily the same as
residence or nationality.
Defined Contribution (DC) Pension Scheme
Drawdown Pension
A pension scheme in which the employer
and employee agree on a set amount to be A short-term annuity or income withdrawal paid
contributed to an individual pension fund. The to a member of a registered pension scheme.
contributions are invested to provide a fund
which is used to buy an annuity on retirement. Drawdown Pension Fund
The employee contribution comes from their A pension fund in respect of an arrangement
salary, before tax is applied. Unlike defined consisting of the sums or assets held for the
benefit schemes, the level of the member’s purposes of the arrangement.
retirement income is not guaranteed.
Earmarking
Dependant A process by which some of the pension benefits
A person who was married to, or a civil partner due to a member are paid to the ex-spouse, as
of, the member at the date of the member’s directed by a court at the time of a divorce, but
death is a dependant of the member. A child are only paid when the member retires.
of the member is a dependant of the member
if the child has not reached the age of 23, or Endowment Policy
has reached age 23 and, in the opinion of the A life assurance policy that pays out a sum
scheme administrator, was at the date of the assured on the death of the life assured, or at the
member’s death dependent on the member end of an agreed term, whichever is the earlier.
because of physical or mental impairment. The money is traditionally invested in a range of
securities, including equities. A traditional with-
A person who was not married to the member or profits policy may provide a higher payout by
was not in a civil partnership with the member at the addition of bonuses.
the date of the member’s death and is not a child
of the member is a dependant of the member if, Financial Conduct Authority (FCA) Handbook
in the opinion of the scheme administrator, at The document containing the FCA rules and
the date of the member’s death: guidance, with which authorised firms must
comply. It is divided into a number of separate
• the person was financially dependent on the Sourcebooks covering different subjects.
member
258
Government Actuary’s Department (GAD) Money Purchase Annual Allowance (MPAA)

Provides actuarial analysis to the public sector When the member has taken advantage
from the public sector. of flexible access, eg, by uncrystallised funds
pension lump sum or flexible-access drawdown
Grandfathered fund, the member can contribute £10,000
A clause in a new law, regulation, or anything annually to a money purchase scheme. Unused
else that exempts certain persons or businesses money purchase annual allowances from
from abiding by it. previous years cannot be carried forward.
HM Revenue & Customs (HMRC) Money Purchase Arrangement

The tax-collecting agency of the UK government. An arrangement is a money purchase
arrangement if, at that time, all the benefits that
Inflation may be provided to or in respect of the member
A measure of the rate of change in prices or under the arrangement are cash balance or other
earnings. In the UK, price inflation is measured money purchase benefits.
using the retail price index (RPI).
Money Purchase Benefits
Inheritance Tax (IHT) Benefits provided under a pension scheme,
Tax paid on inheriting assets, subject to a tax calculated by reference to payments made under
threshold. the scheme by the member or any other person
or employer on behalf of the member, or any
Key Features other factor.
Factual information that must be sent out on
request to inform new investors in an authorised Multiple Employment
fund of the scheme objectives, charges and Concurrent part-time pensionable employment
dealing procedures. with more than one employer.
Liabilities New State Pension

Money owed. The new State Pension will be a regular payment
from the government that you can claim if you
Lifetime Allowance (LTA) reach state pension age on or after 6 April 2016.
The amount set by HM Revenue & Custom
(HMRC) on total pension saving payable from a Occupational Pension Scheme
scheme before an additional tax becomes due. A defined benefit or defined contribution
registered pension scheme established by an
Lifetime Allowance Charge employer or group of employers to provide
The tax charge payable on excess funds, benefits to, or in respect of any, or all of the
following a benefit crystallisation event, for any employees of that employer or group of
members with a benefit value greater than their employers, or any other employer. This is now
lifetime allowance. more frequently referred to as a ‘workplace
pension’.
Lifetime Annuity
Opting Out
An annuity contract purchased under a money
purchase arrangement from an insurance The facility for a person to formally opt out of
company of the member’s choosing that pensionable employment.
provides the member with an income for life.
259
Overseas Pension Scheme Pension Input Period
A pension scheme is an overseas pension The period over which the pension input amount
scheme if it is not a registered pension scheme is measured.
but it is established in a country or territory
outside the UK and satisfies the requirements in Pension Sharing
the Pension Schemes (Categories of Country and If a scheme member’s marriage ends in divorce
Requirements for Overseas Pension Schemes or registered civil partnership is dissolved, a
and Recognised Overseas Schemes) Regulations pension sharing order provides the former
2006. spouse or civil partner with a share of the scheme
member’s pension.
Packaged Product
A life policy, unit trust or OEIC, ITC saving scheme, Pension Sharing Order
stakeholder pension or personal pension. An order or provision following a divorce or the
dissolution of a civil partnership which makes
Pension Commencement Lump Sum (PCLS) provision for the pension rights of a scheme
The tax-free lump sum which may be paid to a member to be split.
member on taking pension benefits.
Personal Pension Scheme
Pension Credit A scheme provided by an insurance company
The amount of benefit rights that an ex-spouse or other financial institution to enable members
or former civil partner becomes entitled to to save for retirement benefits on a money
following a pension sharing order. Also an purchase basis.
income-related means-tested benefit which
boosts a pensioner’s State Pension to ensure Phased Retirement
they have a minimum level of income. This involves accessing pension benefits in a
number of tranches compared to the traditional
Pension Debit approach of securing pension benefits at one
The amount by which the value of the original point in time.
member’s pension rights is reduced and the
Pension Credit is the corresponding amount by Prudential Regulation Authority (PRA)
which the ex-spouse’s or former civil partner’s The Prudential Regulation Authority (PRA),
pension rights are increased. which is a subsidiary of the Bank of England,
is responsible for the prudential regulation of
Pension Credit Member financial firms, including banks, investment
Former spouse or former registered civil partner banks, building societies and insurance
who is credited with pension rights in a scheme companies.
by virtue of a pension sharing order.
Qualifying Period
Pension Input Amount The period (usually two years) a scheme member
The amount of contributions paid or increase must complete in order to qualify for the award
in value of member’s benefits in a registered of retirement benefits.
pension scheme and measured for annual
allowance purposes.
260
Qualifying Recognised Overseas Pension Retirement Annuity Contract (RAC)

Scheme (QROPS) An annuity contract between an insurance
A recognised overseas pension scheme is a company or friendly society and a self-employed
qualifying recognised overseas pension scheme person or someone not in pensionable
if it satisfies certain HMRC requirements. The employment which was established prior to 1
scheme manager must notify HMRC that the July 1988.
scheme is a recognised overseas pension
scheme and provide evidence to HMRC when Retirement Benefits
required. The scheme manager must also sign an Pension and (tax-free) lump sum payable subject
undertaking to inform HMRC if the scheme ceases to completion of a qualifying period and other
to be a recognised overseas pension scheme conditions depending on the type of retirement.
and comply with any prescribed information
requirements imposed on the scheme manager Scheme Administrator
by HMRC. The person or body responsible for the day-
to-day management of a scheme, including
Qualifying Service the maintenance of members’ records, the
Service that counts towards the qualifying period calculation and payment of benefits and the
that a scheme member needs to complete to be collection of contributions.
entitled to retirement benefits.
Self-Invested Personal Pension (SIPP)
Re-Employment Has a single member. Aimed at individuals
Employment following retirement. wishing to benefit from greater flexibility with
investments. Often used by higher-paid self-
Registered Pension Scheme employed professionals.
A pension scheme is a registered pension scheme
at any time when, either through having applied Scheme Pension
for registration and been registered by the Inland A pension paid to a dependant of a member of a
Revenue, or through acquiring registered status registered pension scheme following the death
by virtue of being an approved pension scheme of that member, the entitlement to which is an
on 5 April 2006, it is registered under Chapter 2 absolute entitlement under the scheme.
of Part 4 of the Finance Act 2004.
Short-Term Annuity
Retail Prices Index (RPI) From 6 April 2011 an annuity contract purchased
The general index of retail prices, for all items, from a member’s unsecured pension fund
published by the Statistics Board. If that index held under a money purchase arrangement
is not published for a relevant month any that provides that member with an unsecured
substitute index or index figures published by pension income for a term of no more than five
the Statistics Board may be used. years.
Retirement Age Small Self-Administered Schemes (SSASs)

The transition from full-time work to full-time Company pensions for up to 11 members.
retirement. This may include drawing pension
benefits in stages rather than all at once.
261
Sponsoring Employer Uncrystallised Funds
In relation to an occupational pension scheme, Funds held in respect of the member under
this means the employer, or any of the employers, a money purchase arrangement that have
to or in respect of any or all of whose employees not as yet been used to provide that member
the pension scheme has, or is capable of having, with a benefit under the scheme, so have not
an effect as to provide benefits. crystallised, as defined in the Finance Act 2004.
These are defined differently for cash balance
State Earnings-Related Pension Scheme arrangements. Here In the case of a cash balance,
(SERPS) it is the funds there would be if the member
SERPS was also known as the Additional State decided to draw benefits on a particular date,
Pension. It ran from 6 April 1978 to 5 April not the funds actually held in the cash balance
2002, when it was replaced by the State Second arrangement at that time.
Pension.
Uncrystallised Funds Pension Lump Sum
State Second Pension (S2P) (UFPLS)
The second tier of state pension arrangements An authorised lump sum paid on or after 6 April
from 6 April 2002 until 2016. 2015 directly from pension savings on reaching
age 55 or over. There is no limit on the amount
Statement of Investment Principles (SIP) that can be paid subject to having the available
A written statement of the principles governing lifetime allowance. 25% is paid tax-free and
investment decisions. Legally required for the remaining 75% is subject to the member’s
stakeholder and workplace pensions. marginal rate of tax.
Taper Relief Whole of Life Assurance

An inheritance tax (IHT) relief that offers a Whole of life assurance policies will result in the
gradual reduction in the amount of IHT due on payout of the sum assured on the death of a life
gifts made within seven years of death. assured, whenever that occurs.
The Pensions Advisory Service (TPAS)

Formally known as OPAS. An independent
voluntary organisation that provides information
and guidance to members of the public, covering
state, company, personal and stakeholder
schemes.
262
Abbreviations BCE
Benefit Crystallisation Event
ABI
Association of British Insurers BMI
Body Mass Index
ACT
Advance Corporation Tax BPR
Business Property Relief
ADL
Activities of Daily Living BSP
Basic State Pension
AER
Annual Equivalent Rate CAB
Citizens Advice Bureau
AGM
Annual General Meeting CARE
Career Average Revalued Earnings
AIM
Alternative Investment Market CEO
Chief Executive Officer
AMC
Annual Management Charge CETV
Cash Equivalent Transfer Value
APER
Approved Persons’ Regime CGT
Capital Gains Tax
APP
Appropriate Personal Pension CI
Critical Illness
APR
Agricultural Property Relief CIC
Critical Illness Cover
ASB
Accounting Standards Board CISI
Chartered Institute for Securities & Investment
ASP
Additional State Pension CLT
Chargeable Lifetime Transfer
ASU
Accident, Sickness and Unemployment COBS
Conduct of Business Sourcebook
AVC
Additional Voluntary Contribution COCON
Code of Conduct
263
CPI ER
Consumer Price Index Equity Release
CR EU
Certification Regime European Union
CRAG EUlisses
Charging for Residential Accommodation EU Links & Information on Social Security
Guidelines
EUSD
DB European Savings Directive
Defined Benefit
FAD
DBS Flexi-Access Drawdown
Disclosure Barring Service
FAMR
DC Financial Advice Market Review
Defined Contribution
FAS
DTA Financial Assistance Scheme
Decreasing Term Assurance
FCA
DWP Financial Conduct Authority
Department for Work and Pensions
FIB
EBT Family Income Benefit
Employee Benefit Trust
FOS
EC Financial Ombudsman Service
European Commission
FPSB
EEA Financial Planning Standards Board
European Economic Area
FRS
EFRBS Financial Reporting Standard
Employer-Funded Retirement Benefit Scheme
FSMA
EMI Financial Services and Markets Act
Enterprise Management Incentive
FSMT
EPA Financial Services and Markets Tribunal
Enduring Power of Attorney
FURBS
EPB Funded Unapproved Retirement Benefit Scheme
Equivalent Pension Benefit
264
FV JISA
Future Value Junior ISA
GAD JSA
Government Actuary’s Department Jobseeker’s Allowance
GPP KFD
Group Personal Pension Key Features Document
HEL KFI
Higher Earnings Limit Key Facts Illustration
HMRC KYC
HM Revenue & Customs Know Your Customer
HMT LEL
HM Treasury Lower Earnings Limit
IAS LET
International Accounting Standards Lower Earnings Threshold
ICOBS LISA
Insurance Conduct of Business Sourcebook Lifetime ISA
IDRP LPA
Internal Dispute Resolution Procedure Lasting Power of Attorney
IGC LPI
Independent Governance Committee Limited Price Indexation
IHT LTA
Inheritance Tax Lifetime Allowance
IIP LTCI
Interest-In-Possession Long-Term Care Insurance
IP MAS
Income Protection Money Advice Service
IPI MCA
Income Protection Insurance Married Couples Allowance
ISA MFR
Individual Savings Account Minimum Funding Requirement
265
MI OEIC
Management Information Open-Ended Investment Company
MiFID OFT
Markets in Financial Instruments Directive Office for Fair Trading
MNT ONS
Member-Nominated Trustee Office of National Statistics
MPAA OPG
Money Purchase Annual Allowance Office of the Public Guardian
MPPI OPRA
Mortgage Payment Protection Insurance Occupational Pensions Regulatory Authority
MVR PAS
Market Value Reduction Pensions Advisory Service
NAE PAYE
National Average Earnings Pay As You Earn
NAPF PCB
National Association of Pension Funds Pensions Compensation Board
NEST PCLS
National Employment Savings Trust Pension Commencement Lump Sum
NHS PEA
National Health Service Personal Expenses Allowance
NI PET
National Insurance Potentially Exempt Transfer
NIC PHI
National Insurance Contribution Permanent Health Insurance
NRA PI
Normal Retirement Age Professional Indemnity
NRB PIP
Nil-Rate Band Pension Input Period
NS&I PMI
National Savings & Investments Private Medical Insurance
266
PO RNCC
Pension Ombudsman Registered Nursing Care Contribution
PoA RPI
Power of Attorney Retail Prices Index
PPI RPSM
Payment Protection Insurance Registered Pension Scheme Manual
PPF S2P
Pension Protection Fund State Second Pension
PPP SDLT
Personal Pension Plan Stamp Duty Land Tax
PRA SERPS
Prudential Regulation Authority State Earnings-Related Pension Scheme
PTA SET
Pension Term Assurance Secondary Earnings Threshold
PV SIMR
Present Value Senior Insurance Managers Regime
QNUPS SIP
Qualifying Non-UK Pension Schemes Statement of Investment Principles
QROPS SIPP
Qualifying Recognised Overseas Pension Self-Invested Personal Pension
Schemes
SLA
QSR Service Level Agreement
Quick Succession Relief
SME
RAC Small to Medium Enterprise
Retirement Annuity Contract
SMI
RAS Support for Mortgage Interest
Tax Relief at Source
SMCR
RDR Senior Managers and Certification Regime
Retail Distribution Review
SMR
RICS Senior Managers Regime
Royal Institution of Chartered Surveyors
267
SPA WPP
State Pension Age Workplace Pension Provision
SPLAB WPS
Single-Premium Life Assurance Bond Workplace Pension Scheme
SPS WRPA
Statement of Professional Standing Welfare Reform & Pensions Act
SRI
Socially Responsible Investment
SSAS
Small Self-Administered Scheme
SYSC
Systems and Control Sourcebook
TC
Training and Competence Sourcebook
TEP
Traded Endowment Policy
TPAS
The Pensions Advisory Service
TPR
The Pensions Regulator
TVAS
Transfer Value Analysis System
UAP
Upper Accrual Point
UEL
Upper Earnings Limit
UFPLS
Uncrystallised Funds Pension Lump Sum
UITF
Urgent Issues Task Force
268
Questions and Case
Studies
Questions 265
Case Studies 278
Answers to Questions 284
Answers to Case Studies 292

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Questions and Case Studies
Questions
The following additional questions have been compiled to reflect as closely as possible the examination
standard that you will experience in your examination. Please note, however, they are not the CISI
examination questions themselves.
1. Under the Training and Competence rules, which of the following factors need to be taken into
account when reviewing an employees’ competence on a regular and frequent basis? Select ALL
that apply.
A Changes in products, legislation and regulation
B Skills and expertise
C Technical knowledge and its application
D Succession planning strategy
2. Carolyn will reach her State Pension Age on 7 April 2074. Under current rules, how old will she
be and how many qualifying years will she need to have to receive the full rate of the single-tier
pension?
A 67 and 10 years
B 67 and 35 years
C 68 and 10 years
D 68 and 35 years
3. Adam’s adviser has been considering a range of protection products for his needs, including a
convertible term assurance; a whole of life plan; a decreasing term assurance; and an endowment
assurance. Which of the following are unsuitable for Adam if he wants to accrue a cash-in value?
Select ALL that apply.
A A convertible term assurance and a decreasing term assurance
B A convertible term assurance and an endowment assurance
C A whole of life plan and a decreasing term assurance
D A whole of life plan and an endowment assurance
4. What are the key factors that have an impact on the benefits from defined benefit (DB) schemes?
A The years of service in the pension scheme
B Annuity rates at the time of retirement
C The member’s final pensionable salary
D The scheme’s accrual rate
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5. Which of the following types of policy provides the opportunity of guaranteed insurability?
A Renewable term assurance
B Convertible term assurance
C Increasing term assurance
D Unit-linked term assurance
6. Which of the following are client categories under the Client Categorisation rules (COBS 3)? Select
ALL that apply.
A Professional counterparty
B Retail
C Eligible counterparty
D Professional
7. Which of the following are TRUE regarding traded endowment policies? Select ALL that apply.
A They have an element of inflation-proofing
B They have a guaranteed sum assured
C The investor needs to pay the initial charges
D There could be reversionary bonuses
8. Luke is retiring in 2017–18 and his pension fund is valued at £3,000,000. He did not register for any
protection. He is planning to take the excess over the lifetime allowance as income. How much will
the lifetime allowance charge be?
A £0
B £375,000
C £500,000
D £800,000
9. Which of the following are criteria of the quantitative test for a client to become an elective
professional? Select ALL that apply.
A Involvement in the financial sector for more than one year in a professional capacity
B Portfolio worth over £500,000
C Extensive experience and knowledge of financial services
D Average trade frequency of greater than ten trades per quarter over the previous four quarters
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10. Which conditions apply for an individual to be eligible for tax relief on their pension contributions?
A Be resident in the UK during the tax year
B Be domiciled in the UK during the tax year
C Have relevant UK earnings taxed under PAYE
D Have relevant UK earnings from self-employment
11. Which of the following are a basis for defining incapacity? Select ALL that apply.
A Suited occupation
B Any occupation
C Own occupation
D Close occupation
12. Ivor wants to cut down on his potential inheritance tax (IHT) liability and it has been suggested
that he makes various cash gifts to achieve this. However, he only wants to do this if it ensures that
there is no possibility of IHT on these payments. Consequently, he proposes to make gifts to the
following recipients:
Gift 1 – to his son as a wedding present
Gift 2 – to his wife who is a non-UK domicile
Gift 3 – to a registered charity based in Scotland
Gift 4 – to the local university where he originally attended
Which of the following statements are FALSE? Select ALL that apply.
A Only Gift 2 will be free of any potential IHT
B Only Gift 3 is deemed to be an exempt transfer
C Only Gifts 1 and 2 are subject to a specified IHT-free limit
D Only Gifts 3 and 4 will be treated as potentially exempt transfers
13. Which of the following requirements need to be satisfied for key person policy premiums to be
treated as tax-deductible expenses (‘Anderson rules’)? Select ALL that apply.
A The policy has been set up to meet loss of profits resulting from the loss of the key person
B The policy payouts made to the business must be treated as trading receipts
C The policy term should not usually be for more than five years
D The life assured must not have a significant interest in the business
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14. Which statements are TRUE in relation to Employer-Funded Retirement Benefit Schemes (EFRBS)?
A There is no NI cost when EFRBS benefits are accessed if the beneficiary does not work for the
employer (who set up the EFRBS)
B There is a periodic charge for inheritance tax which arises every tenth anniversary of the
establishment of the EFRBS
C Corporation tax relief on payments made to an EFRBS are deferred until the date when
benefits are taken
D The monies held in the EFRBS are not subject to capital gains tax
15. Stan had an accident and is making a claim on his policy. Which activities of daily living is Stan
expected to perform? Select ALL that apply.
A Shopping
B Cooking
C Climbing stairs
D Typing
16. Which of the following are requirement of the financial promotions rules (COBS 4) in respect of
complex investments? Select ALL that apply.
A If a firm’s regulator (FCA) is named and where matters are not subject to FCA regulation, this
is clearly explained
B If the past performance is below average, this is clearly disclosed
C The complexity of the investment is clearly explained
D If the capital is at risk, this must be clearly specified
17. Which of the following statements is TRUE in relation to Qualifying Recognised Overseas Pension
Schemes (QROPS)? Select ALL that apply.
A Income is subject to the tax rules of the jurisdiction where the QROPS is domiciled
B A QROPS is not subject to UK inheritance tax upon the policyholder’s death
C Income is subject to the tax rules of the jurisdiction where the policyholder is domiciled
D Funds are not subject to the European Savings Directive
18. Which of the following are qualifying rules for a life policy to be tax advantageous? Select ALL that
apply.
A Premiums paid in any one year are not more than one quarter paid over the term
B Premiums paid in any one year are not more than twice those paid in any other year
C Sum assured is not less than 75% of the premiums payable over the term
D Premiums are payable annually or more frequently
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19. Marla has read about payment protection insurance (PPI) and wants to know about the potential
pay out on her store card if she took out PPI cover. Which of the following statements is TRUE?
A The insurer will pay out the balance on her store card at the point of claim, but not any balance
built after this
B The insurer will pay a percentage of the outstanding balance (or the minimum payment) for
24 months at the point of claim, but not any balance built after this
C The insurer will pay a percentage of the outstanding balance (typically the minimum payment)
for 12 months at the point of claim, including any balance built after this
D The insurer will pay a percentage of the outstanding balance (or the minimum payment) for
12 months at the point of claim, but not any balance built after this
20. The rules on suitability apply to personal recommendations (COBS 9) relating to:
A MiFID investments
B Designated investments
C Retail investments
D Regulated investments
21. Which of the following statements is FALSE in relation to auto-enrolment?

A All employees above the age of 18 earning above the NI earning threshold must be enrolled
B Employees earning between £490 and £833 per month have a right to opt in
C Small businesses with fewer than five employees will have to offer a scheme
D Following the transitional arrangement, the minimum employer contribution to a scheme is
3%
22. Which of the following elements is included in a key facts illustration (KFI)? Select ALL that apply.
A The adviser charge to be deducted from the policy
B A projection of the final benefits
C Material risks associated with the product
D The effect of charges
23. The person who effects a life policy is called:

A The proposer
B The life assured
C The insurable interest
D The assured
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24. Four employees all work for a regulated firm of independent financial advisers:
Alan is responsible for compliance oversight
Brenda is a financial adviser
Colin is a complaints officer
Denise is a director
In accordance with the Statements of Principles for Approved Persons, who must ensure that
aspects of their business are controlled effectively? Select ALL that apply.
A Alan
B Brenda
C Colin
D Denise
25. What is the process of building up a pension pot called?

A Accumulation
B Accrual
C Decumulation
D Investment
26. Which of the following protection policies combines an investment plan with a decreasing term
assurance policy?
A Convertible term assurance
B With-profits endowment
C Gift inter-vivos
D Low-cost endowment
27. Two brothers are comparing their respective company pension benefits:
Rupert is a member of a contributory defined benefit occupational pension scheme.
Edward is a member of a non-contributory defined contribution occupational pension scheme.
In relation to these benefits, it is reasonable to expect that:

A Rupert will be less affected by a salary increase than Edward
B Edward will bear a greater investment risk than Rupert
C Rupert’s pension will be taxed more severely than Edward’s
D Edward’s pension will have a greater commutable element than Rupert’s
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28. For how long must a firm keep records that relate to advice given in respect of MiFID business?
A At least three years
B A minimum of five years
C Indefinitely
D At least seven years
29. Steve is in an eightieths defined benefit occupational pension scheme. At the start of the year he
had completed 16 years of service and his pensionable salary was £46,000. One year later this had
increased by £5,000. How much will the annual pension contribution deemed to have been, for the
purposes of testing against the ‘annual allowance’ limit (assume CPI is 0%)?
A £10,625
B £26,200
C £21,250
D £32,750
30. Four clients have contacted you for financial advice.

Client 1 is an eligible counterparty.
Client 2 Is a retail client.
Client 3 is a retail client who wants to be treated as an elective professional client.
Client 4 is a per se professional client.
In respect of the services provided, which of the following statements are true? Select apply. The
answers are still fine.
A Clients 2 and 3 will be given the highest level of protection
B Only Client 2 will be given the highest level of protection
C Clients 2 and 4 will be given the highest level of protection
D Clients 3 will no longer benefit from the highest level of protection
31. Your client plans to dispose of part of their business in the current tax year. How long must they
have owned the business in order to make a valid claim for Entrepreneur’s Relief?
A One year
B Two years
C Five years
D Seven years
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32. Which of the following are the main categories of business protection cover? Select ALL that apply.
A Shareholder and partnership protection
B Key person cover
C Professional indemnity
D Loan protection insurance
33. In the context of private medical insurance plans, what is a moratorium?

A The insurer agrees to provide cover for any undisclosed medical conditions
B The insurer agrees to provide cover for any undisclosed medical conditions from the fifth
policy anniversary
C The insurer specifically excludes cover for any undisclosed medical conditions
D The insurer agrees to provide cover for any undisclosed medical conditions from the second
policy anniversary
34. A financial adviser is advising two overseas clients on pension matters:

Robin is a member of a QROPS.
Maurice is a member of a QNUPS.
Which of the following statements is TRUE in respect of these benefits?

A Only Robin can take income drawdown at the age of 77
B Only Maurice can purchase an annuity at age 56
C Only Robin can incur an inheritance tax liability
D Only Maurice can contribute to the scheme after retirement
35. A client recently died and left a trading family business, which he had run for over 30 years, to his
eldest son, who has since contacted you for advice. What are the inheritance tax (IHT) implications
in this scenario?
A IHT will need to be paid on the value of the business in excess of the lifetime allowance
B IHT will need to be paid on 50% of the value of the business above the lifetime allowance
C No IHT will be due as he will be entitled to claim business property relief on 100% of the value
of the business
D IHT will be levied at a rate of 20% on the value of the business that exceeds the lifetime
allowance
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36. Four occupational pension schemes became insolvent last year. Which of the following members
of these schemes is MOST likely to be entitled to a maximum of 90% of their normal pension
entitlement under the Pension Protection Fund?
A Nigel, who reached normal retirement age under his defined contribution scheme one year
ago and took a pension of £6,200 pa
B Shirley, who reached normal retirement age under her defined benefit scheme two years ago
and took a pension of £8,200 pa
C Jim, who is due to reach normal retirement age next year under his defined contribution
scheme with a pension of £11,200 pa
D Maureen, who is due to reach normal retirement age the year after next under her defined
benefit scheme with a pension of £13,400 pa
37. When arranging a settlement on divorce, which of the following are options for handling any
accrued pension funds? Select ALL that apply.
A Pension sharing order
B Earmarking
C Offsetting
D Benefit crystallisation
38. Which of the following terms refers to adjustments made by life offices to the value of a with-
profits policy in the event of a fund switch or policy surrender during periods of poor market
performance?
A Terminal bonus
B Reversionary bonus
C Market value reduction
D Chargeable event
39. What is the FCA-prescribed minimum number of compulsory annual structured CPD hours
required by retail investment advisers?
A 21 hours
B 35 hours
C 14 hours
D 10 hours
40. How is the benefit from an income protection policy taxed where the premium is paid by the
employer?
A Paid net of the appropriate rate of corporation tax
B Paid net of the individual’s normal marginal rate
C Paid net of basic-rate tax
D Paid gross and with no further liability
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41. What amount of secured pension in payment must an individual have before they are eligible for a
flex-access drawdown arrangement?
A £0
B £11,520
C £20,000
D £23,000
42. Which of the following life insurance policies is designed to provide beneficiaries with a recurring
tax-free income from death of the insured to expiry of the policy term?
A Whole of life assurance
B Level term insurance
C Family income benefit
D Convertible term insurance
43. Which of the following pension arrangements was historically used by individuals to contract out
of the state earnings related pension scheme (SERPS)?
A Section 32 buyout plan
B Small self-administered scheme
C Appropriate personal pension plan
D Stakeholder pension plan
44. Which of the FCA’s Principles for Businesses is the basis for the Treating Customers Fairly initiative?
A Principle 1
B Principle 7
C Principle 6
D Principle 9
45. In what way must a trust be arranged in order to legally protect the assets from any claims by
creditors?
A The settlor must not be a trustee or a beneficiary
B The trust must have an overseas domicile
C It must be irrevocable
D The beneficiaries must not be minors
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46. What is the key difference between Enduring Power of Attorney (EPA) and Lasting Power of
Attorney (LPA)?
A EPA is set up for property and affairs; an LPA can be set up for property and affairs and also
personal welfare
B EPAs cannot come into effect until registered with the Office of the Public Guardian, whereas
LPAs do not need to be registered
C Once the client is incapacitated, they can only choose an LPA
D EPA gives the attorney unlimited powers, an LPA limits the powers of the attorney
47. How would an earmarked pension income payable as a result of a divorce settlement be affected if
the recipient remarried?
A The pension income would cease
B The income would not be affected
C A lump sum would be payable
D The pension income would be reduced
48. What is the maximum amount of scheme assets that a small self-administered scheme can invest in
a single sponsoring employer?
A Up to 5% of scheme assets
B Up to 10% of scheme assets
C Up to 15% of scheme assets
D Up to 20% of scheme assets
49. David, 71, has a capped drawdown fund of £300k and an uncrystallised fund of £200k. Which of the
following would trigger a Benefit Crystallisation Event (BCE)? Select ALL that apply.
A Increasing his drawdown income within the current maximum
B Reaching age 75
C Dying before age 75
D Converting his capped drawdown to FAD
50. How are defined pension benefits that are not yet in payment valued for the purpose of assessing
whether the lifetime allowance limit has been exceeded? The accrued pension is capitalised using
a factor of:
A 16
B 20
C 30
D 25
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51. A person residing in England will have to pay for the full cost of care if the value of their assets is
more than which level?
A £14,500
B £23,250
C £24,000
D £26,250
52. In order for a potentially exempt transfer to be treated as fully exempt from inheritance tax, for
how long must a donor survive after making the transfer?
A Six months
B Two years
C Three years
D Seven years
53. How is the annuity rate determined for a client who has a capped drawdown pension arrangement?
A By reference to the Government Actuarial Department (GAD) tables
B Based on the latest published 20-year gilt yield
C Using FCA-approved tables
D Based on an average annuity yield for the top five providers in the market
54. Which of the following policies incorporates a lower initial monthly premium that increases
annually?
A Low-cost endowment
B Decreasing term assurance
C Low-start endowment
D Unit-linked endowment
55. Bob has Enduring Power of Attorney (EPA) for his friend Gill, who suffers from a progressive
degenerative disorder. Which of the following types of gift is Bob allowed to make from Gill’s
property without approval from the Court of Protection? Select ALL that apply.
A Christmas presents for Gill’s grandchildren
B Marriage present for one of Gill’s nephews
C Donation to Cats Protection, which Gill has supported for 30 years
D Gift of a small holiday home to Gill’s daughter
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56. Ronan designated funds into flexi-access drawdown on 15 May 2017, one month before he was
due to receive his State Pension, taking his pension commencement lump sum. He then takes his
first income withdrawal on 22 November 2017. From what date, if any, will he be deemed to have
flexibly accessed his pension savings and so be subject to the MPAA?
A 15 May 2017
B 22 November 2017
C 6 April 2017
D He will not be deemed to have flexibly accessed his savings.
57. Jesse, age 35 and a higher-rate taxpayer, is considering whether to save for his retirement using
ISAs or a registered pension scheme. One advantage of using an ISA over a registered pension
scheme is:
A The tax treatment of the investments held in an ISA is more beneficial
B He can more readily access the money whenever he wants
C ISAs have better inheritance tax treatment on death
D The amount that can be invested in an ISA each year is higher
58. Which of the following funds have limited or no exposure to the oil, banking and pharmaceutical
sectors?
A Engagement funds
B Light green funds
C Medium green funds
D Dark green funds
59. Drew has told his adviser that he wants to opt up to become an elective professional client. Which
of the following may mean that he can do this?
A over the last year he has been a very active investor trading at least once on most working days
in a month
B as a result of the profits he is made, his portfolio is now worth £500,000
C he used to work in the corporate finance industry providing mezzanine finance to companies
D he explained his understanding of the risks and the type of investments you will be making.
60. Which of the following forms of protection is generally used to provide businesses with a cash
injection in the event that a crucial employee dies or becomes incapacitated?
A Income protection
B Key person protection
C Shareholder protection
D Partnership protection
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Case Studies
Case Study 1
When fact-finding two new clients Richard and Lynn Smith you identify the following information:
• Richard works for a large private engineering company as a senior engineer.

• Lynn is the owner and finance director of a pharmaceutical company.
• They have two children and Lynn is currently expecting their third child.
• Richard’s mother is dead and his father is elderly and is planning on leaving his estate to Richard.
• Richard is concerned about how the family would be able to afford their standard of living including
their capital and interest mortgage should he be ill/incapacitated and be unable to work.
• They currently have no protection policies nor any policies through Richard’s employers.
Question
1. Which of the following might affect the level of cover required if Richard was unable to work?
A Birth of the third child
B Death of Richard’s father
C Sale of Lynn’s company
D Lynn’s earnings
2. Before recommending income protection for Richard which of the following pieces of information
would be useful? Select ALL that apply.
A How much his employer would pay him if he was out of work sick
B For how long his employer would pay him if he was out of work sick
C If his employer would get another employee to cover his work
D If Richard’s earnings include irregular payments, eg, bonus, overtime
3. Which of the following policies would be the most suitable to repay their mortgage in the event of
Richard or Lynn dying or having a serious illness?
A A decreasing life or earlier critical illness policy
B A level term life or earlier critical illness policy
C A convertible term assurance policy
D A health insurance policy
4. Richard’s father has an estate subject to IHT. What type of protection policy could he establish on
Richard’s father’s life to pay a lump sum upon his death to provide liquidity to pay the IHT liability?
A A renewable term assurance policy owned by Richard’s father
B A level term assurance policy held in trust
C A whole of life policy owned by Richard’s father
D A whole of life policy taken out by Richard’s father, held in trust
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5. What type of protection could Richard’s employer take out on his life to ensure that they are
protected against financial loss should he die?
A A shareholder protection policy
B A partnership protection policy
C A key person protection policy
D A professional indemnity policy
Case Study 2
You have just met your existing client Christina Gomez for her annual review. She has told you that she
has just taken up a new role of CEO at a multinational bank. She plans on working there for five years on
a salary of £350,000 per annum plus bonuses, before retiring and taking her pension benefits. Christina
has told you that her company will pay into a pension for her or she can take the equivalent amount as
cash (subject to income tax).
Question
1. Given that Christina’s total pension benefits were worth £1.3 million on 5 April 2016 and that she
wants to receive her employer’s pension contributions going forward, what Lifetime Allowance
transitional protection should she apply for?
A Fixed protection 2014
B Enhanced protection
C Fixed protection 2016
D Individual protection 2016
2. At what rate of tax would she be subject to on benefits over the LTA if she draws them as a lump
sum?
A 20%
B 25%
C 40%
D 55%
3. In 2017–18 what is the maximum she can contribute to a pension without be subject to an annual
allowance charge?
A £10,000
B £40,000
C £80,000
D £350,000
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4. Christina is planning on deferring her State Pension when she becomes eligible for it. Which of the
following rules will apply? Select ALL that apply.
A It will be deferred at a rate of 1% for every nine weeks it is deferred
B She doesn’t have to do anything to defer it as it will be deferred unless claimed
C She will need to defer for at least six months
D There is not an option to take a lump sum
5. If Christina died at age 74 what would the tax treatment of her money purchase pension death
benefits be? Select ALL that apply.
A They can be paid to her nominated beneficiaries
B The proceeds will be tax-free
C Her nominated beneficiaries would pay tax on the proceeds at their highest marginal rate
D 25% of the benefits will be tax-free with the remainder taxed at 40%
Case Study 3
Sandra Hogg, aged 50, earns £80,000 pa. She also receives a bonus of 55% of her salary. She contributes
£800 net per month to a personal pension. She has no taxable savings or investment income. She plans
to semi-retire in 15 years by working a three-day week for a further five years. Her attitude to risk is
moderate.
Her husband owns his own business and doesn’t have a pension or any savings towards retirement.
Question
1. Based on the information provided, what is Sandra’s personal allowance in 2017–18?
A £0
B £5,500
C £6,500
D £11,500
2. In addition to her current contributions how much would Sandra need to contribute (gross) to a
pension to fully regain her personal allowance?
A £5,000
B £6,000
C £11,000
D £12,000
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3. Why would a cash fund not be suitable for her to invest into? Select ALL that apply.
A It is not suitable given her attitude to risk
B Cash offers excellent growth potential
C Cash offers poor protection against inflation
D She has a long-term time horizon so should be investing in the markets
4. What are the dangers of her husband relying on a business sale to provide liquidity for his
retirement? Select ALL that apply.
A He might find it hard to sell the business
B The correct time to sell the business might not coincide with when he wishes to retire
C Tax will be due on the sale of the business
D When he sells the business his pension annual allowance will be £10,000 pa
5. In which of the following circumstances would you recommend that Sandra reviews her retirement
plans? Select ALL that apply.
A If her attitude to risk changes
B Should she be made redundant
C Should she be promoted
D If she switches her bank account
Case Study 4
Rory and Ria are married, in their mid-30s, both employed and they have two daughters. The own their
own home with a mortgage and their employers have just started pensions for them.
They have never undertaken any financial planning before and have asked for your expertise to help to
establish a plan.
Question
1. Outline the six steps involved in the financial planning process. Identify which of the following are
steps in the financial planning process. Select ALL that apply.
A Gathering data about Rory and Ria’s circumstances
B Agreeing Rory and Ria’s goals, objectives and priorities
C Meeting with their employers to review the terms of their employment contracts
D Analysing and processing information
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2. Which of the following areas of planning might it be sensible to give priority to?
A Retirement planning
B Investment planning
C Estate planning
D Protection planning
3. Before recommending protection products/solutions to these clients why is it important to

establish their monthly income and expenditure? Select ALL that apply.
A To ensure they fully use surplus cash to pay for protection
B To establish how affordable any recommendations will be
C To identify how they spend their money and what level of income they would require to
maintain their standard of living
D To identify any areas of spending that could be reduced
4. Why should these clients use savings to establish an emergency fund?

A To pay for a holiday
B To pay for a new car
C To pay for a holiday home
D To provide liquidity should money be needed in the event of a change of circumstances
5. When establishing their attitude to risk why is it important to understand their views on ethical and
environmental factors? Select ALL that apply.
A The clients could have strong views about where their money is or is not invested
B The client is a strong believer in ethical matters and might want to invest in companies that
contradict their view that they want to vote at the AGM
C Ethical investments will generate a higher return
D Ethical investments are lower-risk
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Answers to Questions
1. A, B, C Chapter 3, Section 6.2.5

The strategy for succession planning is not a key factor in maintaining an employee’s competence.
2. D Chapter 2, Section 5.1.1 and 5.4.4

The State Pension Age starts increasing from age 65 to 66 on the 7 November 2018 and from 66 to 67 from
2026 until 2028. Under the Pensions Act 2007 the State Pension Age for men and women will increase
from 67 to 68 between 2044 and 2046. But, a review of the State Pension Age is due every five years with
the first to have been published in May 2017. To qualify for the State Pension, a person will generally need
ten qualifying years but 35 qualifying years to get the new full State Pension if the person does not have
a National Insurance record before 6 April 2016. At the date of writing, the review due in May 2017 had
not been published, so make sure you keep up to date as further increases in State Pension Age or other
changes to the State Pension are likely to happen before she reaches 2074!
3. A, B, C Chapter 1, Section 2
Whole of life and endowment assurance have an investment element as well as a protection element,
whereas convertible term assurance and decreasing term assurance do not.
4. A, C, D Chapter 2, Section 3
The benefits from a DB scheme are based on the final salary, number of years in service and the scheme
accrual rate; the prevalent annuity rates do not have an impact on the pension from a DB arrangement.
5. A Chapter 1, Section 2.2

Renewable term assurance provides the opportunity of guaranteed insurability, which means having
the option of taking out a further term assurance at ordinary rates, without requiring further evidence of
health.
6. B, C, D Chapter 3, Section 6.3.1

Clients can be categorised as retail, professional and eligible counterparty.
7. A, B, D Chapter 1, Section 2.6

The initial charges are already paid by the initial policyholder, not the buyer.
8. C Chapter 2, Section 6.1.3

The tax charge is 25% of the excess over lifetime allowance, which is 25% x (£3,000,000 – £1,000,000) =
£500,000.
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9. A, B, D Chapter 3, Section 6.3.1
For clients to opt up, they must be able to meet two criteria of the following three: average trade frequency
of greater than ten trades per quarter over the previous four quarters, portfolio worth over £500,000, and
work experience or involvement in the financial sector for more than one year in a professional capacity.
The qualitative test requires that the clients have expertise, experience and knowledge.
10. A, C, D Chapter 2, Section 6.1.5

For an individual to be eligible for tax relief on their pension contributions they must be resident in the UK
during the tax year and have relevant UK earnings (from employment or self-employment); UK domicile is
not a condition for obtaining tax relief on pension contributions.

Incapacity is defined on one of the following four bases: own occupation, suited occupation, any
occupation or activities of daily living.

Gifts as a parental wedding present are limited to £5,000 per parent and gifts to non-UK domiciled spouses
are limited to £325,000, whereas gifts to charities and for the national benefit are unlimited.
13. A, C, D Chapter 1, Section 12.3

The premiums of a key person policy will be treated as tax-deductible expenses if they meet the ‘Anderson
rules’: the policy has been set up to meet loss of profits resulting from the loss of the key person, the
policy term must be a maximum of five years, and the life assured must not have a significant interest in
the business. The policy payouts will not automatically be treated as trading receipts; each case will be
assessed on its own merits to establish whether the receipt is capital or revenue.

The monies held in the EFRBS are taxed as though they are held in a discretionary trust; there is income tax
and CGT to pay after allowances.

Typical ADLs include shopping, cooking, climbing stairs, washing, eating; typing is not classed as an ADL.

If a financial promotion makes reference to past performance, it must ensure that this is not any more
prominent than other information; there is no requirement in COBS 4 to disclose figures relating to past
performance (whether this is above or below average) in financial promotions.

A QROPS is subject to the tax rules of the jurisdiction where the QROPS is domiciled, not subject to IHT
upon the policyholder’s death, and funds are not subject to the European Savings Directive or CGT. The
income tax is not determined by the domicile of the policyholder.
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18. B, C, D Chapter 1, Section 8.2

The qualifying rules include: policy term is ten years or more, premiums paid in any one year are not more
than one eighth paid over the term, premiums paid in any one year are not more than twice those paid in
any other year, sum assured is not less than 75% of the premiums payable over the term, and premiums
are payable annually or more frequently.
19. D Chapter 1, Section 10.6.2

The insurer will pay a percentage of the outstanding balance or the minimum payment for 12 months at
the point of claim, but not any balance built after this.
20. B Chapter 3, Section 6.3.1

The rules on suitability apply to personal recommendations relating to designated investments and when
firms manage investments.

The minimum age for automatic enrolment of employees is 22; younger employees must opt in, as the
employer does not have to enrol them automatically.

The risks associated with the products are covered in the key features of the product (KFD), rather than in
the KFI.
23. D Chapter 1, Section 2.1

The person who effects a life policy is called the assured; an insurable interest must exist between the
assured and the life assured, and a payment is triggered on the death of the life assured. The proposer is
the person applying to the insurer for a policy.
24. A, D Chapter 3, Section 6.2.1

A, B and D are approved persons. However, Principle 5 of APER, requiring approved persons to ensure
that the business for which they are responsible in their controlled function is organised so that it can be
controlled effectively, only applies to individuals with a significant influence function, such as those with
management or compliance roles.

The process of building up a pension pot is called accumulation and the process of receiving a pension on
retirement is called decumulation.
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Low-cost endowment policies operate much in the same way as low-cost whole of life plans, with two
different policies operating under one structure, eg, with-profits endowment element or unit-linked
element, and a decreasing term assurance element. They guarantee to pay out the full sum assured on
death. However, there is no such guarantee on the maturity of the plan, as that will depend on the bonuses
added to the with-profits endowment element throughout the term. Often, they rely substantially on the
terminal bonus payout, to determine whether the amount required will be met.
27. B Chapter 2, Section 3

With defined benefit schemes the employer bears the investment risk, whereas with defined contribution
schemes the employee bears the investment risk.

A firm must make appropriate records to demonstrate compliance with the rules in the Training and
Competence Sourcebook, and keep them for the following periods after an employee stops carrying on
the activity: at least five years for MiFID business including life policies or pension cases, at least three years
for non-MiFID business, and indefinitely for a pension transfer specialist.

The contribution will be:
((17/80 x 51,000) – (16/80 x 46,000)) x 16 = £26,200
30. B, D Chapter 3, Section 6.3.1

Only retail clients benefit from the highest level of protection; a client who opts up to elective professional
will lose this extra protection
31. A Chapter 2, Section 11.2.3

Entrepreneur’s Relief can be claimed when an individual disposes of a business, (or part of it). The relief
covers the qualifying gains that an individual makes during their lifetime. From April 2011 it is £10 million.
This brings the rate of CGT down from 20% for higher-rate taxpayers to 10%. The asset must have been
owned for at least one year before disposal.
32. A, B, D Chapter 1, Section 12.2

The three main categories of business protection cover are: loan protection insurance, key person cover,
and shareholder and partnership protection.

Some insurers have moratorium plans in which the client need not reveal current or past medical
conditions. The provider is willing to accept this risk by stating that for the next two years (for example)
if no medical treatment is needed, for any previously existing medical condition, cover will be given for
those conditions.
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Under QNUPS, income drawdown must cease at age 75, but under QROPS income drawdown can
continue beyond age 75.

Business property relief (BPR) is a relief for transfers of business property, designed to try to ensure family
businesses (for example) are not crippled by having to pay an inheritance tax bill. BPR is claimed at two
rates. The relief is 100% for interests in unincorporated businesses, such as sole traders or partnerships;
and shareholdings of any size in unquoted and Alternative Investment Market (AIM) companies.

The PPF only covers members of defined benefit schemes – 100% for members over the scheme’s normal
retirement date and 90% for those yet to reach normal retirement date, up to a maximum cap.
37. A, B, C Chapter 2, Section 8.7

The divorce settlement in the court can look at pension rights in the following ways: balance the pension
rights against another asset, eg, the matrimonial home (known as pension offsetting); or arrange that
when the pension eventually commences paying, a pre-agreed proportion of it will be paid to the other
party (known as pension ear-marking); or split the pension at the time of the divorce thus giving both
parties their own pension pot (known as pension sharing).
38. C Chapter 1, Section 2.4

Most offices reserve the right to apply a market value reduction (MVR) factor if an assured surrenders the
policy, or wants to switch out of the with-profits fund. This is most likely to be applied during periods of
adverse stock market conditions and poor economic climate. The MVR enables the life office to reduce
the surrender or switch value, in an attempt to apply fairness across all with-profits members (including
those who are remaining in the fund). Bonuses are allocated from surpluses, but during times of market
downturns these surpluses are reduced. If an assured is allowed to keep their full allocated bonus, it could
impact negatively on those who are remaining in the fund. Therefore, MVRs are generally only applied in
periods of poor market performance, and only on surrender or switching (not death).

Retail investment advisers must complete a minimum of 35 hours’ compulsory CPD each year that meets
the following requirements: at least 21 of the 35 hours claimed must be structured.
40. B Chapter 1, Section 4.6

The tax situation of income protection policies is interesting because the benefits are totally free of income
tax where the premium has been paid by the consumer, but the benefits are taxable in the hands of the
consumer where the premium is paid by the employer.
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41. A Chapter 2, Section 10
There is no minimum or maximum amount of pension that has to be taken each year from flexi-access
drawdown. There is no need for the scheme administrator to carry out regular calculations of the basis
amount. To be able to have a flexible drawdown pension the member does not need to have a secured
pension.

Family income benefit (FIB) is a form of decreasing term assurance, designed to provide the beneficiaries
of the policy with regular income payments as opposed to a lump sum. A policy will pay a selected level of
(tax-free) income each year, from the death of the life assured until the expiry of the term of the policy. The
later the death during the term, the fewer the income payments made.

A derivation of the PPP format, the appropriate personal pension (APP), also allowed an individual to
contract out of, at the time, SERPS. This had been allowed previously, via occupational schemes, but many
thousands of people welcomed the chance to try to see if they could beat the guaranteed nature of the
state benefit by investing in stock market funds. As with many money purchase arrangements, some
individuals did better than others.

Principle 6 of the Principles for Businesses is the Principle on which the initiative of Treating Customers
Fairly is founded: ‘A firm must pay due regard to its customers and treat them fairly’ is the underlying
Principle for the FCA’s Treating Customers Fairly (TCF) initiative.

In order for a trust to provide asset protection and be able to legally insulate assets from claims of creditors
it must be irrevocable, meaning that the settler has no legal power to revoke the original instructions or
change the beneficiaries.

An EPA is set up for property and affairs; an LPA can be set up for property and affairs and also personal
welfare. Both LPAs and EPAs cannot come into effect until registered with the Office of the Public Guardian.

Earmarking has not been seen as being ideal because: it is not providing a real break in the relationship
between the couple; it means that the ex-spouse is only able to receive a retirement income when the other
party (whose pension pot it is) actually retires (which may be delayed); if the actual divorce settlement says
that there is to be a regular payment of a pension (a periodic payment), what happens on the death of
the pension holder? The payments will stop. It can also stop if the party receiving the earmarked pension
remarries. The right to a lump sum under an earmarking divorce order does not stop on remarriage.
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Small self-administered scheme (SSASs) can invest in the sponsoring employer, although the extent of this
investment has been limited since A-day. Now, an SSAS can only invest up to 5% of scheme assets in any
one sponsoring employer, and under 20% of scheme assets where the shareholdings relate to more than
one sponsoring employer.
49. B, C Chapter 2, Section 6.2

The uncrystallised fund would be tested against the lifetime allowance when David reaches 75 or if he died
before then. The drawdown fund would not be tested if he just increases his income, or if he converts to
flexi-access in order to draw more than the maximum.

For defined benefit schemes, there is no fund as such and, therefore, there are two more factors we need
to be aware of to calculate a deemed fund. If the pension is not yet in payment, it is the accrued pension
amount x 20; if the pension was in payment before A-day, it is the pension amount x 25.

Anyone who requires care in a care home and has assets (including property) worth over £23,250 will have
to pay the full cost of care.

According to HMRC ‘Most lifetime transfers are potentially exempt transfers (PETs), that is they are only
chargeable if the transferor dies within seven years of making the transfer. But a lifetime transfer may be
chargeable as an immediately chargeable transfer, or a gift with reservation of benefit.’
53. A Chapter 2, Section 10

For capped drawdown GAD rates are calculated by taking the client’s age at retirement and looking at
the yield on UK gilts on the 15th day of the month prior to retirement. The yield rate is rounded down
to the next 0.25% and then the final yield figure is matched to the published GAD table in line with the
client’s age; this provides a monetary GAD figure to be used in the calculation. Then the full amount of the
pension fund is divided by £1,000 and multiplied by the GAD figure. The result is the annuity figure.

Low-start endowments are a development of low-cost endowments, but have a lower initial premium.
That is because the premium rises, typically for the first five years of the policy, and then settles at a higher
figure than would have been the case under a low-cost endowment for the remainder of the term.

Gift of a holiday home is likely to be seen as IHT planning and would require permission from the Court of
Protection. Gifts of seasonal nature, gifts to charities and gifts in consideration of marriage are allowed, if
the donor would have been expected to make them.
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56. B Chapter 2, Section 10
The MPAA takes effect from the date the pension is flexibly accessed. Taking tax-free cash is not flexibly
accessing the pension but taking an income is.

Current rules are that to take benefits from a pension scheme the person must be aged 55 or over. An ISA
can be accessed at any age although depending on the person’s age there may be a withdrawal charge on
a LISA.

Dark green funds have limited or no exposure to the oil, banking and pharmaceutical sectors.

Answers A and B are two of the criteria from the quantitative test (assuming £500,000 is still more than
500,000!) and D is part of the qualitative test. Answer C is a quantitative test, but he fails it as he was
involved in lending rather than investment transactions.

Key person cover can business with a cash injection in the event of a key employee dying or becoming
too ill to make a contribution. The cover, which is typically established for up to a five-year term and
can be increased or decreased at any time, is written on the life of the key person but the premiums are
paid by the employer, and any money that becomes due in the event of a claim becomes payable to the
business. The costs to a business of losing a key person could be devastating and even threaten its very
survival, so key person cover is intended to pay for any resulting loss of profits and the costs of finding
and training a suitable replacement. It should ideally include critical illness cover (CIC) as well as life
assurance. It may also include income protection (IP). This can provide added security, as IP will pay out
for conditions such as stress and bad backs that are not covered by CIC, but will significantly increase
the costs.
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Answers to Case Studies
Case Study 1
When fact-finding two new clients Richard and Lynn Smith you identify the following information.
• Richard works for a large private engineering company as a senior engineer.

• Lynn is the owner and finance director of a pharmaceutical company.
• They have two children and Lynn is currently expecting their third child.
• Richard’s mother is dead and his father is elderly and is planning on leaving his estate to Richard.
• Richard is concerned about how the family would be able to afford their standard of living including
their capital and interest mortgage should he be ill/incapacitated and be unable to work.
• They currently have no protection policies nor any policies through Richard’s employers.
Q1. Which of the following might affect the level of cover required if Richard was unable to work?
A Birth of the third child
B Death of Richard’s father
C Sale of Lynn’s company
D Lynn’s earnings
A1. A, D Chapter 1, Section 13.3.3

The third child would increase their outgoings, and Lynn’s earnings would cover at least some of their
expenditure. The death of Richard’s father or the sale of Lynn’s business may provide capital but neither
the timing nor the amount are guaranteed – so can’t be relied on if Richard became unable to work
today.
Q2. Before recommending income protection for Richard which of the following pieces of information
would be useful? Select ALL that apply.
A How much his employer would pay him if he was out of work sick
B For how long his employer would pay him if he was out of work sick
C If his employer would get another employee to cover his work
D If Richard’s earnings include irregular payments, eg, bonus, overtime
A2. A, B, D Chapter 1, Section 4.2

The amount of cover needed and deferred periods (the period before any income is paid out) are
important factors. The longer the deferred period, the cheaper the cover. The choice should be tied in
with any possible sickness benefits paid by an employer.
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Q3. Which of the following policies would be the most suitable to repay their mortgage in the event of
Richard or Lynn dying or having a serious illness?
A A decreasing life or earlier critical illness policy
B A level term life or earlier critical illness policy
C A convertible term assurance policy
D A health insurance policy
A3. A Chapter 1, Section 2.2

Decreasing policies have a sum assured which reduces each year by a given amount, decreasing to zero
at the end of the term.
Q4. Richard’s father has an estate subject to IHT. What type of protection policy could he establish on
Richard’s father’s life to pay a lump sum upon his death to provide liquidity to pay the IHT liability?
A A renewable term assurance policy owned by Richard’s father
B A level term assurance policy held in trust
C A whole of life policy owned by Richard’s father
D A whole of life policy taken out by Richard’s father, held in trust
A4. D Chapter 1, Section 2.5

Whole of life policies are used for estate planning to provide a lump sum to pay an IHT liability. The
policy must be written in trust; otherwise, the proceeds go into the life assured’s estate on death,
making the IHT situation even worse.
Q5. What type of protection could Richard’s company take out on his life to ensure that they are
protected against financial loss should he die?
A A shareholder protection policy
B A partnership protection policy
C A key person protection policy
D A professional indemnity policy
A5. C Chapter 1, Section 12.2

Key person cover on Richard’s life would pay a lump sum to the business should Richard die.
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Case Study 2
You have just meets your existing client Christina Gomez for her annual review. She has told you that
she has just taken up a new role of CEO at a multinational bank. She plans on working there for five
years on a salary of £350,000 per annum plus bonuses, before retiring and taking her pension benefits.
Christina has told you that her company will pay into a pension for her or she can take the equivalent
amount as cash (subject to income tax).
Q1. Given that Christina’s total pension benefits were worth £1.3 million on 5 April 2016 and that she
wants to receive her employer’s pension contributions going forward what Lifetime Allowance
transitional protection should she apply for?
A Fixed protection 2014
B Enhanced protection
C Fixed protection 2016
D Individual protection 2016
A1. D Chapter 2, Section 6.1.4

She should apply for individual protection 2016 as this will give her an LTA of £1.25 million and allow
future contributions, compared to the standard LTA of £1 million. The 2014 protections are closed for
new applicants (fixed protection 2014 closed on the 5 April 2014 and individual protection closed on 5
April 2017).
Q2. At what rate of tax would she be subject to on benefits over the LTA if she draws them as a lump
sum?
A 20%
B 25%
C 40%
D 55%

If benefits above the Lifetime Allowance are taken as income, the excess is taxed at 25% or if they are all
taken as a lump sum, the excess is taxed at 55%.
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Q3. In 2017–18 what is the maximum she can contribute to a pension without being subject to an
annual allowance charge?
A £10,000
B £40,000
C £80,000
D £350,000
A3. A Chapter 2, Section 6.1.1

Given her total income will be over £210,000 then she her annual allowance will be tapered to £10,000.
Q4. Christina is planning on deferring her State Pension when she becomes eligible for it. Which of the
following rules will apply? Select ALL that apply.
A It will be deferred at a rate of 1% for every nine weeks it is deferred
B She doesn’t have to do anything to defer it as it will be deferred unless claimed
C She will need to defer for at least six months
D There is not an option to take a lump sum

Her State Pension will increase at a rate of 1% for every nine weeks it is deferred. The new State Pension
is not automatically paid. A letter be sent to the person four months before reaching State Pension Age
telling them what they will have to do. The minimum deferral period is nine weeks. Unlike the State
Pension payable for those who reach state pension age before 6 April 2017, the new State Pension
cannot be taken as a lump sum.
Q5. If Christina died at age 74 what would the tax treatment of her money purchase pension death
benefits be? Select ALL that apply.
A They can be paid to her nominated beneficiaries
B The proceeds will be tax-free
C Her nominated beneficiaries would pay tax on the proceeds at their highest marginal rate
D 25% of the benefits will be tax-free with the remainder taxed at 40%
A5. A, B Chapter 2, Section 4.1.4

They would be paid tax-free to her nominated beneficiaries.
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Case Study 3
Sandra Hogg, aged 50, earns £80,000 pa. She also receives a bonus of 55% of her salary. She contributes
£800 net per month to a personal pension. She has no taxable savings or investment income. She plans
to semi-retire in 15 years by working a three-day week for a further five years. Her attitude to risk is
moderate.
Her husband owns his own business and doesn’t have a pension or any savings towards retirement.
Q1. Based on the information provided, what is Sandra’s personal allowance in 2017–18?
A £0
B £5,500
C £6,500
D £11,500
A1. B Chapter 3, Section 2.2

Sandra’s PPP contribution is £12,000 pa gross.
Sandra’s adjusted net income is £112,000.
This exceeds £100,000 by £12,000, so her personal allowance is reduced by £6,000.
Sandra’s personal allowance is therefore £5,500 (£11,500 – £6,000) in 2017–18, based on the information
provided.
Q2. In addition to her current contributions how much would Sandra need to contribute (gross) to a
pension to fully regain her personal allowance?
A £5,000
B £6,000
C £11,000
D £12,000
A2. D Chapter 3, Section 2.2

£12,000 gross would reduce her adjusted net income to £100,000; therefore, she would regain her
personal allowance.
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Q3. Why would a cash fund not be suitable for her to invest into?
A It is not suitable given her attitude to risk
B Cash offers excellent growth potential
C Cash offers poor protection against inflation
D She has a long-term time horizon so should be investing in the markets
A3. A, C, D Chapter 3, Section 2.1

Given her retirement plans she has time to invest and an attitude to risk that suggests that cash will
not provide a return aligned to the return that could possibly be achieved by investing in a diversified
portfolio.
Q4. What are the dangers of her husband relying on a business sale to provide liquidity for his
retirement?
A He might find it hard to sell the business
B The correct time to sell the business might not coincide with when he wishes to retire
C Tax will be due on the sale of the business
D When he sells the business his pension annual allowance will be £10,000 pa
A4. A, B, C Chapter 2, Section 11.2.3

The ideal time to sell the business may not be when her husband plans to retire. Also the future value of
the business is unknown and he might find it difficult to find a buyer.
Q5. In which of the following circumstances would you recommend that Sandra reviews her retirement
plans? Select ALL that apply.
A If her attitude to risk changes
B Should she be made redundant
C Should she be promoted
D If she switches her bank account
A5. A, B, C Chapter 2, Section 11.4.1

Annually as a minimum would be advisable so Sandra can review the progress of her pension and
whether it was on track to provide her with the income she needs in retirement.
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Case Study 4
Rory and Ria are married, in their mid-30s, both employed and they have two daughters. The own their
own home with a mortgage and their employers have just started pensions for them.
They have never undertaken any financial planning before and have asked for your expertise to help to
establish a plan.
Question
Q1. Outline the six steps involved in the finical planning process. Identify which of the following are
steps in the financial planning process. Select ALL that apply.
A Gathering data about Rory and Ria’s circumstances
B Agreeing Rory and Ria’s goals, objectives and priorities
C Meeting with their employers to review the terms of their employment contracts
D Analysing and processing information

Gathering data; agreeing goals, objectives and priorities; analysing and processing information;
producing a written financial plan including recommendations as to how to meet goals; implementation
of the plan; reviewing and modifying the plan.
Q2. Which of the following areas of planning might it be sensible to give priority to?
A Retirement planning
B Investment planning
C Estate planning
D Protection planning

Depending on a client’s circumstances, a first priority may be to protect the client’s or their family’s
standard of living in the event of their death, critical illness or long-term incapacity.
Once protection of capital and income liabilities have been considered, retirement planning can be
looked at and any identified shortfalls in retirement income can be considered and strategies put into
place to minimise the impact or increase the income.
Q3. Before recommending protection products/solutions to these clients why is it important to

establish their monthly income and expenditure? Select ALL that apply.
A To ensure they fully use surplus cash to pay for protection
B To establish how affordable any recommendations will be
C To identify how they spend their money and what level of income they would require to
maintain their standard of living
D To identify any areas of spending that could be reduced
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A3. B, C, D Chapter 3, Section 2.2
Preparing an income and expenditure analysis allows the paraplanner and financial planner to see the
amount of investible capital and surplus income available to meet the client’s goals and objectives.
Q4. Why should these clients use savings to establish an emergency fund?
A To pay for a holiday
B To pay for a new car
C To pay for a holiday home
D To provide liquidity should money be needed in the event of a change of circumstances

An emergency fund could help if they had a change of circumstances and needed money. For example,
if urgent work was required to their home, should their car break down or for more serious changes like
one of them being made redundant or being unable to work due to an illness or injury.
Q5. When establishing their attitude to risk why is it important to understand their views on ethical and
environmental factors? Select ALL that apply.
A The clients could have strong views about where their money is or is not invested
B The client is a strong believer in ethical matters and might want to invest in companies that
contradict their view that they want to vote at the AGM
C Ethical investments will generate a higher return
D Ethical investments are lower risk
A5. A, B Chapter 3, Section 2.1.5

This is important as the clients might have strong views and wish to have any investments structured in
a way that is aligned to their ethical and environmental preferences.
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Syllabus Learning Map
306
Syllabus Unit/ Chapter/

Element Section
Element 1 Financial Protection Chapter 1

Consumer and Retail Market Factors and Trends Relevant to
1.1 Financial Protection
On completion the candidate should:
understand the key consumer attitudes, retail market factors and
trends which are relevant to financial protection:
• health and morbidity
• longevity and mortality
1.1.1 14
• employment
• product design and development
• access to advice and/or insurance cover
• compensation and consumer protection
Protection Planning
1.2
Protection Needs
be able to analyse the areas of personal income and family income,
capital protection needs:
1.2.1 • health, incapacity, accident 11
• income, mortgage and other debt
• death, asset protection
understand the relationship between insurance and assets and
1.2.2 1.1
liabilities
be able to analyse the role of insurance in mitigating personal
1.2.3 2
financial risk
understand the areas of business protection needs – small to medium
1.2.4 12
enterprises (SMEs)
Sources of Financial Protection
understand the range and limitations of state, local authority and
other welfare benefits including:
• State Pension and Pension Credit
• housing, rent rebates, mortgage repayment and Council Tax
1.2.5 9
benefits
• incapacity, disability, sickness and maternity benefits
• social care provision
• Universal Credit and other tax credits
be able to evaluate the impact of incorporating state and other
1.2.6 9
welfare benefits into a financial plan
307
Element Section
Life Assurance and Pension-Based Policies
be able to analyse the range, structure and application of life
assurance, legacy pension-based and employment-based policies to
meet financial protection needs including:
• types of policies, comparative costs, benefits and advantages
• cost and premium calculation factors
1.2.7 3
• legal requirements, ownership, uses and relevance of trusts
• underwriting and claims: issues and processes
• terminal illness benefit
• assignments, surrenders, paid-up policies, claims
• employer-sponsored benefit schemes
be able to evaluate the taxation treatment of life assurance and
pension-based protection policies including:
• qualifying and non-qualifying life assurance policies, offshore life
assurance policies
1.2.8 2.7, 8
• taxation of life funds (onshore and offshore)
• capital gains tax (CGT) and life assurance policies
• inheritance tax (IHT) and life assurance
• tax on income and distributions
be able to analyse the range, structure and application of life and
health insurance policies and options to meet financial protection
needs including:
• types of policies, features and uses, comparative costs, benefits
and disadvantages
1.2.9 3
• definitions, exclusions, premium calculation factors
• taxation treatment
• group policies
• employment-based income protection
Income Protection
be able to analyse the range, structure and application of income
protection insurance to meet financial protection needs including:
• types of policies, features and uses, comparative costs, benefits
1.2.10 and disadvantages 4
• definitions, exclusions, premium calculation factors
308

Element Section
Critical Illness Protection
be able to analyse the range, structure and application of critical
illness insurance to meet financial protection needs including:
• types of policies, structure, comparative costs, benefits and
disadvantages
• market developments for critical illness insurance
• definitions, conditions, exclusions
1.2.11 • terms and amount of cover – factors, assessment 5
• premium calculation factors
• claims
• taxation treatment, use of trusts
• group policies
• interaction of critical illness insurance and life assurance
Long-Term Care Protection
be able to analyse the range, structure and application of long-term
care insurance to meet financial protection needs including:
• political environment, social care policy, national factors
• main product types and features
• cost and other factors, options and choices
1.2.12 6
• available resources, impact and consequences
• immediate needs provision
• long-term care planning process
• legal considerations, Power of Attorney
• home income plans/equity release
understand the regulatory considerations that apply to long-term
care insurance:
• affordability, suitability, appropriateness
• Financial Conduct Authority’s (FCA’s) ‘packaged product’/retail
investment products regime
• role of Financial Ombudsman Service and Financial Services
1.2.13 7
Compensation Scheme
• training and competence requirements for long-term care
insurance
• provision of pre- and post-sales information
• claims handling rules
• convertible products
Insurance-Based Protection
be able to analyse the main features of other insurance-based
protection policies:
1.2.14 • personal accident and sickness insurance 10
• private medical insurance, hospital plans and dental insurance
• payment protection insurance – mortgage, credit
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Element Section
Selecting Appropriate Protection Solutions
1.3
understand the relevant factors for individuals and business clients
when it comes to planning their financial protection requirements:
• risks and constraints
1.3.1 13
• priorities
• range and suitability of solutions
• consequences of inadequate protection
be able to evaluate the current and future needs and priorities for
financial protection:
• family and personal protection
1.3.2 12, 13.2
• SME business protection needs – business loans, key person,
partnership and shareholder protection
• existing arrangements
be able to evaluate the relevant factors in selecting appropriate
solutions taking account of:
• similar types of products
• client needs
• current and future affordability
• co-habitation, marriage, civil partnership, birth of child
• property purchase
1.3.3 13.3
• separation and divorce
• work, going overseas, retirement
• basis of ownership (proposal)
• suitability of trusts
• implications of insurable interest
• advice for small businesses
• importance of regular reviews
Element 2 Retirement Planning Chapter 2

Pension Provision in the Context of Political, Economic, Legal and
2.1 Social Environment Factors
be able to evaluate the social and macroeconomic factors influencing
the development of pension policy:
• theory and purpose of pension provision in society
• role of government, policy direction, challenges and proposed
reforms
2.1.1 7.1
• employer responsibilities, challenges and impact on pension
provision
• demographic trends, longevity and ageing population
• financial and economic factors
• incentives, disincentives and attitudes to saving
310

Element Section
understand the main types and methods of pension provision
• State Pension benefits
2.1.2 2
• defined benefit (DB) schemes
• defined contribution (DC) schemes
Pension Scheme Taxation
2.2
understand how registered pension schemes, funds, contributions
and benefits are taxed:
• taxation of pension schemes and members
• taxation benefits of pension schemes
2.2.1 • annual allowance, Lifetime Allowance, special annual allowance 6.1
and associated charges and relevant transitional reliefs post-
Finance Act 2006
• funding/contributions to registered pension schemes and tax
relief provision
2.2.2 understand other pension scheme types and their tax treatment 6.3
2.2.3 understand Benefit Crystallisation Events 6.2
Pensions Law and Regulation
2.3
be able to analyse the aspects of law and regulation relevant to
retirement planning:
• employment law relevant to pensions and the rights of older
workers
• pensions and divorce
• bankruptcy law and pension assets
2.3.1 8
• The Pensions Regulator’s compliance requirements
• Financial Conduct Authority
• pension protection schemes
• Pensions Ombudsman Service
• The Pensions Advisory Service
• Pension Wise
be able to interpret the relevant aspects of pensions law and
oversight to:
• trust- and contract-based pensions
2.3.2 8
• roles and duties of trustees, administrators and professional
advisers
• roles and duties of the Independent Governance Committee
understand auto-enrolment schemes, employer duties, contributions
2.3.3 9
and workers opt-in/opt-out
311
Element Section
understand the pension flexibilities introduced by the Finance Acts
2014–15 and the Pension Schemes Act 2015 and their impact on
retirement planning:
2.3.4 • eligibility based on retirement age 10
• available choices: merits and limitations
• taxation
• fees and expenses
Defined Benefit (DB) and Defined Contribution (DC) Schemes
2.4
understand the key characteristics of DB pension schemes:
• structure, characteristics, attributes and benefits
• main types, variations and hybrids
• rules and operation of DB schemes
• funding methods and issues
• eligibility criteria and top-up options
2.4.1 3
• roles of trustees and scheme reporting
• employer covenant
• roles of Pension Protection Fund, TPAS and Pensions Ombudsman
Service
• funding, valuation and reporting
• certainty of retirement income
• principal risks
be able to analyse the options available from DB pension schemes
regarding retirement planning for individuals:
• factors to consider and benefits on leaving, early, normal and late
retirement
• benefits on ill health and death
• switching issues and considerations
2.4.2 • public sector schemes 3.7.5
• retirement benefits
• leaving benefits
• ill health benefits
• Pension Commencement Lump Sum (PCLS) and interaction with
pension income
• death benefits before and after crystallisation
312

Element Section
understand the key characteristics of DC pension schemes:
• main types of DC schemes and their legal bases, rules and
operation – group personal pensions (GPPs) (employer-
established), individual pension plans (IPPs) (non-employer-
established), stakeholder pensions, self-invested personal
pensions (SIPPs)
2.4.3 • tax treatment 4
• contributions – methods and issues
• accumulation, de-risking and decumulation stages
• types of investments
• funding, fees, valuation and reporting considerations
• the purpose of a default fund and investment choice
• scheme options, limitations and restrictions
be able to analyse the options available from DC pension schemes
regarding retirement planning for individual customers:
• crystallisation options and impact of decisions – including full and
partial crystallisations
• transfer issues and considerations
2.4.4 • stakeholder pensions 4
• SIPPS and group SIPPS
• death benefits before and after age 75
• ill health
• leaving benefits
• role of the National Employment Savings Trust (NEST)
State Retirement Benefits
2.5
be able to analyse the structure, relevance and application of the
state schemes in relation to an individual’s pension planning:
• basic state retirement benefits
• additional state retirement benefits – historic and current
2.5.1 • reform of state provision 5
• system of means-tested benefits, Pension Credit, contributory
benefits leading to Basic State Pension
• single-tier system of means-tested benefits and a contributory
benefit single-tier pension
313
Element Section
Taking a Retirement Income
2.6
be able to evaluate the different ways of taking benefits:
• reasons for taking or deferring state retirement benefits
• considerations when taking income from a DB scheme
• considerations when taking income from a DC scheme
• choosing an annuity – including deferred, single or joint life, level
2.6.1 12
or escalating, enhanced, guaranteed, temporary
• advantages and disadvantages of different types of annuities
• choosing drawdown or partial/ lump sum drawdown
• running down the fund versus leaving the nominal or real value
untouched
be able to analyse the available options for drawing pension benefits
and the factors to consider:
• the role of decumulation and its interaction with mortality, estate
planning, taxation and income levels
2.6.2 • suitability of phased retirement 13
• balancing steady versus flexible income
• ensuring money does not run out before death
• managing fund for yield or total return
• interaction of taking a retirement with taxation
Financial Planning and Advice for Retirement
2.7
be able to analyse retirement aims and objectives taking account of
the following factors:
• availability and prioritisation of savings and investments
• attitude and expectations as regards retirement and working in
2.7.1 11.1
later life
• assumptions and impact
• conflict with other objectives
• timescales and risk
be able to evaluate alternative solutions available for pension income
and long-term care requirements:
• alternative sources of capital including non-pension investment
assets
• equity release products
2.7.2 11.2
• proceeds from sale of a business or property
• inheritance
• buy-to-let, individual savings accounts (ISAs), unitised securities,
alternative investments
• Sharia’a-compliant solutions
314

Element Section
be able to evaluate the merits, limitations and suitability of
investments available to meet stated objectives taking account of:
• when and how retirement may occur
• phased retirement
• projected levels of investment risk and return
2.7.3 11.3
• investment strategy and fund selection criteria
• impact of fees and charges
• products and wrappers, critical yield and optimal crystallisation
dates
• other sources of non-pension income
be able to evaluate a structured and transparent process for
developing, implementing, monitoring and reviewing a client’s
retirement provision over the long term:
• initial planning
2.7.4 11.4
• recommendation and implementation
• ongoing management and periodic review
• managing significant changes to the original strategy
• reviewing near, at and beyond the retirement date
be able to analyse the options and factors to consider as regards
developing a post-retirement investment strategy:
• eligibility for pension liquidation and/or drawdown
2.7.5 • phased retirement options, benefits and risks 11.5
• financial provision for care in later life
• timing of decisions and implementation
• provision for dependants
Element 3 Financial Planning Chapter 3

3.1
On completion, the candidate should:
understand the key purposes of financial planning, and who is
3.1.1 1
involved in the process
know the six-step financial planning process as defined by the
Financial Planning Standards Board (FPSB):
• establish and define client-planner relationship
• collect client data, including personal and financial objectives,
3.1.2 needs and priorities 1.1
• analyse and evaluate the client’s financial status
• develop and present a financial plan and recommendations
• implement the financial planning recommendations
• review the client’s situation
315
Element Section
be able to analyse the key components of a financial plan to include:
• client objectives
• client attitudes to risk
• financial planning assumptions
3.1.3 1.2
• analysis of client’s financial situation
• financial planning recommendations
• action plan
• review strategy
Financial Planning Assumptions
3.2
understand the importance of assumptions and their application in
3.2.1 3
the financial planning process
be able to calculate future values of assets, liabilities, income,
3.2.2 expenditure, the cost of goals and objectives in real and nominal 3.1
terms using assumptions
be able to analyse the effects that changing assumptions may have
3.2.3 3
on a financial plan
Establishing the Client-Planner Relationship
3.3
understand the scope of the adviser’s authorisation including:
• responsibilities
• terms of business
• nature of the advice process
3.3.1 6
• ethical codes
• authorised status and listing on the FCA register
• limitations on the advice the adviser is authorised to give and
circumstances in which client should be referred to a specialist
understand ethics and codes of practice as they relate to financial
planning and financial planners:
3.3.2 6
• professional bodies’ codes of practice and ethical codes
• continuing professional development requirements
Collect the Client’s Information
3.4
understand how to apply appropriate techniques to collect client
information:
• elicit all relevant personal and financial information essential to
the financial planning process
• identify differing client needs, financial objectives and associated
timescales
3.4.1 2
• prioritise real and perceived, present and future needs
• meet the know your customer requirement
• agree investment objectives, growth, income, time horizons
• determine and agree risk profile
• evaluate affordability and other suitability considerations; ethical,
social responsibility and religious preferences
316

Element Section
be able to analyse gaps, errors or inconsistencies in client information,
subjective factors or indicators, including:
3.4.2 • use of appropriate skills when questioning information or 2
assumptions
• gaining agreement on any reinterpretation
be able to evaluate and respond to the main drivers underpinning
3.4.3 the client’s financial needs and objectives, by prioritising them in 2
collaboration with the client
Analyse the Client’s Financial Status
3.5
identify the client’s current circumstances, including:
• assets and liabilities
3.5.1 • loans and debts 2.2
• irregular capital receipts
• any foreseeable changes to their circumstances
be able to calculate net worth:
• during lifetime
3.5.2 2.2
• on death
• on specific events such as illness, disability or retirement
3.5.3 be able to calculate investible capital or excess liabilities 2.2.1
be able to analyse income and expenditure as they apply to the
financial planning process, including:
• gross and net income receipts and expenditure
3.5.4 2.2.1
• tax and National Insurance
• benefits in kind and other non-cash receipts
• calculation of income and expenditure
3.5.5 be able to calculate net spendable income, or income shortfall 2.2.2
understand the principles and application of cash flow forecasting
3.5.6 2.2.3
and time value of money
be able to analyse cash flow at key life stages including:
• current
3.5.7 • at retirement 2.2.4
• on ill health
• on death
understand how to obtain relevant information from third parties:
3.5.8 • identification of missing information 2.2.5
• where and how to obtain further information
317
Element Section
be able to analyse gaps in a client’s current financial provision and
how the client’s financial provision could be improved according to
agreed priorities:
• liquidity
• income
3.5.9 5.4.2
• growth
• protection
• retirement provision
• attitude to risk
• ethical values
be able to evaluate the performance and suitability of the client’s
existing investments taking into account the client’s:
• current financial provision
3.5.10 • objectives 2.2.6
• risk appetite
• capacity for loss
• current and future tax status
Developing and Communicating Financial Planning
3.6 Recommendations
understand how to develop suitable financial plans for action, and
explain and justify recommendations:
• make outline recommendations to meet/address client needs,
3.6.1 4
goals, objectives and other issues or problems where appropriate
• draft initial recommendations for the financial plan
• evaluate the advantages and disadvantages of different strategies
be able to evaluate whether all recommendations are suited to the
client’s situation and financial requirements, including:
• appropriateness and relevance of proposed solutions, products
3.6.2 and, where applicable, providers 4.2
• alternative courses of action where no suitable product is available
• whether they match the client’s agreed risk/reward philosophy
• affordability
be able to analyse estate planning and its application in the financial
planning process:
• the basics of wills and will planning, the events that invalidate
3.6.3 4.3
wills, deeds of variation and will trusts, laws of intestacy
• Powers of Attorney including Lasting Powers of Attorney
• the types of trusts available, their taxation and application
understand the requirement to appropriately balance the
3.6.4 interrelationship between protection, saving and investment, and 4.4
other objectives such as liquidity and retirement
318

Element Section
Implement Financial Planning Recommendations
3.7
know the requirements for compliant and technically correct
3.7.1 processes and documentation in order to implement financial 5
planning recommendations
know the documentation that must be provided to the client and
when it should be provided, including:
3.7.2 • what should be included in a financial plan 5
• when and how client acceptance should be addressed
• what should be included in a ‘suitability’ letter
understand how the plan and/or recommendations meet the client’s
specific needs, in a manner that the client can understand, including:
• explanation of appropriate financial protection products to the
client and how they meet client needs
• appropriateness and suitability
• characteristics, correlation, advantages and disadvantages of
different products
• economic context of the advice and significance of main economic
indicators
3.7.3 • comparison of the different options available 5
• implications of the different recommendations on other parts of
the financial plan
• explanation where a previously agreed action is no longer
considered beneficial to the client
• advantages and disadvantages of the proposed recommendations
including costs
• how the recommendations take account of future needs
• how the recommendations will be handled, including the need
for monitoring and review
be able to analyse reasons for not proceeding with a recommendation,
3.7.4 5.3
and agree with the client how to proceed
Review the Client’s Situation
3.8
understand how the financial plan is to be implemented, serviced
3.8.1 and reviewed to meet the client’s objectives and adapt to changes in 5.4
circumstances
understand how to conduct financial planning reviews and review
meetings, including:
• purpose and frequency of reviews
3.8.2 5.4
• process of reviewing a financial plan
• initiating a review meeting and gathering the data required
• what may be discussed at a review meeting
319
Element Section
be able to analyse actions that may be required after the review,
including:
3.8.3 5.4
• reassessing and rebalancing asset allocation
• review of existing financial solutions
Examination Specification
Each examination paper is constructed from a specification that determines the weightings that will be
given to each element. The specification is given below.
It is important to note that the numbers quoted may vary slightly from examination to examination as
there is some flexibility to ensure that each examination has a consistent level of difficulty. However, the
number of questions tested in each element and/or case study should not change by more than two.
Element Number Element Questions

20 Multiple Choice/Response Questions
1 Financial Protection
1 Case Study (of 5 Questions)
2 Retirement Planning
1 Case Study (of 5 Questions)
3 Financial Planning
2 Case Studies (of 5 Questions)
Total 80
320
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Diploma Programme

This learning manual relates to syllabus

Learning manual version: 2.3 (August 2017)

Questions and Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

Syllabus Learning Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

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2. The Role of Insurance 5

3. Life Assurance, Pension Policies and Employer-Based Policies 18

4. Income Protection (IP) 22

5. Critical Illness Insurance 29

6. Long-Term Care Protection 34

7. Regulatory Considerations Relating to Long-Term

9. Sources of Financial Protection 54

10. Other Insurance-Based Protection Products 56

11. Other Protection Solutions 61

12. Business Protection 63

13. Protection Planning and Solutions 66

14. Consumer and Retail Market Factors and Trends

1.1 Relationship between Assets and Liabilities Insurance

There are two potential types of policy: liability and asset.

2. The Role of Insurance

• paying final expenses (for example, funeral, legal)

2.1 Market Factors and Trends

The 'proposer' is the person applying to the insurer for a policy.

2.2 Term Assurance

Convertible Term Assurance

Decreasing Term Assurance (DTA)

2.3 Family Income Benefit (FIB)

The benefits are:

• a very low-cost method of buying life insurance

2.4 Whole of Life Assurance

Non-Profit Whole of Life Policies

With-Profits Whole of Life Policies

Low-Cost Whole of Life Policies

• a with-profits whole of life policy element

Unit-Linked Whole of Life Policies

2.5 Endowment Assurance

Non-Profit Endowment Policies

With-Profits Endowment Policies

Low-Cost Endowment Policies

• a with-profits endowment element or a unit-linked element, and

Low-Start Endowment Policies

Unit-Linked Endowment Policies

The possibility of early repayment of a debt is also attractive.

The Second-Hand Endowment Market

2.6 Taxation Treatment

2.6.1 Life Assurance and Capital Gains Tax (CGT)

2.6.2 Tax Relief and Life Assurance

2.6.3 IHT and Life Assurance

3. Life Assurance, Pension Policies and Employer-

3.1 Employer-Based Life Assurance

3.1.1 Life Assurance or Death in Service Cover

• the proportion of women in the workforce is higher than men

3.1.2 Life Assurance in a Defined Contribution (DC) Environment

3.1.3 Life Assurance – the Pitfalls

3.2 Uses and Relevance of Trusts

• the transfer is made by an individual

3.2.1 Trusts and IHT

3.3.4 Family History

3.3.5 Hazardous Activities and Occupations

3.3.6 Smoking, Alcohol and Drugs

3.3.7 Residency and Travel

4.1 Types of IP Policies