Certificate in Financial - Personal Finance Society€¦ · Examination Guide FA7 Examination Guide 2014/2015 2 Unit 7 – Financial services products Based on the 2014/2015 syllabus

Examination Guide

THE CHARTERED INSURANCE INSTITUTE

FA7

Certificate in Financial Services

Unit 7 – Financial services products

Based on the 2014/2015 syllabus examined until 31 August 2015

Examination Guide

FA7 Examination Guide 2014/2015 2

Unit 7 – Financial services products Based on the 2014/2015 syllabus examined until 31 August 2015

Contents Introduction to Examination Guide 3 FA7 Syllabus 7 Specimen Examination 10 Specimen Tax Tables 23 Specimen Examination Answers and Learning Outcomes Covered 30

Published in August 2014 by: The Examinations Department, The Chartered Insurance Institute, 20 Aldermanbury, London EC2V 7HY. Telephone: 020 8989 8464 Fax: 020 8530 3052 Email: [email protected] © The Chartered Insurance Institute 2014

Examination Guide


FA7 – Financial services products Based on the 2014/2015 syllabus examined until 31 August 2015

Introduction This examination guide has been produced by the Examinations Department at the Chartered Insurance Institute to assist students in their preparation for the FA7 examination. It contains a specimen examination with answer key. Ideally, students should have completed the majority of their studies before attempting the specimen examination. Students should allow themselves two hours to complete the examination. They should then review their performance to identify areas of weakness on which to concentrate the remainder of their study time. Although the specimen examination in this guide is typical of a FA7 examination, it should be noted that it is not possible to test every single aspect of the syllabus in any one particular examination. To prepare properly for the examination, candidates should make full use of the tuition options available and read as widely as possible to ensure that the whole syllabus has been covered. They should also endeavour to keep as up‐to‐date as possible with developments in the industry by reading the periodicals listed in the FA7 reading list, which is located on the syllabus in this examination guide and on the CII website at www.cii.co.uk.

Background Information CII examination questions undergo a rigorous writing and editing process before reaching an examination. The questions are written to strict guidelines by practitioners with relevant technical knowledge and experience. Questions are very carefully worded to ensure that all the information required to answer the question is provided in a clear and concise manner. They are then edited by an independent panel of experienced practitioners who have been specifically trained to ensure that questions are technically correct, clear and unambiguous. As a final check, each examination is scrutinised by the Senior Examiner and a CII assessment expert. Occasionally a question will require amendment after the examination guide is first published. In such an event, the revised question will be published on the CII website: 1) Visit www.cii.co.uk/qualifications 2) Select the appropriate qualification 3) Select your unit on the right hand side of the page Candidates should also refer here for the latest information on changes to law and practice and when they will be examined.

Examination Guide


Syllabus The FA7 syllabus is published on the CII website at www.cii.co.uk. Candidates should note that the examination is based on the syllabus, rather than on any particular tuition material. Of course, the CII tuition material will provide the vast majority of the information required to perform well in the examination, but the CII recommends that students consult other reference materials to supplement their studies.

Skill Specification The examination syllabus categorises FA7 learning outcomes into cognitive skill levels. Each learning outcome specifies the level of skill required of candidates and thus the level at which candidates may be tested. The FA7 syllabus requires that candidates have the ability to describe, explain and state understanding of the subject matter. Each learning outcome begins with a cognitive skill that encompasses one of the following: Describe ‐ Candidates must typically be able to demonstrate an understanding of particular

aspects of the subject matter. They may be asked to recall detailed information or to identify definitions or descriptions of key terms and concepts.

Explain ‐ Candidates must typically be able to demonstrate an understanding of the

relationships between different aspects or concepts. They may be asked how one part may impact upon or be linked to another. They may also be asked to perform a calculation to evidence an explanation of how certain elements interact with one another.

State ‐ Candidates must typically be able to demonstrate a grasp of factual knowledge.

They may be asked to recall some information or identify some term or concept.

Examination Guide


Examination Information The method of assessment for the FA7 examination is 75 multiple choice questions (MCQs). 2 hours are allowed for this examination. The FA7 syllabus provided in this examination guide will be examined from 1 September 2014 until 31 August 2015. Candidates will be examined on the basis of English law and practice in the tax year 2014/2015 unless otherwise stated. It should be assumed that all individuals are domiciled and resident in the UK unless otherwise stated. The general rule is that the new tax year and changes arising from the Finance Act will be examined from 1 September each year. Other changes, not related to the Finance Act, will not be examined earlier than 3 months after they come into effect. FA7 examinations test the Financial Conduct Authority and Prudential Regulation Authority rules and regulations. When preparing for the examination, candidates should ensure that they are aware of what typically constitutes each type of product listed in the syllabus and ascertain whether the products with which they come into contact during the normal course of their work deviate from the norm, since questions in the examination test generic product knowledge. Extracts from tax tables will be provided at each examination, an example of which can be found in this examination guide. Candidates may find it beneficial to familiarise themselves with this information in advance of the examination. Candidates may not take their own tax tables into the examination. A multiple choice question consists of a problem followed by four options, labelled A, B, C and D, from which the candidate is asked to choose the correct response. Each question will contain only one correct or best response to the problem posed. One mark is awarded for each correct response identified by the candidate. No mark is awarded if the candidate either chooses an incorrect response, chooses more than one response or fails to choose any response. No marks are deducted for candidates choosing an incorrect response. While no questions involve complex calculations, candidates are permitted to use calculators during the examination. 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. Candidates are permitted to make rough notes. Candidates are not permitted, under any circumstances, to remove any papers relating to the examination from the examination room.

Examination Guide


Examination Technique: Multiple Choice Questions The best approach to multiple choice examinations is to work methodically through the questions. The questions are worded very carefully to ensure that all the information required is presented in a concise and clear manner. It cannot be emphasised too strongly that understanding the precise meaning of the question is vital. If candidates miss a crucial point when reading the question it could result in choosing the wrong option. Candidates should read carefully through the question and all the options before attempting to answer. Candidates should pay particular attention to any words in the question which are emphasised in bold type, for example, maximum, minimum, main, most, normally and usually. Negative wording is further emphasised by the use of capital letters, for example NOT, CANNOT. Candidates should not spend too much time on any one question. If they cannot make up their mind, they should leave the question and come back to it later. When all of the questions have been answered, it is prudent to use any remaining time to go through each question again, carefully, to double‐check that nothing has been missed. Altering just one incorrect response to a correct response could make the difference between passing and failing.

After the Examination Rigorous checks are made to ensure the correctness of the results issued. A pre‐defined quota of passes to be awarded does not exist. If all candidates achieve a score of at least the pass mark, then all candidates will be awarded a pass grade. Individual feedback on the candidate’s examination performance is automatically provided and will indicate the result achieved and, for each syllabus learning outcome, the percentage of questions in the examination that were answered correctly.

Financial services productsPurposeAt the end of this unit, candidates should understand the:

• key elements of customer service and administration in financial services;• savings and investment products;• main tax wrappers – pensions and ISAs;• main protection products and mortgage repayment vehicles.

Summary of learning outcomes Number of questionsin the examination*

1.1. DescribeDescribe thethe fundamentalfundamental aspectsaspects ofof customercustomer service,service, 99 MCQMCQadministrationadministration andand marketingmarketing inin financialfinancial services.services.

2.2. ExplainExplain thethe rangerange ofof savingssavings andand investmentinvestment productsproducts availableavailable toto 2424 MCQMCQcustomers.customers.

3.3. ExplainExplain thethe mainmain taxtax wrapperswrappers availableavailable toto customers.customers. 2020 MCQMCQ

4.4. ExplainExplain thethe mainmain featuresfeatures ofof protectionprotection products.products. 1717 MCQMCQ

5.5. StateState thethe mainmain featuresfeatures ofof mortgagemortgage repaymentrepayment andand protection.protection. 55 MCQMCQ*The*The testtest specificationspecification hashas anan in-builtin-built elementelement ofof flexibility.flexibility. ItIt isis designeddesigned toto bebe usedused asas aa guideguide forfor studystudy andand isis notnot aastatementstatement ofof actualactual numbernumber ofof questionsquestions thatthat willwill appearappear inin everyevery exam.exam. However,However, thethe numbernumber ofof questionsquestions testingtesting eacheachlearninglearning outcomeoutcome willwill generallygenerally bebe withinwithin thethe rangerange plusplus oror minusminus 22 ofof thethe numbernumber indicated.indicated.

Important notes•• MethodMethod ofof assessment:assessment: 7575 multiplemultiple choicechoice questionsquestions (MCQs).(MCQs). 22 hourshours areare allowedallowed forfor thisthisexamination.examination.

•• ThisThis syllabussyllabus willwill bebe examinedexamined fromfrom 11 SeptemberSeptember 20142014 untiluntil 3131 AugustAugust 2015.2015.•• CandidatesCandidates willwill bebe examinedexamined onon thethe basisbasis ofof EnglishEnglish lawlaw andand practicepractice inin thethe taxtax yearyear 2014/20152014/2015unlessunless otherwiseotherwise stated.stated.

•• ItIt shouldshould bebe assumedassumed thatthat allall individualsindividuals areare domicileddomiciled andand residentresident inin thethe UKUK unlessunless otherwiseotherwisestated.stated.

•• CandidatesCandidates shouldshould referrefer toto thethe CIICII websitewebsite forfor thethe latestlatest informationinformation onon changeschanges toto lawlaw andand practicepracticeandand whenwhen theythey willwill bebe examined:examined:1.1. VisitVisit www.cii.co.uk/updateswww.cii.co.uk/updates2.2. SelectSelect thethe appropriateappropriate qualificationqualification3.3. SelectSelect youryour unitunit onon thethe rightright handhand sideside ofof thethe pagepage

FA720142014©© TheThe CharteredChartered InsuranceInsurance InstituteInstitute 20142014

1.1. DescribeDescribe thethe fundamentalfundamental aspectsaspects ofof Reading listcustomercustomer service,service, administrationadministration andand

The following list provides details of variousmarketingmarketing inin financialfinancial services.services.publications which may assist with your studies.

1.11.1 DescribeDescribe thethe keykey elementselements ofof customercustomer serviceserviceNote:Note: TheThe examinationexamination willwill testtest thethe syllabussyllabus alone.alone.andand administration.administration.

1.21.2 DescribeDescribe thethe mainmain marketingmarketing methodsmethods inin financialfinancial The reading list is provided for guidance only and isservices.services. not in itself the subject of the examination. The

publications will help candidates keep up-to-date withdevelopments and will provide a wider coverage of2.2. ExplainExplain thethe rangerange ofof savingssavings andandsyllabus topics.investmentinvestment productsproducts availableavailable totoCII/Personal Finance Society members can borrowcustomers.customers.most of the additional study materials below from

2.12.1 ExplainExplain thethe mainmain featuresfeatures ofof investinginvesting inin cash,cash, Knowledge Services.bonds,bonds, propertyproperty andand equities.equities.

CII study texts can be consulted from within the2.22.2 ExplainExplain thethe mainmain featuresfeatures ofof collectivecollectivelibrary. For further information on the lending service,investments.investments. please go to www.cii.co.uk/knowledge.

3.3. ExplainExplain thethe mainmain taxtax wrapperswrappersCII study textsavailableavailable toto customers.customers.Financial services products. London: CII. Study text FA7.3.13.1 ExplainExplain thethe mainmain featuresfeatures ofof defineddefined contributioncontribution

andand defineddefined benefitbenefit pensionpension schemes.schemes.Additional reading3.23.2 ExplainExplain thethe mainmain retirementretirement optionsoptions available.available.Additional reading materials are available through the3.33.3 ExplainExplain thethe mainmain featuresfeatures ofof NewNew IndividualIndividuallibrary or on the Knowledge Services website.SavingsSavings AccountsAccounts (NISAs).(NISAs).New materials are added frequently – for information

4.4. ExplainExplain thethe mainmain featuresfeatures ofof about new books and articles in your area of interest,please visit www.cii.co.uk/knowledge or emailprotectionprotection [email protected].

4.14.1 ExplainExplain thethe mainmain typestypes andand featuresfeatures ofof lifelifeassurance.assurance. Books (and ebooks)

4.24.2 ExplainExplain thethe mainmain typestypes andand featuresfeatures ofof healthhealth Financial services marketing. 2nd ed, Christine Ennew,protectionprotection products.products. Nigel Waite. Routledge, 2013. Available in the CII library

and online via www.cii.co.uk/knowledge (CII/Personal5.5. StateState thethe mainmain featuresfeatures ofof mortgagemortgage Finance Society members only).

repaymentrepayment andand protection.protection. The Financial Times guide to investing. Glen Arnold. FTPrentice Hall, 2010. Available online via www.cii.co.uk/5.15.1 StateState thethe useuse ofof protectionprotection productsproducts andandknowledge (CII/Personal Finance Society members only).repaymentrepayment vehiclesvehicles inin thethe contextcontext ofof mortgages.mortgages.

FactfilesCII factfiles are written by subject matter experts withinthe insurance and financial services industry. They areupdated annually, and interim update bulletins areincluded where necessary to take into account any majorchanges during the year. All are available online viawww.cii.co.uk/knowledge (CII/Personal Finance Societymembers only).

Recent developments in mortgage product design.

Recent developments in investment product design.

Recent developments in life product design.

Critical illness insurance.

Long-term care insurance.

2 of 320142014©© TheThe CharteredChartered InsuranceInsurance InstituteInstitute 20142014

Journals and magazinesFinancial solutions. London: CII. Six issues a year. Alsoavailable via www.cii.co.uk/knowledge (CII/PersonalFinance Society members only).

Financial adviser. London: FT Business. Weekly. Alsoavailable online at www.ftadviser.com.

Health insurance and protection. London: Informa.

Investment week. London: Incisive Financial Publishing.Weekly. Available online via www.investmentweek.co.uk.

Mortgage strategy. London: Centaur Communications.Monthly. Also available online atwww.mortgagestrategy.co.uk.

Mortgage introducer. London: Publishing Group.Fortnightly. Also available online atwww.mortgageintroducer.com.

New model adviser. London: Citywire. Monthly. Alsoavailable online at www.citywire.co.uk/new-model-adviser.

Money marketing. London: Centaur Communications.Weekly. Also available online atwww.moneymarketing.co.uk.

Reference materialsLamont’s glossary: the definitive plain English moneyand investment dictionary. Barclay W Lamont. 10th ed.London: Taxbriefs, 2009. Also available online atwww.cii.co.uk/knowledge (CII/Personal Finance Societymembers only).

The professional adviser’s factfile. Taxbriefs. London:Taxbriefs. Looseleaf, updated.

Examination guidesAn examination guide, which includes a specimen paper,is available to purchase via www.cii.co.uk.

If you have a current study text enrolment the specimenpaper is included, as a mock test, via Revisionmate(www.revisionmate.com). Details on how to access thisresource are on the first page of the study text.

Exam technique/study skillsThere are many modestly priced guides available inbookshops. You should choose one which suits yourrequirements.

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Examination Guide


1. Advisers are restricted, rather than independent, if

A. they have been advising for less than one year. B. mortgage products represent less than 25% of their business volume. C. they cannot always offer a product that is most suitable. D. life policies represent over 75% of their available products.

2. Where assistance with estate planning is provided by a wealth manager, such a service typically

depends on the

A. client’s occupation. B. size of the client’s portfolio. C. client already receiving the highest service level. D. use by the client of private banking services.

3. In its initial disclosure documents, an authorised firm has categorised a client as a professional

client. This indicates that the client

A. never deals on his own account. B. has a full understanding of all investment and pension products. C. may be a government or government body. D. may require higher protection levels than an eligible counterparty.

4. Details of which, if either, of the Financial Ombudsman Service and the Financial Services

Compensation Scheme must be included in an authorised firm’s client agreement?

A. Both. B. Financial Ombudsman Service only. C. Financial Services Compensation Scheme only. D. Neither.

5. Where a platform uses the services of a custodian, the custodian’s role is to

A. manage the client database. B. assess each client’s risk profile. C. operate the adviser’s back office systems. D. hold client assets in a nominee acount.

6. The services typically provided by a platform are

A. bank accounts and pensions only. B. bank accounts and stockbroker services only. C. pensions and stockbroker services only. D. bank account, pensions and stockbroker services.

Examination Guide


7. An authorised firm is implementing a low‐cost marketing strategy which focuses on real‐time feedback determining who reads its literature. Which marketing strategy is most likely being utilised?

A. Direct market. B. E‐marketing. C. Multi‐level marketing. D. Telemarketing.

8. With regard to marketing, the Financial Conduct Authority’s Principles for Businesses specifically

requires that an authorised firm must communicate in a way that is

A. clear, fair and not misleading. B. clear, fair and honest. C. open and honest. D. appropriately skilled and with due diligence.

9. A provider wants to maximise the information made available directly to a large number of clients,

quickly and at low cost. Which type of campaign should it usually adopt?

A. E‐marketing only. B. E‐marketing or direct marketing. C. Telemarketing or direct marketing. D. Telemarketing or e‐marketing.

10. If a commercial property investment is trading on a relatively high rental multiple, what does this

normally indicate?

A. It is growing at the same rate as the sector average. B. The rental yield is relatively high. C. The rental yield is relatively low. D. The value is stable.

11. What income, if any, is usually paid under convertible loan stock?

A. None. B. A fixed rate of annual interest. C. A rising annual income. D. A variable dividend.

12. The latest financial statistics for a company shows an earnings per share of 11.5p, a current share

price of 220p and dividend per share of 1.8p. What is the price earnings ratio?

A. 3.96 B. 5.23 C. 6.39 D. 19.13

Examination Guide


13. If the share price of an investment trust is 140p and the net asset value per share is 120p, it is trading at a

A. discount of 14.3%. B. discount of 16.7%. C. premium of 14.3%. D. premium of 16.7%.

14. The main difference between ordinary shares and ‘A’ shares normally relates to

A. Capital Gains Tax treatment. B. capital redemption. C. dividend levels. D. voting rights.

15. If a company’s share price, earnings per share and net dividend per share are 220p, 11.6p and 5.4p

respectively, what is the company’s dividend cover?

A. 0.47 B. 2.15 C. 12.94 D. 18.97

16. What is the current rate of Stamp Duty Reserve Tax, if any, charged on the purchase of gilts?

A. None. B. 0.5% C. 0.75% D. 1%

17. An 8% Treasury 2022 gilt, with a coupon payable half‐yearly, has a current price of £125. If £10,000

is invested into this gilt, what half‐yearly income would be received?

A. £320 B. £400 C. £640 D. £800

18. If an index‐linked gilt is sold on the London Stock Exchange prior to its redemption date, on what

basis will the sale price be determined?

A. By reference to the index‐linked early redemption published prices. B. By reference to index‐linking on a purely pro rata basis. C. By the current market value only. D. By the current market value modified to secure full index‐linking.

Examination Guide


19. The primary difference between a conventional corporate bond and a floating‐rate corporate bond is that

A. a conventional corporate bond is issued at a discount to its face value. B. the coupon on a floating‐rate corporate bond is not fixed at the outset. C. the coupon on a conventional corporate bond is not fixed at the outset. D. the price of a conventional corporate bond remains constant at around par value.

20. Jennifer incurred a Market Value Reduction (MVR) when she surrendered her investment. This

indicates she had invested in

A. an ethical fund. B. an index‐tracker fund. C. a structured equity fund. D. a with‐profits fund.

21. How is the income paid from a National Savings & Investments Income Bond?

A. Gross and at a fixed rate. B. Gross and at a variable rate. C. Net of 20% tax and at a fixed rate. D. Net of 20% tax and at a variable rate.

22. If £2,000 is placed on deposit with nominal interest of 8% per annum payable half yearly, the total

interest accumulated at the end of the first year will be

A. £160.00 B. £163.20 C. £166.60 D. £332.80

23. What rate of tax, if any, is automatically applied at source to the gross interest paid on a bank

deposit account of £45,000 held by a higher‐rate taxpayer in the tax year 2014/2015?

A. None. B. 10% C. 20% D. 40%

24. An unexpected reduction in the dividend level paid by a company usually leads to a

A. decrease in the net asset value. B. decrease in the gross asset value. C. reduction in the dividend cover. D. reduction in the share price.

Examination Guide


25. Which type of institution offers Permanent Interest Bearing Shares?

A. Bank. B. Building society. C. Friendly society. D. Local authority.

26. Neil pays £110 per annum into a tax‐exempt friendly society savings plan. What is the maximum

permitted increase in his annual premium?

A. £140 B. £160 C. £190 D. £270

27. A manager of manager fund usually takes the form of an open‐ended investment company or

which other product type?

A. An Enterprise Investment Scheme. B. An Exchange Traded Fund. C. A FTSE 100 structured product. D. A unit trust.

28. An Exchange Traded Fund would be most suitable for a client seeking which style of investment

management?

A. Active. B. Ethical. C. Passive. D. Value.

29. The main responsibility of the depositary in connection with an open‐ended investment company is

to

A. decide on the investment strategy. B. manage the day‐to‐day subscription collection. C. market the product to the general public. D. safeguard the assets of the company.

30. When Hamish received the proceeds from his endowment policy, he incurred a Capital Gains Tax

liability. This was because

A. his policy was set up on a non‐qualifying basis. B. he had made some encashments from his policy during the term. C. he had made a number of partial withdrawals from his policy exceeding 5% per annum. D. he had bought the policy on the second‐hand market.

Examination Guide


31. Clive lives and works in the UK and intends to do so for the rest of his life. Most of his investments are in widely diversified Far Eastern unit trusts. What risk(s) is he usually exposed to?

A. Currency risk only. B. Market risk only. C. Market risk and currency risk. D. Liquidity risk and currency risk.

32. A significant difference between freehold and leasehold ownership of property is that leasehold

property

A. cannot usually be sub‐let. B. carries a greater responsibility for maintenance of the premises. C. is more likely to fall in value after a long period of ownership. D. is less likely to be subject to local planning laws and covenants.

33. Adam is about to invest in a direct property unit trust and a fixed‐interest unit trust through the

same investment house. In what way is the property investment likely to be more restrictive?

A. Accessibility. B. Additional investments. C. Dividend reinvestment. D. Maximum investment amount.

34. When comparing pension illustrations from different providers, the reduction in yield figure

indicates the

A. effect of charges on possible investment return. B. extent to which clients may be penalised by the different providers for taking early retirement. C. past investment performance of the different providers’ contracts. D. projected investment performance of the different providers’ contracts.

35. With regard to pensions, what is the main intention of Statutory Money Purchase Illustrations?

A. To illustrate the effect of charges within a defined benefit scheme. B. To illustrate the projected benefits from a defined contribution plan in a way that allows for an

element of inflation. C. To include an allowance for State Pension benefits. D. To include the requirements of The Government Actuary’s Department tables.

36. It is NOT possible for pension funds to reclaim any tax deducted before payment in respect of

A. dividends from UK shares. B. income from corporate bonds. C. income from gilts. D. interest on deposits.

Examination Guide


37. Mike, a higher‐rate taxpayer, pays £800 net per annum into a personal pension scheme. How much will the provider claim per annum from HM Revenue & Customs?

A. £160 B. £200 C. £280 D. £400

38. A director of a private limited company draws a basic salary of £30,000 per annum. He is also paid

a dividend of £10,000 and has benefits‐in‐kind of £5,000. What are his relevant UK earnings for pension purposes?

A. £30,000 B. £35,000 C. £40,000 D. £45,000

39. The pension input period of a personal pension plan is used to determine the

A. level of relevant UK earnings. B. level of tax relief on the contribution. C. tax year in which the contribution will be deemed paid for annual allowance purposes. D. tax year in which the contribution will be deemed paid for lifetime allowance purposes.

40. How does the tax treatment of income from State Pension benefits differ from that of income from

private pension schemes?

A. Tax is always deducted at source from private pension schemes. B. Tax is always deducted at source from State Pension benefits. C. Tax is never deducted at source from private pension schemes. D. Tax is never deducted at source from State Pension benefits.

41. What is the minimum number of qualifying years of National Insurance contributions required to

become entitled to an element of Basic State Pension?

A. 10 years. B. 11 years. C. 15 years. D. 30 years.

42. What will be used to assess the level of annual increase to the new single‐tier State Pension after

2016?

A. Earnings only. B. Earnings or price inflation only. C. Price inflation or 2.5% only. D. Earnings, price inflation or 2.5%.

Examination Guide


43. Julie, aged 57, is an additional‐rate taxpayer and has £400,000 inside her personal pension fund. How much of this is she permitted to take and with what tax implications?

A. £100,000 tax free. B. £400,000 tax free. C. £400,000 taxed at 25%. D. £400,000 taxed at 45%.

44. Where a member of a public sector pension scheme transfers benefits under the Transfer Club

rules, the benefit transferred is treated as

A. if the years of service had occurred under the new scheme. B. a set amount increased annually in line with inflation. C. based on the salary under the previous scheme increased in line with average earnings. D. based on career average earnings.

45. A member of a defined benefits pension scheme with an accrual rate of 1/60ths, who has been a

member of the pension scheme for 35 years and has a final pensionable salary of £60,000, will be entitled to an annual pension of

A. £33,000 B. £35,000 C. £37,000 D. £39,000

46. What is the maximum guaranteed period, if any, that can apply to an annuity purchased with the

proceeds of a personal pension?

A. A maximum guaranteed period does not apply. B. 5 years. C. 10 years. D. 15 years.

47. If a client opts for escalation rather than taking a level annuity, what effect, if any, will this have on

his initial income?

A. His initial pension income will be deferred. B. His initial pension income will be higher. C. His initial pension income will be lower. D. It will have no effect.

Examination Guide


48. What is the effect of lifestyling on an individual’s pension arrangement as the selected retirement age approaches?

A. The anticipated pension increases in line with inflation. B. The fund is protected against the effects of inflation. C. The risk of the underlying fund reduces. D. The risk of the underlying fund increases.

49. When compared to a conventional personal pension, a distinction about a self‐invested personal

pension (SIPP) is that it

A. allows the policyholder greater choice and control over investments. B. can invest directly in residential property and obtain tax benefits. C. can make loans to the member. D. typically has lower annual management charges.

50. Whilst past performance may be considered when selecting investment funds, what important

factor must be taken into account?

A. It is a reliable indication of future returns. B. It is not a guarantee of future returns. C. It should only be used to demonstrate the potential maximum return. D. It should only be used to demonstrate the potential minimum return.

51. What is the structure of a group personal pension scheme?

A. A collection of individual pension plans in the name of each member. B. A collection of individual pension plans in the name of the trustees. C. A pooled arrangement in the name of the trustees. D. A pooled arrangement with each member having an earmarked entitlement.

52. At what minimum age is an employee deemed to be an eligible worker under the automatic

enrolment rules?

A. 18 years old. B. 20 years old. C. 22 years old. D. 24 years old.

53. An investor has subscribed £7,500 into a cash NISA for this tax year. What NISA contribution(s) are

permitted in the same tax year?

A. A new cash NISA only. B. A new stocks and shares NISA only. C. The existing cash NISA and a new stocks and shares NISA. D. A new cash NISA and a new stocks and shares NISA.

Examination Guide


54. A policyholder has a unit‐linked policy set up on a standard cover basis. In order to maintain the original level of sum assured, the policyholder has been obliged to increase the premium payments. This confirms that

A. investment performance has fallen below expectations. B. the policyholder’s health has deteriorated between reviews. C. underwriting limits have become more stringent. D. policy and fund management charges have reduced.

55. A typical friendly society will pay what proportion of its profits, if any, after expenses to its

members?

A. Nil. B. 50% C. 75% D. 100%

56. When a policyholder exercises the option to convert his term assurance policy to a whole of life

policy, what conditions regarding the provisions of medical evidence or underwriting normally apply?

A. No medical evidence or underwriting is required regardless of the policyholder’s state of health. B. The policyholder must complete a declaration of health but further underwriting is only required

if a severe deterioration has occurred. C. Medical evidence and underwriting will always be required for sums assured above a specified

threshold. D. Medical evidence and underwriting will only be required where conversion is within five years of

the end of the policy term.

57. A policyholder has put his life assurance policy into a discretionary trust and left a letter of wishes.

What implication does this have for the trustees?

A. They are obliged to distribute benefits as stated in the letter. B. They are obliged to distribute some benefits to those named in the letter but may select

additional beneficiaries. C. Those named in the letter must receive benefits if still alive, otherwise the trustees have

complete discretion. D. The letter is purely for guidance and does not constitute a legal obligation for the trustees.

58. Where a terminal bonus is payable at the maturity of a with‐profits policy, the amount of this bonus

normally represents

A. a fixed amount for each year of the policy term. B. a fixed percentage of the reversionary bonuses paid. C. 50% of the maturity value. D. an amount determined by overall investment returns throughout the term of the policy.

Examination Guide


59. The maximum percentage of gross income usually payable under individual income protection policies is

A. 50% B. 60% C. 67% D. 75%

60. Which of occupation, hobbies and smoker status normally affect the premiums charged under an

income protection policy?

A. Occupation and smoker status only. B. Hobbies and occupation status only. C. Smoker and hobbies status only. D. Occupation, hobbies and smoker status.

61. Where an individual receives benefits payable under an income protection policy directly from the

insurer and without any deduction of tax, this confirms that

A. benefits are a fixed amount rather than related to salary. B. benefits will be payable for a maximum of one year. C. the policyholder is a non‐taxpayer. D. the policyholder has effected an individual policy.

62. What difference, if any, applies to the tax treatment of a group critical illness policy benefit paid to

an employed person when compared to a similar benefit paid to a self‐employed person on an individual basis?

A. None. B. Only the self‐employed person receives benefits free of any tax deductions. C. Only the employed person receives benefits after deduction of 10% tax. D. Only the employed person receives benefits after deduction of 20% tax.

63. A stand alone critical illness insurance policyholder has just received a second payment under the

policy. This indicates that

A. the benefits are payable under a trust. B. his insured condition has progressed in severity. C. payment is being made as an accelerated death benefit. D. his death is now expected within 12 months.

64. Providers of critical illness policies typically set their required survival periods at

A. 7 to 10 days. B. 14 to 30 days. C. 31 to 60 days. D. 61 to 90 days.

Examination Guide


65. An employee who is a member of his employer’s group personal accident and sickness policy will be taxed on the benefits and premiums

A. in no circumstances. B. only on the premiums as a benefit‐in‐kind. C. only on the benefits at the basic rate. D. only on the benefits at his marginal rate

66. The benefit payable in respect of accidental bodily injury under a personal accident and sickness

policy is normally an amount

A. equal to the sum insured regardless of the nature of the injury. B. calculated as a proportion of the sum insured depending how many injuries are suffered. C. specified according to the nature and level of injury. D. related to the nature and level of injury plus the anticipated recovery period.

67. Which type of private medical insurance policy(ies) will normally provide cover in respect of

outpatient and psychiatric issues?

A. Any as a standard option. B. Any, subject to payment of an additional premium. C. Mid range and comprehensive. D. Comprehensive only.

68. Where a private medical insurance policy is set up with moratorium underwriting, this indicates

that

A. cover has been transferred from a previous insurer. B. the policy is part of a package for which a single proposal form has been completed. C. only specified conditions are included until the insured agrees to be medically examined. D. pre‐existing conditions are excluded for a number of years.

69. An accident, sickness and unemployment insurance policy will typically provide a lump‐sum benefit

A. in no circumstances. B. for a specified event such as loss of sight. C. where a long‐term hospital stay is required. D. for any accident or illness which causes the insured to become unemployed.

70. The insured benefit under an individual accident, sickness and unemployment insurance policy is

typically expressed as a

A. percentage of earnings only if the insured is employed. B. set amount regardless of employment status only. C. set amount only if the insured is self‐employed. D. either a percentage of earnings or a set amount regardless of employment status.

Examination Guide


71. A policyholder has protected his mortgage capital with a level term assurance policy. If he survives the term and repays the capital, what is the status of the policy?

A. It is allowed to continue for the benefit of the policyholder. B. It ceases with the possibility of a capital surplus. C. It ceases with no residual capital value. D. It can be converted to another policy type at the option of the policyholder.

72. A mortgage which has a variable rate linked directly to movements in another interest rate is

known as a

A. discounted mortgage. B. flexible mortgage. C. standard variable rate mortgage. D. tracker mortgage.

73. The main reason for a lender to obtain a valuation of the property on which it has been asked to

lend is to

A. ensure that the purchase price is not excessive. B. establish the level of buildings and contents insurance required. C. check that its market value adequately exceeds the mortgage amount. D. check that it is in a reasonable state of decorative order.

74. Where a borrower has a significant share portfolio which is to be put towards the repayment of

capital under an interest‐only mortgage, the Financial Conduct Authority now requires the lender to

A. ensure the proceeds of any sale of shares during the term are used to reduce the capital. B. ensure there is a strategy in place to repay the mortgage. C. recommend conversion into a vehicle which carries a lower risk. D. carry out a full annual review to monitor gains or losses.

75. A typical condition of eligibility for a mortgage payment protection insurance policy is that the

insured

A. is aged between 21 and 70. B. has not previously been made redundant. C. has an employment contract for at least 20 hours per week for the next 3 months. D. has been working at least 16 hours per week for the last 6 months.


INCOME TAXRATES OF TAX 2014/2015

Starting rate for savings* 10%Basic rate 20%Higher rate 40%Additional rate 45%Starting‐rate limit £2,880*Threshold of taxable income above which higher rate applies £31,865Threshold of taxable income above which additional rate applies £150,000 Child benefit charge from 7 January 2013: 1% of benefit for every £100 of income over £50,000

*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 § £100,000Personal Allowance (basic) (if born after 5 April 1948) § £10,000Personal Allowance (if born between 6 April 1938 and 5 April 1948) § £10,500Personal Allowance (if born before 6 April 1938) § £10,660 Married/civil partners (minimum) at 10% † £3,140Married/civil partners at 10% † £8,165 Income limit for age‐related allowances £27,000Blind Person’s Allowance £2,230 Enterprise Investment Scheme relief limit on £1,000,000 max 30% Seed Enterprise Investment relief limit on £100,000 50% Venture Capital Trust relief limit on £200,000 max 30% § the Personal Allowance reduces by £1 for every £2 of income above the income limit irrespective of age (under the income threshold).

† where at least one spouse/civil partner was born before 6 April 1935.

Child Tax Credit (CTC)

- Child element per child (maximum) £2,750- family element £545

Threshold for tapered withdrawal of CTC £16,010


NATIONAL INSURANCE CONTRIBUTIONS Class 1 Employee Weekly Monthly Yearly

Lower Earnings Limit (LEL) £111 £481 £5,772 Primary threshold £153 £663 £7,956 Upper Accrual Point £770 £3,337 £40,040 Upper Earnings Limit (UEL) £805 £3,489 £41,865

Total earnings £ per week CLASS 1 EMPLOYEE CONTRIBUTIONS

Contracted‐in rate Contracted‐out rate (final salary)

Up to 153.00* Nil Nil 153.01 – 770.00 12% 10.6% 770.01 – 805.00 12% 12% Above 805.00 2% 2% *This is the primary threshold below which no NI contributions are payable. However, the lower earnings limit is £111 per week. This £111 to £153 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 153.00** Nil Nil Nil 153.01 – 770.00 13.8% 10.4% 13.8% 770.01 – 805.00 13.8% 13.8% 13.8% Excess over 805.00 13.8% 13.8% 13.8% ** Secondary earnings threshold.

Class 2 (self‐employed) Flat rate per week £2.75 where earnings exceed £5,885 per annum. Class 3 (voluntary) Flat rate per week £13.90. Class 4 (self‐employed) 9% on profits between £7,956 ‐ £41,865.

2% on profits above £41,865.


PENSIONSTAX YEAR LIFETIME ALLOWANCE ANNUAL ALLOWANCE

2006/2007 £1,500,000 £215,000 2007/2008 £1,600,000 £225,000 2008/2009 £1,650,000 £235,000 2009/2010 £1,750,000 £245,000 2010/2011 £1,800,000 £255,000 2011/2012 £1,800,000 £50,000 2012/2013 £1,500,000 £50,000 2013/2014 £1,500,000 £50,000 2014/2015 £1,250,000 £40,000

ANNUAL ALLOWANCE CHARGE 20% ‐ 45% 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.

CAPITAL GAINS TAXEXEMPTIONS 2014/2015

Individuals, estates etc £11,000Trusts generally £5,500Chattels proceeds (restricted to five thirds of proceeds exceeding limit)

£6,000

TAX RATES

Individuals: Up to basic rate limit 18%Above basic rate limit 28% Trustees and Personal Representatives 28% Entrepreneurs’ Relief* – Gains taxed at: 10%Lifetime limit £10,000,000 *For trading businesses and companies (minimum 5% employee or director shareholding) held for at least one year.


INHERITANCE TAXRATES OF TAX ON DEATH TRANSFERS 2014/2015

Transfers made after 5 April 2014

- Up to £325,000 Nil- Excess over £325,000 40%- Lifetime transfers to and from certain trusts 20%

*For deaths after 5 April 2014, a lower rate of 36% applies where at least 10% of deceased’s net estate is left to charity.

MAIN EXEMPTIONS

Transfers to

- UK‐domiciled spouse/civil partner No limit- non‐UK‐domiciled spouse/civil partner (from UK‐domiciled spouse) £325,000- UK‐registered charities No limit

Lifetime transfers

- Annual exemption per donor £3,000- Small gifts exemption £250

Wedding/civil partnership gifts by

- Parent £5,000- Grandparent £2,500- other person £1,000

100% 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 0‐3 3‐4 4‐5 5‐6 6‐7 ‐ 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 2014/2015:

Cars that cannot emit CO2 have a 0% charge.

The percentage charge is 5% of the car’s list price for CO2 emissions of 75g/km or less.

For cars with CO2 emissions of 76g/km to 94g/km the percentage is 11%.

For cars with CO2 emissions of 95g/km to 99g/km the percentage is 12%.

Cars with CO2 emissions of 100g/km have a percentage charge of 13% and thereafter the charge increases by 1% for every complete 5g/km to a maximum of 35% (emissions of 210g/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 CO2 emissions % relevant to the car and that % applied

to a set figure (£21,700 for 2014/2015) e.g. car emission 100g/km = 13% on car benefit scale. 13% of £21,700 = £2,821.

1. 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 £5,000. 3. 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%.

PRIVATE VEHICLES USED FOR WORK 2014/2015 Rates

Cars On the first 10,000 business miles in tax year 45p per mileEach business mile above 10,000 business miles 25p per mileMotor Cycles 24p per mileBicycles 20p per mile


MAIN CAPITAL AND OTHER ALLOWANCES 2014/2015

Plant & machinery (excluding cars) 100% annual investment allowance (first year)

£500,000

Plant & machinery (reducing balance) per annum 18%Patent rights & know‐how (reducing balance) per annum 25%Certain long‐life assets, integral features of buildings (reducing balance) per annum

8%

Energy & water‐efficient equipment 100%Zero emission goods vehicles (new) 100%Qualifying flat conversions, business premises & renovations 100%

Motor cars: Expenditure on or after 1 April 2014 (Corporation Tax) or 6 April 2014 (Income Tax) CO2 emissions of g/km: 95 or less* 96‐130 131 or more Capital allowance: 100% 18% 8% first year reducing balance reducing balance *If new

CORPORATION TAX 2014/2015

Full rate 21%Small companies rate 20%Small companies limit £300,000Effective marginal rate 21.25%Upper marginal limit £1,500,000

VALUE ADDED TAX 2014/2015 Standard rate 20%Annual registration threshold £81,000Deregistration threshold £79,000


MAIN SOCIAL SECURITY BENEFITS 2014/2015

£Child Benefit First child 20.50 Subsequent children 13.55 Guardian’s allowance 16.35 Employment and Support Allowance

Assessment Phase

Age 16 – 24 Up to 57.35 Aged 25 or over Up to 72.40 Main Phase Work Related Activity Group Up to 101.15 Support Group Up to 108.15 Attendance Allowance Lower rate 54.45 Higher rate 81.30 Retirement Pension Single 113.10 Married 180.90 Pension Credit Single person standard minimum

guarantee 148.35

Married couple standard minimum guarantee

226.50

Maximum savings ignored in calculating income

10,000.00

Bereavement Payment (lump sum) 2,000.00Widowed Parent’s allowance 111.20 Jobseekers Allowance Age 16 ‐ 24 57.35 Age 25 or over 72.40 Statutory Maternity, Paternity and Adoption Pay

138.18

Copyright © The Chartered Insurance Institute 2014

Examination Guide


Specimen Examination Answers and Learning Outcomes Covered

Question Answer Learning Outcome



Learning Outcome 1 Learning Outcome 3 Learning Outcome 4

1 C 1.1 34 A 3.1 54 A 4.1

2 B 1.1 35 B 3.1 55 D 4.1

3 C 1.1 36 A 3.1 56 A 4.1

4 A 1.1 37 B 3.1 57 D 4.1

5 D 1.1 38 B 3.1 58 D 4.1

6 D 1.1 39 C 3.1 59 C 4.2

7 B 1.2 40 D 3.1 60 D 4.2

8 A 1.2 41 A 3.1 61 D 4.2

9 B 1.2 42 D 3.1 62 A 4.2

9 Questions 43 A 3.1 63 B 4.2

44 A 3.1 64 B 4.2

Learning Outcome 2 45 B 3.1 65 B 4.2

10 C 2.1 46 C 3.2 66 C 4.2

11 B 2.1 47 C 3.2 67 C 4.2

12 D 2.1 48 C 3.2 68 D 4.2

13 D 2.1 49 A 3.2 69 B 4.2

14 D 2.1 50 B 3.2 70 D 4.2

15 B 2.1 51 A 3.2 17 Questions

16 A 2.1 52 C 3.2

17 A 2.1 53 C 3.3 Learning Outcome 5

18 C 2.1 20 Questions 71 C 5.1

19 B 2.1

72 D 5.1

20 D 2.1 73 C 5.1

21 B 2.1 74 B 5.1

22 B 2.1 75 D 5.1

23 C 2.1 5 Questions

24 D 2.1

25 B 2.1

26 B 2.1

27 D 2.2

28 C 2.2

29 D 2.2

30 D 2.2

31 C 2.2

32 C 2.1

33 A 2.2

24 Questions

Documents

Certificate in Financial - Personal Finance Society€¦ · Examination Guide FA7 Examination Guide 2014/2015 2 Unit 7 – Financial services products Based on the 2014/2015 syllabus