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Exams Are Not Just About Knowledge

Exams Are Not Just About Knowledge

This article is relevant to anybody who wants to further their career in the financial services industry, whether you are at Certificate Level or Diploma Level.

It is surprising how many people go into an exam with a high level of knowledge and understanding, but who fail due to lack of practise at the exam questions.  Different exams can and do have different exam questioning style and it is vital that you recognize the style of questions as soon as you sit down in the exam and start reading.  If you don’t, you will lose precious time and will also lose marks due to not understanding the style of questions and therefore what exactly is needed to pass.  Do all you can to avoid being one of those people with the necessary knowledge and understanding, but who stumble at the final hurdle due to lack of practise.

Case studies form the exam for R06 – an exam which is undoubtedly tough.  Here’s an excerpt from one of our case studies.  For the full case study with all the questions and answers go to http://www.brandft.co.uk/drfp/r06wkbk.asp and enter your name and email address.  We will then email it to you.

We also have a full case study workbook complete with 6 case studies with questions and answers to purchase at http://www.brandft.co.uk/drfp/r06wkbk.asp

Matthew and Penny Robinson

 

Matthew and Penny Robinson are married and aged 35 and 33 respectively. They own their own house valued at £130,000 with the aid of a repayment mortgage of £95,000 from the local building society. They have a joint life first death mortgage protection policy to cover their mortgage that includes critical illness cover.

Aside from their mortgage they have not taken financial advice from anyone else and are unsure how the full process works.

Matthew has just started a new job with a publishing company on an increased salary of £27,500. There is also the opportunity to earn productivity bonuses of up to 20% of salary. The company are about to introduce a benefits package including a contributory pension scheme, death in service and possibly sick pay. These prospective benefits appeal to both Matthew and Penny and this was a key reason he took the new job. Penny currently works part time on a salary of £3,000 per annum as well as bringing up their two young children.

Now that they feel they are on a firmer financial footing they are keen to repay the credit card debts they have accumulated over the recent years. These amount to £8,000 and they are only covering minimum payments at the moment of £200 per month.

Their other monthly outgoings are:

  • Mortgage and insurance £420
  • Household bills £220
  • Food £375
  • Children and clothes £200
  • Cars and miscellaneous £140
  • Holiday fund £160

Following a recent lottery win they now have £30,000 on deposit, paying gross interest of 4%, with their local bank and are considering investing this for their future. Matthew and Penny have very limited experience of investments and are looking for assistance in this area to make the most of their good fortune. Apart from this they have no other savings.

They have identified their financial aims as:

  • To commence financial planning for their retirement
  • To repay their debts as soon as possible
  • To review their protection needs

Questions

a) Calculate, showing all of your workings, Matthew and Penny’s net income after tax, national insurance and outgoings (16 marks)

b) As they are relatively new to financial advice, identify and explain the different methods of paying for advice by way of commission or fees (10 marks)

c) Matthew and Penny are keen to repay their debts and are considering using their investment monies or approaching their mortgage lender for a further advance – identify the benefits and drawbacks of both of these courses of action (16 marks)

Answers

 

a)

  • Matthew Robinson – Income Tax
Detail Non Savings – £ Savings – £
Employed income 27,500
Bank interest (50% of £30,000 x 4%) 600
Less personal allowance (6,475)
Taxable income – £21,625 21,025 600
Tax payable Non Savings: £21,025 @ 20% = £4,205
Savings: £600 @ 20% = 120
Total tax liability £4,325
Less tax paid on savings (£120)
Total tax due £4,205

 

  • National Insurance
£27,500 divided by 52 weeks = £528.85
£0 – £110 = 0%
£528.85 – £110 = £418.85 x 11% = £46.07 x 52 weeks = £2,395.64

 

  • Penny Robinson – Income Tax
Detail Non Savings – £ Savings – £
Employed income 3,000
Bank interest (50% of £30,000 x 4%) 600
Less personal allowance (6,475)
Taxable income – Nil (3,475) 600
Total tax liability £0
Less tax paid on savings (£120)
Total tax refundable (£120)

 

  • National Insurance
£3,000 divided by 52 weeks = £57.70
Earnings below lower earnings threshold so no NI payable

 

  • Net income after tax and national insurance and outgoings
Matthew Robinson – £ Penny Robinson – £
Gross income 28,100 3,600
Less Tax (4,325) (0)
Less National Insurance (2,395.64) (0)
Net income 21,379.36 3,600
Total net income 24,979.36 less outgoings 20,580 = £4,400

 

b)

  • Commission paid by product provider
  • Commission levels set by the product provider / Adviser may rebate some of this to the client.
  • Fund Based Trail Fees
  • Based on an annual percentage for the funds under management / Fee taken as cash or from investment
  • Time Based Charging
  • Based on amount of time spent on each client’s affairs
  • Fixed fees
  • Based on time cost and value of the work
  • Commission rebating combined with fee charging
  • Notional fees on a time cost or value basis are offset against commissions received

c)

  • Using their savings
Benefits Drawbacks
  • Saving money each month as not paying £200pm
  • Monthly savings can be used to meet other financial aims
  • Reduces risk strategy
  • Potential penalties on clearing debts early
  • Loss of interest on current investment
  • Loss of access to capital
  • Loss of use of money for original purpose
  • May run up debts again

 

  • Further advance on their mortgage
Benefits Drawbacks
  • Lower interest rate on mortgage as opposed to credit cards
  • There is equity available in property
  • Reduces outgoings / more disposable income
  • Straightforward – one lender for all debts
  • Extends the term of the debts therefore paying more interest
  • Consideration for additional life cover for increased borrowing
  • Moving form unsecured to secured borrowing – home may be at risk if they default
  • There may be set up fees for further advance

This is just an excerpt from one case study.  For the full case study with all the questions and answers go to http://www.brandft.co.uk/drfp/r06wkbk.asp and enter your name and email address.  We will then email it to you.

We also have a full case study workbook complete with 6 case studies with questions and answers to purchase at http://www.brandft.co.uk/drfp/r06wkbk.asp

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