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Additional Factors to consider - Coggle Diagram
Additional Factors to consider
Lifetime allowance charges
BCE before Death:
Scheme admin responsibility to asess LTA being used by BCE
scheme admin and member jointly liable for LTA charge
Scheme admin pays HMRC before paying member
BCES After death - responsibility of personal representatives to calculate whether LTA charge arises, after lump sum designated.
Beneficiary liable to pay
Member can choose order of BCE if simultaneous - except PCLS which happens first
calculated to 2 decimal places and rounded down
Attitude to risk and capacity for loss
ATR - degree of uncertainty the client is willing to accept with investment returns
CFL - ability to absorb falls in value
Factors affecting CFL: age and proximity to retirement,
number of dependants
health and family longeivity
likely income needs in retirement (and pattern)
capital expenditure required
other financial objectives
any debts outstanding
other investments that can provide an income
any secure income available and inflation proofing
Confirmation bias - accepting information that supports their beliefs
Sustainability Risk - how much income is drawn and how long income is needed for
SWR - SAfe withdrawal rate.. quantity of money as a % of initial investment, which can be drawn every year for a given period of time, including adjustments for inflation that will not lead to portfolio failure
How to determine SWR
Age client wants to take benefits
health and family history (longevity)
Are the funds required to provide income on death
amount and pattern of expenditure
inflation assumptions
expected tax rates
secure income available later
other funds available later
assumed growth rate on investment
charges payable from the funds
SWR drawbacks: exhaust funds before death, may have to reduce income to prolong life
SWR may be lower than annuity rate available
May be insufficient to meet income needs of dependants
Longeivity Risk - outliving funds or
underspending so having a lower income Uncertainty, underestimation and complexity
Investment risk: Volatility and sequence of returns. volatility is fluctuation of value
Inv risk is chance of selling investment for a loss
Sequence of returns = uncertainty of order of returns over given time
Inflation risk: not increasing to at least match inflation rate, losing purchasing power
Cashflow modelling and stress testing: visual representation of financial position stress test to identify possible shortfalls, see if income is sustainable
Assumptions: Timescale
Income requirements
Capital Requirements
Assets available to provide retirement income
Other assets
Investment returns
Charges
inflation
Taxation: MPAA triggered when benefits accessed flexibly
Small pots and trivial commutation: no MPAA, no LTA test maximum of 3 DC pots - £30k (£10k each)
Income tax and Capital gains tax
Inheritane tax: IHT on a lifetime transfe, right to determine the terms of the payment of death benefit iswithin the members estate - loss to estate
2 years before death transfers
Establish rights before transfer: CETV paid, apply growth rate, apply discount absed on likelihood of survival
Establish rights after transfer (assume UFPLS taken): deduct LTA charge payable, deduct tax free part, deduct income tax payable
Value of lifetime transfer
Vulnerable clients: health, life events, resilience, capability
consequences: heightened stress levels
limited effective concentration
lack of perspective
changing attitudes towards risks (more careless or reckless)
Options: Record on file, build in time for additional meetings, include trusted friend or relative
Take additional time to explain drawbacks