What would you do with £381m?

June 7, 2013

The news over the past day has informed us of the largest ever undivided lottery win the United States of $590m (£381m), going to an 84-year old widow.dollars

Talk of the lottery is nearly always accompanied by a discussion of what you would do with the winnings…

But after you have stopped considering how to furnish the gatehouse, it is worth remembering that it doesn’t have to be a massive lottery win for your money to require due consideration.

Using our cash flow modelling tool, Voyant, we can create a wide variety of what if scenarios that project forward how different choices today can affect your financial outlook tomorrow.

Assets detailed for websiteWe can enter in information such as your incomes, expenses, assets and liabilities and model forward projections, such as those seen on the right.

Being at the age Gloria, the 84 year old jackpot winner, is she chose to take her winnings as a lump sum rather than 30 annual payments of £12m. Taking it in this manner reduced the sum to £240million.

This type of situation is similar to those faced by retirees and those made redundant every day as they must decide how best to take their benefits. This is exactly the situation where cash flow modelling can shine.

lotterywinCombining this with expert advice that guides you through an all encompassing view of your current circumstances, maybe you can generate some of your own luck.

Of course, if you are feeling lucky, we can even model a scenario where you win big…

 

Share:

How we can change your life this week

May 31, 2013

Much of human understanding of the world is built on models that attempt to recreate complex systems in a simpler form. This ranges from the reactions of the economy to a reduction in government expenditure to the effect of CO2 on climate change.

No model will ever be perfect as there are too many intricate relationships at play, but I am sure that most would agree that we are better to have some understanding of how these systems work than nothing at all.

Now let’s consider financial planning. It is one of those disciplines that, whether you are interested or not, it still applies to you. Every single person reading this blog will, in the simplest sense, have things they want to do, a number of years ahead of them, and an exhaustible amount of money flowing in and out.

timelineThere are different attitudes to this problem. Apathy is one. Some may not want to think about it because it will stop all of today’s fun.  Some may have a vague idea it will all work out. Some people may have fashioned a rudimentary spreadsheet in Excel to try and boil the situation down into hard numbers, but once the projections involve discounted values of future contributions and the timescale stretches out, things can get complicated very quickly.

At OAM, equipped with the market leading cash flow modelling software, Voyant, we can produce charts, projections, balance sheets and inheritance tax ledgers. We can put in key events such as weddings and the sale of a business. We can even kill you off next year, just to see what happens. We can tweak every assumption that lies behind the model to make it as realistic to your circumstances, and the wider economy, as is possible.

The level of detail is quite astonishing. Every change from HMRC on future tax rates are factored into models automatically, within days of announcement.

This week we made a big difference to a couple’s life, confirming that which they suspected: they don’t actually need to work anymore. They have accumulated more than enough to last comfortably until their assumed mortality age (itself selected by the client on the grounds of family history and the Office of National Statistics).

assetsIn the past we have helped clients assess their inheritance tax liability, choose between different redundancy options, set the amount of savings contributions required to pay for their children’s education and more.

As stated above, every model has its limitations, but it is worth coming to see us to gain some understanding of how your future looks rather than earning and spending money in the dark. And as we see confirmed every day when small tweaks are made to client’s plans, a change today can make life quite different in 20 years.

Malcolm Stewart

Share:

Modelling Your Estate and Inheritance Tax

November 30, 2012

We are currently carrying out a large exercise for a client to ensure that the inheritance tax on her estate is mitigated as much as possible.

As well as taxation and trust work, the use of our cash flow modelling system has become an important part of this.

We are able to enter all of the client’s assets into the system and simulate an immediate estate scenario (a nice way of putting it!). This provides balance sheet style view of everything that needs to be taken into account, and performs the appropriate calculations. Any beneficiaries of the estate can also be entered into the planning, as well as potentially exempt transfers.

Please click on the image below for a basic example of this.

In this case, the estate will be distributed to two children, John and Jen. The system automatically collects anything that would be part of the estate and performs the calculations. This can be as simple or as complicated as necessary to correctly simulate your planning. The detail can drive down into the way certain policies are set up. For example, the Whole of Life insurance policy that the example client above holds is written in trust, and therefore the payment is outside of the estate.

The example above shows one solution in inheritance tax planning, whereby the £100,000 Whole of Life policy in trust pays out enough to cover the inheritance tax charge of £94,140.

For a detailed look at your inheritance tax position and to see what we can do for you please get in touch.

MS

Share:

Can Your Planning Withstand a Major Loss Event?

October 1, 2012

Scenario

Meet John, 56, and his wife Janet, 54. John runs ABC Ltd, a company which provides high quality examples in many business settings. Janet is a civil servant.

They have 3 children: Jill, Jenny and Johnny. They will all have flown the nest by the time John is 62. At this time John and Janet plan to travel and spend more for six years. Following this they plan to downsize their house.

They have various investments in the stock market, including John’s pension, although Janet is lucky enough to have a final salary pension. They like to take a medium-high level of risk with their investments.

Assuming the economy and the stock market proceeds at a general average over the remaining period of their lives they will be in good shape, with no deficit at any stage.

Modelling a major loss

Once the media start focussing on other things it’s easy to forget that there is still a substantial chance that Greece or many others may drop out of the Euro, triggering a mechanism that will essentially send confidence back to levels seen earlier in the year, or worse. I won’t get into too much speculation on that because a major loss can come from anywhere when we least expect it.

So is your financial planning robust enough for a tornado to tear through Canary Wharf?

John and Janet would like to know, and we can help them run one of many scenarios.

Let’s say our disaster event creates the following effect: a 3 year loss of -35%, -25% and -20%. This occurs when John is age 60 (in 4 years).

 

Each investment in the stock market that John and Janet have has been modelled as close to reality as possible in terms of asset allocation, and based on statistics from Novia Market Assumptions.

Each of these investments will be automatically affected by our loss simulation above.

So what do we find out?

Figure 1

 

 

 

 

 

Figure 2

 

 

 

 

 

 

In the cash flow chart we can see a period of red setting in from age 77, unlikely the status quo base plan chart from above.

The effect is more strongly seen in the liquid assets charts, with usable funds running out at age 76.

In the base plan the growth rate was 6-7%. Once we factor in that this major loss will occur, we see that 9.06% growth is required on these assets from the start of the plan, or 10.57% is required once the major loss has occurred, to ensure once again that there will be no shortfall.

So what does this mean? Well, for John and Janet, they would likely have to downsize again at age 77 to free up more liquid assets.

What would it mean for you?

Get in touch for a comprehensive look at your planning.

Malcolm Stewart

Share:

Modelling Your Legacy

August 21, 2012

As part of the Wealth Management service we offer a comprehensive look at your entire financial position. If you have significant assets, an important part of your planning is the future of your estate in the event of your death. This entails the obvious legal aspects such as having a will prepared but also how exactly these assets are arranged.

The basic things to consider are as follows:

– Inheritance tax is only due if your estate – including any assets held in trust and gifts made within seven years of death  is valued over the current inheritance tax threshold (£325,000 in 2012-13 tax year).
– Tax is paid at 40% on the amount over this threshold
– Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.*

Step one when producing an estate solution is to model your complete financial situation. This allows us to not only calculate what your immediate legacy or joint immediate legacy is, but also what it is likely to be factoring in rates of income and expenditure, as well as growth and inflation over time.

With this in place we can firstly analyse whether there is an inheritance tax liability at all. If there is, we will also be able to quantify just what this liability is and also, if desired, designate the estate split amongst other members of the plan.

The planning can be as detailed as appropriate

 

The calculations are presented in a detailed report. Once the liability is recognised we can then start to prepare what the best solution or solutions will be in discussion with the client, from gifting strategies to whole of life insurance policies.

You don’t have to be planning on leaving an inheritance to make the most of these tools. For some clients we have been able to take a different approach; how much can they afford to spend annually to make the most of their assets and gradually exhaust them? By adding in an arbitrary expense we can make an estimate. We can carry this out on a worst case scenario basis as well.

In this scenario we see liquid assets gradually being used up over time.

 

This approach takes a lot of the uncertainty out of inheritance tax planning and is of great benefit to our clients in this stage of their lives.

If you feel that this side of your planning hasn’t been looked at appropriately please get in touch. We offer a free second opinion service to anyone unsure about their current plans.

* Legislation from HMRC correct at the time of writing.

Share:

The Lost Generation

February 21, 2012

There have been two recent conversations of late that serve to illustrate the worrying lack of understanding of how much retirement might cost.

The first was from someone wondering how we might get more income from his retirement pot.  Put more money in I said, not entirely tongue-in-cheek.

Secondly, a young woman said she would save what was left of her income once her bills were paid and her “fun” money was set aside.

I’m not sure you can owe your pension plan the contributions, but you get the picture.

This from the MetLife 2011 Retirement IQ:

“2011 shows a significant increase of respondents who say that the greatest financial risk facing retirees is longevity. Sixty-two percent of respondents answered correctly in 2011, compared to 56% in 2008, and 23% in 2003.”

I’m genuinely concerned that our mighty Financial Services industry has not managed to get the message to the public that you need to plan to stop work and that you’ll need money to do it.

It’s a pretty simple concept and to take more from the MetLife’s Mature Market Institute research, even if people are prudent, sensible and save for retirement, longevity and market risk are leading to generations that will run out of cash before they have the good grace to die.

Whichever way you slice it, a large dose of reality has to be brought to bear when doing retirement planning for clients.

Wealth modelling plays a great part in determining the numbers, (Voyant is our system of choice) but it has really struck me that we, as financial planners, have a huge burden of responsibility to make clients aware of what’s involved in getting to your “number”

Taking this a stage further I got to thinking about whether we work with our clients, for our clients or do we take orders?

I’m sure we are more in category one and two rather than three, but it requires a genuine want to get involved at much more personal level.

David Jones of Dimensional Fund Advisers recently mentioned to me the idea of the one number on the fridge door that should anything happen to the couple, the family could ring the phone number and person on the other end of the phone would understand and be able to sort out the financials.

Does your current financial adviser educate you, train you and make you do what you need to get to retirement in the shape you need to be?

And is he or she your trusted number on the fridge door?

I know Shane Mullins of Fiscal Engineers of Nottingham is rightly focussing on the “trust” part of the relationship between client and adviser and I too believe that this is the key part of our makeup.

I await his tweets with further interest.

So what am I saying?

Guiding clients to retirement requires reality, discipline and commitment from clients and a desire from the adviser to understand the client and their family’s needs and be seen as someone who can be trusted to deliver the plan.

We can’t get to the numbers until we put the time in to establish a relationship with the client that’s based on mutual respect and understanding.

So when your adviser tells you to put more money into your retirement plans because he thinks it is a good idea and it will benefit you and not him, you know you’ve got the right man and can post his number on your fridge.

We need to make the public understand that there is a big difference between going to see someone who will sell you a pension (insert you own local favourite or bank here) to working with trusted adviser who will have a genuine interest in helping you retire in good shape.

One final point; MetLife research would point to income guarantees being very important in retirement for clients and with the continued erosion of annuity purchasing power, is this the way forward?

0131 273 5202 – Cut out and stick on fridge.

Roland Oliver

Share:

Cash flow modelling and utility bills

June 10, 2011

Whilst working with a client this morning and using our Voyant cash flow process, a couple of very interesting points where raised.

Our client noted that this approach of getting into the real detail of his income, expenditure, assets and liabilities then testing different financial scenarios was the only way to plan. He felt that this was a serious way to approach his Wealth Management plan and it was the first time he felt fully involved in the process.

During the meeting, he noted that since we last spoke a few weeks ago, his monthly payment for electricity was to double.

It’s not been a good week for the majority of Brits as we continue to be faced with ever higher costs across a whole range of goods and services we need on a daily basis.

Clearly our client wanted to factor in this increase in his monthly expenditure and for him knowing what his financial picture looked like, good or bad, was infinitely better than not knowing.

From the point of understanding the effects of increased cost and from the peace of mind that comes with knowing you’ll be OK financially, cash flow modelling is such an important part of a Wealth Manager’s process.

We find that using this approach allows clients to better understand their financial circumstances “in the round” and avoids falling into the specifics trap and confusion over jargon, policies and industry-speak.

Take Voyant away from me now and I’d struggle to do my job.

As we continue to live through these tough economic conditions the value we provide to clients in managing their cash flow models becomes even greater.

Please call us today and we’d be delighted to demonstrate how our Wealth Management Experience, including cash flow modelling, can put you firmly in control of your financial plan.

Roland Oliver

Share:

The fundamental need for protection

June 7, 2011

Reading an article in the paper the other day reminded me that one of the most basic functions of my job is in ensuring that clients are adequately protected with life and critical illness cover. This is arguably the most important but often the least appreciated part of my work.

We all have stories of untimely death or serious illness and how families been devastated but have survived because of having financial protection in place.

I’m not going to go into all the details of what plan, who with or what type of cover at this stage but I am going to point out some areas that must be addressed.

I will not be alone in noting that clients have a reluctance to paying for something “they may not need” and tend to try and talk the cost of life and critical illness cover down to a budget.

We use Voyant cash flow modelling to determine the actual financial cost of someone dying early or suffering a critical illness which tends to bring some serious reality to the levels of cover needed.

Often clients will have some protection in place (flogged by a bank in many instances) which the level of cover bears no resemblance to the actual level of risk. There are a lot of fans of nice round numbers out there and clients are usually at a loss as to why a particular level of cover has been arrived at.

Establishing with clients the real cost of early death or serious illness by more rigorous methodology is paramount and the costs of providing this cover are then seen in the right context.

I find that people do understand the need for cover and are much happier to have the right level of protection in place once they see the real amount of money required to make sure their family will be financially protected if the unthinkable happens.

Once we have the right numbers established, then using the appropriate trusts to ensure swift dispatch of any monies in the event of claim should be a given.The option of using Relevant Life policies were possible also adds a very welcome 20% corporation tax saving on premiums.

So to summarise, don’t leave it to chance; make sure the amount of cover is relevant to the level of risk and get the proper amount and type of cover you need.

If you need us to give you a more accurate figure as to how much cover you might need, contact Malcolm Stewart our Voyant guru on 0131 273 5202 and he’d be happy to help out.

Roland Oliver

Share: