Our Post-Exam Review of the July 2020 CII AF5 Exam

The cancelled AF5 exam from April was sat by candidates in July, and now that the CII has released the exam paper, we can see how we did in our pre-exam analysis. This is useful reading if you’re planning to sit the AF5 exam in October.

If you haven’t already seen the exam guide for July, you can access it on the CII website.

This time, the fact-find, released two weeks prior to the exam, concerned Kathy and Tim Finch, both aged 61 who had retired ‘a few months ago’ after Kathy suffered an accident at work.  They had two daughters and four grandchildren.

The objectives, given on exam day, were as follows:

Immediate objectives:

• To review the tax efficiency and suitability of their current pensions and investments
• To establish a suitable investment strategy for Kathy’s compensation payment
• To ensure they have sufficient income throughout retirement

Longer-term objectives:

• To mitigate any potential IHT
• To provide financial security for the survivor on first death
• To set up a regular savings strategy to provide funds for their grandchildren

Question 1

The first question was in three parts for a total of 33 marks. Firstly, candidates had to identify the additional information needed to establish if their current savings, pensions, and investments were suitable to meet their needs now that they’re retired.  Candidates were then asked for a description of the process an adviser would follow to establish if their existing plans were likely to be sustainable throughout their retirement. Finally in Question 1, candidates had to identify and explain the key client-specific factors, applying to Tim and Kathy, that should be considered when assessing capacity for loss.

We had correctly identified the first aim as one of their key objectives, so our analysis included not only the process an adviser should follow to provide them with advice on their portfolio but also the process to review performance and the overall suitability of their investments. It also covered the client-specific factors regarding attitude to risk but most importantly – as this was what was tested – capacity for loss. We had covered fact-finding as part of ensuring they could generate a tax-efficient, and sustainable income throughout retirement, so this answer could easily have been adapted to answer part (i).

Question 2

Question 2 was in two parts: first, an explanation of the key issues that should be taken into consideration when setting up fixed monthly withdrawals from the OEIC portfolio instead of continuing to draw the natural dividends; and secondly, an explanation of why Kathy’s compensation payment should be paid free of tax.  Fortunately, the second part was only worth 4 marks, as this, we hadn’t specifically covered.  As for the first part, our analysis covered areas relevant to this question, such as their tax position, cash flow, as well as the key factors that should be considered when establishing a reasonable rate of withdrawal. Although we had linked this to Tim’s SIPP, many of the points were relevant.

Question 3

The third question was in several parts: firstly, a description was needed of the benefits of Kathy purchasing a fixed-term annuity to provide them with an income to cover essential expenditure. Part (b) was in two parts itself: in part (i), candidates had to recommend and justify a suitable and tax-efficient strategy to enable Tim to draw a regular flexible monthly income payment from his SIPP; and secondly, explain why the strategy in part (i) would benefit both Kathy and their children on Tim’s death. We are pleased to say that a large part of the analysis was dedicated to the various options they both had with their existing pension plans, including UFPLS, FAD, as well as the death benefit options available, and tax treatment.  Candidates using our analysis therefore would have had all the necessary information to gain the majority of the 23 marks on offer for this question.

Question 4

Question 4 tested the investment strategy within Tim’s SIPP: firstly, an explanation of why a range of ETFs may be suitable investments; and secondly, the key reasons why liquidity should be considered when reviewing the investments held.  We had covered the potential risks of the funds Tim was invested in which did, of course, cover liquidity risk; although, it was more of a generic answer. We also had included analysis on the various features of ETFs, which should have enabled most of the marks to be picked up on this part of the question.

Question 5

Onto Question 5 and again two parts: firstly, an explanation of the benefits of continuing to make personal pension contributions now they are retired; and a recommend-and-justify question on the actions they can take to improve the tax efficiency of their current savings and investments.  We had recommended that Kathy and Tim both continue making personal pension contributions as part of their IHT mitigation strategy, so limited information was available here. However, throughout the analysis, we had information on how they could improve their position by transferring holdings to each other and making more use of their available tax allowances – all of which could have been used to answer the second part of the question.

Question 6

Question 6 concerned their IHT position: firstly, an explanation of why setting up a whole of life policy with a reviewable premium may be a suitable option to help them in their IHT planning objective; and a further recommend-and-justify question – this time on a suitable trust arrangement to enable them to mitigate any future IHT, whilst retaining full access to their capital.  The IHT objective was also expected, so our analysis included various areas which we thought might have been tested. We thought it more likely that a discounted gift trust would be tested; however, in case they did not want to lose access to capital, we had also included how a loan trust scheme would also benefit them.  We had included a useful table on how a life policy should have been set up to cover their current and future IHT liability, which also included the potential drawbacks of the recommendations made. All this information would have been useful in formulating answers to both parts of these questions.

Question 7

Onto Question 7, and this concerned the aim of setting up regular savings plans for their grandchildren: firstly, candidates had to identify the key benefits of making regular savings in a pension plan rather than a Junior ISA; secondly, candidates were asked for the reasons why a personal pension may be more suitable for this purpose than a stakeholder pension; and lastly, identify the key reasons why a global equity-based investment strategy may be appropriate.  In our analysis, we had focused on Junior ISAs; however, one part of the analysis detailed the drawbacks of choosing to invest in them, such as control at 16 and access at 18, and certainly, this could have been used as part of an answer to the first part of the question. Information regarding fund choices earlier in the analysis would have also been very useful as key reasons why a global equity-based investment strategy might be appropriate.

Question 8

Finally, the review question and this time candidates had to explain why they should review their investment portfolio more than once a year.  Our analysis always includes a review question, and this time, we had included a couple of areas which we thought might be important for these clients which were pension planning, including FAD, and IHT planning.  Although the actual question was not related to a specific objective, rather an overall assessment, all of the answers would have been relevant, and we hope most if not all the 8 marks on offer could have been achieved.

In summary, the objectives given on the day were the ones we expected, and many of the resulting questions were anticipated and covered in full in our analysis.  Some signposts in the fact-find didn’t translate into questions, for example, Kathy’s PMI policy, which was referenced, and the fact they didn’t know their State pension entitlement, which seemed particularly relevant to them at this point in their life.  This was another reminder of having to think and analyse widely when considering the fact-find and endeavouring to leave no stone unturned when preparing for the exam.

Grab the resources you need!

If you’re studying for your CII AF5 exam, and you’re wanting to prepare as much as possible, grab our free taster analysis to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF5 fact-find analysis taster now!