LLQP Segregated Funds & Annuities · Component 1.2 · 35% of the exam
A client has a defined benefit pension and is offered a commuted value on leaving her employer. The assessment should consider:
- Guaranteed income and indexing versus the lump sum's risk, the taxable excess, solvency, health and ability to manage
- BOnly the size of the lump sum, since a larger commuted value always beats the monthly pension
- CAlways taking the lump sum, since the money then belongs to the client's estate on death
- DAlways keeping the pension, since a guaranteed income can never be matched by an investment portfolio
Correct answer: A) Guaranteed income and indexing versus the lump sum's risk, the taxable excess, solvency, health and ability to manage
Commutation is a major, often irreversible decision. The curriculum expects understanding of transfer options and their tax treatment.
Why the other options are wrong
- BSize alone ignores investment risk and the tax on the excess over the maximum transfer value.
- CThe pension may be worth more as income, especially for a healthy client.
- DThe lump sum may suit some clients, such as those in poor health.
Exam tip
Commuted value: income certainty vs investment control; excess over transfer limit is taxable.
Common mistake
Advising commutation without addressing the taxable excess.
What this tests
CISRO competency component 1.2 — Assess the client's needs and situation — which is weighted at 35% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 1
- The first step before recommending a segregated fund or annuity is to:
- A client's 'time horizon' for an investment is:
- 'Risk tolerance' in an investor profile refers to:
- A client says he wants 'high returns with no risk of losing money'. The agent should:
- Investment objectives are commonly classified as:
- Why is the client's marginal tax rate relevant to a segregated fund recommendation?
Practice the whole Segregated Funds & Annuities module
Timed sets weighted like the exam, and review of every question you miss. Free to start.