R02 Life assurance-based investments: free practice questions

1. Question 1 of 5

   What is the purpose of smoothing in a with-profits fund?

   Option A: To guarantee a fixed rate of return to policyholders each yearOption B: To even out returns by holding back profits in good yearsOption C: To link returns directly to the fund's unit priceOption D: To pay out all profits as soon as they're made

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   The answer is B: To even out returns by holding back profits in good years

   Not all profits are distributed in good years; some are kept back so bonuses can still be paid in poor years. This smoothing distinguishes with-profits from unit-linked policies.

   Why the other options are wrong

   A

   Bonuses aren't guaranteed in advance.

   C

   That describes unit-linked policies.

   D

   Some profits are held back.

2. Question 2 of 5

   How is the value of a single premium unit-linked policy worked out?

   Option A: Premium paid less any withdrawalsOption B: Sum assured plus declared bonusesOption C: Number of units held × current unit priceOption D: Premium paid plus a guaranteed growth rate

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   The answer is C: Number of units held × current unit price

   With unit-linking, the value is directly linked to investment performance: units held multiplied by the current (bid) price, ignoring any early surrender penalty.

   Why the other options are wrong

   A

   The value moves with the unit price.

   B

   That's a with-profits valuation.

   D

   Unit-linked values aren't guaranteed.

3. Question 3 of 5

   Why are unit-linked bonds popular with higher-rate taxpayers wanting 'income'?

   Option A: The underlying fund pays no tax at all on its incomeOption B: 5% of the investment a year can be withdrawn with tax deferredOption C: All withdrawals from the bond are permanently free of taxOption D: Withdrawals are taxed at the dividend rates

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   The answer is B: 5% of the investment a year can be withdrawn with tax deferred

   Up to 5% of the original investment a year, for up to 20 years, can be withdrawn with no immediate tax. These are capital withdrawals; if they exceed growth, capital is being eroded.

   Why the other options are wrong

   A

   UK life funds pay tax on income and gains.

   C

   Tax is deferred, not removed.

   D

   Withdrawals are capital, with tax deferred.

4. Question 4 of 5

   Which of the following are conditions for a regular premium endowment to be a qualifying policy? 1. A term of at least ten years 2. Life cover of at least 75% of total premiums payable 3. No year's premiums more than double any other year's 4. Annual premiums of at least £3,600

   Option A: 1, 2 and 3 onlyOption B: 2, 3 and 4 onlyOption C: 1 and 2 onlyOption D: 1, 2, 3 and 4

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   The answer is A: 1, 2 and 3 only

   Qualifying rules include a term of at least ten years, premiums at least annually for ten years, cover of at least 75% of total premiums, no year more than double another, and no premium over an eighth of the total. Premiums are capped at £3,600 a year.

   Why the other options are wrong

   B

   £3,600 is a maximum, not a minimum; the ten-year term applies.

   C

   The limit on uneven premiums also applies.

   D

   £3,600 is the annual maximum, not a minimum.

5. Question 5 of 5

   A higher-rate taxpayer plans to surrender a bond with a large gain. Her husband is a basic-rate taxpayer. What could reduce the tax?

   Option A: Assigning the bond to her husband before surrenderOption B: Surrendering it in the same tax year as a pay riseOption C: Assigning it to him for cash firstOption D: Taking a withdrawal above 5% first

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   The answer is A: Assigning the bond to her husband before surrender

   Assignment between spouses by way of gift isn't a chargeable event, is free of CGT and IHT, and puts the gain in the hands of someone taxed at a lower rate.

   Why the other options are wrong

   B

   That would increase the tax.

   C

   Assignment for money is a chargeable event.

   D

   That creates a chargeable excess.

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