The CII AF7 October 2020 Exam in Review
We have been reviewing the CII exam papers from the October 2020 sitting, and this week it’s the turn of the AF7 Pension Transfer exam.
If you haven’t seen October’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 was a nice start as it asked for an explanation of why a client must receive independent financial advice before a transfer can take place, as well as the steps that must be taken to prove the advice has been received. This question was for 7 marks in total.
Question 2 was, as is often the case, a mini case study and tested HMRC criteria that must be met to enable an ill-health early retirement pension to be paid; the compensation that is likely if the scheme enters the PPF whilst in receipt of an ill-health pension; and finally, state why a CETV for someone in poor health might represent good value. This question had 11 marks in total.
Question 3 was a ‘factors’ question, a firm favourite of all the AF papers; this question asked for 8 factors to consider when evaluating a potential transfer with specific regard to GMP benefits.
Question 4 asked for 7 possible reasons for a higher CETV than the one which had been obtained three years previously.Here's a review of the Oct 20 exam paper for #CII #AF7. Click To Tweet
Onto the first case study where candidates were introduced to Zak and Martina, both in their mid-60’s with no children. Zak had left his previous employer’s scheme in 2014, which allowed partial transfers with Zak able to transfer the pre-97 or post-97 benefits.
The questions were:
- Outline the factors that should be taken into account when deciding whether to recommend a transfer of the pre-97 benefits leaving the post-97 benefits preserved in the scheme – this was for 15 marks.
- Outline the potential death benefits, including their income tax treatment, in respect of (a) a scheme pension being received by Zak in respect of the post-97 benefits within the scheme and (b) a DC pension following the transfer of the cash equivalent of Zak’s pre-97 pension benefits – for 12 marks.
- Outline the factors to take into account when designing an investment strategy for Zak’s transferred pension fund – for 7 marks.
Case Study 2 concerned Rosie, aged 50, a widow with two dependent children. The questions were:
- Identify the additional information an adviser would require in respect of Rosie’s former employer’s DB scheme before advising her on the suitability or otherwise of transferring the benefits – for 11 marks.
- Explain the factors that would support a recommendation for Rosie to retain her pension benefits within the DB scheme at this point in time – for 12 marks.
- Explain why Rosie should complete nominations in favour of her children for the dependent’s flexi-access drawdown pension and her workplace pension scheme – for 5 marks.
- Assuming HMRC assigns a value to the transfer of Rosie’s previous husband’s scheme for IHT purposes, outline the impact this will have for Rosie when carrying out any future IHT Planning – for 5 marks.
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.
|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.
|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
As you can see with all of 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 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.
We are now offering brand new 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 new ‘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 brand new resource that we developed specifically for the AF7 exam.
Recent pension transfer legislation changes that came into force on 1 October 2020 could potentially be examined from 1 January 2021. We have updated all our AF7 resources, which also include revision notes and mock papers, to incorporate the reforms.
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!