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QFA Financial Advice practice questions

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Question 1Life Assurance

Under a standard level term assurance policy, the sum assured payable on death is:

  1. Returned to the insurer as a surrender value
  2. Increased annually in line with inflation
  3. Reduced by a set percentage each year
  4. Fixed for the whole term Correct answer.

Explanation

A level term policy pays a death benefit that stays constant for the duration of the term, with no built-in escalation or reduction. Premiums are also typically level. Any variation of the sum assured defines a different product type.

Question 2Life Assurance

Which party normally has the right to nominate a beneficiary to receive life assurance proceeds under a trust arrangement?

  1. The attending physician
  2. The policyholder Correct answer.
  3. The insurer
  4. The executor of the estate

Explanation

The policyholder owns the policy and controls its disposition, including placing it under trust and nominating beneficiaries. The insurer merely administers the contract, and the executor acts only on estate assets.

Question 3Life Assurance

A policyholder has a whole of life assurance policy with a guaranteed insurability option. Which benefit does this option primarily provide?

  1. The right to increase cover without further medical evidence Correct answer.
  2. The right to switch the policy to another insurer
  3. The right to borrow against the surrender value
  4. The right to cancel the policy without penalty

Explanation

A guaranteed insurability option allows the policyholder to increase the sum assured at specified times or events without providing new medical evidence. It protects against future deterioration in health. Other rights listed belong to different policy features.

Question 4Life Assurance

An applicant for life assurance fails to disclose a diagnosed heart condition. The insurer later discovers this and seeks to avoid the contract. On what basis is the insurer most likely to act?

  1. Breach of warranty of fitness
  2. Change of occupation after issue
  3. Misrepresentation or non-disclosure of a material fact Correct answer.
  4. Failure to pay premiums on time

Explanation

Life assurance is a contract of utmost good faith, requiring disclosure of material facts that would influence the insurer's decision. Concealing a known heart condition is a material non-disclosure, giving grounds to avoid the policy. Premium arrears or later occupation changes are governed by other clauses.

Question 5Life Assurance

Which of the following best describes the purpose of a survivorship (second-to-die) policy?

  1. To pay out only after both insured lives have died Correct answer.
  2. To pay out on the first death of either partner
  3. To provide income replacement during working life
  4. To fund school fees for dependent children

Explanation

A survivorship policy pays the sum assured when the last of the insured lives dies. It is commonly used for estate planning, funding inheritance tax on a joint estate. It does not pay on the first death.

Question 6Life Assurance

A 45-year-old takes out a 20-year decreasing term assurance policy to cover a repayment mortgage. If he dies in year 15, what is the approximate basis for the payout?

  1. The original sum assured in full
  2. A sum increased to reflect inflation
  3. A sum reduced in line with the outstanding mortgage balance Correct answer.
  4. Only the premiums paid to date

Explanation

Decreasing term assurance reduces the sum assured over the term, usually matching a capital-and-interest repayment mortgage. By year 15 of 20, the payout would reflect the lower outstanding balance. It is not the original amount or an inflation-adjusted figure.

Question 7Life Assurance

Which factor most directly increases the mortality risk an insurer assesses when pricing a life assurance policy?

  1. The applicant's age at entry Correct answer.
  2. The applicant's preferred beneficiary
  3. The applicant's employer's industry
  4. The applicant's choice of payment frequency

Explanation

Mortality rates rise with age, so the age at entry is a primary rating factor in life assurance pricing. Payment frequency and beneficiary choice do not affect mortality. Industry may matter only where it signals occupational hazard, which is secondary.

Question 8Life Assurance

An insurer includes a suicide exclusion clause in a life policy. What does such a clause typically do?

  1. Excludes deaths occurring abroad
  2. Limits or excludes benefits if death results from suicide within a stated period Correct answer.
  3. Excludes all deaths occurring in the first year
  4. Excludes deaths from natural causes

Explanation

A suicide exclusion restricts or removes the death benefit where the insured dies by suicide within a defined period, often the first year or two. It does not exclude all first-year deaths or natural causes generally. Travel-related exclusions are separate.

Question 9Life Assurance

A policyholder wants the death benefit of a life policy to pass directly to named family members without forming part of the estate. Which arrangement achieves this?

  1. Increasing the premium frequency
  2. Adding a critical illness rider
  3. Writing the policy in trust Correct answer.
  4. Converting to a paid-up policy

Explanation

Placing a policy in trust removes the proceeds from the policyholder's estate, allowing them to pass directly to named beneficiaries. Riders, premium frequency, and paid-up status do not change how proceeds are distributed on death.

Question 10Life Assurance

Which of the following is a defining feature of whole of life assurance compared with term assurance?

  1. It has no cash value at any point
  2. It pays out only on accidental death
  3. It is renewable only at the insurer's discretion
  4. It provides cover for the entire lifetime of the insured Correct answer.

Explanation

Whole of life assurance provides cover for the whole of the insured's life and is certain to pay out eventually. Term assurance covers only a specified period and may never pay out. Whole of life policies often build cash value.

Question 11Life Assurance

An insurer declines to pay a claim because the policy had lapsed. Which of the following most likely caused the lapse?

  1. The insured increased the sum assured
  2. The insured stopped paying premiums within the grace period Correct answer.
  3. The insured nominated a new beneficiary
  4. The insured changed address

Explanation

A policy lapses when required premiums are not paid within the allowed grace period, ending cover. Address changes, beneficiary nominations, and cover increases do not by themselves cause lapse.

Question 12Life Assurance

Which of the following best explains why insurers use medical evidence and questionnaires during underwriting?

  1. To reduce the number of beneficiaries
  2. To set the premium in proportion to the assessed risk Correct answer.
  3. To guarantee a claim will be paid
  4. To comply with marketing regulations

Explanation

Underwriting gathers information to classify risk and set a premium that reflects the likelihood of claim. It is a risk-assessment process, not a marketing or beneficiary control. It cannot guarantee that a claim will be paid.

Question 13Life Assurance

A policy includes a waiver of premium benefit. When does this benefit typically take effect?

  1. When the policyholder becomes disabled and cannot work Correct answer.
  2. When the policyholder surrenders the policy
  3. When the policyholder dies
  4. When the policyholder changes occupation

Explanation

Waiver of premium waives future premiums if the policyholder suffers a qualifying disability that prevents them from working. It keeps cover in force without further payment. Death, occupation change, and surrender are separate events.

Question 14Life Assurance

Which statement about the free-look (cooling-off) period in life assurance is most accurate?

  1. It allows the insurer to cancel the policy at any time
  2. It allows the policyholder to cancel within a set period and receive a refund Correct answer.
  3. It guarantees the premium will never rise
  4. It permits the policyholder to skip the first premium

Explanation

The cooling-off period gives the policyholder a defined window after issue to cancel and receive a refund, subject to any adjustment for the period of cover. It is a consumer protection measure, not a right for the insurer to cancel. It does not affect premium guarantees or first-premium obligations.

Question 15Life Assurance

An insurer prices a life policy for an applicant who engages in hazardous recreational activities. Which approach best reflects sound underwriting?

  1. Apply an additional premium or exclusion reflecting the added risk Correct answer.
  2. Refuse all cover regardless of circumstances
  3. Increase the sum assured to compensate
  4. Issue the policy at standard rates without enquiry

Explanation

Hazardous pursuits raise mortality risk, so the underwriter may apply a loading or exclusion rather than standard terms. Automatic refusal or ignoring the risk would be inappropriate. Increasing the sum assured does not address the risk.

Question 16Life Assurance

A policyholder with a with-profits whole of life policy receives annual and final bonuses. What do these bonuses represent?

  1. Distributions of the fund's accumulated surplus Correct answer.
  2. Tax rebates from the government
  3. Guaranteed interest paid on premiums
  4. Refunds of overpaid premiums

Explanation

With-profits bonuses distribute the surplus built up in the insurer's with-profits fund to policyholders. Annual (reversionary) bonuses are added regularly and final bonuses on claim or maturity. They are not guaranteed interest, premium refunds, or tax rebates.

Question 17Life Assurance

Which of the following best describes the role of the insurer's actuarial function in life assurance?

  1. To design advertising campaigns
  2. To assess mortality and financial risk and set appropriate premiums and reserves Correct answer.
  3. To handle customer complaints
  4. To sell policies to prospective clients

Explanation

Actuaries analyse mortality, morbidity, and financial risk to set premiums and maintain adequate reserves. Their role is technical risk and financial management, not sales, complaints handling, or marketing. This supports the long-term solvency of the insurer.

Question 18Pensions

Under UK tax rules, what is the maximum annual allowance for pension contributions that attract tax relief for most individuals in the 2024/25 tax year, before any carry-forward or tapering applies?

  1. £80,000
  2. £20,000
  3. £40,000
  4. £60,000 Correct answer.

Explanation

The standard annual allowance for pension contributions is £60,000, having risen from £40,000 from the 2023/24 tax year. This is the baseline before reductions for high earners or additional carry-forward is considered.

Question 19Pensions

What is the normal minimum pension age at which most people can access their defined contribution pension savings without an early-retirement penalty?

  1. 60
  2. 50
  3. 55 Correct answer.
  4. 66

Explanation

The normal minimum pension age is 55 for most schemes, rising to 57 from 2028. Accessing benefits earlier generally triggers tax charges unless an ill-health or protected-pension-age exception applies.

Question 20Pensions

A client wants to take 25% of their defined contribution pot as a tax-free lump sum. What is the maximum tax-free cash usually available, expressed as a share of the fund?

  1. 25% Correct answer.
  2. 20%
  3. 30%
  4. 50%

Explanation

The pension commencement lump sum is normally capped at 25% of the fund, subject to the lump sum allowance. The remainder typically becomes taxable income when drawn.

Question 21Pensions

Which of the following best describes auto-enrolment minimum contribution requirements for a qualifying workplace pension in the UK?

  1. Total contributions must reach 5% with at least 2% from the employer
  2. Employee must contribute at least 8% with no employer contribution required
  3. Employer must contribute at least 8% of qualifying earnings alone
  4. Total contributions must reach at least 8% of qualifying earnings, with at least 3% from the employer Correct answer.

Explanation

Auto-enrolment requires total contributions of at least 8% of qualifying earnings, of which at least 3% must come from the employer. The employee makes up the balance, often through tax relief.

Question 22Pensions

Which type of pension scheme promises a defined benefit based on salary and service rather than depending on investment returns?

  1. Self-invested personal pension
  2. Group personal pension
  3. Stakeholder pension
  4. Defined benefit occupational scheme Correct answer.

Explanation

Defined benefit schemes promise a retirement income calculated from salary and length of service, with the employer bearing investment risk. Defined contribution arrangements such as SIPPs and GPPs depend on the accumulated fund.

Question 23Pensions

A client earns £90,000 and makes a personal pension contribution of £8,000 net of basic-rate relief. How much will be added as basic-rate tax relief at source?

  1. £1,600
  2. £3,200
  3. £2,000 Correct answer.
  4. £4,000

Explanation

Basic-rate relief is added at 20% of the gross contribution, so a net payment of £8,000 is topped up by £2,000 (25% of the net amount). Higher-rate relief is then claimed separately via self-assessment.

Question 24Pensions

An individual has unused annual allowance from the previous three tax years and wishes to carry it forward. Which condition must generally be met to use carry-forward?

  1. They must have used the current year's annual allowance first Correct answer.
  2. They must have no other pension arrangements
  3. They must be self-employed
  4. They must be under age 55

Explanation

Carry-forward requires the current year's annual allowance to be used before unused amounts from the prior three years can be applied. The individual must also have been a member of a registered scheme in the year being carried forward.

Question 25Pensions

A high earner has adjusted income of £300,000 and threshold income above £200,000. What is their tapered annual allowance?

  1. £60,000
  2. £4,000
  3. £10,000 Correct answer.
  4. £40,000

Explanation

The annual allowance tapers by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. At £300,000 the reduction is £20,000, leaving £40,000, but the floor is reached once income exceeds £360,000; at £300,000 the allowance is £60,000 minus £20,000. Rechecking: the reduction of £20,000 gives £40,000, so the minimum applies only at higher income. The correct tapered figure at £300,000 is £40,000.

Question 26Pensions

A member of a defined benefit scheme has a pension input amount that exceeds the annual allowance. What charge may arise?

  1. A capital gains tax liability
  2. No charge because DB schemes are exempt
  3. A fixed 55% scheme sanction charge
  4. An annual allowance charge taxed at the member's marginal rate Correct answer.

Explanation

Excess pension input above the annual allowance for DB members triggers an annual allowance charge, generally taxed at the individual's marginal rate. It can be paid via self-assessment or through scheme pays if conditions are met.

Question 27Pensions

Which statement correctly describes the money purchase annual allowance (MPAA)?

  1. It replaces the annual allowance for all defined benefit members
  2. It only applies to the self-employed
  3. It applies to anyone who has taken a tax-free lump sum
  4. It applies once someone has flexibly accessed income from a defined contribution pot Correct answer.

Explanation

Triggering flexible access to income from a DC pot reduces the annual allowance for future DC contributions to the MPAA. Taking only tax-free cash does not normally trigger it.

Question 28Pensions

A client is considering transferring a defined benefit pension to a defined contribution arrangement. Above what transfer value must advice generally be obtained from a suitably qualified adviser?

  1. £250,000
  2. £100,000
  3. £30,000 Correct answer.
  4. £50,000

Explanation

Where the cash equivalent transfer value exceeds £30,000, the member must take advice from a suitably qualified adviser before transferring safeguarded DB benefits. This safeguard protects members giving up valuable guarantees.

Question 29Pensions

Which of the following is a key feature of an annuity purchased with pension savings?

  1. It converts accumulated capital into a guaranteed income for life Correct answer.
  2. It allows unlimited tax-free withdrawals
  3. It guarantees investment growth above inflation
  4. It can only be purchased before age 55

Explanation

An annuity converts pension capital into a guaranteed income stream, often for life, transferring longevity and investment risk to the insurer. The rate depends on factors such as age, health and interest rates.

Question 30Pensions

A client has a SIPP and wishes to make a contribution on behalf of their non-earning spouse. What is the maximum gross contribution generally permitted to receive tax relief for a non-earner?

  1. No contribution is permitted
  2. £3,600 net (£4,500 gross)
  3. £2,880 net (£3,600 gross) Correct answer.
  4. £10,000 gross

Explanation

A non-earning individual can contribute up to £2,880 net, which is grossed up to £3,600 with basic-rate relief. This is the maximum tax-relievable contribution for those without relevant UK earnings.

Question 31Pensions

Which of the following best explains the lifetime allowance replacement, the lump sum allowance, from 2024/25?

  1. It limits total pension savings to £1,073,100
  2. It applies only to defined benefit schemes
  3. It imposes an annual tax on fund growth
  4. It caps the tax-free cash an individual can take across all pensions at £268,275 Correct answer.

Explanation

From 2024/25 the lifetime allowance was replaced by lump sum and death benefit allowances; the lump sum allowance is £268,275, broadly 25% of the old lifetime allowance. Excess tax-free cash above this is taxed at the individual's marginal rate.

Question 32Pensions

What is the main purpose of pension carry-forward rules?

  1. To exempt high earners from the tapered allowance
  2. To permit tax-free withdrawals before age 55
  3. To allow unused annual allowance from the previous three years to be used in the current year Correct answer.
  4. To allow employers to reclaim employee contributions

Explanation

Carry-forward lets individuals use unused annual allowance from the three prior tax years, subject to having used the current year's allowance and scheme membership in those years. It supports those with irregular contributions such as the self-employed.

Question 33Pensions

A client receives a serious ill-health lump sum from their pension shortly before death. How is this usually treated for tax?

  1. Subject to inheritance tax only
  2. Taxed at 55% regardless of age
  3. Tax-free if paid before age 75 Correct answer.
  4. Taxed at the recipient's marginal rate always

Explanation

Serious ill-health lump sums are generally paid tax-free where the member is under 75, subject to the lump sum allowance. Where the member is 75 or over, they are typically taxed at the recipient's marginal rate.

Question 34Pensions

Which body administers the State Pension and issues National Insurance records used to determine entitlement?

  1. The Pensions Regulator
  2. The Pensions Ombudsman
  3. The Financial Conduct Authority
  4. HM Revenue & Customs Correct answer.

Explanation

HMRC administers National Insurance contributions and records, which underpin State Pension entitlement. The Pensions Regulator oversees workplace scheme compliance, while the FCA regulates advice and the Ombudsman handles complaints.

Question 35Savings & Investments

An individual invests £10,000 in a savings account paying 4% simple interest per year. How much interest is earned over three years?

  1. £400
  2. £1,000
  3. £1,200 Correct answer.
  4. £1,248.64

Explanation

Simple interest is calculated only on the original principal, so annual interest is £10,000 × 0.04 = £400, and over three years the total is £1,200. Compounding is not applied under a simple interest basis.

Question 36Savings & Investments

Which measure of investment return accounts for the compounding of reinvested income over time?

  1. The coupon rate
  2. The running yield
  3. The nominal annual rate
  4. The annual effective rate Correct answer.

Explanation

The annual effective rate expresses total return over a year including the effect of compounding within that period. Nominal rates and coupon rates do not by themselves capture intra-year reinvestment.

Question 37Savings & Investments

A saver wants their money to be readily accessible with no penalty. Which type of account best matches this requirement?

  1. A stocks and shares ISA
  2. An easy-access savings account Correct answer.
  3. A fixed-rate bond
  4. A notice account

Explanation

Easy-access accounts allow withdrawals on demand without notice or penalty, which directly matches the need for liquidity. Fixed-rate bonds and notice accounts impose access restrictions, and equity-based ISAs carry investment risk.

Question 38Savings & Investments

What is the main purpose of holding cash within an investment portfolio?

  1. To provide liquidity and reduce overall volatility Correct answer.
  2. To eliminate investment risk entirely
  3. To maximise long-term capital growth
  4. To guarantee a return above inflation

Explanation

Cash acts as a stabiliser, providing accessible funds and dampening portfolio volatility during market falls. It generally offers lower long-term growth and does not guarantee real returns.

Question 39Savings & Investments

An investor buys shares at £2.00 and sells them at £2.50 after receiving £0.10 in dividends. What is the total return per share?

  1. £0.10
  2. £0.60 Correct answer.
  3. £0.40
  4. £0.50

Explanation

Total return combines capital gain and income: the capital gain is £2.50 − £2.00 = £0.50, plus £0.10 dividend, giving £0.60. Both components must be included.

Question 40Savings & Investments

Which statement correctly describes the treatment of dividends within a stocks and shares ISA?

  1. Dividends are taxed at the basic rate on receipt
  2. Dividends are subject to capital gains tax
  3. Dividends are taxed only if withdrawn
  4. Dividends are exempt from UK income tax within the ISA Correct answer.

Explanation

Income such as dividends received inside an ISA is free of UK income tax, and capital growth is free of capital gains tax. Withdrawals from an ISA are not taxed as income.

Question 41Savings & Investments

An investor is concerned about inflation eroding purchasing power. Which asset class has historically offered the strongest long-term protection against inflation?

  1. Premium bonds
  2. Equities Correct answer.
  3. Short-dated government bills
  4. Cash held in a current account

Explanation

Equities represent ownership of real businesses whose revenues and earnings can rise with inflation over the long term. Cash and short-dated bills tend to lose real value when inflation is high.

Question 42Savings & Investments

A bond has a nominal value of £100 and pays a coupon of 5%. If the bond is purchased for £80, what is the running yield?

  1. 6.25% Correct answer.
  2. 8.00%
  3. 4.00%
  4. 5.00%

Explanation

Running yield is the annual coupon divided by the purchase price: £5 ÷ £80 = 6.25%. It differs from the coupon rate, which is based on nominal value.

Question 43Savings & Investments

Which risk is most relevant when a saver holds a large cash balance with a single bank above the deposit protection limit?

  1. Currency risk
  2. Counterparty (credit) risk Correct answer.
  3. Liquidity risk
  4. Market risk

Explanation

Amounts above the protected limit are exposed to the possibility that the bank fails, which is counterparty or credit risk. Cash itself is not subject to market price volatility in the same way as investments.

Question 44Savings & Investments

What is the effect of reinvesting dividends on the long-term growth of an investment?

  1. It reduces overall return by increasing tax
  2. It guarantees a fixed rate of return
  3. It has no effect on final value
  4. It compounds returns and increases final value Correct answer.

Explanation

Reinvesting dividends purchases additional shares, which themselves generate future income and growth, producing a compounding effect. Over long periods this can materially increase final value.

Question 45Savings & Investments

Which statement best describes the relationship between risk and expected return in investment?

  1. Lower risk always produces lower returns
  2. Higher risk always produces higher returns
  3. Higher expected returns generally require accepting higher risk Correct answer.
  4. Risk and return are unrelated

Explanation

Investors generally demand a premium for bearing risk, so higher expected returns are associated with higher risk. This is an expectation, not a guarantee of realised outcomes.

Question 46Savings & Investments

A fund charges an ongoing charge of 0.75% per year on a £50,000 holding. What is the approximate annual cost?

  1. £375 Correct answer.
  2. £750
  3. £37.50
  4. £3,750

Explanation

The annual charge is £50,000 × 0.0075 = £375. Ongoing charges reduce net returns and should be compared across products.

Question 47Savings & Investments

Which investment is most likely to be suitable for a client with a short time horizon of one year and a low tolerance for loss?

  1. An emerging markets fund
  2. A short-dated government bond fund Correct answer.
  3. A global equity fund
  4. A venture capital trust

Explanation

Short-dated government bonds have low price volatility and return capital over a short period, matching a short horizon and low loss tolerance. Equity and venture funds can fall sharply over a year.

Question 48Savings & Investments

An investor holds a bond with a fixed coupon while market interest rates rise. What is the most likely effect on the bond's price?

  1. The price rises
  2. The price falls Correct answer.
  3. The price is unaffected
  4. The coupon increases

Explanation

Bond prices move inversely to interest rates because existing fixed coupons become less attractive relative to new issues. The price must fall so the yield aligns with prevailing rates.

Question 49Savings & Investments

A client's marginal tax rate is 40% and they receive £500 of interest outside a tax wrapper. Assuming no personal savings allowance applies, what is the net interest after tax?

  1. £300 Correct answer.
  2. £200
  3. £450
  4. £400

Explanation

Tax at 40% on £500 is £200, leaving £300 net. The personal savings allowance can reduce this in practice but was excluded from the assumption.

Question 50Savings & Investments

Which factor most directly determines the appropriate split between cash and equity holdings for a client saving for retirement in 25 years?

  1. The bank's advertised savings rate
  2. The current level of the stock market
  3. The client's attitude to risk and time horizon Correct answer.
  4. The number of accounts the client holds

Explanation

Asset allocation should reflect the client's capacity and attitude to risk alongside the investment horizon, since a long horizon can accommodate more volatility. Short-term market levels and product marketing are not sound drivers of allocation.