Financial Planners (New), A Simple Example Plan

This section illustrates the basic use of the Financial Planners in regard to a very simple client record and factfind.

First create a test client like the one shown above for Fred Bloggs. Then in his Fact Find Menu select the most recent version of the “Planners” factfind layout, like the “Planners (rev 7g)” version shown below, and click the “Revise” button to edit it…

…then enter the following details:

· He was born on 01/01/1990, is a non-smoker, in good health and still single

· He would like to retire at age = 65, which is 3 years before his suggested state retirement age of 68

· He’s willing to accept the suggested inflation rate of 4%

· He purchased a flat for £150,000 in 2011, which he expects to increase in value at 5%

· To do so he took out a 5% repayment mortgage of £120,000 over 25 years (his parents gave him the deposit)

· Other than the mortgage Fred’s expenditure is £8,000 p.a., which for the sake of simplicity you are advised to allocate under the single expenditure heading of “Food & Clothing”

· He’d like a pension of £10,000 pa at today’s prices (n.b. and index-linked), which is £2,000 more than the suggested sum to cover just his committed outgoings

· Fred started full time employment on 01/01/2010 at age 20 on £20,000 pa before tax and NI, which he expects to increase in line with his expected inflation rate of 4% p.a.

· His preferred retirement year = 2055 so his last year of earnings = 2054 (i.e. the last year of earnings is from 01/01/2054 until his 65^th birthday on 01/01/2055)

· He does not have any life cover nor a private pension at this point, and his state pension won’t start till he’s 68 in 2058

After saving and exiting from the factfind, click the “Planners” button at the bottom left of the Factfind Menu, illustrated two above, to activate the Financial Planners spreadsheet shown below…

Start by clicking the “Pension Shortfall” button at the top centre of the spreadsheet….

This shows his pension situation for ten years starting from his preferred year of retirement in 2055. He has no private pension at all, and no state pension for the first three years, so his pension shortfall initially is 100% of his required £10,000 p.a. at today’s prices (inflated at 4% per year, to be around £55,000 p.a. by 2055). After 2058 he receives a state pension, which is projected to be worth around £30,000 p.a. by that time, but actually only meets around half his requirement.

Click the “Back” button and then try the “Inheritance Tax” one….

This shows that even though he has an inadequate pension he will still be liable to pay inheritance tax should he die any time after he’s fifty. The reason is that his house is growing in value at 5% p.a. while the Inheritance Tax threshold is projected to increase with inflation at 4%. Also over his working life he earns more than he spends, so is able to accrue savings. You can see from the graph above how he dips into these after he retires, but after the first three years his state pension is just enough to keep his overall net worth growing. To analyse this further click the “Back” button, then click the “Custom Graph” button and select “Income Breakdown>Gross income”, “Mortgages/Loans> Payments” and “Living Costs>Food and clothing”, as shown below…

This results in the three individual graphs, shown below, from which you can see that his income always exceeds his living costs, even if his mortgage repayments were to be added to them for the 25 year term of his mortgage. So this explains how he accrues savings.

Click the “Back” button again, and this time try the “Net Worth” one, which matches the analysis above in that it shows his net worth accruing steadily throughout his working life, then dipping when he retires until his state pension starts…

Click “Back” again then use the “Lifetime Cashflow” button, which illustrates the net inflows and outflows over this period. You can clearly see how he has to repay the fixed mortgage repayments until 2035, while the rest of his net income-after-expenses grows steadily till he retires in 2055, whereupon he has three years with expenses and no income, followed by the rest of his retirement where his state pension fails to meet his expenses…

Finally try the “Life Cover” button, which initially will be BLANK because his house is set to be sold on death. Under the “Home (Life 1)” heading right-click the “Sold on death” line, shown below, and change the value to “No”, then re-try the “Life Cover” button.

The revised situation, below, is for the typical married scenario where the home cannot be sold on death, and hence the mortgage repayment requires protection via a term assurance policy.

Note: Use the “Chart Tools” button in Excel (shown above) to select different colours and backgrounds, and use the “Change Chart Type” button to switch between pie charts, or line and bar graphs.

Finally, click the “Back” button and this time click the “Yearly Breakdown” button and select 2011, then in the spreadsheet shown below click the “Year” buttons to cycle through his lifetime cashflow. With regard to 2011 you can see how he ends this first year with savings of £180.81 after….

· Earning £20,800 before tax (n.b. he started on £20,000 in 2010, which has increased by 4%)

· Paying tax and NI of £4,294

· Spending £8,000 on living costs

· Paying £8,325.19 towards his mortgage

· Which leaves £180.81 in his bank account

· While his net worth = (his bank account + his house value, which is growing at 5%) – (the outstanding amount of his repayment mortgage)