Learning Material Sample

UK Financial Services, regulations and ethics

4. Main areas of financial advice

In this section, we briefly discuss the importance of budgeting and how it affects an individual’s financial needs.

Within any financial plannin...

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...he recommendations made by the adviser and accepted by the client are sustainable over the long term to avoid policies lapsing and vital protection being lost.

In this section, we analyse the factors upon which and individual’s protection needs arise before moving on to look at some basic features of the main protection products.

Factors on which protection needs arise

There are many factors that influence a client’s protection needs. Some major ones are:




Financial liabilities

Employment status

Existing cover.


Variance in age will often highlight different protection needs (see life cycle of protection needs later).


Number and age are very important. They will often be vital in determining the type of cover needed, how much and for how long. Adults as well as children could be dependants (e.g. elderly relative). If dependants are children then it is likely that their dependency will not last forever e.g. they may consider their children will become financially independent when they start full time work perhaps at age 18 or 21.


The amount of income an individual has determines affordability to meet objectives. If a client cannot afford to meet all protection needs, they will have to prioritise. The amount of income also assists in calculating cover levels e.g. in income or family protection arrangements

Financial liabilities

Regular income expenditure needs to be deducted from income to assess affordability. Capital liabilities may require protecting so that on death or incapacity, they can be repaid. Some examples of potential liabilities that would need repaying on death or illness include mortgages, credit cards and inheritance tax.

Employment status

A person’s employment status is important in determining any protection needs. Those who do not work through unemployment and/or sickness may not receive anything other than modest State benefits. Equally they are unlikely to be able to afford private protection arrangements to augment the provision made by the State. Employees are likely to have the most provision made for them through work-based schemes for example, the continuation of salary in the event of illness or incapacity. These would need to be fully investigated before making any recommendations to ensure there is no unnecessary duplication. Those who are business owners are likely to have a variety of both personal and business related protection needs.

Existing cover

Existing cover should always be taken into account when assessing client needs. Other areas to assess are accessibility to State benefits and any payments that may be made by an employer on death or illness. As already mentioned, there is no point in arranging more cover than is needed as this would also be a breach of the ‘suitability rules’.

Protection life cycle

The following list gives an indication of the potential protection needs that may arise during the different stages of a person’s life. You should not look at this list and assume it applies to all people. Many will have variances of these needs at different life stages far removed from those shown below. For instance, as a result of never marrying or having children, divorce and second families.

Typical protection needs that may arise on death, sickness or redundancy, i.e. the need to have appropriate cover in place:

Under 18

Death – none

Sickness – none

Redundancy – none


Death – if marrie...

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...tairs, shopping, preparing food

First three definitions get used for people in work. First occupation definition will be most expensive but more likely to pay a claim. Last occupation definition will be cheapest but least likely to pay a claim. Activities of daily living definition usually used with cover such as that available for house persons.

Critical illness cover

Critical illness cover – benefits

Provides a lump sum on the diagnosis of a “critical illness” as specified in the policy schedule. Common conditions include: cancer, kidney failure, heart attacks, major organ transplants, multiple sclerosis, permanent and total disability, stroke, etc. Many other conditions are included these days as the market has become more competitive.

Amount of lump sum benefit is usually linked to some kind of need of the individual e.g. linked to mortgage loan or to meet costs of house alterations in event a claim. No specified maximum benefit though in theory

Benefits received tax free

No tax relief on premiums

Premiums can be guaranteed or reviewable.  Reviewable are cheaper at the start but will be reviewed after a stated number of years throughout the policy and there is no initial indication of how much increases may be.

Critical illness cover – definition of incapacity

Apart from permanent and total disability, usually diagnosis of the illness will trigger payment of the claim

Where there is no life cover associated with the policy, insurers require the assured to survive diagnosis by between 14 and 30 days (depending on provider).

Mortgage Payment Protection Insurance (MPPI) and Accident Sickness and Unemployment Insurance

Benefits – In the event of accident, sickness or unemployment, MPPI provides monthly benefits to cover mortgage repayments, buildings and contents insurance, life policy premiums and the MPPI premium too. Benefit is often limited to 120-125% of these repayments but is still quite comprehensive. Monthly benefit payments are limited to a maximum of two years.

Deferred period is often between 30 and 60 days. It can vary depending upon whether the claim is made for an accident and sickness or unemployment. These plans are fully portable so can be taken with the policyholder when he moves and use it to cover mortgage costs there.

The main difference between an MPPI policy and accident sickness and unemployment insurance is that the latter can be taken out without any link to a mortgage. Benefits, deferred periods and exclusions are all similar to MPPI. Benefits will be limited to about 75% of earnings or a maximum monthly amount. Some will provide a lump sum for event such as the loss of a limb or eye.

For both types of policy, benefits are tax-free and premiums do not attract tax relief.

The types of cover that Personal Accident and Sickness insurances generally provide are as follows:

Lump sums on:


Permanent disablement

Loss of an eye

Loss of a leg, foot or toe

Loss of an arm, hand, finger or thumb

Other specified injuries or accidents.


Weekly sickness benefits paid if the insured is unable to work through illness or accident subject to a short deferred period e.g. 30 days. Benefits payable for a maximum of 104 weeks

Medical expenses will be refunded up to a specified percentage of the costs incurred when the insured suffers and accident.

In this section, we very briefly discuss the effects of borrowing to raise funds to pay for a variety of ne...

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... should ask why it is that the client does not consider repaying some of their debt with their cash reserves.
In this section, we identify the factors that are taken into account when assessing a client's savings and investment needs.

Savings and investment objectives

In both cases of savings and investments, a defined and realistic set of income and capital growth objectives need to be agreed between client and adviser.


Refers to the regular investment of small amounts of money. Objectives tend to revolve around expensive item...

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...isk can be reduced by choosing investments that provide “real growth” based on the values of goods and services.

For each class of asset, it is possible to determine a relevant rate of return that can then be used to define the appropriate ratio of these assets within the savings or investment portfolio.


Account needs to be taken of taxation of the investment

Account needs to be taken of taxation of the individual.

In this section, we identify the factors that are taken into account when assessing a client’s retirement planning needs.


Many people fail to consider their retirement planning until it is too late to make adequate preparations, despite wanting to maintain the same if not better standard of living. Less than15 of members of occupational pension schemes retire on maximum benefits (many receive only 20% - 30% of pre-retirement earnings) and for many others their only provision will be the benefits provided by the State.

An individual’s retirement provision needs depend upon a number of factors that we shall discuss in the ensuing text. In all areas the adviser will need to ask specific questions in order to sufficiently ascertain what the client’s needs are. These are outlined in note form below.

Factors on which a client’s pension requirements depend ...

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...ow withdraw any amount at any time from their built up ‘pension pot’, which will be taxed according to their marginal rate of income tax in the year the withdrawal is taken.  In order to give individuals clear information on the options and implications, Pension Wise – a free and impartial service – has been set up by the Government.

Other methods of funding for retirement

ISAs can be used to provide a fund free of tax

Using lump sums from pension to purchase an annuity to provide income

Compulsory Purchase Annuities (CPA) are purchased directly from a pension fund – taxed fully as earned income at the individual’s appropriate rate(s)

Purchased Life Annuities (PLA) are purchased from capital or a lump sum from a pension – split into two elements, capital element is tax free, income element is taxed at the individual’s appropriate rates

In this section, we briefly identify the factors that are taken into account when assessi...

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...rious family members. We shall discuss the fundamentals of inheritance tax in chapter 7.

In this section, we briefly identify the considerations that need to be made in order to advise clients on mitigating their tax liabilities.

There is a difference between tax avoidance which is le.g.al and tax e...

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... making informed choices and decisions in financial related matters.  A website www.moneyadviceservice.org.uk and a telephone helpline are available along with free guides on a range of financial planning areas.
In this section, we very briefly discuss long term care insurance and the factors that influence an individual’s needs in this area.

The constant developments in medical science have led to an increasing number of elderly people surviving illnesses that would previously have resulted in their death. This increased longevity however frequently results in a need for long term care. They may be able to have this provided through additional support in their homes but for many this requires them to move into residential nursing homes. As the co...

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...ment bonds which include pre-funded long term care provision. These policies are taken out in advance of actually requiring care.

Immediate needs policies - a form of impaired life annuity that helps to pay for the costs of long term care at the point at which it is required. In exchange for a single lump sum payment they provide a regular income.

Equity release plans, where some of the value of an individual’s home is exchanged for an immediate needs plan or to fund the cost of long-term care could be considered a third type of provision.

There are a number of factors that need to be taken into account when considering planning for long term care. These are; age, health, existing financial planning and State benefits.


The type of policy that will be suitable for an individual will be influenced by their age. Older clients, who are already in failing health, are more likely to need immediate care plans.


Where the health (mental or physical) of an individual is already deteriorating, the cost of insurance will increase through underwriting. In order to receive the benefits from a long term care insurance policy, the degree of an individual’s disability needs to be measured. This is done with reference to Activities of Daily Living (ADLs), which are tasks upon which health, hygiene and basic survival depend.

Standard accepted definitions are:

Activity of Daily Living (ADL)



The ability to wash in the bath or shower (including getting into and out of) or wash by other conventional means.


The ability to put on, take off, secure and unfasten all garments and as appropriate, any braces, artificial limbs or other surgical appliances.


The ability to move indoors from room to room on level surfaces.


The ability to move from bed to an upright chair or wheelchair or vice versa.


The ability to feed oneself food which has been prepared and made available.


The ability to use the lavatory or manage bowel and bladder function, including the use of protective undergarments or surgical appliances if appropriate.

henances if appropriate.vatory or manage bowel and bladder function, including the use of protective ndergarments or surgical a

When an individual is no longer able to complete a given number of ADLs (with the use of supporting device or special equipment if appropriate) unaided, the insurer will then pay the benefits from the policy.  The number of ADLs that require to be failed will vary from insurer to insurer.

Existing financial planning

The amount of income and assets that each individual has will impact on the amount they may have to contribute themselves to their own care and the State bene...

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...owance. Income included as part of the assessment will include:



State and other benefits

Pension credit

Trust income

Income from investments - dividends, bonuses

Income from investment bonds - withdrawals

Income from letting (including sub-letting)

Attendance allowance.

Some income may be completely disregarded, such as council tax benefit

Some income may be partially disregarded i.e. 50% of occupational pension benefits where the partner or spouse relies on this money to remaining in their own home.

The home will be included in the capital assessment but it will be disregarded from the calculation of capital for a period of up to twelve weeks from the date permanent care begins.

In addition, the home will be excluded from the assessment if it is occupied by:

A spouse or civil partner

An unmarried partner

A relative aged 60 or over

An incapacitated relative aged under 60, or

A child under 16 who the claimant is liable to maintain.

If no other eligible person lives in the property, the local authority will take the value of the home into account when means testing but it cannot force the home to be sold.

Instead the local authority may agree to hold a legal charge over the property and will recover the cost of the care fees when the person dies and the house is subsequently sold. There is no interest charged on the deferred LTC payment provided the money owed is paid within 56 days after the claimant’s death.

Care needs to be taken if an individual transfers an asset out of their name to someone else. Where the local authority can prove that a transfer was done deliberately or intentionally to reduce the individuals capital that would otherwise be means tested, the local authority can treat the individual as having ‘notional capital’ to the value of the asset disposed of. There is no time limit with regards to when transfers are made therefore local authorities can look back further than just the period immediately preceding the assessment. Deliberate deprivation of assets is illegal and the local authority could claim back the cost of care fees plus all the legal costs through the courts, which could end up being very expensive.

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