THE CHARTERED INSURANCE INSTITUTE

R06
Diploma in Regulated Financial Planning
Unit 6 – Financial planning practice
June 2011 examination

SPECIAL NOTICES All questions in this paper are based on English law and practice applicable in the tax year 2010/2011, unless stated otherwise and should be answered accordingly. Assume all individuals are domiciled, resident and ordinarily resident in the UK unless stated otherwise. Candidates should answer based on the legislative position immediately BEFORE the 2011 budget.

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.

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R06 June 2011 © The Chartered Insurance Institute 2011 1852 2 .

R06 June 2011 Unit R06 – Financial planning practice Instructions to candidates Read the instructions below before answering any questions    Three hours are allowed for this paper. 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. 1852 3 PTO . it must be a silent battery or solar-powered nonprogrammable calculator. You are advised to spend approximately 90 minutes on the questions for each case study. even if you have used a calculator. It is important to show all steps in a calculation. If you do this. You are strongly advised to attempt all parts of each question in order to gain maximum possible marks for each question.       Subject to providing sufficient detail you are advised to be as brief and concise as possible. provided it meets these requirements. The question paper consists of two case studies and carries a total of 150 marks. 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. Tax tables are provided at the back of this question paper. You may find it helpful in some places to make rough notes in the answer booklet. Answer each question on a new page and leave six lines blank after each question part. you should cross through these notes before you hand in the booklet. using note format and short sentences on separate lines wherever possible. Your answer will be marked strictly in accordance with the question set. If you bring a calculator into the examination room. Read carefully all questions and information provided before starting to answer.

The OEIC is now worth £35. 1852 4 .000 per month from her personal income protection policy (PHI) until she reaches age 50.000 in a building society deposit account which pays him £600 net interest per annum.000 and they have an outstanding interest only mortgage of £200. It commenced five years ago and runs until James reaches age 60. She will receive sick pay of £2. Emily. repay their mortgage by the time James reaches age 60. He has £40. Once the sick pay ceases. James is employed as an IT consultant on a salary of £75.000 with CO2 emissions of 128g/km and he pays for all fuel which is for private use. He is concerned that he and Sally may be paying too much tax. aged 13. they have no protection cover. They have a decreasing term mortgage protection policy which is on a joint life first event basis and covers one accelerated critical illness.000.000 per annum.000. maintain their standard of living in retirement. review their protection arrangements. which had a purchase price of £16. Additionally. Sally does not intend to return to paid employment in the future. The repayment vehicle for this is a stocks and shares ISA.R06 June 2011 Attempt ALL questions for each case study Time: 3 hours Case study 1 James and Sally Hill. she will receive £1. Other than Sally’s PHI policy. The mortgage runs until James reaches age 60. James and Sally own a house worth £400. are married with one daughter.000 per month gross from her employer for a further three months. into which he pays £140 per month net of basic rate tax. James has no other investments. The policy was originally for £200. aged 40 and 48 respectively. He has the benefit of a petrol driven company car. Sally suffered a serious accident a few months ago which resulted in severe damage to her back.000 which commenced five years ago. James started a personal pension plan four years ago. Their financial aims are to:     assess Sally's entitlement to State benefits. in the tax year 2010/2011 he received a net dividend of £900 from a UK equity OEIC.

Describe in detail the actions that a financial adviser should take to determine whether James and Sally’s mortgage-related products are suitable for their circumstances and intended mortgage repayment. (i) (ii) Comment on the suitability of James and Sally’s existing protection arrangements and any issues they might face if these continue unaltered. Recommend and justify the long-term protection products that should be taken out by James to protect Sally and Emily if he were to die or become ill. giving your reasons. (2) (3) (2) (2) (e) State the additional information required in order to advise James and Sally on their retirement planning. Attendance Allowance. Disability Living Allowance. James’s total Income Tax payable for the tax year 2010/2011. (15) (b) (15) (c) (12) (18) (d) State. Total marks available for this question: (11) 80 Questions continue over the page 1852 5 PTO . showing all your workings. whether Sally would be able to receive the following State benefits: (i) (ii) (iii) (iv) Jobseeker’s Allowance.R06 June 2011 Questions (a) Calculate. Carer’s Allowance.

Sam and David.000 per annum.000 and they have no mortgage.600 82.000 and is in accumulation units. has been a self-employed architect for the last 30 years.000.400 The investment bond has been in force for exactly seven years and had an initial investment of £23.700 48. They are both medium risk investors and have an investment portfolio that is made up as follows.500. Katie is due to retire at age 60. aged 59. He currently contributes £1.500 377. 1852 6 .000 per annum. works as a part-time administrator for a local firm of solicitors and is on a salary of £12. The plan has a selected retirement age of 65 and is invested in a global equity fund. The initial investment of the Global Equity OEIC was £43. which is the scheme’s normal retirement age.400 17. They have two sons.000. Name Joint Scott Scott Scott Katie Katie Total Asset Bank Deposit Global Equity OEIC UK Equity Growth Onshore Investment Bond FTSE Tracker ISA FTSE Tracker ISA Cash ISA Current Value £ 198. review their attitude to risk. maximise the tax efficiency of their investments. review their investment portfolio. Katie. His wife. His taxable net profits are £60.800 17. who are both financially independent and each son has one child at secondary school. Scott has contributed into a personal pension plan since 1989. aged 62. Their financial aims are to:     maintain their standard of living in retirement.400 12. Scott and Katie own their own home which is worth £600. Both Scott and Katie are in good health and have simple mirror Wills. Katie and her employer each contribute 3% of her gross salary to the scheme and the current value is £16.R06 June 2011 Case study 2 Scott Jacobs.000 per month net and the current value is £400. Katie is a member of her employer’s stakeholder pension scheme which is wholly invested in a deposit fund.

R06 June 2011 Questions (a) (i) (ii) Comment on the suitability of Scott and Katie’s current investment portfolio. Total marks available for this question: (8) (e) (10) 70 1852 7 PTO . Calculate. the tax payable. No calculation is required. Outline how Scott can reduce any potential tax liability of his OEIC. Assume that regular withdrawals of £920 per annum have been taken at the end of each policy year since inception. Explain how the tax liability on the encashment of the investment bond could be reduced by assigning it to Katie. if any. if Scott’s OEIC is fully surrendered. showing all your workings. Assume that no withdrawals have been taken and no other capital gains or losses have been realised. Describe the process that an adviser should follow when reviewing Scott and Katie’s investment portfolio. if the investment bond is fully surrendered. State ten areas that an adviser should address at a review meeting with Scott and Katie in 12 months’ time. (8) (10) (b) (i) (6) (8) (ii) (c) (i) (4) (4) (ii) (iii) (4) (8) (iv) (d) Explain how a risk profiling tool and its output may be used to assist Scott and Katie in their investment planning. Describe to Scott five benefits and three drawbacks of a short-term pension annuity. if any. No calculation is required. showing all your workings. State three benefits and three drawbacks of Scott’s pension remaining invested in the global equity fund through to his selected retirement age of 65. Calculate. the tax payable.

R06 June 2011 The tax tables can be found on pages 9 .13 1852 8 .

640 £2.000 £545 £545 £50.670 £6.000 £200.000 £200.900 £1.000 *restricted to savings income only and not available if taxable non-savings income exceeds starting rate band.475 £9.family element baby addition CTC usually reduced by 6.family element .670 £6.INCOME TAX RATES OF TAX Starting rate for savings* Basic rate Higher rate Additional rate Starting-rate limit Threshold of taxable income above which higher rate applies Threshold of taxable income above which additional rate applies 2009/2010 10% 20% 40% N/A £2.440* £37.000 § the Personal Allowance reduces by £1 for every £2 of income above the income limit irrespective of age from 2010/2011.000 £6.400 £150.900 £1.640 £2.965 £22.965 £22.000 £100.67% of joint income over £545 £545 £50.400 N/A 2010/2011 10% 20% 40% 50% £2.440* £37.490 £9.890 £500. Child Tax Credit (CTC) . † where at least one spouse/civil partner was born before 6 April 1935.475 £9.490 £9.890 £500. MAIN PERSONAL RELIEFS Income limit for Personal Allowance § Personal Allowance (basic) § Personal Allowance (age 65-74) § Personal Allowance (aged 75 and over) § Married/civil partners (minimum) at 10% † Married/civil partners (age 75 and over) at 10% Income limit for age-related allowances Blind person’s allowance Enterprise Investment Scheme relief limit at 20% Venture Capital Trust relief limit at 30% N/A £6.000 1852 9 PTO .

Class 2 (self-employed) Class 3 (voluntary) Class 4 (self-employed) Flat rate per week £2.4% 12.650.875 £40.000 £245. 1852 10 .000 £1.00 770.337 Yearly £5. which is subsequently taxed under PAYE.000 £1.875 PENSIONS TAX YEAR 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 LIFETIME ALLOWANCE £1.£43.00 Above 844.715 £43. ** Secondary earnings threshold.8% 12.40 where earnings exceed £5.000 ANNUAL ALLOWANCE £215.000 £1. LIFETIME ALLOWANCE CHARGE 55% of excess over lifetime allowance if taken as a lump sum.00** 110.875 plus 1% on profits above £43. This £97 to £110 band is a zero rate band introduced in order to protect lower earners’ rights to contributory State benefits e.500. ANNUAL ALLOWANCE CHARGE 40% member’s tax charge on the amount of total pension input in excess of the annual allowance.000 £255.8% 12.040 CLASS 1 EMPLOYEE CONTRIBUTIONS Contracted-in rate Contracted-out rate Nil Nil 11% 9.01 – 844. However.8% 12.600 – (For schemes that require post-1989 benefits to be still subject to a cap).715 . 25% of excess over lifetime allowance if taken in the form of income.00* 110.000 £235. the lower earnings limit is £97 per week.01 – 770.00 Excess over 844. Flat rate per week £12.000 NOTIONAL EARNINGS CAP £123.600.750.8% 9. Basic State Pension.01 – 844.05 8% on profits between £5.g.000 £1.8% Below 110.00 Total earnings £ per week Weekly £97 £110 £844 £770 Monthly £421 £477 £3.656 £3.00 * This is the primary threshold below which no NI contributions are payable.NATIONAL INSURANCE CONTRIBUTIONS Class 1 Employee Lower Earnings Limit (LEL) Primary threshold Upper Earnings Limit (UEL) Upper Accruals Point Total earnings £ per week Up to 110.00 770.8% 12.8% 12.000 £225.044 £5.800.1% 11.4% 11% 11% 1% 1% CLASS 1 EMPLOYER CONTRIBUTIONS Contracted-in rate Contracted-out rate Final Money salary purchase Nil Nil Nil 12.075 per annum.01 – 770.

000 £2.000 = £3.UK-domiciled spouse/civil partner .grandparent/party to marriage/civil partnership . However. A lower percentage charge of 10% of the car’s list price applies for emissions at or below 120g/km and 5% for emissions at or below 75g/km.8%.Lifetime transfers to and from certain trusts MAIN EXEMPTIONS Transfers to .000 £250 £5. included in the list price on which the benefit is calculated. 3.parent . the maximum charge remains 35% of the car’s list price.500 £1.000.000 then its price for tax purposes will be fixed at £80. 5.Years before death 0-3 . There is no For 2010/2011: The percentage charge is 15% of the car’s list price for CO2 emissions at or below the qualifying level of 130g/km. The base percentage charge of 15% increases in 1% steps for every additional full 5g/km over the 130g/km threshold.780. 1852 11 PTO .000. 4.UK-registered charities Lifetime transfers . 2. reduction for high business mileage users. car emission 160g/km = 21% on car benefit scale. unlisted/AIM companies. in most cases. up to a maximum of 35% of the car’s list price. There is an additional 3% supplement for diesel cars not meeting Euro IV emission standards or registered after 31 December 2005.000 CAR BENEFIT FOR EMPLOYEES The charge for company car benefits is based on the carbon dioxide (CO2) emissions.000 for 2010/2011) e.000 £2.000 No limit £3.Up to £325.g. Fuel scale is reduced only if the employee makes good all the fuel used for private journeys.500 £1.000 No limit £3. All car and fuel benefits are subject to employers National Insurance Contributions (Class 1A) of 12. If price of car exceeds £80.annual exemption per donor . 21% of £18. Accessories are. certain farmland/building 50% relief: certain other business assets Reduced tax charge on gifts within 7 years of death: .000 £250 £5.other person 100% relief: businesses.000 . Car fuel The benefit is calculated as the CO2 emissions % relevant to the car and that % applied to a set figure (£18.INHERITANCE TAX RATES OF TAX ON DEATH Transfers made after 5 April 2010 . 1.non-UK-domiciled spouse/civil partner (from UK domiciled spouse) .Excess over £325. List price is reduced for capital contributions made by the employee up to £5.small gifts to same person Wedding/civil partnership gifts by . Car benefit is reduced by the amount of employee’s contributions towards running costs.000 .Inheritance Tax payable 100% 3-4 80% 4-5 60% 5-6 40% 6-7 20% 2009/2010 2010/2011 Nil 40% 20% Nil 40% 20% No limit £55.000 No limit £55.

60 202.00 97.30 2010/2011 £ 20.00 2.00 198. business premises & renovations £100.40 47.40 68.10 70.000.000 business miles in tax year Each business mile above 10.000 business miles Motor Cycles Bicycles 40p per mile 25p per mile 24p per mile 20p per mile MAIN CAPITAL AND OTHER ALLOWANCES 2010/2011 Plant & machinery 100% annual investment allowance (first year) Plant & machinery (reducing balance) per annum Patent rights & know-how (reducing balance) per annum Certain long-life assets.15 132.30 13.000.PRIVATE VEHICLES USED FOR WORK 2010/2011 Rates Cars On the first 10. integral features of buildings (reducing balance) per annum Industrial & agricultural buildings (straight line) Energy & water-efficient equipment Zero emission goods vehicles (new) Qualifying flat conversions.65 156.25 64.00 2.45 6.000.80 71.75 80.80 47.00 95.65 65.000.25 152.40 10.95 81.00 13.20 67.45 Attendance Allowance Retirement Pension Pension Credit Bereavement Benefit (lump sum) Widowed Parent’s allowance Jobseekers Allowance * under State Pension Age 1852 12 .35 95.15 89.40 97.60 91.30 130.000 20% 25% 10% 1% 100% 100% 100% Motor cars: Expenditure on or after 01/04/09 (Corporation Tax) or 06/04/09 (Income Tax) CO2 emissions of g/km: 110 or less * 111-160 161 or more Capital allowance: 100% 20% 10% first year reducing balance reducing balance * If new Research & Development: Revenue expenditure: Capital expenditure Small/medium companies: Large companies: 100% 175% 130% MAIN SOCIAL SECURITY BENEFITS Child Benefit Incapacity Benefit first child subsequent children short-term lower rate* short-term higher rate* long-term rate lower rate higher rate single married single person standard minimum guarantee married couple standard minimum guarantee maximum savings ignored in calculating income 2009/2010 £ 20.

500.for trustees of trusts and personal representatives the rate chargeable is 28%.000 2010/2011 28% 21% £300.000.050.CAPITAL GAINS TAX RATES OF TAX Chargeable gains. CHATTELS EXEMPTION Gains on chattels are exempt if proceeds do not exceed £6.100.for individuals who are higher-rate taxpayers or additional-rate taxpayers. Most trusts have an annual exemption of £5.75% £1.500.000.Entrepreneurs’ Relief reduces the rate to 10% on qualifying assets subject to a lifetime limit of £5. ANNUAL EXEMPTION The annual exemption is £10. .000 29. less allowable losses. the rate chargeable is 28%.000 VALUE ADDED TAX Standard rate to 03/01/11 Standard rate from 04/01/11 Annual Registration limit 17.for individuals who are non-taxpayers or basic-rate taxpayers. CORPORATION TAX 2009/2010 Full rate Small companies rate Small companies limit Effective marginal rate Upper marginal limit 28% 21% £300. the rate chargeable is 18%.5% 20% £70.000 1852 13 . are charged to tax as follows from 23 June 2010: . .000 29.000 per item. .75% £1.

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