Inflation vs Interest rates affecting the CETV

With inflation running at levels we have not seen for the last 40 years, many of my clients are questioning the benefit of waiting to obtain a CETV, hoping that the increased inflation will have a positive affect on the CETV values. Before we explore this, it is important for us to understand the relationship between inflation and interest rates.

Inflation is increased when there is an increased demand on supplies, and supplies are maintained at their current level, and/or increased by a lower degree than the increase in demand. An increase in demand will increase prices and this leads to inflation. Most central banks have a target inflation rate of 2% per annum and inflation above this will be “reigned in” by central banks increasing the interest rates. By increasing the interest rates, borrowing becomes more expensive and this reduces the demand. A reduction in demand will result in a reduction of prices and hence inflation will cool off.

Both inflation and interest rates have a relationship on the CETV as provided by defined benefit pension schemes. Inflation has a positive relationship on the CETV value (i.e. an increase in inflation has an increase in the CETV value); whereas (which is a little less known), interest rates have a negative relationship on CETV values.

Owing to the fact that interest rates are increased when inflation is high, members of defined benefit schemes find themselves in the unenviable position where one variable increases the CETV, whilst the other reduces it. Therefore, the vital question is which one of these variables has a larger affect on the CETV.

To answer, this we need to understand how the CETV is calculated. For a detailed description please visit this blog post. Let’s assume a person works for 30 years, with a final salary of £50,000 and the scheme has an accrual rate of 1/60th. Using a 2% inflation, a 3% gilt rate, a 4% discount rate and 10 years until retirement, we can see that the CETV would compute to £686,257.46.

If we were to increase the inflation rate by 1%, this would result in the CETV increasing to £756,584.79. This is a 10.25% increase in the CETV.

By increasing the gilt rate (interest rates), also by a single percentage point, we can see that the CETV decreases from £686,257.46 to £514,693.10. This is a 24.99% reduction in the CETV.

Therefore we can conclude that a single percentage increase in interest rates, has a negative effect on the CETV of more than double a similar single percentage increase in the inflation rates.

Furthermore, by increasing both inflation and interest rates by a single percentage point, the CETV reduces from the original £686,257.46 to £567,438.59; a reduction of 17.31%.

By keeping all the data static we can clearly ascertain that movements in interest rates have a larger (negative) effect on the CETV than a similar movement in inflation would have.

To conclude therefore, it would be detrimental to postpone obtaining a CETV under the impression that higher inflation would increase this in the future, as interest rates would also be increasing to counter inflation and this has a larger affect on the CETV.

If you would like to download a free CETV calculator, please use this link and you can amend the variables to ascertain the degree to which each affects the CETV.

Naturally, should you wish to discuss this in more detail and how this may be affecting you, please feel free to get in touch.

The Attractiveness of your PCLS

I was recently working with a client concerning a pension transfer of his defined benefit (DB) pension scheme; and some questions which arose concerning his available PCLS.  Owing to the fact that this was not the first time such question has arisen, I thought it wise to write a brief piece on how the PCLS is calculated, and how to determine the attractiveness of such PCLS in light of the suitability of a possible pension transfer.  This is going to be a rather technical (bumpy) ride, so fasten your seatbelts; let’s go!

Unless a member has transitional protection (primary protection, enhanced protection, Fixed protection or individual protection), the maximum PCLS will always be limited by the standard lifetime allowance (currently £1,073,100).  This means for the current tax year the maximum PCLS from any arrangement is capped at £268,275 (25% of £1,073,100).  

When considering a money purchase scheme, the calculation is simple.  25% of the total fund, capped at 25% of the standard lifetime allowance.  In fact, the regulations are written to state that “one third of funds allocated to drawdown can be taken as a pension commencement lump sum”.  However, the math is the same.  If a member has a money purchase scheme with a fund of £1,000,000, and they take 25% PCLS; £750,000 would be allocated to drawdown.  One third of this £750,000 is £250,000 which is the same as 25% of the total fund.

However, when dealing with a defined benefit scheme, there is another, less known rule implemented by the HMRC, and it utilizes the commutation factor which the scheme chooses.  Before we look at the cap implemented by the HMRC, let’s clarify what we mean by “commutation factor”.

Most DB schemes will allow a member to take a PCLS through commutation.  Each fund would have a commutation factor, and this dictates how much of their scheme pension they need to “commute”, in return for the PCLS.  For example, if a scheme commutation factor was 16, then for every £16 of PCLS, the scheme pension would be reduced by £1 per annum.  For example, if a member was permitted to take a PCLS of £200,000, then their annual scheme pension would be reduced by £12,500 (£200,000/16).

What is less known, is that the commutation factor is also used to calculate the maximum PCLS permitted by a member of a DB scheme.  In doing so, the pre-commuted pension is required (based on accrual rate, pensionable salary and time of employment).  By using the formula (PCP X CF)/[1+(0,15 X CF)], one can ascertain the maximum permitted PCLS allowed under the scheme, (where PCP is pre-commuted pension and CF is commutation factor).  This is best illustrated by means of an example.

Assume a member has a pre-commuted annual pension of £35,000, and the scheme has a commutation factor of 16.  Then the maximum PCLS permitted would be:

(£35,000 X 16)/[1+(0,15 X 16)]


The annual pension would be reduced by £1 for every £16 taken as a PCLS, which, in casu, would reduce the members annual pension to £24,705.88 (£35,000 – (£164,705.88/16))

What is more important than calculating the maximum PCLS, is rather identifying the attractiveness of such PCLS.  This is normally undertaken when a member is considering a pension transfer and the transfer value is required to assess the attractiveness of the PCLS offered by the DB (ceding) scheme.  By following the same example above, and assuming the transfer value for the client is £875,000, we can run our assessments.

If the client were to transfer his pension benefits into a defined contribution arrangement, the maximum PCLS he would be able to withdraw would be £218,750 (£875,000 X 0,25).  This is clearly a lot higher than the maximum PCLS which would be available under his current DB scheme.  

Upon further consideration, we can deduce the following.  The client needs to forego 29,41% of his annual scheme pension ((£164,705/16)/£35,000) X 100), to receive 25% of his pension as tax free cash.  One may argue therefore, that this doesn’t represent good value and would support an argument to transfer out of his current scheme.

Using the formula’s above, and assuming that the commutation factor was 25, then the maximum PCLS permitted under HMRC rules would be £184,210.  This would result in a reduction of annual pension by £7,368.  As a percentage of the pre-commutation pension (£35,000), this represents 21,05%.  Therefore, in such a situation, a member would need to forego 21% of their annual pension for 25% tax free cash.  Unlike the example above using a commutation factor of 16; this represents good value and would support an argument in favour of remaining.  Generally speaking therefore, the higher the commutation factor, the more favourable this would be for the member (which makes sense as one would be receiving a higher PCLS amount for the same £1 reduction in annual pension).

Analysing the relative value of a PCLS in relation to forfeited pension is not the only factor which needs to be taken into consideration; however, it does support an argument either to transfer or not.  When dealing with DB schemes the available PCLS is not always simply 25% of the transfer value as is clear from the above.

As is apparent from the above, such analyses are rather technical and hence a pension transfer specialist should always be consulted.  If you would like to discuss your pension situation, please feel free to get in touch with me.

Understanding the TVC

In October 2018, the FCA made the provision of an appropriate pension transfer analysis (APTA) mandatory. One of the elements which the APTA needs to contain is the Transfer Value Comparator (TVC).

Traditionally pension transfer reports utilised the critical yield, however, after much criticism for lack of understanding, and the over reliance on the critical yield to a transfer/not, the TVC has now been made mandatory in all APTA reports.

The TVC is nothing more than a fictitious CETV, used to compare the obtained CETV from the ceding scheme to a CETV (the TVC) based on FCA dictated assumptions. As may well be known, the CETV is calculated using 3 various assumptions (rates of inflation, gilt yield rates and investment returns). To understand how these are used in calculating the CETV, please visit this blog post.

The assumptions which the FCA stipulate can be found in the conduct of business sourcebook (COBS) section 19 Annex 4C. The rules state that the deferred benefits should be revalued using the schemes method of revaluation (RPI or CPI), however, it stipulates these rates as 3.0% (RPI) and 2.0% (CPI). Benefits should be revalued up to the normal retirement age using the formula FV=PV(1+r)^n where “r” is the rate of RPI/CPI.

The future value needs to be capitalised using the gilt yield rates to provide a future capital value which at normal retirement age, could secure an annuity which would provide equal benefits to those being surrendered under the ceding scheme.

The capital value is increased by 4% to illustrate the cost of purchasing such annuity at some point in the future (normal retirement age).

The future capital value is then discounted back to the date of calculation using the formula PV=FV/(1+r)^n where “r” is the coupon yield for the applicable term as per the FTSE actuaries index. This is reduced further by 0,75%. This reflects the risk free rate of returns, reduced by the expected advice expenses.

The result of the above two charge assumptions (increasing capital value by 4% and reducing returns by 0,75%) tend to have the effect of ballooning the TVC in relation to the CETV. Furthermore, it is extremely arguable whether it is a true reflection of the future cashflows. Purchasing an annuity does not cost 4%, and investment returns should be higher than the risk free rate as stipulated.

Therefore, whilst being a fictitious CETV with pre-determined assumptions, the FCA argue that it is a suitable comparison as it reflects the risk free nature of the deferred benefits the member currently holds in the ceding scheme. On the other hand, everyone knows that the benefits are not relinquished in the ceding scheme, only to purchase the exact same benefits elsewhere. That would be like selling your watch to a second hand dealer, and then buying the exact same watch at a different dealer. These are two very plausible arguments; and as is so often the case, reality probably lies somewhere in the middle.

Do you understand your pension statement?

For most of us, the two main assets we will ever possess, are our house and our pensions. The former is easy to understand. A net income/expense calculation can provide us with clarity whether we are living efficiently or not. The benefits it provide are simple to understand. It is a tangible asset which one can view, improve and retain ongoing use from. Pensions are a lot more abstract.

What makes pensions even more difficult, are the applicable legislative provisions which govern them. My dad always taught me that there were two things which are certain in life; death and taxes. After being in the industry for close on 10 years I can add the fact that the pension legislative landscape will change to my father’s limited list.

Many people do not understand their pension statements. Furthermore, every person has different objectives and hence would value different aspects of their pensions to varying degrees. Here are some basic things which one should consider when viewing their pensions

  • Any other retirement provisions. One should take all their retirement provisions, including state pension entitlement into account. This will provide a complete picture of what one can expect.
  • What is the best investment strategy for your pension? Is the current strategy suitable to your own personal objectives. Being too risky close to retirement is almost as bad as being too cautious with many years to lapse. Is the investment strategy aligned to your retirement time-frame?
  • What options are available for you to take benefits? There is an array of options available. Do you want a fixed income for life, increasing/not with inflation. Do you want a pension commencement lump sum and what impact would this have on your pension income. Do you want flexible income, and if so how would you like this to be taken. Furthermore, are you aware that by taking a pension commencement lump sum will eliminate the possibility to take a series of (partial) tax free payments later in life.
  • What (if anything) of your pension will be available for your family? As mentioned, above, death is a certainty of life. The majority of the pensions will have some form of being retained for your spouse, however, these options vary greatly. Do you know what your death would mean to your pension. Can you pass this onto your family members, and if so who qualifies for such receipt of pension benefits.
  • Do you understand the tax position? Once again, another certainty taxes. However, the tax treatment of pension benefits (especially upon death) is rather complex. Depending on the age upon which you die this may have huge consequences for the tax position of the remaining pension benefits you may be able to pass to your family members.
  • Finally, have you consolidated the pension benefits or not? In the UK there is a lifetime allowance which is the maximum amount of benefits a person can receive from UK registered pension benefits. If you have already received pension benefits, then it is critical to know your remaining lifetime allowance and how the benefits will be calculated in light of this restriction. Also, if you exceed the lifetime allowance (and do not hold any transitional protections – another story in its own right); then are you aware of the tax implications which would arise?

As you can see understanding a pension benefits statement is not only understanding the amount of money/benefits one can expect. There are a lot more factors which need to be considered.

Due to the above I would strongly recommend speaking to a qualified financial advisor, and preferably a qualified pension transfer specialist who can guide you into the complex world of pension benefits and the taxation thereof.

There they go again…

One of the most asked questions in connection with investing – perhaps second only to “What would be my return?” – is “How much income will I receive?”

I’ve met a lot of investors who require an income from their investment in order to cover their living expenses. For perhaps behavioural reasons, many investors are unwilling to finance consumption out of capital. As a result, many savers are currently looking for high monthly returns in order to earn an income and avoid having to fund living expenses out of their capital.

In an effort to generate sufficient returns from investments, they are taking on too much risk; unknowingly.

“Where do babies come from?”

This was the subject of many debates when I was a kid, and the answer was always the same: “An aeroplane drops them from the sky.” Thirty years later, and no one talks about this anymore. Today’s kids learn the real answer a lot earlier than I did.

“Where does my monthly investment return come from?”

Fewer people ask this question than the one about babies thirty years ago, and even fewer have the answer. I’ll give you one hint: it’s not from the sky.

Investors truly make the same mistakes over and over. It may be a new generation of people doing it, and usually, they do it in new markets or with new glamorous financial instruments, but the behaviour is the same.

It rarely happens that the same errors are repeated in successive years. Usually, enough time passes by for the mistakes and cries of the past to be forgotten. If you observe with the benefit of the knowledge of history and objectivity, you can easily see the patterns.

The past three years have been rife with financial innovations that promise to pay people enough money to be rich and earn a massive monthly income (or salary replacement). As I read the website posts in 2017 about the new financial innovations that have high and guaranteed returns as their birthright, I find myself saying one thing over and over again “There they go again”.

Why do people repeat the same mistakes?

First, few investors have been around long enough to see the recurrence of trends that existed in the past. And second, organised crowds have always played a role in the lives of individuals. This is especially true when the good times are rolling. There’s a tendency to ignore the rules of the game when following them leads to uninspiring returns.

Herewith a few common behavioural mistakes:

This is new and different

The most dangerous thing in investing is believing that the rules of the past are old-fashioned and new ways are required to create wealth. It is well documented that when investors take a trend to excess, it eventually goes “pop”!

I will never lose

“Well you never say never and you never say always.” Many investors are still struggling to stop themselves from believing in the most fairy-tale like story of all: an investment without risks. I will say it now: there is no such thing as a risk-free investment or one that guarantees to deliver high returns as its birthright.

The future will look like the past

From time to time, a colourful mix of opportunists (who often don’t understand what they are getting into) and money-driven people convince others that the current environment will continue forever.

Usually, things will get bad at some point and there will be a creation of new market characteristics. Just like in chemistry when certain elements are brought into contact, they combine to form a new body possessing properties quite different from the original.

The storytelling is simple

By this I mean to make fun of investors’ tendency to believe stories that seem true on the surface but ignore how the stock market actually works. These include “I’m about to share with you the biggest secrets of making money in the stock market” and “Make 10.000 euros a month from the stock market”.

Buffett says, “The market, like the Lord, helps those who help themselves…But, unlike the Lord, the market does not forgive those who know not what they do”.

So, in your hunt to generate decent returns, invest in things you understand with a certain level of confidence within your circle of competence.

Past returns will look like future returns

There is no asset class that will do well simply because it exists. An example is property. People say, “You should buy property, it always goes up in value” and “You should buy property, they are not making any more land”.

But nobody tells you that when done at the wrong price and time, property investment doesn’t work. The key is who likes the investment now and who doesn’t. Future prices will be determined by whether more people demand the asset or not.

It sounds too good to be true, but I don’t want to miss out

There have been many times when people knew something was unlikely to work forever but they jumped on the bandwagon anyway. Usually, they do this because they think there’s a bit more left and watching from the sidelines whilst everyone gets rich becomes too painful a pill to swallow.

I’ll get out before it stops working

In the stock market, there is no referee that blows the whistle to prepare you for oncoming danger. Nobody ever asks how they’ll know when to sell before others know, or who they will sell to if everyone is also trying to sell at the same time.

We have secrets that are used by professionals

There are no secrets in the stock market! Warren Buffet, the world’s most successful investor has his every investment success recipe published in every book. Similarly, in the food lab, recipes are as effective as cooking guides; they provide a method from a list of ingredients to a finished dish.

But chefs who rely only on strictly ordered formulas miss what is really important. Do I need to add more or less of an ingredient to satisfy my personal taste? That is because recipes assume a certain basic knowledge, just like a GPS won’t tell you to stop at a red traffic light.

Wishful thinking

The mistakes listed above express wishful thinking, an inevitable part of human nature. They come from our desire to “hope for the best” and ignore any negatives in our pursuit to make money. When individuals are under extreme financial pressure, as I think many are now, they sometimes behave irrationally. In the stock market, excessive confidence sets the stage for disappointment.

A CET What?

Anybody who has looked into a defined benefit (DB) pension transfer, would have come across this acronym. A Cash Equivalent Transfer Value (CETV). All well and fine to know what the CETV is, but wouldn’t it be nice to know how it is calculated so that you can have a better understanding on it.

In a DB scheme, the member has safeguarded rights in that they will be given a pension income from pension age until they die; indexed by either RPI, CPI or NAE, as stipulated in the scheme rules.

At any one point in time, these benefits have a cash equivalent value which the member can chose to transfer out of the scheme and in doing so foregoes their safeguarded benefits.

In calculating the CETV, as with so many other financial calculations, certain assumptions have to be made. The CETV calculation is a 4 step process, of which there are three assumptions. The assumptions are those pertaining to inflation, gilt yield rates and assumed investment growth rates. Now that we have covered the basics, let’s get into the calculation.

The first step is simply calculating the members benefit at the date of leaving the scheme (or at the date of calculation if they are still a member). In calculating this no assumption is made as all variables are known. The duration of service, their pensionable salary and the schemes accrual rate (the rate in which benefits accrue due to employment).

If an employee is a member of a scheme and it is a 60th scheme, for each year worked (and contributed to the scheme), 1/60th of their final salary is accrued as pension benefits. Let’s assume a member had a pensionable salary at the date he left the scheme of £50,000 and he had been a member for 30 years. The calculation is simple; £50,000X(30/60)=£25,000.

Step 1 completed; onto the next step and the first assumption. The pension benefit as calculated in step 1 is at the date the member left the scheme and this now needs to be factored up to the scheme’s normal retirement age (NRA). In doing so a simply time value of money calculation is used, as well as the assumed rate of inflation. The formula is FV=PV(1+r)^n. Let’s assume our member had another 10 years until he reached the scheme’s retirement age, and the scheme actuaries assume an inflation rate of 2%, then the £25,000 will be increased to £30,474.86 (FV=25,000(1+0,02)^10).

This is the future value of the accrued pension benefits, and forms the basis for the third step; capitalising this future valued benefit. The actuaries will use the gilt rates to capitalise this value, however, such rates would need to be assumed as although known at present, they may very well change in the future. To capitalise the future benefit, simply divide such benefit by the gilt rate (expressed as a decimal). Assume the gilt rates are 3%, then £30,474.86/0,03=£1,015,828.67

This future capitalised value is the value that would need to be available in 10 years time. However, between now and then it is assumed that the transfer capital will be invested and hence we arrive to the last part of the calculation, discounting the future capitalised value to present value. In order to do this, the actuaries (of the ceding scheme), will assume a growth rate (i.e. annualised rate of growth of the capital if invested now until retirement). The longer the period between the date of calculation and the member’s NRA, the higher the discount factor would be. The assumption underlying this is that with a longer timeframe, more of the capital can be invested in equities and hence a higher growth rate can be expected.

If we assume a 4% growth rate, then the future capitalised value will need to be discounted by this over a period of 10 years. Once again, using a simple time value formula we can ascertain this present date amount. PV=FV/(1+r)^n. Let’s plug in the numbers. PV=£1,015,828.67/(1+0,04)^10=£686,257.45

And, just like that you have your CETV of £686,257.45. The best way to now understand this calculation is as follows. If we invest £686,257.45 today for a period of 10 years and achieve an annual growth rate of 4%, then in 10 years time the capital would be £1,015,828.67. At that time (10 years from date of calculation), if the capital was used to purchase an annuity of 3%, then this annuity would pay out an annual amount of £30,474.86. This annual income of £30,474.86 would have the same purchasing power as £25,000 has today, in 10 years time (if inflation is 2% per annum from date of calculation up to the member’s NRA).

This understanding can be checked using the formulas as follows:

£686,257.45(1+0,04)^10 = £1,015,828.67. Then we can take the £1,015,828 and multiply by 0,03 as representative of the 3% annuity rates. This provides us with £30,474.86. If we discount this by the inflation rate (2%) over the 10 year period (30474.86/(1+0,02)^10); we end up with £25,000 which is the exact same amount as the pension benefits owing to the member at date of leaving the scheme.

As one can see a CETV calculation is not a science due to the amount of assumptions. The purpose of this piece was not to judge the suitability of the CETV but rather to enlighten those who have received one to understand a little more how the scheme actuaries arrived at such amount.

If you want to see how this works in action, why not try a FREE calculator I have created. You can access the file by following this link. Please note, I recommend you download the Excel spreadsheet before populating it to ensure the auto-calculations all function correctly.

Do you have enough money for retirement?

One of the most common questions I receive in my practice, is that concerning retirement planning. For many of us, retirement seems a distant future and one which many people do not concern themselves with. Hopefully this will change that belief.

It is safe to say that apart from your house, your pension would probably form the largest asset you own/benefit from. In order to calculate your future target amount we need some facts and as always, some assumptions.

I am going to walk you through the steps in calculating how much money you need in retirement. Hopefully you can run your own calculations as we progress. It is my desire that everyone knows what their target is.

Firstly, we need to ascertain how much money you need in retirement. Imagine you could retire tomorrow, how much money would you need to lead a comfortable lifestyle. Remember, the 8 hours (or more) of work which you were performing now need to be filled up with leisure activities, and hence many people feel that more money would be required in retirement. Another way you can determine this amount is by asking yourself “how much more money than my current net income would I like in retirement?”.

Let’s assume your monthly figure is €2,500 per month, annualised this would be €30,000. However, as they say “the devil is in the detail.” In this instance, that detail is inflation. Inflation is simply the rate at which the price of goods increases year on year. Remember when you went with your father to the bar for your first beer (well, at least HE thinks it was your first beer). How much did it cost back then? €1,50? Nowadays you are lucky if you can find one for less than €4,50. That, ladies and gentlemen, is inflation.

Also, we need to determine how long until your retirement before we can fully appreciate the effects of inflation. Lets assume you have 25 years until you would like to be in a position to retire (financial freedom). We can now fully incorporate the effects of inflation using our beloved formula FV=PV(1+r)^n.

This calculation works out the future value (FV) of present day money (PV), at an assumed rate of inflation (r) over a pre-determined period of time (n). In our example the future value of €30,000 over 25 years (assuming an inflation rate of 2.5%) is €55,618. This means that in 25 years time, at an assumed rate of inflation of 2.5%; €55,618 would purchase you the same goods as €2,500 would today.

This is now your targeted annual income in retirement. The next step would be to calculate where this income is to originate from. That will be dealt with in a future blog post and once published it will be referred to hereunder. If you can’t wait until then, of course – feel free to send me a message and I would love to walk you through the steps.

Who needs a financial advisor anyway?

We often surprisingly hear potential clients say that they can get independent financial advice from a friend or a self-taught financial commentator. But no matter how well-meaning their intentions are, unless they are an independent qualified financial adviser, you cannot be sure that you are getting the best possible advice. So we will say it now: not everyone is qualified to provide financial advice.

To put it another way, you would not ask a friend to perform open-heart surgery on you. So why is it, when it comes to your finances, you avoid professional advice and go with what your friends say? While you may have a good idea of what will and won’t work well, only a professional has the specialist knowledge to help you maximise your finances.

In defence of my profession, I would like to present some of the misconceptions people have about the role of a financial adviser.

1. Financial advisers don’t know what my investment return will be.

It is a fact! We have no shame with the fact that we don’t know what your future return will be. Many investors that seek financial advice arrive at our doorstep with a target return in mind for their investment. However, these return objectives are influenced by past experiences, historical fund performance or a random number that will fulfil personal expectations. After all, who doesn’t want higher returns? We can refer to this return expectation as a desired return – a return target based on a want more than a need. Our role as financial advisers is to estimate the return you require to accomplish your objectives, taking into account your unique goals, time horizon, current asset base and risk tolerance, among other factors.

2. I only need an insurance policy from a financial adviser.

Your financial life is bigger than an insurance policy. Our first job is to get to know you. Financial planning is a holistic process that integrates your life’s goals with financial solutions, in order to create a financial plan. Many clients want to know: How can I save for my children’s education? Do I have enough money saved for retirement? What will happen to my children when I’m gone? How can I protect my income if I get disabled or retrenched? The goal of every financial adviser is to be the “Chief Financial Officer” of their client’s entire financial life. This work extends to investment, estate, retirement and risk planning.

3. You only need a financial adviser if you have a lot of money.

You can benefit from working with a financial adviser because you have competing financial goals – not necessarily because you have a lot of money. You may be thinking about buying a house, starting a family, travelling the world or any number of other things. All of these goals are competing for a slice of your salary, so setting your priorities and adjusting your savings percentages with an adviser becomes a requirement. Financial planning is a continuous process of anticipating and adapting to changes in personal circumstances over the long-term.

4. Financial advisers charge me fees for advice that I can get for free.

It is probably safe to assume that people take financial advice from friends rather than a professional because of the costs associated with it. While your friend is unlikely to charge you, you could potentially be losing out on more than just the adviser’s fee. To use another medical comparison, you can Google the symptoms of your illness online but that doesn’t mean that medical consultation must be free when you finally go to the doctor. Advisers like any other professional need to be incentivised for the work that they do. A qualified financial adviser is an individual whose job it is to get the most out of your finances and the benefits are likely to far outweigh the costs.

The Importance of financial planning for individuals.

My dad used to tell me that two things in life are certain. Death, and taxes. The latter is something we (to some degree), can influence by adopting to live in more tax-favourable jurisdictions. The former certainty, is unavoidable, and it is this inherent fact of life where financial planning often comes to the fore.

Can you imagine what your family has to go through in order to pay the bills, if you do not leave enough for them? Planning for the future is not something we should to; it is something we all must do.


Financial Planning is a solution which converts your goals into action plans and provides the direction and discipline to achieve these goals.


If you have life goals, such as a worry-free retirement, education for your children at the best schools and colleges, buying a house or a car — then building a financial plan can help you achieve these goals.

Your financial plan will work towards achieving goals such as planning for your retirement, child’s education, marriage, buying a house, debt management and insurance.

Financial planning could help you:

  • Categorise your risk appetite;
  • Put a number to your goals (what is achievable and what looks difficult); map your current and future cash flows to your financial goals;
  • Map your existing assets to your financial goals;
  • Make a statement of your net worth;
  • Look at the adequacy of your insurance;
  • Determine whether you have any shortfalls or inadequacies;
  • Help you build a capital for your retirement; and
  • Make recommendations for your existing investments.

While some banks do offer a financial planning service, many find their approach to be less thorough and their impartiality must be questioned. Many people prefer going to an independent financial planner instead as they have a fiduciary relationship to their clients and not to any one institution or investment house; hereby often implementing a plan which is in their clients best interests and not in the best interests of shareholders of the institutions.

The importance of financial planning cannot be overstated. In addition to the financial implications of death, two factors matter a lot — inflation and changing lifestyles.

Inflation is a situation in which too much money chases a limited number of goods. This leads to a fall in the value of money. It is also expressed as a rise in price levels. For example, a product that costs €100 now would cost €105 a year later, assuming prices rise at 5 percent. This is the impact of rising prices over one year. Over 30 years, assuming that inflation continues to rise at 5 percent, the same product would cost you €432!

Financial planning can ensure you are better equipped to deal with the impact of inflation, especially in retirement when expenses continue but income streams dry up.

The second factor is changing lifestyles. With higher disposable incomes, it is common for individuals to upgrade their standard of living. For example, cars were considered luxuries not too long ago but are a necessity today. Financial planning has a role to play in helping individuals both upgrade and maintain their lifestyle.

Moreover, there are contingencies like medical emergencies or unplanned expenditures. Sound financial planning can enable you to mitigate such circumstances, without straining your finances.

I strongly recommend all individuals to seek financial advice to assist them in achieving their goals. For a free consultation, please comment to this article and I will get in touch with you. Should you be outside of Europe and seek financial advice, I have some great professionals within my network who I can put you in touch with.

The Power of Compound Interest

Many Individuals are unfortunately ill-prepared for retirement, and it’s an unsettling prospect that so many citizens of this modern day world may not be able to support themselves in their golden years.

However, the beauty of compound interest means that if you start saving from an early age, investing in your future doesn’t have to be the heavy financial burden that many people fear (and thus postpone). The power of compound interest actually makes saving from an early age much cheaper and less stressful than if you were to put off saving until you’re older.

Albert Einstein referred to compound interest as “the greatest mathematical discovery of all time”, and he declared it to be “the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it”.

This is best illustrated by means of an example:

Based on a growth rate of 10% per annum, if one saves €1,000 a month, the capital amount after 20 years would be €759,300. If one saves €1,000 per month for 40 years, the value would be €6.3 million… The total contributions for the client who saved for 20 years was €240,000 and the contributions of the client who saved for 40 years was €480,000, yet the difference in their values at retirement was a massive €5.5 million.

This is because compound interest is the interest calculated on the initial principal, compounded with accumulated interest. It is essentially the result of reinvesting interest so that interest is then earned on the principal sum and previously-accumulated interest combined. To put it simply, it can be thought of as ‘interest on interest on interest,’ and it will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

The company that you work for may make monthly contributions to your retirement either in addition to your wage or through salary sacrifice. Accordingly, if you begin with your company retirement fund at age 25, then 19% of your salary should be sufficient should you continue with this for the next 40 years and not cash-in your funds on resignation or retrenchment, but rather preserve them. Should you start working later, then you would need to invest a higher percentage of your salary to compensate for your lack of compound growth in previous years.

Time is of the essence when it comes to taking advantage of the effects of compound interest to build a healthy savings pot that will provide for you in your autumn years, as well as potentially allow you to support your children with their financial goals. The bottom line is that the longer you wait to start saving, the more money you will need to save to achieve the same financial goal. And this is particularly the case when it comes to retirement savings, as this could benefit from a 40-year saving term.

The power of compound interest lies not in saving vast amounts, but instead when you start saving. Don’t underestimate its power, and don’t hesitate to arrange a meeting to find out how much you need to save per month to reach your retirement goals. Calculations will be based specifically on your current age, desired retirement age, and future requirements, so don’t delay in making compound interest work for you.

Please note that all figures in this post are average examples and don’t constitute financial advice. Each plan is unique and needs to be tailored inside of a host of influencing factors.

If you want to see how compound interest works in a real life situation, why not simply try my personally made compound interest calculator. To access this you can simply follow this link. What’s best though, is that it is FREE; and…I will not even ask you for your e-mail address. Simply download the editable Excel sheet and populate it as you wish. I am sure you will find the results rather impressive!

Want to see this calculator in action, watch my video here.