The CII AF7 February 2021 Exam in Review
We have been reviewing the CII exam papers from the February 2021 sitting, and this week we’re looking at AF7 – the Pension Transfer exam.
If you haven’t seen February’s exam guide, it can be found here.
In this paper, Section A had 30 marks allocated to it, and Section B had 70 marks.
Question 1 tested a section 32 policy that included GMP. For 8 marks, candidates were asked to outline the factors to consider regarding the GMP when advising on a transfer.
Question 2 introduced us to Rose, aged 55, who had received a CETV for deferred membership of a DB scheme. The scheme was underfunded but the CETV had not been reduced due to the employer’s covenant. Candidates had to explain what an employer covenant is, including its significance in respect of the decision to not reduce the CETV. This was for 7 marks.
Question 3 involved another 55-year-old, this time Paulo, a divorcee with two young children. He was also a deferred member of a DB scheme. The question asked for an outline of the death benefits, including the income tax treatment, in the event of Paulo’s death before benefits are crystallised and before his children reach 18 if he: (a) retains the DB scheme or (b) transfers the CETV to a PP. This question should have caused few problems for candidates as pension death benefits are regularly tested in this exam and candidates should have been prepared.
Question 4 was the obligatory regulatory question; this time it asked for 6 factors the FCA expects an adviser to consider when providing abridged advice. This question was apparently not well answered despite the information being widely publicised.Here's a review of the Feb 21 exam paper for #CII #AF7. Click To Tweet
Case Study 1
Case Study 1 of Section B introduced us to Camillo aged 64 and Benita aged 59, a married couple with one son and two grandchildren. Both had deferred benefits in DB schemes and both planned to retire when Camillo is 65.
Question 5 asked candidates to explain the factors to consider when deciding whether it is Camillo or Benita’s DB pension that should be transferred. This was for 15 marks.
Question 6 firstly asked for 4 benefits and 4 drawbacks of using part of the transferred fund to buy an annuity rather than placing the fund into FAD. This was for 8 marks. Part (b) asked candidates to explain the factors to consider when deciding which annuity basis should be recommended for partial annuitisation and again this was for 8 marks.
Finally, for Case Study 1, Question 7 asked candidates to explain, giving reasons, why they have recommended that Camillo makes Class 3 NICs to top up his State pension. This was for 7 marks and a nice end to this case study.
Case Study 2
Case Study 2 involved married couple, Jenny aged 55, and Ruth aged 42. The couple had two young children.
Jenny’s only pension benefits were in her previous employer’s contracted-in DB scheme. Ruth was taking time out from employment to look after the children.
Question 8 tested contingent charging; the question asked candidates to explain, in detail, why Jenny does not qualify for either of the exemptions to the contingent charging ban introduced in October 2020. This was for 8 marks.
Question 9 tested cash flow modelling; part (a) of the question asked for an outline of the FCA requirements when using cash flow as part of the APTA (for 6 marks) and part (b) asked for an explanation of why it is important to regularly review and revise it – this was for 8 marks. This should have been well answered as again candidates should have good knowledge of this area.
The final question was for 10 marks and asked candidates to explain the risks that should be highlighted if a recommendation is made that Jenny accept the CETV, immediately withdraw the PCLS to repay the mortgage and other debt with the balance placed on deposit as an emergency fund. Candidates would have done well if they made sure their answer was specific to the circumstances as given.
The Senior Examiner for the February paper made some interesting comments regarding the performance of candidates; firstly that answers must be focused on what is being asked to achieve a good level of marks. In Question 2 there was some advice on how to split an answer into the relevant parts so that the answer is clear to the marker.
The comment is made again that candidates must focus their answers on the question asked and use the information in the case study.
As AF7 is a specialist paper we thought it might be useful to see what has been tested over the previous six papers starting with the first sitting in October 2017.
|October 2017||Suitability report requirements and how the FCA expects an insistent client to be dealt with|
How a CETV is calculated / how the assumptions used to work out CY in a TVAS differ from those used to work out a CETV
Fact-finding a client with an EPP and the steps they must take before being able to transfer to a PP
|Fact-finding the client before advising on a transfer|
Factors to consider before making a recommendation
Limitations of the critical yield produced by TVAS
Options available (assuming a transfer to a SIPP) to the children in the event of death before 75
Why a nomination form doesn’t guarantee children would receive death benefits
|Benefits and drawbacks of transferring to a PP
Currently available transitional reliefs
Safe withdrawal rate
Stress testing as part of an annual review
|April 2018||Statutory transfer process including timescales and responsibility|
How inflation assumption increases impact a cash flow model and the suitability of a transfer
Key documentation that should be retained on file for compliance
Death benefits from a DB scheme and FAD following transfer
Reasons for an increase in a CETV
Factors to consider when advising whether to transfer
Why transferred funds should be held in cash rather than any other asset class
|Fact-finding of client before advising on a transfer
PPF and rate of revaluation in deferment and pension benefits provided in retirement
Reasons for recommending a client should not transfer
|October 2018||Risk warnings and risk factors FCA expects firms to consider|
Benefits and drawbacks of transferring pre-97 excess benefits to a PP whilst retaining GMP and post-97 benefits within DB scheme
Sequencing risk and strategies to reduce its potential impact
Reasons that may have contributed to a reduction in CETV
|Features specific to a section 32 policy that should be considered before recommending a transfer|
Reasons for not transferring
Why client should take £10,000 pa needed as PCLS payments rather than UFPLS each year
|Fact-finding client before advising on whether to transfer or not
Benefits and drawbacks of transfer to a PP
Suitability and children’s income tax position if death benefits are nominated to children directly or via a bypass trust (after transfer)
|April 2019||Member eligibility criteria for right to transfer safeguarded benefits and how this is applied when more than one category of benefit exists|
Pension benefit calculation of public sector schemes/advantages of the Transfer Club
Factors FCA expects to be considered within an APTA
|HMRC requirements for taking ill-health pension|
Factors to consider and their relevance when considering a transfer
The benefits of taking a scheme pension
The benefits of transferring and buying a lifetime annuity with protection
Death benefits under a scheme pension and a lifetime annuity including income tax treatment
Use of nomination forms with an annuity protection lump sum death benefit
|Fact-finding on income payable under the scheme and financial circumstances and objectives
Factors to consider when assessing capacity for loss
Benefits and drawbacks of transferring to a PP
Stress tests as part of an annual review of the cash flow model
|October 2019||How a triage service works including benefits for client.|
Factors to consider when advising whether to transfer a RAC with a GAR.
Factors to consider when assessing security of scheme benefits from an underfunded scheme.
How the estimated costs of providing same benefits in a DC scheme as those in a deferred DB scheme are calculated, stating assumptions used.
|Information needed from the administrator of the scheme. |
Factors to focus on when assessing attitude to transfer risk.
Client-specific factors to be considered when undertaking APTA.
The reasons why the recommendation was for client to leave benefits in the scheme.
|The benefits and drawbacks of transferring a DB scheme to a PP.
Why the pre-retirement death benefits payable under the scheme don’t meet their objectives should client die before drawing benefits and the actions they could take to help meet their objectives.
Following a recommendation to transfer, the factors to take account of when assessing sustainability of withdrawals needed to meet their income needs and the additional information needed to advise on a suitable investment strategy.
|July 2020||FCAs rules when two advisers work together to provide advice and the advice on the proposed receiving scheme and its investments|
How a higher assumed rate of future inflation would impact a CETV
Benefits of using a lifetime cashflow model and why it needs to be reviewed regularly
Key factors, and their importance, when assessing ATR
|Factors to consider and their relevance when recommending a potential transfer|
Death benefit options and their tax treatment on a transfer to a PP
Tax implications of using an investment portfolio to provide income / capital requirements as opposed to taking funds from a PP
|Additional information needed to advise on the suitability or otherwise of transferring a DB pension scheme to a PP
Why the results of a TVC will be of limited relevance in determining whether a transfer is suitable or not
Benefits and drawbacks of transferring to a PP now rather than when the client approaches age 60
How benefits will be affected if the scheme enters the PPF before age 65
|October 2020||Independent advice and transfers. |
Criteria for ill-health pension; PPF compensation and why CETV when in poor health might be good value.
Factors when transferring/GMP benefits.
Reasons for higher CETV.
|Factors when transferring pre-97 benefits leaving post 97 benefits in scheme.|
Death benefits and taxation for post-97 benefits and DC pension following transfer of cash equivalent pre-97 benefits.
Factors when designing an investment strategy for a transferred pension fund.
|Additional information needed before advising on suitability of transferring benefits.
Factors to support a recommendation to retain benefits in DB scheme.
Why nominations for dependent’s FAD and workplace pension should be made.
As you can see in all the AF7 papers, there has been a fact-finding question and often more than one ‘factors’ question. It goes without saying that candidates must be prepared for the question on the benefits and drawbacks of transferring out of a DB scheme into a personal pension as well as the reasons for not transferring.
Within each exam generally, there is a good mix of technical knowledge and its application and information analysis and evaluation skills. Using past exam papers will really help with various scenarios, but of course, in each sitting, delegates will have to very carefully read each case study to ensure that they relate their answers specifically to those clients; this is essential to achieve good marks.
We offer resources to support you as you revise for the AF7 Pension Transfers exam. AF7 has a large number of ‘staple questions’ which come up time and again in the exam paper.
Our ‘Core Knowledge’ resource focuses on these ‘staple questions’ and includes questions, answers, detailed explanations, and cross-references to the CII study text. The resource also includes some of the core calculation questions you would be expected to understand. This is a resource that we developed specifically for the AF7 exam.
Grab the resources you need!
If you’re studying for your CII AF7 exam, and you’re wanting to feel confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF7 Core Knowledge Taster now!