Finance Questions

Part A (45% of the mark for this assignment)

Question 1

Tanya is 39 years old and has never saved into a pension previously. She has started a new job. Her gross earnings are £28,500 per year and she is automatically enrolled into her employer’s defined contribution pension scheme. Tanya contributes 8% of her earnings and this is topped up by 5% by employer contributions and tax relief. At retirement, she also expects to get a state pension worth £9,627.80 (before tax) in today’s money.

1.1 Using the ‘Pension calculator’, work out how much disposable income Tanya will have in the first year of retirement if she retires at age 68 and uses the whole of her pension fund build up under the defined contribution scheme to buy an annuity (which, in the calculator, is an index-linked annuity). Assume that there has been no increase in Tanya’s real income or pensions savings strategy over this time period.  (2 marks)

1.2 Using the ‘Pension calculator’:

  1. Work out the sum of Tanya’s disposable income and drawdown ‘income’ in the first year of retirement if she retires at age 68 and uses the whole of her pension fund for drawdown, choosing to draw out a fixed income equal to 33% of her gross pre-retirement income. (2 marks)
  2. Comment on the sustainability of Tanya’s drawdown strategy. (3 marks)

1.3 Describe one advantage and one disadvantage for Tanya in choosing an index-linked annuity rather than drawdown. (4 marks)

1.4 Discuss two policies which a government could introduce to reduce the generosity of a state pension scheme in a country. (4 marks) 

(Total marks: 15 marks)

Question 2

Dale and Darcey are a couple with two young children, Brix, aged 6 months and Travis, aged 4. Darcey has been on maternity leave and is due to go back to work full-time as a train station announcer. Dale is employed full-time as a retail worker. Both parents are in their late twenties and live in Wardley, England. They are looking into arranging childcare once Darcey returns to work.

2.1 Dale has the option to work flexibly by halving his hours from 40 to 20 for the next three years. Under this arrangement, his monthly gross pay will also halve to £958.

Dale says that if he takes this option, his financial sacrifice might be more than just the £958 per month in lost income over this three-year period. Identify two factors that might cause Dale to have a much larger financial loss over his lifetime if he takes this option of going part-time. (4 marks)

2.2 Darcey could return to her gross annual full-time salary of £22,150 per year (based on 40 hours per week). Her employer introduces changes to working practices that will also allow her to reduce her hours and her pay by up to 50%. The household is discussing the short-term opportunity costs of Darcey taking the part-time (50%) working option, rather than Dale.

With respect to gross monthly earnings only, explain and calculate the short-term opportunity cost for the household of Darcey going part-time as opposed to Dale. (2 marks)

2.3 If both Darcey and Dale decide to stay in full-time employment, their net annual salaries would be £18,964.65 and £19,526.69, respectively. Darcey also receives child benefit, equating to £1,885 per year. Brix and Travis would attend a nearby local nursery full-time from Monday to Friday, at a cost of £592 per week, covering both of them.

Using the Tax credit calculator where appropriate, calculate the couple’s total tax credit entitlement and their net household income after childcare costs. (4 marks)

2.4 The household is also considering a second option, namely whether both should halve their hours (and thus their gross earnings), keeping things equal between them and sharing their time looking after the children so that they do not pay for the nursery.

Using the Tax credit calculator where appropriate, work out their tax credit entitlements and net household income after childcare under this option, and compare the short-term financial situation of the household with the previous option of both of them staying in full-time employment. (5 marks)

(Total marks: 15 marks)

Question 3

Read the extract, which is about a scheme introduced by the Welsh Government for people leaving care in Wales. Then, drawing upon module material as well as the extract, answer the following three questions.

3.1 Define what is meant by a universal basic income. Explain why the Welsh Government pilot is not, strictly speaking, a universal basic income according to that definition. (5 marks)

3.2 Outline one advantage and one disadvantage of a universal basic income for supporting individual well-being. (4 marks)

3.3 Define what is meant by universal basic services. Give two examples of specific services that might be used to support those people leaving care. (6 marks)

(Total marks: 15 marks)

Extract: Wales pilots scheme for care leavers

From 1 July 2022, more than 500 people leaving care in Wales will be offered £1600 each month (before tax) for two years to support them as they make the transition to adult life.

Launched by First Minister Mark Drakeford, it is hoped the pilot will set care leavers on a path to live healthy, happy and fulfilling lives.

The radical approach has trust, autonomy and respect at its centre. It will provide independence and security to people who have faced immense challenges during their childhood, giving them greater control and empowering them to make decisions about their future.

The £20 million pilot, which will run for three years, will be evaluated to carefully examine its effect on the lives of those involved.

Social Justice Minister Jane Hutt said the scheme is a direct investment in the lives and futures of some of Wales’ most vulnerable young people.

Those taking part in the pilot will also receive individual advice and support to help them manage their finances and develop their financial and budgeting skills.

Local authorities will play a key role in supporting them throughout the pilot. Voices from Care Cymru will also work with the young people to give them advice on wellbeing, education, employment and help them plan their future after the pilot.

Source: Welsh Government (2022)

Word limit for Part A: 1000 words

Part B (45% of the mark for this assignment)

Drawing on module themes and content across the module, discuss the following statement:

‘Governments are in the best position to reduce financial gender inequalities in old age by ensuring that women have better financial well-being in later life. However, it also helps if women have strong financial capability in early life.’

(Total marks: 45 marks)

Word limit for Part B: 1400 words

Part C (10% of the mark for this assignment)

Select one skill (for study, employability or financial capability) where you feel your ability and/or confidence has improved during your study of DB125, and explain:

  1. The main aspect of your studies that has contributed to the improvement in this skill b. why this skill is important to the achievement of your future goals.

(Total marks: 10 marks)

Word limit for Part C: 200 words

Student notes for Part A

To answer Part A, you will need to use the material from Personal Finance and the online study weeks, as well as the Pension calculator and the Tax credit calculator.

Question 1 focuses on saving for retirement and the pressures both individuals and society face regarding pension provision. Relevant sections of the module materials are Chapter 8 (especially Sections 4, 5, 6 and 7) and the related online study in Week 23 (in particular, Sections 5, 6 and 7). In parts 1.1 and 1.2, you will need to use the Pension calculator – this is quite a detailed tool, so you may want to review Sections 6.2 and 7.2 in Week 23, which explain how to use it. You are strongly advised to show or explain the amounts you entered into the calculator, since it may be possible to gain marks for a largely correct method even if your final answer is wrong.

Question 2 tests your understanding of the short- and long-term financial implications of sharing paid and unpaid work in a household. For example, Question 2.1 asks you to explain briefly why the decision to move from full-time to part-time work for three years might cause a bigger long-term sacrifice than just the income lost in those three years. For Question 2.2, you should work out a numerical answer to explain the opportunity cost faced by the household.

In Questions 2.3 and 2.4, you need to use the Tax credit calculator, where you should select the tax year 2022–23. Make sure you calculate the correct household income to enter into the calculator. You then need to use the results of this calculation to work out the net household income after childcare costs, so make sure you consider all the elements needed to calculate the result.

Relevant module material for Question 2 can be found in Chapter 9, in particular, Sections 4 and 5, as well as in Week 25, Sections 3–5.

Question 3 is about universal basic income (UBI) and universal basic services. You should read and use the extract supplied to support your answers. Relevant module materials are Chapter 10 of Personal Finance (particularly Sections 3.2, 4, 5.1 and 5.2) and Week 27 (Sections 2 and 5).

Student notes for Part B

Answering Part B requires you to think back across the whole module and write an essay that draws on material from a number of chapters and online material. Given the amount of material that you could potentially use, it is essential that you carefully plan your essay to ensure that it has coherence and focus; you are not expected to cover every possible aspect of the module. Throughout your essay, you must make sure you relate your answer to the four themes running through the module.

There are essentially two parts to this essay. In the first part, you should define the concept of financial well-being. You need to illustrate the type of inequality in old age you want to focus on, explicitly about the differences between men and women but also perhaps between different groups of women, and of men. You could discuss how earlier disadvantages may compound over the life course. Then, importantly in the context of the question, you need to consider the strategies governments can deploy to counteract such disparities. Explore the role of the state to consider to what extent it can influence the constraints and opportunities, particularly faced by women, to improve their long-term financial well-being. Remember to use referenced evidence from the module material to back up your claims and arguments.

ASK FOR HELP WITH THESE QUESTIONS

In the second part of the essay, using the module materials, you need to define financial capability and to consider how improving financial capability can lead to better financial well-being in later life. You can tie this in to the constraints and opportunities identified in the first part of your essay. It would also be a good idea to consider how employers might affect women’s ability to be financially capable and how employers might help to reduce financial gender inequality in old age. Again, remember to use referenced evidence from your module materials in this second part of the essay.

In this part of the final assessment for DB125, you are expected to display appropriate essay-writing skills. Guidance on essay writing is provided throughout the online weeks and, as usual, make sure that any sources you cite or quote from are properly referenced. You can find a quick link to all the skills activities, including references that you have practised throughout the module under the Resources tab.

Don’t forget to include your word count.

Student notes for Part C

In Part C, you are asked to reflect on how one of the skills you have been developing during your study of DB125 has improved. You will find it helpful to refer back to the scores and notes you made in the skills activity you completed towards the end of Week 27. You will need to answer both parts of the question, (a) and (b), so you should choose a skill that is important to you and in which you have also shown improvement.

Learning outcomes

The learning outcomes (from those listed in Week 1) that this EMA is testing are:

Knowledge and understanding

  1. Knowledge and understanding of basic concepts in economics and accounting that are significant for household finances, such as income, expenditure, debt and saving.
  1. Understanding of the relationship between financial decisions and the broader process of social and economic change.
  1. Awareness of the diversity of households, and the conflicts and negotiations around finance within them.
  2. Understanding of the significance of trade-offs/opportunity cost and other factors in financial planning over the life course.

Cognitive skills

  1. Describe and compare the various ways in which social and economic factors impact on the financial decisions of different households.
  1. Interpret and use key financial and economic terms, concepts and theories to inform financial decision-making.
  1. Select, interpret and use qualitative and quantitative information in financial problem solving.

Key skills

  1. Communicate information clearly, accurately and appropriately.
  1. Interpret and use simple graphs, tables and charts.
  1. Demonstrate relevant numeracy, for example, calculating and using percentages, interest rates and averages.
  1. Use feedback and self-reflection to improve your own learning.
  1. Plan, study and manage a sequence of work that meets a deadline.
  1. Use information and communication technology (ICT) to work through and apply module themes and other relevant material.

Practical and/or professional skills

  1. In the light of economic concepts and theories, interpret relevant information from the financial press and other sources, to inform decision-making.
  1. Demonstrate use of relevant techniques and tools, including budgeting, cash flow statements and financial balance sheets.
  1. Make suitable financial decisions, while understanding the constraints and limitations.
  1. Plan a study pathway to link learning with your personal and/or career goals.

References

Welsh Government (2022) Wales pilots basic income scheme. Available at: https://gov.wales/wales-pilots-basic-income scheme (Accessed: 8 September 2022).