The CII J05 February 2024 Exam in Review

In this article, we’re looking at the CII’s Diploma in Financial Planning J05 exam paper that students sat in February – this is the exam on Pension Income Options. This will be useful reading for you if you are preparing to sit this exam in the near future; it will help you to focus your revision on the areas that are likely to be examined.

This article is correct as at 23 May 2024.

You can find a copy of the exam guide here.  

Two hours are given to answer 15 questions for a total of 130 marks; a pass gives students 20 Diploma credits.

Question 1

We opened up with a question regarding Shabana, who had enhanced protection with lump sum protection of 45%. This two-part question firstly required candidates to explain why she can now make further contributions to her pensions without surrendering her enhanced protection. The second part of the question required us to outline her lump sum entitlement assuming she takes the lump sum on 1 April 2024. This question has historically always been lifetime allowance related and interestingly remains along the general theme despite the allowance itself having been dispensed with.

Question 2

This was a very topical question and concerned 2028 protection, i.e. the right that will be afforded when the minimum pension age increases to 57 for members whose scheme rules allow earlier retirement to continue to take this. We have seen similar historically when the minimum pension age of 50 was introduced in 2006 and in 2010 when it increased to 55.

This one has now come up in the last three sittings. Given that we have four years until the increase comes into effect, it appears to be a virtual certainty for a repeat outing, particularly given that the examiners commented that many candidates were still struggling with it. Those who are planning on sitting this paper in September would do well to take note.

Question 3

In this question, we were introduced to Karen, aged 54, who planned to semi-retire at age 55. Karen had numerous pensions including a dependents pension in payment from her late husband with a capital value of £18,600, a group personal pension valued at £26,300 and a small personal pension valued at £2,000. She wished to use her pensions to repay her mortgage and the question required candidates to explain how she may be able to commute her pensions for lump sums.

The question required knowledge of the rules governing triviality and small pots. The examiner commented that some candidates struggled with the group personal pension confusing this with the rules for DB schemes. Some candidates also discussed PCLS and UFPLS options, which stresses the importance of ensuring you answer the question asked and not the one that you wish had been asked.

Question 4

Question 4 was a practical advice considerations one. It introduced us to Astrid, who was close to retirement and asked us to outline the factors to take into account when determining whether she should access her pension using flexi-access drawdown or purchase an annuity. This ought to have held little fear for those actively involved in the at-retirement advice market. The question took the form of a mini-case study.

The CII commented that better scoring answers took the information given in the case study, such as limited experience, cautious attitude to risk and existing secured pension and referred to it in the answer rather than simply stating answers such as ‘capacity for loss’ which some other candidates did.

Question 5

In this question, we met Franco and Sally, aged 63 and 60. He had recently retired and she had reduced hours as part of a phased retirement. Therefore, they wished to withdraw £25,000 per annum from their pensions in order to top up their income. In a not-too-dissimilar manner to Question 4, we were asked to outline the benefits of phased flexi-access drawdown as opposed to a lifetime annuity purchase.

We were then asked to explain why they should take the withdrawals from Franco’s personal pension rather than Sallys’ GPP. The latter was an interesting question and required a range of factors to be considered, such as tax rates, MPAA and her being an active member of the scheme.

Question 6

Question 6 was a fairly standard one which referred to COBS 9.3 and asked us to outline the relevant circumstances which should be considered when making a personal recommendation regarding income withdrawals. This was 7 marks and should have been a quick gain for those who are familiar with the subject. However, the CII did remark that candidates often seem to struggle with rules-based questions and would ‘do well to familiarise themselves with the COBS rules given they underpin all aspects of financial advice’. They are also a staple diet of CII pension exams.

Question 7

Again, this was a fairly standard question covering investment scams and a firm which identified that some of its clients have been approached by scammers. It asked us to state five common tactics used by scammers which should be included in its warning. Again, this question was a fairly basic knowledge test and those who knew the relevant information should have been able to score quite nicely on it.

Question 8

Next up, we met Sabine who was approaching her 66^th birthday and wanted to understand how much state pension she would receive. This question required candidates to explain to her how her state pension will be calculated.

This again was a topic which has been well visited in recent exam sittings and given that it did not require any actual calculations, well-prepared candidates should have been able to score very close to the full seven marks. The CII remarked, however, that some candidates really struggled and could not provide anything beyond national insurance requirements, which was surprising given how long the system has been in place.

Question 9

Next, we had another vesting options question, which required candidates to outline the factors to take into account when advising on whether to take a lump sum from a pension plan as a PCLS or UFPLS. This has been well tested over the years and those who had read up on their past papers again ought to have been able to score well on it. The CII remarked that candidates did very well on the whole, which was helpful given that the question was for a fairly substantial 11 marks.

Question 10

Question 10 was a tricky little number about spousal bypass trusts. Whilst this has been tested previously, these arrangements are no longer anywhere near as common since the pension freedoms as there is now very little benefit to them other than in a very limited range of circumstances. Siobhan and Harvey in the case study was one such situation, with her wishing to provide for him in the event of her predeceasing him, but to ultimately leave any residual fund to her daughter. Unsurprisingly, feedback was that many candidates struggled with the question. The good news was that it wasn’t a significant one, with seven marks available.

Question 11

This, again, covered vesting options and required candidates to explain why Suzy, who had just lost her wife, Gwen, would be best served taking her income need from her ISA rather than her dependent’s flexi-access drawdown plan. This is a practical question which comes up quite often in real-life financial planning and candidates generally did well in a question which offered up to ten marks.

Question 12

In this question, we were introduced to Angus and Hannah aged 64 and 56. Angus was considering transferring his defined benefit scheme into a personal pension plan. The question asked us to outline the death benefits available from either scheme if Angus died before the age of 75 and their tax treatment. This was a fairly basic question for anyone studying for level 4 pensions exams and ought to have been money for old rope, with the CII commenting that candidates displayed a good level of knowledge.

Question 13

Question 13 related to Alexa, who has recently retired and is drawing £22,000 per annum from her portfolio of drawdown plans and ISAs. She required advice on how long her portfolio would last. The question covered two areas. Firstly the purpose of creating a lifetime cashflow model. This question is often asked in terms of the benefits of creating a cashflow model, however, the question was described as well answered.

Secondly, candidates were asked to describe the four key risks that she was subject to in terms of the withdrawals, those being market risk, inflation risk, longevity risk, and sequencing risk. The feedback was that part one was well answered, part 2 not so much so.

Question 14

Next, we met Carlos, aged 63, whose pension was invested into a lifestyle annuity fund, but who had an adventurous attitude to risk and planned to draw income via a series of uncrystallised funds pension lump sums. We were asked to explain why his current approach was unsuitable and why he would benefit from an earmarked investment strategy in retirement. The first part ought to have been straightforward, the second was a bit of a curveball, and the CII stated that marks were lost for not providing enough detail in the answers.

Question 15

Finally, we had a question regarding Petra, aged 64, who was getting divorced and had been awarded a share of her husband’s defined benefit pension scheme via cash equivalent transfer value. Candidates were asked to explain the advantages of using a pension sharing order rather than an earmarking one. Again, there ought to have been nothing too scary here. However, the CII commented that some candidates lost marks for stating the disadvantages of earmarking, which was not what the question asked. This emphasizes the need for candidates to read the question carefully and ensure the question that is being asked and not the one they would like to be asked.

Overall, there were the odd couple of curveballs, but this paper ought not to have contained anything that would really phase candidates who came into it thoroughly prepared.

Comparison with the September 2023 Exam Paper 

Let’s compare this paper with what was tested in September 2023: That exam guide can be found here. 

The topics covered were:  

• PCLS calculations
• 2028 protection
• Pension increase exchange
• Cashflow modelling
• Sequencing risk
• Pros and cons of UFPLS
• Dependents, nominees and successors
• Income tax and IHT treatment of death benefits
• PPF and FSCS
• State pension and guarantee credit
• Pension consolidation
• PCLS vs UFPLS
• Annual reviews
• Attitude to risk/capacity for loss
• Business sale as a retirement strategy.

Whilst the last one in September’s exam was a curveball indeed, the same themes continue to run through the sittings. In addition to 2028 protection as previously noted, cashflow modelling, risk, death benefits, PCLS/UFPLS and the PPF, amongst others, continue to be regular features.

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