CIIN Certificate CF6 flashcards

36 cards. Read the term and the definition here. The deck at the top of this page is optional.

Financial planning process

Six sequential steps: establish the relationship, gather data and goals, analyse the situation, develop recommendations, implement the plan, then review and monitor progress against objectives.

Consumer Duty

FCA rules requiring firms to act in good faith, avoid foreseeable harm and enable retail customers to pursue their financial objectives, supported by outcomes monitoring and fair value assessments.

Suitability report

Written explanation of why a recommendation fits a client's objectives, risk profile and capacity for loss, including costs and disadvantages, provided before the transaction completes.

FSCS protection limits

Compensation scheme limits: 100% of the first £85,000 for deposits and investments per person per firm, and 100% of pension claims with no upper cap.

Net worth

Total assets minus total liabilities at a point in time; a negative result means liabilities exceed assets and signals balance-sheet insolvency.

Current ratio

Liquid assets divided by current liabilities; a value below 1.0 shows that short-term assets cannot cover obligations falling due within a year.

Emergency fund

Cash reserve covering three to six months of essential expenditure, extended to six to twelve months for single-income or variable-income households to absorb income shocks.

Real return

Return after inflation, approximated as nominal return minus inflation; the precise figure is (1+nominal)/(1+inflation)-1, showing change in purchasing power.

Debt service ratio

Total monthly debt repayments divided by gross monthly income; lenders commonly treat levels above 36-40% as an affordability warning sign.

Human life value

Insurance need calculated as the present value of future earnings net of self-maintenance, discounted at a real rate, representing the economic value of the insured person.

Income protection

Policy paying a replacement income, typically 50-70% of gross earnings, after a deferred period and until selected retirement age if the insured cannot work.

Critical illness cover

Pays a tax-free lump sum on diagnosis of a listed condition such as cancer or stroke; it addresses medical and lifestyle costs, not ongoing loss of earnings.

Term assurance

Life cover paying a lump sum only if death occurs within a fixed term; it has no investment element and is the cheapest form of death protection.

Risk treatment options

Five responses to risk: avoid, reduce, retain, transfer through insurance, and share; insurance suits low-frequency, high-severity events.

Asset allocation

Division of a portfolio among asset classes such as equities, bonds and cash; it drives most of the variability in portfolio returns over time.

Sharpe ratio

Portfolio return minus the risk-free rate, divided by portfolio standard deviation; a higher value indicates better return per unit of total risk taken.

Beta

Measure of a security's sensitivity to market movements, where the market equals 1.0; values above 1.0 indicate greater volatility than the market.

Capacity for loss

Objective ability to absorb falls in value without derailing financial goals; it can override a client's stated attitude to risk when setting strategy.

Correlation and diversification

Diversification benefit grows as correlation between assets falls; negatively correlated assets reduce portfolio volatility most for a given level of expected return.

Rebalancing

Returning a portfolio to target weights using calendar or threshold triggers, such as a five per cent drift, which enforces selling winners and buying laggards.

Defined benefit scheme

Occupational pension promising income based on accrual rate, salary and service; the employer bears investment and longevity risk rather than the member.

Annual Allowance

Cap on tax-relieved pension contributions per tax year, set at £60,000 in 2024/25; unused amounts may be carried forward from the previous three years.

Money Purchase Annual Allowance

Reduced contribution limit, £10,000 in 2024/25, that applies once a member has taken flexible income from a defined contribution pension.

Pension Commencement Lump Sum

Tax-free cash normally equal to 25% of a pension fund, capped by the Lump Sum Allowance, with the remaining fund taxed as income when withdrawn.

Normal Minimum Pension Age

Earliest age at which pension benefits can normally be taken, currently 55 and rising to 57 in 2028, subject to protected retirement ages.

Personal allowance taper

The £12,570 allowance falls by £1 for every £2 of adjusted net income above £100,000, disappearing entirely once income reaches £125,140.

Capital gains tax exemption

Annual amount of gains free of CGT, £3,000 in 2024/25; residential property gains must be reported and tax paid within 60 days of completion.

Residence nil rate band

Additional inheritance tax allowance of £175,000 when a main residence passes to direct descendants, tapered by £1 for every £2 of estate above £2 million.

Inheritance tax rate

Charge of 40% on the estate above available nil rate bands, reduced to 36% where at least 10% of the net estate is left to charity.

Potentially exempt transfer

Gift to an individual or bare trust that becomes fully exempt if the donor survives seven years; otherwise it is charged using the nil rate band at death.

Taper relief on gifts

Reduction in inheritance tax on failed potentially exempt transfers: 20% after three to four years, rising to 80% after six to seven years.

Intestacy rules

Statutory distribution when there is no valid will; a surviving spouse receives a fixed sum and personal possessions plus a share, not the entire estate.

Business relief

Inheritance tax relief that can remove qualifying business assets from the estate at 100% or 50%, provided ownership and trading conditions are met.

Client's best interests rule

FCA requirement that firms act honestly, fairly and professionally in the best interests of clients, supported by disclosure of conflicts and costs.

Conflicts of interest

Situations where personal or firm interests may compromise client outcomes; they must be identified, managed and disclosed, and harmful inducements are banned.

Vulnerable client

Client whose circumstances such as health, bereavement or low financial resilience raise harm risk; firms must adapt communication and service to protect them.