THE CHARTERED INSURANCE INSTITUTE. Diploma in Regulated Financial Planning SPECIAL NOTICES

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1 THE CHARTERED INSURANCE INSTITUTE R06 Diploma in Regulated Financial Planning Unit 6 Financial planning practice October 2011 Examination Guide SPECIAL NOTICES Candidates entered for the November 2011, January and April 2012 examinations should study this examination guide carefully in order to prepare themselves for the examination. Practice in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

2 R06 Financial planning practice Contents Important guidance for candidates 3 Examiner comments 8 Question paper 9 Model answers 15 Test specification 21 Tax tables 23 Published November 2011 Telephone: Fax: customer.serv@cii.co.uk The Chartered Insurance Institute

3 Introduction IMPORTANT GUIDANCE FOR CANDIDATES The purpose of this Examination Guide is to help you understand how examiners seek to assess the knowledge and skill of candidates. You can then use this understanding to help you demonstrate to the Examiners that you meet the required levels of knowledge and skill to merit a pass in this unit. During your preparation for the examination it should be your aim not only to ensure that you are technically able to answer the questions but also that you can do justice to your abilities under examination conditions. Before the examination Read the Diploma in Regulated Financial Planning information for candidates and important notes for candidates Details of administrative arrangements and the regulations which form the basis of your examination entry are to be found in the current Advanced Diploma in Financial Planning Information for Candidates and important notes for candidates, which is essential reading for all candidates. It is available online at or from Customer Service. Study the syllabus carefully It is crucial that you study the relevant syllabus carefully, which is available online at or from Customer Service. All the questions in the examination are based directly on the syllabus. You will be tested on the syllabus alone, so it is vital that you are familiar with it. Read widely It is vital that your knowledge is widened beyond the scope of one book. It is quite unrealistic to expect that the study of a single coursebook will be sufficient to meet all your requirements. While books specifically produced to support your studies will provide coverage of all the syllabus areas, you should be prepared to read around the subject. This is important, particularly if you feel that further information is required to fully understand a topic or an alternative viewpoint is sought. The reading list which can be found with the syllabus provides valuable suggestions. Make full use of the Examination Guide The best way to understand what the examiners require is to study the CII Examination Guides. You can purchase copies of Examination Guides online at CII members can download free copies of past Examination Guides online at This guide and previous Examination Guides can be treated as mock examination papers, attempting them under examination conditions as far as possible and then comparing your answers to the model ones. The examiner s comments on candidates actual performance in each question should be noted carefully. Know the layout of the tax tables Familiarise yourself with the tax tables printed at the back of each examination paper and the Examination Guide. The tax tables enable you to concentrate on answering the questions without having to worry about remembering all the information. Please note that you are not allowed to take your own tax tables into the examination. Note the assumed knowledge For the R06 Diploma in Regulated Financial Planning paper, candidates are assumed to have already the knowledge gained from studying the other relevant units of the Diploma in Regulated Financial Planning or the equivalent. 3

4 Understand the nature of assessment Assessment is by means of a three-hour written paper. This Examination Guide contains a full examination paper and model answers. The model answers show the types of responses the examiners are looking for and which would achieve maximum marks. However, you should note that there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. Know the structure of the examination The paper is made up two written case studies. The paper will carry a total of 150 marks. Each question clearly shows the maximum marks which can be earned. The allocation of marks between the two case studies may vary slightly from one session to another. 4

5 Two weeks before the examination What will I receive? Case studies will be sent to candidates two weeks before the examination. They will contain client information which will form the basis of the exam questions. How should I use my time over the two week period? It is too late at this stage to start your general revision. The two weeks will need to be devoted to familiarising yourself with the client details from the case studies. How should I use the case studies to help me prepare? Study the client circumstances presented in the case study. Consider the financial objectives of the clients and look for other possible areas of need. Look for technical areas that you may wish to revise, e.g. investment portfolios, pensions. Practice some key calculations, e.g. Income Tax and Inheritance Tax liabilities, which might inform the client s final financial plan. Preparing the groundwork considering possible solutions Once you have indentified the clients likely needs you should start to consider possible solutions to meet those needs and how the financial planning process would be properly applied to the client(s). You may need to research some details of the solutions you are considering. You may want to go back to your revision notes. You may need to read about particular products; try product providers for technical information, tax offices, Directgov website, National Savings and Investments liaison office. For each of the possible solutions, consider how appropriate it might be to the client(s). Understand the skills the exam seeks to test The examination is based on two case studies for imaginary clients whose details you will have received two weeks prior to the exam date. The case studies will enable you to familiarise yourself with the clients circumstances. The questions will only be supplied in the actual examination. Test yourself under timed conditions You should test your report writing skills under timed conditions. A good way to do this and assess your technical knowledge at the same time, is to set yourself a mock examination using the Examination Guide. To gain most benefit from this exercise you should: Study the details in the case studies over the two week period as you would for the real examination. Set yourself three clear hours to complete the question paper taking into account the financial objectives provided. Compare your answers against the model answer once the three hours are up. The model answer will not give every acceptable answer, but it will give you a clear indication of whether your responses were sufficiently detailed and if your technical knowledge was correct. Go back and revise further any technical weaknesses revealed in your responses. If you use your time wisely, focusing on improving your technical knowledge and understanding of the financial planning process, you will have the time when the case studies arrive to focus on the client details and prepare yourself for the examination day. 5

6 In the examination What will I receive? The case studies You will not be able to take your pre-released copy of the case studies into the examination with you. You will be issued with an identical fresh copy. There will not be any new or different information contained within the case studies. The instructions are focused on the client objectives identified from the case studies. Assuming you have prepared adequately, you will only do justice to yourself in the examination if you follow two crucial common sense rules: 1. Spend your time in accordance with the allocation of marks as indicated on the paper. The maximum marks allocated to each question and its constituent parts are given on the paper; the number of marks allocated is the best indication of how much time you should spend on each question. If a question has just two marks allocated, there are likely to be only one or two points for which the examiner is looking, so a long answer is a waste of time. Conversely, if a question has 12 marks allocated, a couple of lines will not be an adequate answer. Always remember that if the paper is not completed, your chances of passing will be reduced considerably. Do not spend excessive time on any one question; if the time allocation for that question has been used up, leave some space, go on to the next question and only return to the incomplete question after you have completed the rest of the paper, if you have time. 2. Take great care to answer the precise question set. The model answers provided in this Examination Guide are quite focused and precise; alternative answers will only be acceptable if they still answer the question. However brilliantly a candidate writes on a particular topic, if it does not provide a satisfactory answer to the precise question as set, the candidate will not achieve the marks allocated. Many candidates leave the examination room confident that they have written a good paper, only to be mystified when they receive a disappointing result. Often, the explanation for this lies in a failure to think carefully about what the examiner requires before putting pen to paper. Order of tackling questions Tackle the questions in whatever order feels most comfortable. Generally, it is better to leave any questions which are felt to be very challenging until the more familiar questions have been attempted, but remember not to spend excessive time on the questions you are most confident about. Answering different question parts Always read all parts of a question before starting to answer it, otherwise, you may find that after answering part (a), the answer you have given is really more appropriate to part (b) and it would be necessary to duplicate much of what has already been written. The examiners will normally only give credit for an answer if it is contained within its correct question part. Handwriting Provided handwriting is legible, candidates will not lose marks if it is untidy. It is strongly recommended that candidates do not write in block capitals, because they will be slowed down so much by doing so. Answer format Unless the question requires you to produce an answer in a particular format, such as a letter or a report, you should use bullet points or short paragraphs, since this allows you to communicate your thoughts in the most effective way in the least time. The model answers indicate what is acceptable for the different types of question. 6

7 Calculators If you bring a calculator into the examination room, it must be a silent battery or solar-powered non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetical or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. It is important to show all the steps of your calculation in your answer. The examination is testing your ability to carry out all the appropriate steps in calculating a value. A proficient mathematician is someone who follows the correct method, i.e. carries out the appropriate steps. The majority of the marks will be allocated for demonstrating the correct method of calculation. After the examination All examiners who mark Diploma in Regulated Financial Planning answer books are either active practitioners in the financial services industry or are experts on the subject. They have been specially trained to mark papers using a detailed marking scheme, the model answers in examination guides are based on those marking schemes. After each examiner has provisionally marked a small number of answer books, there is a co-ordination meeting of all the examiners at which the Senior Examiner goes through the marking scheme with the other examiners. Based on the feedback from the initial marking, the detailed marking scheme is finalised. The marking of each examiner is closely monitored by a Senior Examiner during the marking period and sampling of marked answer books is carried out. After all the answer books have been marked, a moderation meeting is held, at which all available statistical information is considered, together with the views of the Senior Examiner and other assessment experts. At the meeting a pass mark is set which should ensure that the standard of knowledge and skills required to pass the paper is comparable with that of previous papers. All candidates at or above the agreed pass mark will pass: the CII does not operate a quota system whereby only a fixed percentage of candidates can pass a paper. 7

8 Candidates overall performance EXAMINERS COMMENTS There was clear evidence that candidates performance continues to improve and that they can apply financial planning principles. Candidates demonstrated a broader knowledge and a greater ability to apply themselves than in previous sessions. This may be a result of candidates being better prepared through training facilities available and studying previous examination guides. Some candidates did not always answer the question being asked and generally did not provide sufficient detail to achieve high marks. Candidates should note the number of marks available for a question or question part and answer with proportionate detail. Question 1 Part (a)(i) was well answered by the majority of candidates. The question required candidates to provide information across a broad range of issues to achieve high marks. In part (ii), well prepared candidates achieved high marks, however a small number of candidates were not familiar with salary sacrifice. Part (b)(i) was a basic financial planning question with better prepared candidates performing well. This was case study specific and required candidates to analysis the clients current position. In part (b)(ii), the majority of candidates achieved high marks. Part (c)(i) was well answered by the majority of candidates. Part (c)(ii) required recommendations for protection products which was well answered by the majority of candidates. Part (d)(i) is a standard question which has previously been tested and candidates achieved high marks. Part (d)(ii) was well answered by the majority of candidates. Question 2 Parts (a)(i) and (ii) were well answered by the majority of candidates. In part (b)(i), many candidates did not provide sufficient detail to achieve high marks, however better prepared candidates performed well. Part (b)(ii) was not well answered by many candidates. Candidates should ensure they are familiar with encashment and tax calculations on bonds. In part (b)(iii), the majority of candidates achieved high marks. Part (c) was generally well answered by the majority of candidates, however some candidates did not correctly apply the client s attitude to risk when applying the principles in answering this question. Parts (d)(i) and (ii) demonstrated that some candidates were not familiar with equity release, however well prepared candidates achieved good marks. Parts (e)(i) and (ii) were both well answered by the majority of candidates, demonstrating a good knowledge of Inheritance Tax planning and application issues. Part (f) was well answered by the majority of candidates. 8

9 THE CHARTERED INSURANCE INSTITUTE R06 Diploma in Regulated Financial Planning Unit 6 Financial planning practice October 2011 examination SPECIAL NOTICES All questions in this paper are based on English law and practice applicable in the tax year 2011/2012, unless stated otherwise and should be answered accordingly. Assume all individuals are domiciled, resident and ordinarily resident in the UK unless stated otherwise. Instructions Three hours are allowed for this paper. Do not begin writing until the invigilator instructs you to. Read the instructions on page 3 carefully before answering any questions. Provide the information requested on the answer book and form B. You are allowed to write on the inside pages of this question paper, but you must NOT write your name, candidate number, PIN or any other identification anywhere on this question paper. The answer book and this question paper must both be handed in personally by you to the invigilator before you leave the examination room. Failure to comply with this regulation will result in your paper not being marked and you may be prevented from entering this examination in the future. 9

10 Unit R06 Financial planning practice Instructions to candidates Read the instructions below before answering any questions Three hours are allowed for this paper. The question paper consists of two case studies and carries a total of 150 marks. You are advised to spend approximately 90 minutes on the questions for each case study. You are strongly advised to attempt all parts of each question in order to gain maximum possible marks for each question. The number of marks allocated to each question part is given next to the question and you should spend your time in accordance with that allocation. Read carefully all questions and information provided before starting to answer. Your answer will be marked strictly in accordance with the question set. You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet. It is important to show all steps in a calculation, even if you have used a calculator. If you bring a calculator into the examination room, it must be a silent battery or solar-powered non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements. Tax tables are provided at the back of this question paper. Answer each question on a new page and leave six lines blank after each question part. Subject to providing sufficient detail you are advised to be as brief and concise as possible using note format and short sentences on separate lines wherever possible. 10

11 Attempt ALL questions for each case study Time: 3 hours Case study 1 John and Alison, aged 39 and 38 respectively, are married with twins, Alan and Julie, who are six years old. John is an in-house legal counsel for a major firm and earns 113,000 per annum. Alison, previously an advertising executive, stopped work when the twins were born and has no plans to return to work in the immediate future. John and Alison currently hold an interest only mortgage of 320,000 on their home which is worth 500,000, and make monthly payments of 700. The mortgage rate tracks the Bank of England base rate. They have indicated that they would like to take a very low risk approach to their future financial stability. John is currently a member of his employer s defined contribution pension scheme and makes a contribution of 5% of his salary. John s employer will pay his salary for up to six months if he is unable to work due to sickness or accident. He has no other employee benefits. Alison worked for various different employers before she became a full time mother. John and Alison have a unit-linked whole of life assurance policy written on a joint life first death basis. This has a sum assured of 320,000 and is on a maximum cover basis. It was taken out to repay the mortgage in the event of death. Their financial aims are to: ensure financial security in the event of long-term disability or serious illness; maintain their standard of living in retirement; repay their mortgage by the time John reaches age 55; ensure financial security for the twins in the event of premature death of either John or Alison. 11

12 Questions (a) (i) State the additional information that an adviser would require in order to advise John and Alison on their retirement planning. (14) (ii) John s employer offers a salary sacrifice facility for employees wishing to make additional contributions. State four benefits and four drawbacks for John of using this type of facility. (8) (b) (i) Comment on the suitability of John and Alison s existing protection arrangements to meet their life assurance needs. (10) (ii) Recommend and justify suitable protection products for John and Alison should either of them die. Assume their mortgage remains on its current basis. (12) (c) (i) Identify any gaps in John and Alison's provision to meet financial needs in the event of serious illness or long-term disability. (6) (ii) Recommend and justify suitable protection arrangements for John and Alison should either of them suffer a serious illness or long-term disability. (15) (d) (i) State the additional information that an adviser would require in order to advise John and Alison on their mortgage repayment objective. (8) (ii) Recommend and justify a course of action with respect to John and Alison s mortgage which meets their attitude to risk. (5) Total marks available for this question: 78 Questions continue over the page 12

13 Case study 2 Tom and Lisa, aged 66 and 69 respectively, are married. They have two children, Emile, aged 32, and Harry, aged 30. Emile is employed and is financially independent but Harry has been out of work for some time. Tom has recently retired and together with his State pension, receives a pension of 23,000 per annum. Lisa was a housewife for most of her working life and receives a State pension of 2,600 per annum. They live in a house worth 1,100,000 which has no mortgage. They have two unsecured personal loans which were taken out eight years ago to help their children get on the property ladder. They have confirmed they have a low to medium attitude to risk but have little understanding of investments. Any other savings they had have been spent on supporting their children in earlier years. Their assets are listed below. Name Asset Current Value Investment Funds Gross Yield % Tom Car 12,000 N/A N/A Tom Anybank Bank Deposit 20,000 Cash 0.1 Tom Anybank Stocks and Shares ISA 14,000 Technology Fund 1.0 Lisa Anybank Stocks and Shares ISA 22,000 UK Equity 3.6 Joint House contents 90,000 N/A N/A Joint Superior Life Investment Bond 52,000 Managed Fund N/A You are informed of the following details regarding their loans: Loan One The outstanding balance is 7,000 and has an annual percentage rate (APR) of 9.9%. It is on a repayment basis and has four years left to run. Loan Two The outstanding balance is 6,000 and has an APR of 11.6%. It is on a repayment basis and has four years left to run. Their financial aims are to: increase their disposable income; repay their loans; restructure their investments in line with their attitude to risk; minimise their current liability to tax and any potential Inheritance Tax liability. 13

14 Questions (a) (i) State the additional information that an adviser would require in order to advise Tom and Lisa on repaying their personal loans immediately. (5) (ii) State four benefits and four drawbacks for Tom and Lisa of repaying their personal loans immediately. (8) (b) (i) State the additional information that an adviser would require in order to advise Tom and Lisa on restructuring their investments. (8) (ii) If Tom and Lisa fully surrender the bond, there will be a gain of 12,000. Calculate, showing all your workings, the effect, if any, of the gain on Tom s Income Tax liability. (5) (iii) Explain the effect, if any, of the gain on Lisa s Income Tax liability. (2) (c) Comment on Tom and Lisa s investment portfolio and how it should be restructured to meet their financial objectives and attitude to risk. (10) (d) (i) State four benefits and four drawbacks for Tom and Lisa of equity release. (8) (ii) Describe the main features of a lifetime mortgage. (5) (e) (i) Calculate, showing all your workings, their Inheritance Tax liability should Tom and Lisa both die now. (5) (ii) Recommend and justify suitable actions for Tom and Lisa to take to mitigate Inheritance Tax. (12) (f) State four reasons for carrying out an annual review for Tom and Lisa. (4) Total marks available for this question: 72 14

15 NOTE ON MODEL ANSWERS The model answers given are those which would achieve maximum marks. However, there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. An oblique (/) indicates an equally acceptable alternative answer. Model answer for Question 1 (a) (i) Attitude to risk. Details of the asset allocation of their pension funds/available investment choices available under their current pensions. Statement/projection/value for pensions. Employer contribution level/how much? Details of their State Pension entitlements/form BR19/State Second Pension. Do they have any retained benefits? What other investments do they have available/prepared to use investments for pension. The age at which they wish to retire. The level of income required in retirement. Their affordability/budget. Whether/when Alison plans to return to paid employment. Scheme/normal retirement ages for John and Alison s pensions. State of health. Are they expecting any inheritances? (ii) Benefits Saves employees National Insurance. Increase pension benefit without affecting net pay. The employer may invest their employer s National Insurance Contributions saving into John s pension. The personal allowance reduction due to the level of John s earnings is reduced which will save tax. Candidates would have gained full marks for any four of the following: Drawbacks The salary level is reduced which may affect borrowing capacity. Maximum benefits on income protection insurance may be reduced. The arrangement to increase pension contributions in exchange for a reduced salary cannot be binding on the employer. May impact on future salary increase. May reduce level of employee benefits. 15

16 (b) (i) The unit linked whole of life policy is not suitable for John and Alison because they wish to take a very low risk approach to their finances. Does not match their attitude to risk. Sum assured matches the mortgage. Premium reviewed/may increase at review. Term not linked to mortgage/will continue for whole of life. Premium likely to be higher than term assurance. They do not have any other provision to replace income in the event of either death. They are wholly reliant on John's income. No provision for child care if Alison dies. (ii) Candidates would have gained full marks for any twelve of the following: Effect family income benefit policy/level term assurance (LTA). Joint Life First Death/two single lives. At least until retirement as he is the breadwinner. Until children no longer dependant to cover costs of child care. To cover outgoings/income need/ 100,000 per annum/half million. Guaranteed premium. Matches attitude to risk. Include escalation to offset effects of inflation. Waiver of premium to protect contributions in the event of incapacity. Policies to be written under trust/life of another. To be kept outside the estate/avoid probate. Joint Life First Death LTA to cover mortgage. May be cheaper/more suitable than whole of life. (c) (i) After six months John s income ceases. No income replacement insurance/income Protection Insurance. No cover for childcare if Alison falls ill. They have no critical/serious illness cover. May be eligible for State benefits but likely to be minimal. No Private Medical Insurance in place. (ii) An Income Protection Insurance policy; for John based on the maximum benefit/50-75%. Own occupation. To retirement. Indexation. In order to provide an income if John cannot work. With a six month deferred period to match his employers benefits. An Income Protection policy for Alison until children no longer dependant/15 years to provide for childcare. Critical Illness cover. For at least the mortgage amount. Until retirement/mortgage term. To repay mortgage/provide capital/income for other needs. Private Medical Insurance. For family cover/john and Alison. Quick treatment/return to work. 16

17 (d) (i) Term of the mortgage. Any redemption penalties. Their credit rating/any other debts. Details of any mortgage repayment vehicle/plan. Affordability. Any available capital/inheritances. Future plans to move house/extend the house. Interest rate of the current mortgage. (ii) Candidates would have gained maximum marks for any five of the following: A capital and interest/repayment mortgage term of 16 years/to age 55. Flexible mortgage/fixed rate. Allows overpayments. Matches attitude to risk. Guarantees repayment if payments are maintained. Saves interest throughout term. 17

18 Model answers for Question 2 (a) (i) What are the repayments on the loans? Are there any early repayment penalties? How do they intend to repay the loans now? Ongoing affordability if loans not repaid. Do they have any other loans/debts/credit cards? (ii) Benefits No longer paying interest/interest saving. Increases disposable income. May improve credit rating. Matches their attitude to risk. Candidates would have gained full marks for any four of the following: Drawbacks Loss of future growth on investments. Lack of liquidity/loss of emergency fund. May crystallise a loss/market timing. Penalties/tax charges on encashment of investments. Potential penalties for early repayment. (b) (i) Candidates would have gained full marks for any eight of the following: Are their investments for income or growth? Timescale they wish to invest for? Any encashment penalties on the investment bond? Asset allocation/mix of the investment bond? Original amount invested in the bond? Any withdrawals from the bond? Date of original investment in the bond? Do they have any ethical views? Do they expect to receive any inheritances? Have they used their current year s ISA allowance? (ii) 23, , = 29,020 29,020-24,000 = 5,020 5,020 2 = 2,510 Maximum permissible reduction in age allowance is: 9,940-7,475 = 2,465 2,510 is larger than 2,465, therefore the personal allowance is reduced to 7,475 (iii) Lisa s Income Tax will not be affected as income remains within her Income Tax allowance. (c) Candidates would have gained full marks for any ten of the following: Bank account into Lisa s name. As a nil rate taxpayer, she can elect to receive interest gross/r85. Review market to find a more competitive interest rate. 5% of the original investment tax-deferred can be taken/transfer bond to Lisa annually/ cumulative since inception. Switch technology fund within his ISA to match his attitude to risk to an income-producing fund. Switch to fixed interest fund for Lisa s ISA. Tax on dividends not recoverable. Utilise tax-free products; Portfolio is overweight in equities/no fixed interest. Portfolio does not match attitude to risk. Emergency fund is sufficient/could repay loans. 18

19 (d) (i) Benefits Will potentially reduce Inheritance Tax. Facilitates income required. No need to sell the property. Can clear debts/gift money/spend on lifetime events. Drawbacks Would reduce estate to be passed onto children. If lifetime mortgage interest only may not be affordable in later life. May not be acceptable to family members. Expensive. (ii) Guaranteed occupancy/retain title to the property. Interest payable/compounds on debt. Provides lump sum/income. Available loan to value increases with age. Full repayment on death/residential care. (e) (i) Assets House 1,100,000 Other assets 210,000 Total 1,310,000 Minus debts 13,000 Total 1,297,000 Less IHT band 650,000 Total 647,000 x 40% = 258,800 (ii) Review/set up Wills; to avoid intestacy. Make annual gift allowances/exemptions. Make potentially exempt transfers. Investment bond in trust; reduces estate. Take out whole of life; Joint Life Second death. In trust. This will pay Inheritance Tax liability. Effect appropriate protection policy to cover potentially exempt transfers; to preserve the value of the nil rate band. (f) Change in personal circumstances. To take account of changing market/legislation/taxation conditions. To review performance of investments/rebalance investments. To make the clients aware of new investment opportunities/top up ISAs/tax free investments. 19

20 Test Specification Question no. 1. Syllabus learning outcomes being examined Obtain appropriate client information and understand clients needs, wants, values and risk profile essential to the financial planning process. Synthesise the range of client information, subjective factors and indicators to provide the basis for financial planning assumptions and decisions. Analyse a client s situation and the advantages and disadvantages of the appropriate options. 4. Formulate suitable financial plans for action and explain and justify recommendations Obtain appropriate client information and understand clients needs, wants, values and risk profile essential to the financial planning process. Synthesise the range of client information, subjective factors and indicators to provide the basis for financial planning assumptions and decisions. Analyse a client s situation and the advantages and disadvantages of the appropriate options. 4. Formulate suitable financial plans for action and explain and justify recommendations. 5. Implement, review and maintain financial plans to achieve the clients objectives and adapt to changes in circumstances. 20

21 All questions in the November 2011 paper will be based on English law and practice applicable in the tax year 2011/2012, unless stated otherwise and should be answered accordingly. The Tax Tables which follow are applicable to October and November 2011, January, April, June and July 2012 examinations. 21

22 INCOME TAX RATES OF TAX 2010/ /2012 Starting rate for savings* 10% 10% Basic rate 20% 20% Higher rate 40% 40% Additional rate 50% 50% Starting-rate limit 2,440* 2,560* Threshold of taxable income above which higher rate applies 37,400 35,000 Threshold of taxable income above which additional rate applies 150, ,000 *restricted to savings income only and not available if taxable non-savings income exceeds starting rate band. MAIN PERSONAL ALLOWANCES AND RELIEFS Income limit for Personal Allowance 100, ,000 Personal Allowance (basic) 6,475 7,475 Personal Allowance (age 65-74) 9,490 9,940 Personal Allowance (aged 75 and over) 9,640 10,090 Married/civil partners (minimum) at 10% 2,670 2,800 Married/civil partners (age 75 and over) at 10% 6,965 7,295 Income limit for age-related allowances 22,900 24,000 Blind Person s Allowance 1,890 1,980 Enterprise Investment Scheme relief limit on 500,000 max 20% 30% Venture Capital Trust relief limit on 200,000 max 30% 30% the Personal Allowance reduces by 1 for every 2 of income above the income limit irrespective of age. where at least one spouse/civil partner was born before 6 April Child Tax Credit (CTC) - family element family element baby addition 545 Withdrawn CTC usually reduced by 41% of joint income (6.67% for 2010/2011) over 50,000 40,000 22

23 NATIONAL INSURANCE CONTRIBUTIONS Class 1 Employee Weekly Monthly Yearly Lower Earnings Limit (LEL) ,304 Primary threshold ,225 Upper Accrual Point 770 3,337 40,040 Upper Earnings Limit (UEL) 817 3,540 42,475 Total earnings per week CLASS 1 EMPLOYEE CONTRIBUTIONS Contracted-in rate Contracted-out rate Up to * Nil Nil % 10.4% % 12% Above % 2% * This is the primary threshold below which no NI contributions are payable. However, the lower earnings limit is 102 per week. This 102 to 139 band is a zero rate band introduced in order to protect lower earners rights to contributory State benefits e.g. Basic State Pension. Total earnings per week CLASS 1 EMPLOYER CONTRIBUTIONS Contracted-in rate Contracted-out rate Final salary Money purchase Below ** Nil Nil Nil % 10.1% 12.4% % 13.8% 13.8% Excess over % 13.8% 13.8% ** Secondary earnings threshold. Class 2 (self-employed) Flat rate per week 2.50 where earnings exceed 5,315 per annum. Class 3 (voluntary) Flat rate per week Class 4 (self-employed) 9% on profits between 7,225-42,475 plus 2% on profits above 42,475. PENSIONS TAX YEAR LIFETIME ALLOWANCE ANNUAL ALLOWANCE 2006/2007 1,500, , /2008 1,600, , /2009 1,650, , /2010 1,750, , /2011 1,800, , /2012 1,800,000 50,000 ANNUAL ALLOWANCE CHARGE 20% - 50% member s tax charge on the amount of total pension input in excess of the annual allowance. LIFETIME ALLOWANCE CHARGE 55% of excess over lifetime allowance if taken as a lump sum. 25% of excess over lifetime allowance if taken in the form of income, which is subsequently taxed under PAYE. 23

24 INHERITANCE TAX RATES OF TAX ON DEATH TRANSFERS 2010/ /2012 Transfers made after 5 April Up to 325,000 Nil Nil - Excess over 325,000 40% 40% - Lifetime transfers to and from certain trusts 20% 20% MAIN EXEMPTIONS Transfers to - UK-domiciled spouse/civil partner No limit No limit - non-uk-domiciled spouse/civil partner (from UK-domiciled spouse) 55,000 55,000 - UK-registered charities No limit No limit Lifetime transfers - Annual exemption per donor 3,000 3,000 - Small gifts exemption Wedding/civil partnership gifts by - parent 5,000 5,000 - grandparent 2,500 2,500 - other person 1,000 1, % relief: businesses, unlisted/aim companies, certain farmland/building 50% relief: certain other business assets Reduced tax charge on gifts within 7 years of death: - Years before death Inheritance Tax payable 100% 80% 60% 40% 20% CAR BENEFIT FOR EMPLOYEES The charge for company car benefits is based on the carbon dioxide (CO2) emissions. There is no reduction for high business mileage users. For 2011/2012: The percentage charge is 15% of the car s list price for CO2 emissions at or below the qualifying level of 125g/km. Cars with CO 2 emissions of less than 75g/km have an appropriate percentage of 5%. Cars with CO 2 emissions of 76g/km to 120g/km have an appropriate percentage of 10% and thereafter the rate is 15% increasing by 1% for every 5g/km to the current maximum of 35% (emissions of 225g/km and above). There is an additional 3% supplement for diesel cars not meeting Euro IV emission standards. However, the maximum charge remains 35% of the car s list price. Car fuel The benefit is calculated as the CO 2 emissions % relevant to the car and that % applied to a set figure ( 18,800 for 2011/2012) e.g. car emission 155g/km = 21% on car benefit scale. 21% of 18,800 = 3, Accessories are, in most cases, included in the list price on which the benefit is calculated. 2. List price is reduced for capital contributions made by the employee up to 5, Car benefit is reduced by the amount of employee s contributions towards running costs. 4. Fuel scale is reduced only if the employee makes good all the fuel used for private journeys. 5. All car and fuel benefits are subject to employers National Insurance Contributions (Class 1A) of 13.8%. 24

25 2011/2012 Rates PRIVATE VEHICLES USED FOR WORK Cars On the first 10,000 business miles in tax year Each business mile above 10,000 business miles Motor Cycles Bicycles 45p per mile 25p per mile 24p per mile 20p per mile MAIN CAPITAL AND OTHER ALLOWANCES 2011/2012 Plant & machinery (excluding cars) 100% annual investment allowance (first year) 100,000 Plant & machinery (reducing balance) per annum 20% Patent rights & know-how (reducing balance) per annum 25% Certain long-life assets, integral features of buildings (reducing balance) per annum 10% Energy & water-efficient equipment 100% Zero emission goods vehicles (new) 100% Qualifying flat conversions, business premises & renovations 100% Motor cars: Expenditure on or after 01/04/09 (Corporation Tax) or 06/04/09 (Income Tax) CO 2 emissions of g/km: 110 or less * or more Capital allowance: 100% 20% 10% first year reducing balance reducing balance * If new Research & Development: Capital expenditure 100% MAIN SOCIAL SECURITY BENEFITS 2010/ /2012 Child Benefit first child subsequent children Employment and Support Allowance Assessment Phase Age N/A Up to Aged 25 or over N/A Up to Main Phase Work Related Activity Group N/A Up to Support Group N/A Up to Attendance Allowance lower rate higher rate Retirement Pension single married Pension Credit single person standard minimum guarantee married couple standard minimum guarantee maximum savings ignored in calculating income 10, , Bereavement Payment (lump sum) 2, , Widowed Parent s allowance Jobseekers Allowance Age Age 25 or over

26 CAPITAL GAINS TAX EXEMPTIONS 2010/ /2012 Individuals, estates etc 10,100 10,600 Trusts generally 5,050 5,300 Chattels proceeds (restricted to five thirds of proceeds exceeding limit) 6,000 6,000 TAX RATES Individuals: Up to basic rate limit 18% 18% Above basic rate limit 18%/28%* 28% Trustees and Personal Representatives 18%/28%* 28% Entrepreneurs Relief Gains taxed at: 10% 10% Lifetime limit 5,000,000 / 2,000,000** 10,000,000 For trading businesses and companies (minimum 5% employee or director shareholding) held for at least one year. * 18% rate applies to disposals on or before 22/06/10. 28% thereafter. ** For disposals 06/04/10 to 22/06/10: 2,000,000. 5,000,000 until 05/04/11 CORPORATION TAX 2010/ /2012 Full rate 28% 26% Small companies rate 21% 20% Small companies limit 300, ,000 Effective marginal rate 29.75% 27.5% Upper marginal limit 1,500,000 1,500,000 VALUE ADDED TAX 2011/2012 Standard rate 20% Annual Registration limit 73,000 26