AF3 is the pension planning examination taken by candidates in pursuit of the Advanced Diploma in Financial Planning, many of whom will also be en route to attaining the chartered financial planner title. It has additional significance to many, in that it is also the examination that can be a stepping stone to allow financial planners to advise individuals on pension transfers from defined benefit schemes.
Holders of AF3 are therefore expected to have a detailed knowledge of pensions from a technical perspective and also an in-depth understanding of the planning issues affecting clients faced with pension-related decisions.
It builds on the knowledge gained by studying Diploma examinations such as R04 (Pensions and Retirement Planning). Candidates must understand, however, that it is a higher level of examination and recalling facts alone will not be adequate unless used appropriately in the context of the specific question asked. To do this you will need to work on the skills necessary to apply that knowledge in practical situations having conducted relevant analysis and evaluation. It is very much about planning; finding solutions to problems encountered by clients that a financial planner with such a qualification can hope to advise.
The examination paper has two distinct parts: the first section is a case study with associated questions worth 80 marks while the second section contains two structured questions worth a further 80 marks.
So that’s 160 marks available in a three-hour examination paper. Think of it as 10 minutes familiarising yourself with the paper and ‘getting into the zone’ (you should know the instructions by heart before you go into the examination and also know what to find in the tax tables), 160 minutes to do the paper – that’s a mark a minute – and 10 minutes at the end to check you’ve covered everything to the best of your ability. It’s worth monitoring your times when you attempt mock papers and during the course of the actual examination.
Naturally, the three questions will cover different parts of the syllabus:
HMRC tax regime
Features and risks of defined contribution and defined benefit schemes
State retirement benefits
Choices facing early leavers, transfer value analysis and transfer advice
Various options for drawing income – features, tax benefits and risks
Different needs and solutions available to personal and corporate clients
Some parts of the syllabus will appear more often – and in more detail – than others. The planning opportunities in terms of State retirement benefits are somewhat limited and are therefore liable to account for fewer marks in the examination than, say, benefit options from a money purchase pension scheme.
Clearly, there will always be a considerable number of marks available in respect of pension transfer issues. Such questions can be quite direct, testing candidates’ knowledge and understanding of the processes involved in gathering and analysing the data necessary to make a compliant pension transfer report and recommendation.
But pension transfer issues can also be tested more subtly, perhaps by considering factors affecting defined benefit schemes; looking from a slightly different angle at the risks that would be passed to the individual on transfer. Let’s face it, on the assumption that a client would want the transferred funds to provide a certain level of income in retirement, he or she is taking on the roles of both the existing trustees and sponsoring employer and would expect you to have the knowledge and understanding necessary to provide the appropriate level of support.
Topical themes and issues are also highly likely to be examined due to their particular relevance to the consumer. For example, candidates inadequately prepared on subject areas such as workplace pension reform shouldn’t be surprised that this is being tested when it is an area of concern for both employers and employees and an issue on which advice from a knowledgeable pension specialist is going to be valued.
Pension specialists are also likely to encounter more complex scenarios involving wealthier clients. These questions will test the boundaries: limits on tax efficiency of contributions and benefits and how to help clients plan to make best use of their resources to meet their objectives.
Calculations will also have prominence; these generally show the examiners whether candidates not only have relevant knowledge but can also apply it in practical situations. That’s why it is particularly important to show your workings in an orderly, step-by-step fashion – you’ll manage to pick up valuable marks even if you make an error along the way.
So, what are the common errors and how can they be avoided?
Read the question several times to be sure that you know exactly what is being asked before putting pen to paper.
Make the answer relevant to both the question and the factors provided in the case study.
Consider the rule of five – if the question is worth five marks then make five points and don’t spend more than five minutes on it.
Preparation for the examination is vital. There isn’t a definitive AF3 textbook, but the study text for R04 (Pensions and Retirement Planning) is excellent. Combined with wider reading, research and experience in the workplace this will form a firm foundation for you to meet the standard required to pass the examination.
Finally, attempt past papers and study past examination guides; this will give you a feel for the quality and quantity of answers expected of you.