The CII AF7 September 2022 Exam in Review
Last updated on August 3rd, 2023 at 7:33 am
We’re looking at the exam paper from the CII’s September 2022 sitting of AF7 – the Pension Transfer exam.
This article is correct as at 25 November 2022.
You can find the question paper here.
In this paper, Section A had 30 marks allocated to it, and Section B had 70 marks.
Section A, as usual, consisted of four questions and these were for a total of 34 marks. The first one, again as usual, was a regulatory question and was also an outline question. The content concerned the production of an appropriate pension transfer analysis and the steps that the regulator expects an adviser to consider.
The CII remarked that these questions are often answered very well or poorly and that it is hard to make an educated guess. To obtain the marks available, these questions have to be answered quite specifically to reflect the wording in the regulations or FCA handbook. It is always worth learning the FCA’s requirements for the basic processes involved in giving pension transfer advice and making sure that you are able to reproduce them fairly verbatim. This question was for 12 marks and if you know the requirements and are able to articulate them, then this could have been 20% of the pass mark in the bag straight away.
In Question 2, we met Nadeem, who had an old-style retirement annuity contract with a guaranteed annuity rate of 9.5%. These types of product tend to be quite restrictive in nature and this was no exception, with the rate only available on retirement at age 65 and on a no escalation basis. The question required us to state the additional information which would be required from Nadeem in order to advise him on whether to accept the guaranteed annuity rate or transfer to an alternative. Note here that the key words are ‘from Nadeem’. What this means is that marks won’t be given for information that would be obtained from the scheme itself. This question was basically looking for soft facts, and the feedback was that most performed well. However, a surprising number of candidates did not ask what age he planned to retire, which was key information given that the rate was only available at age 65.
Question 3 was a fairly routine one asking us to identify and explain four key risks that our protagonist, Sabrina, would be subject to if she opts to transfer out of her defined benefit scheme and into a defined contribution alternative. This sort of question should be straightforward to those dealing with defined benefit transfers on a regular basis and it offered up a very reasonable 8 marks for answering.
In Question 4, Olla had been left a defined contribution pension pot by her husband David, who had transferred from a defined benefit scheme six months prior to his death. The question surrounded HMRC, who had assigned a value to the pension fund for IHT purposes, and how this would be treated for IHT purposes. HMRC do, of course, ask in their IHT return forms about any pension transfers taking place in the two years prior to death, and where this was done in the knowledge of poor health, may seek to treat it as a transfer of value for IHT purposes. The answers were mixed, and the CII commented that a number of candidates explained why it would have a value assigned, which was not the question asked.
Case Study 1
In the first case study, we were introduced to Ivo, 54, married to Mary, 51, with two young children. Ivo had a congenital heart defect, which meant that his life expectancy was likely to be reduced, however, there was no way to be sure by how much. Ivo may have been eligible for ill health early retirement, but wanted to continue to work as long as he could, even if he had to work part-time hours. Ivo was keen to ensure Mary had sufficient secure income in the event of his premature passing.
Question 5 was a short one asking the criteria, which would be required under HMRC rules, for Ivo to qualify for ill health early retirement. This was four marks only. This area pops up every now and then and is a nice easy four marks where candidates have committed it to memory, however, would not be the end of the world if it were not able to be answered in full.
In Question 6, we were asked the lifetime allowance treatment of the various benefits from Ivo’s defined benefit and defined contribution schemes in the event of his death. We were then asked to explain the death benefits that would be payable from the Larkin Ltd scheme and how these could assist Mary in meeting her income shortfall until State Pension age. Death benefits are a staple diet of AF7 and often the questions in this area are for double figure marks, as was the case here. This is a core knowledge area for those active in defined benefit pension transfer advice, and candidates who knew their stuff should have been able to achieve close to full marks. However, feedback was that some struggled in correctly assessing the treatment of the scheme benefits.
Question 7 was for 12 marks and was one of those advice-related questions where you were given the advice (not to transfer the scheme benefits) and asked to give reasons for it. This was a 12-marker and again, good scores ought to have been available to those who were well prepared. The line about being keen to ensure Mary had sufficient secure income in the event of his premature passing might, in truth, have been a bit of a giveaway, particularly with uncertainty over her state pension entitlement. However, note that this was an ‘explain’ question and the CII commented that some candidates fell into the trap of simply stating points with no further consideration. It is crucial to know your verbs when sitting a level 6 CII exam.
Finally, Question 8 was a PPF question, which asked about how Ivo’s benefits would be impacted if the scheme entered the PPF prior to his normal retirement age, assuming he did not take ill-health early retirement. PPF questions again have been a staple diet of this exam in the past, though there is a slight curveball in the form of the recent removal of the PPF cap following the judgement in Hughes versus the Board of the PPF. This would not have impacted Ivo as his benefits in the scheme did not exceed the cap to start.
Case Study 2
The second case study introduced Robert and Veronica, who were aged 65 and 62 and who both had preserved benefits under defined benefit pension schemes. They were looking to retire with a joint secure income of £24,000 net and would also like to ensure their children inherit some assets.
Question 9 asked the additional information you would require from their scheme administrator before making a recommendation. The key term here, again, is from the scheme administrators. Candidates would not have scored for information that would need to be obtained from them. Again, well-prepared candidates should have been able to get close to the full ten marks, though there was a curveball in that we were expected to state whether the information would be required from Robert’s scheme, Veronica’s scheme, or both and the feedback commented that some candidates slipped up on this.
In Question 10, we were asked a fairly basic question regarding the difference between attitude to risk and capacity for loss and what factors we would take into account from the case study when assessing capacity for loss. This is a fairly basic financial planner’s question rather than a pension-transfer-specific one and unsurprisingly some candidates were able to score highly on it. However, the CII commented that a few candidates didn’t link their answer to the information in the case study and simply listed generic questions they would ask to establish capacity for loss.
Finally, Question 11 once again gave us a recommendation (Robert retains and draws his scheme pension whilst Veronica transfers to a defined contribution scheme) and asked us to justify it based on the information in the case study. This was a 15-mark question and involved basic competence in identifying the salient points to consider when giving pension transfer advice. Again, this was answered well and many candidates scored highly on it.
All in all, this was a relatively straightforward paper as far as AF7 sittings go, with little in the way of curveballs.
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 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
|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.
|Section 32 policy that included GMP.
Death benefits and tax treatment in the event of death before crystallisation if scheme is retained or a transfer to a PP is made.
|Factors to consider when deciding which DB pension to transfer.
Benefits and drawbacks of using part of a fund to buy an annuity.
Factors to consider when deciding which annuity basis should be recommended for partial annuitisation.
Class 3 NICs.
Cash flow modelling – FCA requirements when used as part of the APTA and reviews.
Risks regarding accepting a CETV, withdrawing the PCLS to repay debt with balance placed on deposit.
|Abridged advice and the process that must be followed where the initial outcome is unclear.
Key factors to consider when assessing capacity for loss in respect of a safeguarded benefits transfer.
RACs and guaranteed annuity rates
Sustainable withdrawal rates
|Information needed regarding existing scheme when advising to transfer.
Factors to consider when making a recommendation.
Investment and diversification.
Death benefits and nomination forms.
|Information within the one-page summary.
Which pension to transfer and why.
|The four drivers of vulnerability.
Cash equivalent transfer value assumptions.
Information provided by trustees.
|Recommending an investment strategy for a transferred pension.
PCLS vs UFPLS.
Payment of class 3 NICs.
|Information required from the customer.
Factors to consider when recommending.
|Personalised charges communications
|Transfer value comparator
Death benefits and tax treatment
|Additional information from the administrator
Capacity for loss
Reasons for a retain recommendation
Life assurance to cover death benefits
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!