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The Technical Quiz: 24 April

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To help you to keep up with the fundamentals of tax, retirement and financial planning, try answering these questions.

The following questions relate to pensions.

 

Question one

Joan is 60 and has retired. She still has an outstanding mortgage of £20,000 on which the interest rate is 4.5% with five years left to run. She can afford the repayments and she has £20,000 PCLS from her pension, but wants to know how best to invest the £20,000. She is risk averse.

A Repay the mortgage now.

B Make a £20,000 investment in a life assurance bond managed fund.

C Make a £20,000 investment in Isas spread over the next two years.

D Make a £20,000 investment in the pension.

Question two

The client wants to take flexible rather than capped drawdown from her pension. She and her husband each have £10,000 of state pensions. What condition does she need to fulfil to avoid the minimum income restriction on drawdown?

A She needs to have an additional £20,000 of income from one or more of the following: state pension, lifetime annuity, scheme pension or overseas or dependant’s equivalent pension.

B She does not need any additional income for at least the next five years because her husband’s state pension counts towards her £20,000 minimum income requirement.

C She needs to have an additional £10,000 of income from one or more of the following: state pension, lifetime annuity, scheme pension or overseas or dependant’s equivalent pension.

D She needs to have an additional £10,000 of income from a state or private pension or any other source of reasonably dependable income, eg from a portfolio of listed securities or mutual funds.

Question three

What is the difference in net total return from an ISA and a registered pension for a basic rate taxpayer, leaving aside any growth in the value of the fund, and assuming the same income yield and charges? What is the impact of 20-year fund growth on net total return from each plan, assuming identical growth and charges?

A Leaving aside growth there is no difference in net return from the two types of plan. Assuming 20-year fund growth, the additional return from the Isa is no more than about 8 per cent.

B Leaving aside growth the net return from the Isa is about 8 per cent more than from the pension. Assuming 20-year fund growth, the return from the pension is about the same as from the Isa.

C Leaving aside growth there is no difference in net return from the two types of plan. Assuming 20-year fund growth, the return from the pension is up to about 8% more than from the Isa.

D Leaving aside growth the net return from the pension is about 8% more than from the ISA. Assuming 20-year fund growth, the additional return from the pension is no more than about 16% than from the Isa.

Scroll down for the answers

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Questions supplied by the CPD Centre. For more help keeping up to date with your technical knowledge go to www.ifacpd.com

Answers:

1 A

2 C

3 C

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