The CII AF7 July 2020 Exam in Review
We have been reviewing the CII exam papers from the July 2020 sitting and this time, it’s the turn of the AF7 Pension Transfer exam.
If you haven’t seen July’s exam guide, it can be found here.
In this sitting, Section A had 33 marks and section B had 67 marks.
The first question asked candidates to outline the FCA’s rules that must be followed when two separate advisers work together to provide DB pension transfer advice and the advice on the proposed receiving scheme and its investments – 7 marks.
Question 2 was a mini case study and tested how a higher assumed rate of future inflation would impact a client’s CETV calculation – 9 marks.
Question 3 was another mini case study and had two parts; part (a) asked candidates to outline benefits of using a lifetime cashflow model as part of the advice process and part (b) asked for an explanation of why the lifetime cash flow model will need to be reviewed regularly – 9 marks.
The last question in Section A asked for an outline of the key factors that should be considered when assessing an individual’s attitude to investment risk and outline why they are important – 8 marks.Here's a review of the Jul 20 exam paper for #CII #AF7. Click To Tweet
The first case study of Section B concerned William and Olivia. The three questions asked were:
- List the factors you would consider and outline their relevance when making a recommendation on the potential transfer of the cash equivalent value of William’s DB pension scheme – 15 marks.
- State all the potential death benefit options and their tax treatment, if William transfers his DB pension scheme benefits to a personal pension in order to access his benefits flexibly – 10 marks.
- Compare the tax implications of using the couple’s investment portfolio to provide any income or capital requirements as opposed to taking funds from William’s personal pension – 9 marks.
In Case Study 2, we were introduced to Nisha and Sanjay. The four questions were:
- State the additional information you would need prior to advising Nisha on the suitability or otherwise of transferring the value of her DB pension scheme to a personal pension – 8 marks.
- Explain why the results of a TVC will be of limited relevance in determining whether a transfer is suitable or not – 12 marks.
- List the potential benefits and potential drawbacks of transferring the value of her DB pension scheme to a personal pension now rather than when Nisha approaches age 60 – 8 marks.
- Outline how Nisha’s benefits will be affected if the scheme enters the PPF before she reaches age 65 – 5 marks.
Overall, this seemed another reasonable paper with a similar mix of application and technical knowledge that we have seen in previous papers.
As AF7 is a specialist paper, we thought it might be useful to see what has been tested over the previous five papers starting with the first sitting in 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
|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
|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)
|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
|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.
As you can see with all of the AF7 papers, there has been a fact-finding question and often more than one ‘factors’ question. Recent legislation will be tested as soon as it is practically possible to do so. 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 application of that knowledge. Using the past 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.
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 mock paper taster now!