Financial services, regulation and ethics

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1.1 Budgeting

Clients who know how they spend their money have better control of their finances than those who cannot or will not budget effectively

Everyone needs to be able to pay their basic monthly outgoings, although not all will achieve this objective

Ideally, there should be some money left over to cover large one-off expenses such as holidays and household and motor repairs, as well as Christmas and birthday presents

Where one-off expenditure is financed through short-term borrowin...

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Where assumptions are made instead of full analysis, the client may find that they cannot continue with an important financial commitment

If the client cannot continue with an important commitment, policies may lapse and value may be lost for both adviser and client

It is better to fully analyse the situation and recommend a partial solution that the client can afford to sustain than the perfect solution which they cannot

Working out total income and expenditure is the essential first step to managing debt

Income may include earnings, benefits, pensions, income from savings and investments, maintenance and rental income

Expenditure falls under essential spending, everyday spending and occasional or non-essential spending

If money is tight, clients should reduce spending, espec...

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Clients should be aware that some companies charge fees for debt help that charities offer for free

Free expert help is available from organisations such as Citizens Advice, National Debtline, PayPlan and StepChange Debt Charity

Final options include an individual voluntary arrangement or bankruptcy, which are formal legal processes and last-resort measures

Clients may borrow to fund home improvements, start a busines...

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The term mortgage is commonly ...

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There are two main mortgage repayment methods: capital and interest repayment, and interest-only

In capital and interest repayment mortgages, monthly payments include...

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Since the Mortgage Market Review (MMR) in April 2014, lenders must verify that borrowers choosing interest-only mortgages have a credible repayment strategy

Both capital and interest and interest-only loans can be structured in several different ways

Cap and collar mortgage – guarantees that the interest rate will not rise above a set level (cap) or fall below a minimum (collar), fixing the range for a defined period

Capped mortgage – guarantees th...

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Offset mortgage – links the mortgage to a current account, charging interest only on the net balance, reducing interest costs when account balances are positive

Tracker mortgage – has an interest rate that moves automatically in line with an index, usually the Bank of England base rate, after a short delay period

Some home finance products are complex and may require specialist qualifications to advise on

Advisers without the relevant permissions should refer clients to suitably qualified professionals

Equity release products allow older clients, typically aged over 60, to release cash from the value of their home while continuing to live there

Equity release...

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The client retains the right to live in the property for life under a lease agreement

Typically, clients receive between 20% and 60% of the property’s market value depending on age at entry

Older clients usually receive a higher percentage due to shorter expected lease terms

Lease terms vary by provider and may include nominal rent or higher rent in exchange for greater upfront payment

Home purchase plans provide a way to buy a hom...

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Sale and rent back agreements involve a company buying a client’s home and renting it back to them for a fixed perio...

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Be aware

Advisers and clients should carefully consider such schemes and fully understand the consequences before proceeding

Buy-to-let ...

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Consumer buy-to-let mortgages apply to lending ...

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Business buy-to-let mortgages are not r...

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There are two main types of loan: unstructured and structured

Unstructured loans

Include mortgages, commercial property loa...

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Clients should factor in penalties when considering early repayment or loan rearrangement

Financial protection is a co...

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Age affects protection needs, with younger clients typically focu...

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All factors interact, so recommendations should consider them collectively rather than in isolation

Protection needs change significantly through different life stages

In ...

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The number and age of dependants are key factors influencing protection needs

The more people reliant on one income and ...

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Dependency circumstances may change due to relationship changes or having children later in life

Income determines both the amount of protection required and the ability to afford it

Protection aims t...

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Where income is limited, protection priorities must be set and compromises made between cost and long-term needs

Existing and future financial liabilities must be considered when assessing protection needs

Liabiliti...

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If large tax liabilities exist, protection cover can ensure these are paid if the individual dies before settling them

Employment status significantly influences protection needs

Emp...

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Existing cover must be reviewed when assessing protection needs t...

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The personal financial life cycle model shows...

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Childhood is a period of dependency lasting until full-time educat...

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After childhood, young singles are partly dependent on parents before full independence

With no dependants, ...

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Encouraging budgeting can help young people begin retirement saving even on limited income

Needs change significantly when formi...

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The arrival of children quickly changes ...

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Most people aim ...

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Relationship breakdown...

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Life assurance policies are designed to provide financial protection for the assured and their dependants

Term assurance pays a lump sum (or income series under family income benefit) if the...

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Renewable term assurance: allows renewal for a further term without medical evidence, though premiums rise with age

Some contracts combine two or more of these variations for added flexibility, normally at higher cost

Endowment pol...

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Whole of life policies provide cover for the entire lifetime of the assured

Primarily designed to provide substantial life cover, though some hav...

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IP policies replace lost income if the insured cannot work due to illness or accident Shortened demo course. See details at foot of page.

Life assurance underwriting is based on mortality

Income protection underwriting is based on morbidity

Pays a regular benefit while the insured cannot work due to illness or accident

...

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ASU premiums are higher than standard accident and sickness cover but lower than income protection

CIC policies are often combined with life cover

Pay a lump sum rather than a...

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Reviews occur every 5–10 years based on general medical advances, not individual health

UK residents are entitled to free healthcare under the NHS

PMI provides choice ...

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Most exclude pregnancy, fertility, HIV, mental health, or cosmetic surgery

LTCI supports clients needing help due to illness, disability, or old age

Covers needs arising from conditions such as arthri...

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Benefits triggered when unable to perform ADLs or on mental incapacity

No new pre-funded plans currently available, but some older ones still exist

PPI pays benefits if the insured ...

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Demand has increased due to reduced State help with mortgage costs

MPPI shares many features with standard payment protection in...

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MPPI can also cover premiums of related mortgage protection policies

Cover is relatively expensive

The UK welfare system provides a wide range of benefits for different circumstances

Eligibili...

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Awareness of benefit types and qualifying conditions is essential for accurate advice

Wide range of State benefits administered mainly by the De...

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Private provision through insurance or pensions is often necessary

A cap limits the total amount of benefits most working-age people can receive

Applies across England, Wales, Scotland and Northern Ireland

Ensures non-working househo...

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Introduced in April 2013 to simplify the benefit system by combining multiple benefits into a single payment

Government t...

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Supports financial responsibility and monthly budgeting; may also save money through cheaper monthly payment options

Child Benefit is a universal, non-means-tested benefit for parents claiming for their children

Tax charge applies if parent or partner’s i...

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State benefits are gene...

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Income Support is means-tested and non-taxable

2025/26 rates: £...

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Amounts above £30,000 are subject to income tax and employer NICs

Provides help for homeowners with mortgages or loans for e...

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Pension Credit recipients have no waiting period

Attendance Allowance is a tax-free, non-means-tested benefit for those over State pension age needing personal care due to disability

Rates (2025/26): £110.40 per week higher rate; £73.90 ...

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Private insurance providers limit benefits so that combined State and employer payments remain at least 25% below pre-disability income

New State Pension is a taxable, contributions-based benefit for individuals retiring on or after 6 April 2016 who have made sufficient National Insurance (NI) co...

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A savings credit element of up to £17.30 (single) and £19.36 (couple) per week may apply but is generally unavailable to those retiring on or after 6 April 2016.

Bereavement Support Payment provides a first payment of £3,500 (£2,500 if not eligible for Child Benefit or not pregnant when the partner died) followed by up to 18 monthly payments of £350 (£100 in the same circumstances).

Claim must b...

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Winter Fuel Payment is a tax-free payment to help older people with winter heating costs; available to those born before a qualifying date that changes yearly; clawed back via HMRC for incomes above £35,000; different from Cold Weather Payment.

Pension provision aims to avoid poverty in old age ...

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Sound professional advice is essential for effective pension planning

The basic factors determining pension requirements i...

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By their 50s, many reach peak earnings, may have capital, and often have more surplus income for pensions

Pension provision is influenced by the level of income desired in ...

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Dependants and their costs influence pension priorities and the money available ...

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A client’s existing pens...

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Pensions are an effective retirement income source due to tax relief on contributions and tax exemption on fund growth

ISAs are popular because, although contributi...

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Flexi-access drawdown allows flexible taxable withdrawals after taking a tax-free PCLS

An UFPLS involves taking a lump sum, usually 25% tax free and 75% taxed as earned income

Nearly everyone in the UK will need an income after they stop earning, making pensions vital for all

Pensions in the UK have developed significantly, with established State and private systems

The section outlines the current UK State pensions and key private pension types

Those reaching S...

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Contracting out allowed individuals and schemes to opt out of earnings-related State pensions

Contracting out reduced NI contributions but removed entitlement to earnings-related benefits for that period

Contracting out was abolished on 6 April 2016, with deductions now made for contracted-out years

Pension schemes can be provided by employers or by financial service companies

Two main types of pension scheme in the UK are:

– Occupational

– Personal

Employers have historically provided occupational schemes, while individuals bought personal pensions

Many employers now offer group personal pensions (GPPs) instead of traditional defined benefit (DB) schemes

Occupational schemes are set up by an employer with trustees appointed to oversee the scheme

Sc...

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Policyholders choose contribution levels and investment funds to suit their risk and retirement goals

Personal pensions are earmarked, so benefits can be valued at any time

Group personal pensions (GPPs) allow employers to contribute to employees’ personal pensions

GPPs are cost-effective and avoid the need for trustees

Stakeholder pensions were introduced in April 2001 and are personal pensions meeting additional regulatory requirements

Occupational pension schemes can be divided into:

– Public schemes

– Private sector schemes

Public sector schemes include pensions for nationalised industries and statutory schemes for civil servants and other public employees (e.g. NHS, teachers, police, fire service)

Most statutory schemes are unfunded , providing benefits on a pay-as-you-go basis

Pensions for nationalised...

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NEST is a qualifying scheme available to any employer

To be qualifying, workplace pensions must meet:

– Minimum contribution standards (for DC schemes)

– Minimum benefit standards (for DB schemes)

Employers must maintain qualifying pension provision for:

– Existing members of qualifying schemes

– Workers who become members of qualifying schemes

Clients usually need to build up money for future spending, though resourc...

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Regular savings involve setting aside small amounts regularly to build a larger lump sum

Common saving goals include buying a house or car, funding holidays or paying school fees

The savings phase for major goals, like a house purchase, may include both deposit saving and loan repa...

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Protect the family with insurance for unexpected events (fire, illness, redundancy, death)

Maintain an easily accessible emergency fund before making further savings or investments

After addressing these priorities, clients can plan additional savings and investments

Saving is usually for short-term goals or when quick access to money is nee...

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The main types of deposit-based savings account are:

Savings accounts: Usually pay higher interest than current accounts and offer instant or easy access

Cash ISAs: Allow up to £20,000 per tax year (2025/26); interest is tax-free and may be higher than ordinary deposits

Notice accounts: Require advance notice (e.g. 30, 60, 90 days) to withdraw money; withdrawing early can result in reduced interest

Fixed-rate bonds (term accounts): Require money to be locked in for a set term (typically one year or more); may have a minimum deposit (e.g. £1,000); penalties may apply for early withdrawal

Hig...

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Help to Buy ISA holders cannot contribute to both a Cash ISA and Help to Buy ISA in the same tax year

Tax treatment of savings

Banks, building societies, and NS&I pay interest gross (without tax deduction)

A £5,000 0% starting-rate band applies for savings income

Basic-rate taxpayers: £1,000 Personal Savings Allowance (PSA); interest beyond this taxed at 20%

Higher-rate taxpayers: £500 PSA; interest beyond this taxed at 40%

Additional-rate taxpayers: No PSA; all interest taxed at 45%

ISAs and certain NS&I products (e.g. savings certificates) pay tax-free interest

NS&I provides Government-backed savings and investment products; as a result, any money invested is totally secure

There are many different product types — some aimed at certain taxpayers, some for income, others for growt...

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Deposit-based investments are an important part of financial planning for short, medium, and long-term portfolios

They help ensure liquidity, stability, and flexibility within an investment strategy

Emergency fund

Deposit-based investments provide ready access to money fo...

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Diversifying across asset classes increases the likelihood of steady overall growth

Holding money in deposits and other lower-risk investments can offset losses from equities when market conditions are unfavourable

Investing is for the longer term and usually means putting money into schemes or funds linked to the performance of the stock market

Investors take a risk by investing their money in assets that could rise or fall in value

They must be willing to tie up money they do not need immediately and accept some risk to achieve better returns

Investors need to balance the risk of a short-term l...

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Pooled investment (second layer): investors’ money is combined and invested by a fund manager; common pooled types include OEICs, unit trusts, investment trusts, and life funds

Tax wrapper (third layer): holdings within an ISA or pension to reduce or eliminate tax; pensions may also provide tax relief on contributions

Some services allow investments to be held and managed more conveniently &mda...

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Client investment objectives may extend beyond financial goals to include ethical or personal values

Many investors choose or exclude certain investments for social, environmental, or religious reasons

Conventional investing

Focuses on generating financial returns by investing in companies expected to perform well

Managers analyse financial metrics such as price-to-earnings ratio, return on equity, dividend yield, gearing ratio, earnings per share, and cash flow from operations

ESG factors may be considered, but the emphasis remains on financial performance rather than social or environmental impact...

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Assess the strength of the client’s beliefs and how far they want them reflected in the portfolio

Incorporate values into the investment process and review regularly as views may change

Recommend products and funds appropriate from both financial and personal perspectives

Consider whether beliefs lead to restricted fund choice and less diversification

Compare charges versus non-sustainable equivalents

Consider whether performance and volatility may differ from non-sustainable equivalents

Revisit the client’s views as part of periodic reviews and adjust the portfolio where necessary

Investors can buy shares directly on the stock market or as part of a pooled investment

Shares (also called equities or stocks) represent ownership in a company

Shareholders may have voting rights and may receive dividends depending on company profits

New shares can be bought via an Initial Public Offering (IPO), or investors can buy existing shares traded on the stock market

The aim is for shares...

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Asset allocation: combining equities with other asset classes can smooth portfolio volatility and reduce overall risk

Long-term use: aligns with objectives such as:

increasing income

capital preservation

asset allocation

Over longer periods, short-term fluctuations tend to be smoothed; historically, equities have often outperformed deposits and fixed interest.

A bond is a loan to a company, the Government, or a local authority

Investors receive a regular income from interest until the loan is repaid

Other names for bonds

Loan stock

Fixed interest

Debt securities

Gilts (loans to the Government)

Corpo...

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Index-linking helps address inflation risk and aims to maintain real returns

Comparisons involve trade-offs (e.g., a bond paying 2% above inflation with inflation at 2.5% vs a fixed bond paying 5%)

RPI and CPI may increase at different rates, affecting the real value of returns

Building societies used to issue a form of fixed interest investment called a permanent interest bearing share (PIBS). PIBS a...

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PIBS are no longer issued as they do not meet regulatory requirements; however, existing holdings can still be traded on the stock exchange.

Although fixed interest investments as an asset class rate as ‘low risk’, it is fairly unusual for individuals to actively seek them out as an investment medium in their own right. They are a specialised form of investment and, although ‘amateurs’ can get good returns, most investors would be best advised to leave it to investment managers who specialise in that field

One of the best ways to access fixed interest investments is via investment funds such as unit trusts, OEICs or life assu...

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Long-term gilts and other fixed interest investments are the underlying asset for pension annuities

Asset allocation

An asset class in their own right which can be used in conjunction with deposits and equities to ‘diversify’ a medium-term portfolio

Effective long-term investment portfolios need to be diversified over all asset classes, including fixed interest investments

Investing in property can give investors both income (rent) as well as capital growth (when selling it for a profit in t...

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With a long lease and a financially strong tenant, the owner has a reasonably safe long-term rental income

A pooled investment is where investors’ money is pooled together into a fund which is then invested in one or more asset classes by a fund manager; sometimes called collective investments

The main benefits of pooled investments are:

Professional expertise: an investment expert selects and monitors holdings and decides when to buy and sell

Spreading your risk: even small amounts can be spread across many holdings to reduce the impact if one company performs badly; pooled funds can invest in one or more asset classes

Reduced dealing costs: pooling money creates economies of scale, lowering transaction costs

Less administration: the manager handles trading, income collection and dealing with brokers and exchanges

Choice: a wide range of funds allows investors to pick one or several to suit their needs

There are severa...

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Friendly society children’s savings plans

Allow investment on behalf of a child with the same tax exemptions and limits

Endowments may be invested as with-profits, where returns are smoothed by actuarial methods, or as unit-linked, where values track the underlying assets directly

Investment trusts

An investment trust is a listed company with a fixed number of shares and may borrow to invest (gearing)

Unlike open-ended funds, investment trusts are closed-ended and cannot create or cancel shares based on demand

Share demand affects price; trading at a premium if above asset value and at a discount if below

Investors can buy shares via the investment trust company, advisers, brokers or savings schemes as lump sums or regular contributions

Derivatives

There are other types of asset called derivatives, which are unlikely to be invested in directly but may be included within pooled investment vehicles

A derivative is a right or obligation to buy or sell another asset – such as a share, bond or commodity – at a specific price on a future date

The actual market price on that date may be higher or lower than the agreed price

The most common types of derivatives are futures and options

Contracts for differences (CFDs)

A CFD is a contract where one party pays the other the difference between the current val...

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Junior individual savings accounts (Junior ISAs)

Replaced new CTFs from 1 November 2011 and generally available to any child born after 2 January 2011

No initial Government contribution

Components are cash or stocks and shares with no restriction on how contributions are divided

Withdrawals are not permitted before age 18 except in very limited circumstances

Normal ISA tax benefits apply; no personal tax liability on income from parental contributions

Annual limit for 2025/26 is £9,000

Existing CTFs can be transferred into Junior ISAs

Inheritance tax (IHT) is potentially chargeable on the worldwide assets of anyone who is a long-time UK resident (i.e. resident for at least 10 of the last 20 tax years)

UK assets are within scope for IHT for all individuals, regardless of residence status

The first £325,000 of an estate is covered by the nil rate band (NRB)

A further £175,000 is available as the residence nil rate band (RNRB) where a main residence is left to direct descendants

The RNRB also applies to those who downsized or sold their home after 7 July 2015 if assets of equivalent value are left to direct descendants

For estates valued over £2m, the RNRB is reduced by £1 for every £2 above £2m

IHT planning should identify potential liabilities and use allowances effectively

Ways to reduce IHT

Organise the estate to reduce liability – ensuring wills are correct, using lifetime gifts, allowances, and trusts

Provide money to cover liability – using a life policy such as a whole of life pla...

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Pension death benefits

Death benefits from most pension arrangements are paid under discretionary trust and usually fall outside the estate

Tightening of IHT rules

Stricter penalties for incorrect information by personal representatives

Anti-avoidance legislation preventing schemes where donors transfer homes but continue living rent-free

Pre-Owned Asset Tax (POAT) applies to benefits retained from previously owned assets

Summary

Estate planning is complex and wider than just IHT mitigation

Most clients want to reduce IHT but without harming their own standard of living

Key client profiles:

– Affluent individuals able to make gifts or bequests

– Older clients more conscious of mortality

Some with modest estates worry about IHT; others with large estates may not care

Clients should understand:

– The impact of IHT

– Options for reducing liability without affecting income

– The importance of early planning

Attitudes evolve over time as clients recognise risks and solutions

The amount of tax paid can make a big difference to the return on savings and investments, and tax is an important element of overall financial planning

Four main approaches to tax planning for investors:

make maximum use of tax allowances and exemptions

choose suitable investments based on the investor’s own tax position

choose investments that provide tax-free returns

choose investments th...

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Complete tax returns accurately and on time

Pay tax on time to avoid interest and surcharges

Never recommend a scheme you do not understand

Keep planning flexible in case tax law changes

Undertake a regular audit of the client’s tax position

Avoid recommending actions a client would not otherwise take purely for tax advantage

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Estimated study time 7 hours