LLQP Segregated Funds & Annuities · Component 1.2 · 35% of the exam
A client's former employer offers him the choice between a deferred pension and a transfer of its commuted value. For the review the key point is:
- AThe transfer is always preferable, since the client controls the money rather than the plan sponsor doing so
- The choice trades a guaranteed income against investment control, locked-in restrictions and a taxable excess
- CThe deferred pension is always preferable, since a guaranteed income cannot be replicated privately
- DThe choice has no tax consequences, since the whole commuted value transfers to a locked-in plan
Correct answer: B) The choice trades a guaranteed income against investment control, locked-in restrictions and a taxable excess
The commuted value moves investment and longevity risk to the client, part of it is usually taxable immediately, and the transferred portion is locked in under pension rules.
Why the other options are wrong
- AControl comes with risks the pension was carrying for the member.
- CA lump sum suits some members, particularly those in poor health.
- DAmounts above the transfer limit are paid in cash and taxed.
Exam tip
Commuting trades a guarantee for control, risk and a tax bill.
Common mistake
Advising on 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.