We think it’s a really easy question to answer – it helps empower clients to make informed decisions about their financial futures.

There you go.  Shortest blog ever.

…

OK, I’m assuming you’re looking for a little justification of this somewhat bold claim.  In this blog, we’ll look at 5 symptoms that might indicate you need to review your business’s use of Cashflow Modelling software:

1. You struggle to get referrals
2. Clients question the value of your advice
3. You’re worried about future complaints
4. You’re spending hours doing manual calculations
5. Your client review processes are inconsistent

Let’s address each of these symptoms in turn: look at what they might mean for your business, and how cashflow modelling can help.

You struggle to get referrals

Picture this: you’ve spent a dozen hours over a 2-week period considering a client’s pension situation.  You’ve made some carefully-considered recommendations and the client seems happy.  But it stops there.  Maybe you make an appointment for another meeting; maybe not.

Our customers tell us the biggest difference they notice after incorporating cashflow modelling into their business is increased client engagement.  Often clients will politely nod their way through a planning meeting.  Using Cashflow modelling within your business in a way that challenges clients and questions their assumptions about their financial futures forces them to sit up and take notice.

In a recent blog, we looked at how increasing the detail in your cashflow model increases engagement.  Your model stops being generic and starts to become a narrative of your clients’ lives.  Clients understand that they’re pulling the strings of a dynamic model which you can change together.  They aren’t looking at a static report.

Once your clients understand the need to provide all that juicy detail, not only about their bills and expenses but about their future life goals and ambitions, they become empowered to make important and informed decisions about their financial futures and (perhaps more importantly) invested in the process.  You impress on them how important it is to revisit the plan on a regular basis and before they leave your office they’ve made an appointment for their next meeting.  They become enthused not just by the outcome, but by the advice process itself!

This doesn’t only make your relationships with your existing clients stickier, it will help you find new clients organically.  Who’s more likely to provide positive referrals: the client you sold a new life policy to, or the client with whom you had a 4-hour meeting helping them understand when they can afford to retire, and what that retirement might look like?

Clients question the value of your advice

When you tell your clients you’re going to be taking X% of their investment growth, or charging them £Y for giving them advice, how do they react?

We asked some of our most successful customers how they combat this and they told us that they focus on “lifelong financial planning” rather than selling products.  Cashflow modelling underpins this business proposition by providing simple visuals which offer clarity and peace of mind to their clients.  They don’t tell clients they’ll get them better growth on their GIA, or that they should transfer their ISAs to the adviser’s chosen platform.  This may or may not happen as a result of the process.

It’s impossible to compete with robo-advisers who can match clients with a portfolio for a few basis points.  We need to focus on the human aspect of advice – the bit that can’t be offered by artificial intelligence and algorithms.  In our experience this comes from inspiring confidence in your clients.  A simple answer to a simple question, backed up with comprehensive stress testing, is more powerful than a hundred pages of figures.  Telling clients they’re OK is one thing, but showing them is a different matter.  You can demonstrate that they can maintain their lifestyle even in the rough seas of adverse market conditions, poor investment performance, or if they were to need long term care.  Suddenly they’re not just empowered and enthused, but also confident!  They understand you’ve pre-empted even the worst-case scenarios for them.

When you align your interests with your clients for your mutual benefit you create a great relationship.  You create a human bond that has a tangible value to the client.  This is worth infinitely more than a few pennies on the pound and cost becomes irrelevant.

You’re worried about future complaints

Aren’t we all?

It’s a sad truth that we live in a litigious society.  When things don’t go the way we anticipated the default question is no longer “what did I do wrong?” but rather “who can I blame?”

I’m sorry to say that cashflow modelling isn’t a magic umbrella which will protect you from any potential future complaints.   What it IS is a fantastic audit trail of what you discussed with your client; what you recommended, and why.

Going back to my points above – the process is all about informing, educating, and empowering clients.  We’ve always advocated cashflow modelling as a collaborative process.  Not a service you provide for the client, or a something you do to the client, but a process you engage in with the client.  If clients are genuinely engaged with and involved in the advice process, buy into the importance of providing accurate information and the value of ongoing reviews, they have far less ground to complain when something goes wrong.

Our cashflow modelling software is amongst the most comprehensive and detailed tools on the market.  Some see this as a weakness; we see it as a strength.  A customer who recently signed up for Truth^® told me about an experience they recently had at a conference.  One of their peers was trying to persuade them to use a more basic cashflow tool and their gambit was “my cashflow software is so simple to use that my 7-year-old daughter can use it”.  To which the adviser replied “I wouldn’t want my clients retiring on the back of a system that can be piloted by a 7-year-old”!

Cashflow modelling doesn’t have to be complicated.  Using a system that can handle the complexity of your clients’ individual situation and helps them engage in a real way with the advice process offers the best protection possible against whatever the future may hold.  And PI insurers like it, too!

If you had an FCA visit how would you want your “perfect” client file to look?  It’s worth noting that Truth includes a Contact History module, which allows you to record all your client touchpoints from all sources, as well as securely store documents and emails.

You’re spending hours doing manual calculations

When a client has a complicated history of contributions to a variety of DB and DC pensions with different pension input periods and is subject to a tapered Annual Allowance due to their earnings, how do you work out what carry-forward they have available?

If a client is considering various different ways of drawing money from their assets moving forward and wants to see the impact on their holistic position including any relevant income tax, National Insurance, and Lifetime Allowance charges, how do you show them this?

I could give countless examples.  The important thing is that if any element of your answer involves a pen, paper, calculator, or spreadsheet this is a good sign that your business needs proper cashflow modelling software!

We’ve been developing our software for over 35 years based entirely on customer feedback.  It’s not perfect, but it’s designed specifically to answer these kinds of questions for your clients with minimal fuss.  If your client wants to look (for example) at a completely different strategy during a meeting you shouldn’t have to tell them you’ll get back to them in a week with fresh calculations.  A good cashflow tool will allow you simply to change assumptions live in front of the client, and automatically update all those complex tax calculations at a click of a button.

Yes, there are some tools which don’t do all of these calculations for you.  If you’re still using a pen and paper, or an Excel spreadsheet, to supplement software you’re paying for maybe it’s time to reevaluate?

Your client review processes are inconsistent

Paul Etheridge, founder of Prestwood Software and founding member of the Institute of Financial Planning (now part of CISI) has a saying:

Avoid having unique thoughts in routine situations

Whether you’re seeing 200 clients a year or 20, having repeatable and consistent processes is key to running an efficient and profitable business.  If you’re reinventing the wheel for each client review it will inevitably take you far more time and energy, and will cost you money.  Your cashflow tool should support and facilitate this.

With a comprehensive cashflow tool such as Truth there are a wealth of charts and statements, each of which can help you to enlighten your clients.  We encourage customers to develop their own “route” around our software.  The journey which clients go on you during a meeting should be something that is familiar and comfortable for you, but also something that works for your customers.

Our regional User Groups, which run regularly across the country, feature case studies delivered by our customers.  In the feedback from these groups, we often hear that attendees have discovered new and useful features in our software which they’ll be incorporating into their meeting process moving forward.

Once you have your meeting sculpted around your cashflow tool you have the formula for a repeatable and consistent client experience.  The “oohs” and “aahs” will inevitably come at the same points, and you’ll know which tools and buttons to use to fix the “aarghs”!

So you’ve had your meeting, what next?  Do you write each client report manually?  Do you incorporate screenshots from your existing software?  Does your report reflect your brand and corporate identity?  Your cashflow tool should allow you to create simple and customisable reports, incorporating the charts you looked at in your meeting, the figures you discussed, and your own suitability wording.

Maintaining simple, repeatable processes helps deliver better and more consistent client outcomes.

The important thing to bear in mind is that the tools you use should help you to empower clients.  The end goal of financial planning is helping the client realise their future lifestyle goals, whatever these goals might be.  Cashflow modelling can help you answer some really complex questions with ease, resulting in empowered, enthused, engaged clients and a business which delivers consistently fantastic client outcomes!

If any of these symptoms apply to your business then maybe it’s time to take a close look at cashflow modelling software?

The post 5 signs your business needs Cashflow Modelling Software appeared first on Prestwood Software.

Thousands of clients have been imported from Intelligent Office^TM into Truth^® since we released our new iOStore app at the end of August.  One of the key bits of feedback we’ve had over this time has been that the data you have in your iO fact finds, while great and useful for iO’s purposes, isn’t necessarily what we need to produce a cashflow model.

Over this time I’ve seen employments that never end; term assurance policies with no term; mortgages with no APR; and pensions that grow exponentially for the rest of time.

There’s an adage in computer programming: “garbage in, garbage out”.  In other words – if the input isn’t up to scratch, the output will be worthless.

Which got us to thinking – can we adapt the data that we import into something good enough for financial planning?  Can we turn “trash into treasure”?

Garbage in, cashflow out?

So we came up with Import Rules – some simple yes/no rules you can apply to even the sparsest iO data to convert it into rich, cashflow-ready financial planning data.

We’re starting with three rules, but this will be growing over the coming weeks and months as the iO API grows and more information gets included.  Keep your eyes peeled for expenditure, which will be added to the API any day now.  As soon as it is budgeting info your clients key into the Personal Finance Portal will pull directly into Truth.

So what are the three rules we’re applying so far, and how will they help you model more efficiently for your clients?

Working yourself into the ground?

All of the import rules have come about because there’s stuff you need to know to do financial planning which you don’t need for admin.

One of the first things we picked up on was that a lot of the employment details coming across from iO didn’t have end dates.  That’s fine if your clients are happy to work up to age 100.  Less so if they were planning to retire at any stage!

The first Import Rule we’ll be applying is:

• Employments – Apply retirement ‘key date’ if there is no end date

If you’re not familiar with Key Dates – these are key life events which can be attached to almost anything in Truth.  They appear as sliders at the bottom of the cashflow and can be moved around dynamically in a meeting.  This lets you instantly show clients the impact of, for example, retiring earlier or later, downsizing, etc.

When you import a client from iO for the first time we’ll create a “Retirement” Key Date for you.  If your employment doesn’t have an end date in iO we’ll set the end date to your dynamic “Retirement” Key Date.  You can now import your data then go straight to the cashflow and, by moving a simple slider, show your client the impact of retiring earlier or later!

Austerity Britain

It’s not been a fantastic decade to be working in the public sector.  From what I’ve seen of clients imported from iO you’d think they were all low-level public servants on a pay-freeze.

Yes, the next issue we found with imported data was to do with the indexation of employment income.  Again, there’s nowhere to record this in iO.  This meant while clients were working through to age 100, they were finding themselves unable to afford to put food on the table in retirement!  Which brings us on to the second new Import Rule:

• Employments – Apply RPI increases to income

We’ll now assume your client’s employment will increase at your specified rate of inflation.  They may not be John D Rockefeller, but at least they’ll be able to put a roof over their families heads.

It’s mine, my precious!

While many clients have every intention of ring-fencing their pension fund for IHT planning purposes, this isn’t always the case.  The last problem we found with imported data was that iO doesn’t need to know how your clients plan to draw down on their pension fund.  This information would be completely superfluous in your back-office… in your cashflow model, it’s crucial!

The final Import Rule is as follows:

• Pensions – Apply sustainable projected benefits

You can now assume, by default, that your client will take their maximum allowable PCLS followed by a sustainable amount of taxable drawdown income.  The amount of income taken will recalculate automatically when fund values, growth rates, or retirement dates change.

Again, we’ll use the dynamic retirement Key Date, to tie all your assumptions together.  So you’ll now be able to dive straight into a client’s cashflow and immediately show them the impact of retiring earlier or later.  Just drag the “Retirement” annotation on the client’s cashflow and the date on which they stop work and start taking pension benefits will change before their eyes.

Cooking with gas

So what does all this mean for you?  Well, the answer is efficiency!

You don’t want to have to be second-guessing data entry or finding strange mistakes you don’t even remember making.  You don’t want to have to validate all your iO data to ensure it’s “cashflow ready”.  You don’t want to find yourself in an embarrassing situation in a client meeting where something odd has been assumed on your behalf.

Import Rules are the next step towards a completely seamless integration.  Rather than spending your valuable time doing menial admin, entering data in two separate fact-finds, or sense checking questionable integration data, you can spend more time planning with clients, delivering fantastic outcomes, and earning referrals!

Where we DO apply a rule this fact will be logged in the Audit Trail.  This means that you’ll always have full transparency about which assumptions were made by you, which were made on your behalf, and when.

The post Import Rules appeared first on Prestwood Software.

So we did.  What we saw was music to our ears (or eyes?)!

What the FCA say about Cashflow Modelling

Cutting to the chase, here’s what CP 19/25 says about the use of cashflow modelling in pension transfer advice:

Our supervisory work has identified some areas where cashflow modelling has been used in a way that could be misleading. These include the use of nominal terms cashflows without explaining inflation, a lack of indexation of tax bands or tax limits, and no consideration of market downturns. As a result, advisers may be giving clients unrealistic expectations of future income.

They then go on to break this down into key areas that cashflow providers need to address. Before I look at those in more detail, let’s itemise the issues that the FCA’s supervisory work has picked up on as potentially misleading, and how Truth^® handles each of these issues:

1. “the use of nominal terms cashflows” – our cashflow is always in today’s/real terms, and always has been!
2. “a lack of indexation of tax bands or tax limits” – all tax bands are indexed by inflation in Truth^® unless there’s legislation in place which states otherwise
3. “no consideration of market downturns” – Truth^®‘s cashflow has a dedicated tool for just this job!

In other words (spoiler alert) we won’t be changing anything in readiness for whatever new guidance is published in response to the consultation paper because we’re already doing it all!

“How will you be making your software compliant?”

We were approached last week by a major provider of support services for IFAs to find out how we will be making our software compliant with the proposed new rules.  We were delighted to tell them we didn’t have to and broke down for them why this was the case.  That email prompted this blog!

Going into a little more detail, here’s what the FCA is proposing:

To address the shortcomings we have seen in cashflow modelling in the APTA, we are proposing the following new rules if firms choose to use cashflow modelling:

• Firms must prepare cashflow models in real terms, ie in today’s money terms. This will ensure that the models are consistent with other mandated documents such as Key Features Illustrations (KFIs).
• Firms must ensure that tax bands and tax limits are set using reasonable assumptions if they model net income from year to year. The use of real terms’ modelling should facilitate appropriate indexation.
• The model should explicitly allow for taxes or constraints that are likely to arise on a transfer that would not occur if safeguarded benefits were retained, such as a Lifetime Allowance charge, any tax applicable on the death of the consumer, or the application of the money purchase annual allowance.
• The modelling must include ‘stress testing’ scenarios to illustrate the impact of less favourable future scenarios so that the consumer can see more than one potential outcome.

If you’re a Truth^® user, or considering using Truth^® for producing your cashflow models, here’s what you need to know:

“Firms must prepare cashflow models in real terms, ie in today’s money terms”

Truth^® cashflows are always in Today’s Terms.  They always have been, and always will be!  This is because we find Today’s Terms cashflows eliminate ambiguity, and show clients what their money might be worth (in terms of spending power), relative to inflation.

I won’t labour the next point – we’ve already covered it.  We index all tax bands and allowances with inflation unless legislation states otherwise.  We don’t model net income, we want all your gross figures, and will calculate any tax for you.  This includes National Insurance disappearing at State Pension age; tapering of allowances for higher-rate and additional rate taxpayers; sharing allowances between married couples, etc., etc.

I’m sure I said I wasn’t going to labour the point?!

“The model should explicitly allow for taxes or constraints that are likely to arise on a transfer”

As I said: music to our ears!

One of the things we constantly emphasise both to our existing customers and prospective ones is that they can simply change pension benefits, and Truth^® deals with everything else.

Even when using our dynamic cashflow tools in Truth^® to look at hypothetical modelling exercises with a client during a meeting (such as topping up Annual Allowance, looking at a DB pension transfer, etc.), Truth^® will factor in the impact of any potential Lifetime Allowance charges.  Of course, as ever, we’re taking into account changes to their income tax position; national insurance; personal savings allowance…

The DB transfer tool gives you the option to overlay a comparison of death benefits.  On death, of course, we’re factoring in the client’s marital status (and their partner’s, assuming they aren’t bigamous!); any widow’s carry-over nil-rate band and residence nil-rate band; tapering to the RNRB; the client’s age on date of death (i.e. whether income is or isn’t taxable); the surviving partner’s tax and NI position…

All you need to do is enter a CETV and click the “Overlay” button.

“The modelling must include ‘stress testing’ scenarios”

I won’t spend too much time on this point, as we’ve already addressed this at length in a previous blog (”
Why Your DB Transfer Cashflows NEED To Use Our Market Crash Simulator…”).  In summary:

“As the old saying goes: “hope for the best, plan for the worst”.  Although we’re hoping for x% growth (on average), and a long, happy, healthy retirement, planners should at the very least make clients aware of what could happen.

Truth^® can help clients visualise the impact of “the worst”, and so helps you plan for it.”

But when we talk about stress-testing in Truth^®, we’re not only talking about market crashes.  Our software provides you with a variety of tools to stress-test your scenarios.  This includes four in-built catastrophes looking at the potential impact of death or disability of either client or partner.  In the specific case of pension transfers, this allows you to highlight to your clients the difference between the death and disability benefits from their DB scheme, and the fund they would have access to if they transferred.  You can, of course, choose how those death benefits are paid out (i.e. as a lump-sum; dependent’s drawdown; dependent’s annuity), and Truth^® will deal with any tax implications for you.

In summary

What will we be changing, in readiness for CP19/25?  We’re incredibly proud to say: “nothing”!

Our software has the benefit of 35 years’ development behind it, all driven by our focus on providing accurate and detailed calculations, and directed by the feedback of our customers.  If you’re using Truth^® for your pension transfer cashflows, you can rest assured that your model is compliant with any changes that may be around the corner.  We haven’t made any changes, it’s just the way we’ve always done things.

The post Why we won’t be changing anything in Truth for CP 19/25 (hint: it’s because we’re already compliant!) appeared first on Prestwood Software.

Yes, the 6th of April is upon us again.  We know you’re inundated with tax-year end queries, so we’ve been working hard to ensure Truth continues to provide unrivalled accuracy for you and your clients in the new tax year.

We’ve got all the 2019/20 Tax Year changes covered, so you can focus on delivering fantastic outcomes for your clients.

Here are the highlights:

• Increased personal allowance (to £12,500)
• All tax and National Insurance thresholds and allowances updated
• Changes to Scottish Rates of Income Tax (SRIT)
• Ready for Welsh Rates of Income Tax (when they differ from the UK)
• Lifetime Allowance increased to £1,055,000
• Main Residence Nil Rate Band increased to £150,000
• New State Pension figures for 2019/20
• A “Revoke Article 50” option in Cashflow Tools*

Along with a host of other tweaks and improvements.

Click here to take a look at recent developments and changes to Truth.

* – well done for reading the whole blog!  There isn’t really an option, but you can definitely use Truth to simulate any of your clients’ Brexit concerns!

The post Tax Year 2019/20 Cashflow Changes appeared first on Prestwood Software.

We looked at TVC, and why it is a great illustration of value for money, but a poor indicator of suitability.  We talked about the things your APTA should focus on, such as clients’ specific and personalised objectives, and how your experience with retirees helps establish their realistic income needs.

But what your APTA is still missing, and where Cashflow really comes to the fore, is a way of “clearly demonstrating” different outcomes to the client.  We can talk about trade-offs, impacts, and risks till we’re blue in the face, but unless we can help clients visualise them, we’re not fulfilling the APTA requirements.

Cashflow to the rescue?

Back in May, Rory Percival was quoted as saying, of the new APTA regulations:

effectively cashflow planning becomes mandatory from October

It’s NOT mandatory, but it might as well be.  One of the questions we regularly get from our customers is “how do people who DON’T do cashflow modelling explain this to clients”?  The simple answer is that there really isn’t any way of illustrating the potential risks and rewards of DB transfers, other than by using cashflow modelling software.  This is a sentiment which was mirrored by all participants at this week’s Pension Debate.

Many advisers are concerned about meeting the minimum suitability requirements for DB transfer advice.  If you’re producing a comprehensive cashflow model for a client, incorporating not only how transferring meets your client’s objectives, but also highlighting the traps and pitfalls they may encounter along the way, you’re probably already exceeding them!

There’s a misconception that cashflow modelling has to be complicated.  This really isn’t the case.  To illustrate this, I’m going to build the simplest of cashflow models for Bob, to illustrate how even the most basic of illustrations helps highlight the impact of financial decisions in an easily-understandable, transparent, and straightforward way.

The most powerful cashflow is one which balances detail and simplicity – allowing you to give comprehensive advice, while still making sense for your clients.

Bob’s Cashflow

This is Truth’s Cashflow Capital chart.  For those of you who are unfamiliar with our software – in a nutshell: it shows the client’s liquid capital position throughout their life, and whether they have enough money to realise their desired future lifestyle.

It’s not quite true to say that this is Bob’s cashflow: this is just Bob’s DB pension.  I’ve not included anything else in this model – all we have here is Bob’s £30,000 per annum income from age 65.  It’s literally the simplest cashflow I’ve ever created!  What it does allow us to see, however, is the direct impact of transferring out of his DB pension.  This is similar to what we saw earlier in the TVC – a graphical illustration of the value for money the client gets by transferring.

Truth’s DB Transfer Tool allows you to enter your CETV and instantly see the impact of transferring:

What does this show?  The orange line is Bob staying in his DB pension.  The black line is Bob transferring.  Here he’s taking 25% of his pot as a tax free lump sum at 65; Truth has automatically calculated a sustainable income from his drawdown fund, and overlaid this on the cashflow.  According to this, transferring would leave Bob significantly better off initially, and marginally worse off if he were to survive beyond his mid 80s (but still not running out of money).

By looking at the pension in isolation, it’s incredibly easy to see a direct comparison between the two options, and the impact of transferring.  In very direct terms, is Bob better or worse off by transferring?  Looking at Bob’s cashflow, rather than his TVC, we can already see that the answer is less black and white.

Adding detail

But clearly it’s nonsense to look at Bob’s pension in isolation.  As we established in our last blog, APTA isn’t about value for money, it’s about suitability.  We’re not just interested in whether Bob is “better” or “worse off”, we want to see if transferring out is better suited to his objectives than remaining in his DB pension scheme.

It’s essential that any APTA cashflow takes into account Bob’s income need and objectives – it’s simply not good enough to look at the pension in isolation.

Bob said he wants £20,000 per annum in retirement – how does his cashflow look taking this into account?

Here you can see the Basic Cashflow (black line) at the top, assuming no expenditure, and the cashflow taking into account Bob’s Income Need (orange) down here at the bottom.  You can immediately see the importance of factoring in Bob’s expenditure.

We’re building up the cashflow, layer-by-layer.  Unsurprisingly, as we know he’s getting £30,000 income from his DB pension, and only spending £20,000, we see that Bob still doesn’t have a problem.

Impacts and Trade-Offs…

The next thing we need to incorporate into the model is Bob’s objectives, so we can see if they are better served by transferring or by staying put.  Bob’s wanted to pay off  his £50,000 mortgage – let’s see what his cashflow looks like if he does so:

Remember this is Bob’s liquid capital position.  Clearly his DB pension alone doesn’t allow him to pay off his mortgage – there isn’t enough liquid capital to allow it.  This further reinforces the point that, while it’s important to keep the model simple, there’s a minimum level of detail we need to build into the model.

Let’s build Bob’s savings into the model, and use the DB Transfer Tool again to see whether transferring would be appropriate:

The light blue line shows Bob staying in his DB pension scheme.  He pays off his mortgage from his savings, and has more than enough money for the rest of his life.  The black line shows Bob transferring.  He pays off his mortgage from his PCLS, but might run out of liquid capital at 96, and would be better off remaining in his DB scheme if he lived beyond age 85.  Because we’re keeping all the other variables the same, we can clearly see the impact of transferring, and whether it might be suitable in Bob’s specific case.

There’s two really interesting things going on here.  Firstly – we’re starting to see the value of building a more comprehensive cashflow (albeit we’re still only looking at a handful of elements); secondly – we’re starting to see a dramatically different cashflow if Bob transfers.  What we can see here is, as required by APTA, the impacts and trade-offs of transferring.  As we build the detail and the complexity of the model, the pros and cons of the different courses of action start to emerge.

Crossing the Ts and dotting the… lower case Js

There’s still a couple of things missing from this model.  Rather than add each of these individually, the next cashflow we’re going to look at incorporates a few extra elements:

• Bob’s State Pension (£8,544/annum)
• Mrs Bob’s State Pension (£8,544/annum)
• Bob retiring at 60

With this extra income taken into account, but with 5 more years’ living on his transferred pot, would you expect Bob to be better or worse off, if he were to transfer?

This is an interesting chart, and it’s really where we start to see the impact and trade-offs of transferring that APTA refers to.  We’re finally at the stage where we have a “complete” cashflow, and are still only changing one variable in our comparison.  The orange line is Bob staying in his DB scheme; the black line is Bob transferring.  What we can see here is that Bob would be financially secure in either case, but “better off” from around age 85 by staying in his DB pension scheme.  If he stays in his DB pension scheme, he ends up with far more capital than he needs in later life.

The full picture

The final thing Bob wanted to look at was whether he could afford NOT to touch his pension pot, and to leave it to his kids and grandkids.  When I put this in to Truth, Bob ran out of money.  I asked our More Income Calculator how much income Bob NEEDED to take from his transferred pension, and the answer was just £5,000 per annum.  So here’s Bob’s cashflow, incorporating all of his goals and objectives:

This is what I’d refer to as a “Full” cashflow for Bob.  The pink line is Bob transferring and (rather than taking his tax-free cash up front) taking a small income from his transferred pot.  The light blue line is Bob staying in his DB scheme.

The model is still REALLY simple – it’s really just 5 elements: his transferred pension, state pension, his savings, his mortgage, and his income need, but it allows us to cover all of the APTA requirements.  We’re looking at all of Bob’s objectives, and taking into account his realistic retirement income need.  We know that £5,000 is enough, but what I’ve done in this scenario is I’ve assumed that Bob will draw £8,000 per annum from his transferred pension, just in case he’s understated his retirement income need.  This is supplemented by his savings and his state pension, and we can see that his cashflow looks pretty good.

Remember there’s only 5 elements to Bob’s cashflow, and 4 of them are the same in both of these scenarios.  What this means is that we can show our client the direct impact of transferring and not transferring, while meeting all of their objectives, and satisfying their income needs.

This is where we can really start to add value for Bob, and show him those all-important impacts and trade-offs.  Remember the cashflow only shows Bob’s liquid capital…  here’s Bob’s cashflow if he were to transfer, take £8,000 per annum income from his pot, but incorporating the value of his pension fund. 

We can see from this that, if Bob were to transfer, he’d potentially still have nearly £600,000 in his pension fund at age 100.  This helps us look at Bob’s final objective: putting money aside for his children and grandchildren.

The true value of Cashflow Modelling

What’s interesting about this case is that, from a cashflow perspective, Bob is “better off” staying where he is.  This confirms what we saw on the TVC, which showed that Bob was about £150,000 worse off transferring than staying in his DB pension.  But remember the TVC is comparing one thing the client doesn’t want to do with another thing he also doesn’t want to do!

When we look at the wider picture, not only in terms of the client’s cashflow, but also how transferring might help them meet their goals and objectives, we can help Bob look at whether he would like to go ahead with the transfer, armed with all of the information we need to give him to satisfy the APTA requirements.  We’re providing Bob with a bespoke (i.e. “appropriate”) pension transfer analysis, which clearly demonstrates the impact of transferring.

Unlike the TVC, which could equally apply to anyone in similar circumstances, this is most definitely Bob’s cashflow.  We’ve covered his objectives, and whether they’re better served by transferring or not.  We’ve explained to him the difference between safeguarded income from age 65 and flexible income from age 60.  We’ve discussed his Income needs, and the impact and trade-offs that come about as a result.  We’ve shown him that there is an alternative – i.e. paying off his mortgage with savings.  We can even test his capacity for investment loss.

Cashflow modelling software, used well, can help you satisfy, and even perhaps exceed, the requirements of APTA.  It takes into account clients’ aspirations and allows them to see whether transferring better meets their needs, rather than just whether transferring leaves them “better off”.

Cashflow modelling software, used well, can help you satisfy, and even perhaps exceed, the requirements of APTA

The value of Cashflow modelling is that it helps facilitate the decision making process by illustrating to the client not just the difference between staying in their DB pension and drawing an identical income from a drawdown fund/SIPP, but more importantly the difference between staying in the DB pension and doing what they actually want to do with the rest of their lives.

The post Putting the A in APTA (Part 2) appeared first on Prestwood Software.

Advisers who produce robust cashflow models for clients may be surprised (or, indeed, they may not!) to discover they’re already exceeding the APTA requirements.  Those who aren’t should be wary of off-the-shelf solutions.  We know from experience that “standardised” reports don’t hold water with the FCA.

In this blog we’ll look at what’s changing; what you need to do to ensure you’re providing suitable DB transfer advice, and the role cashflow modelling plays in this.

TVC and Anchoring Bias

TVC is in many ways a direct replacement for the illustration element of TVAS, which was based on critical yield.  You take the offered “Cash Equivalent Transfer Value” (CETV), and calculate the rate of return required to match the benefits offered by the ceding DB pension.  Fairly straightforward, but difficult for a client to visualise.

For example – a 58 year-old client has been offered a CETV of £800,000 in exchange for their £30,000 pa DB pension.  The Critical Yield, assuming a life expectancy of 100, is 5.53%.  The problem is that this number is pretty arbitrary.  £800,000, on the other hand, is NOT an arbitrary number.

The appeal of the generous CETV causes an anchoring bias – clients subconsciously latch on to a number which is often more than they’ve ever seen before in their lives.  The fact that 5 and a half percent is not achievable, given their attitude to risk, is just a momentary distraction from the appeal of the cheque they’re already cashing in their minds.

The FCA consultations concluded that, rather than looking at hypothetical rates of return, showing the client the pound-for-pound cost of replacing their DB pension income is more transparent.  This is where the Transfer Value Comparator, or TVC, comes in.

TVC provides a comparison between the transfer value offered and “the estimated value needed… to purchase the future income benefits… using a pension annuity”.  That’s not saying that the client is actually going to buy an annuity, it’s simply using it to provide a pound-for-pound illustration of the cost of replacing their DB pension.  Here’s an example of the standard report that you will be required to produce:

So what does this really show?  On the left we have the CETV (“Cash Equivalent Transfer Value”; on the right is the cost of buying an annuity which offers the same level of future income.  The client can see, at a glance, whether transferring leaves them better or worse off.

TVC is great at doing the very specific job that the FCA want it to do.  Where a client has been offered a huge transfer value, but their TVC indicates that it would cost even more to buy an annuity with the same level of income, an even bigger number is psychologically far more effective as a deterrent than an arbitrary percentage.

Where a client has been offered a huge transfer value… an even bigger number is psychologically far more effective as a deterrent than an arbitrary percentage.
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Value for Money doesn’t equate to suitability

If a client is considering a pension transfer, this must mean that they don’t feel their DB pension income is suitable for them.  If they don’t feel their DB pension income is suitable for them, why show a like-for like illustration of the cost of replacing this income?

It’s comparing one thing the client doesn’t want with something else the client doesn’t want.

The client, in all likelihood, is considering a transfer because they DON’T want to take an escalating income from a date set by a scheme administrator, which will leave them with more income at age 100 (when they aren’t in a position to enjoy it) than at 60 (when they are).  They might want control of their pension fund, and the freedom to use it as an IHT planning vehicle, or to take ad-hoc withdrawals from it as and when they are required.

This is Bob.  Bob is 58 years old, and he’s a member of a DB pension scheme belonging to his old employer.

Bob’s pension will pay him £30,000 pa, escalating with inflation, from when he reaches the scheme retirement age of 65.  He doesn’t have a tax-free lump sum option.  He’s been offered a transfer value of £700,000.  Should he accept it?

The answer is that we don’t have enough information to answer the question.  You may notice Bob is looking a little sketchy!  We DO have enough information, however to produce a TVC for Bob, and here it is:

Bearing in mind the transfer value being offered is this column on the left, and the cost of an equivalent annuity is this column on the right, do we now think Bob should transfer?

It’s really pretty straightforward – with the CETV offered, Bob would be just over £150,000 worse off by transferring.  So we should probably advise Bob NOT to transfer, given that this is BOB’s TVC.  But that’s the problem – it’s NOT just Bob’s TVC, it’s also the TVC of every 58 year old with similar DB pensions and similar transfer values.  It’s a clear illustration of whether a transfer is good value-for-money, but doesn’t touch on whether it’s suitable.

TVC is a clear illustration of whether a transfer is good value-for money, but doesn’t touch on whether it’s suitable.
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APTA to the rescue

And this is where APTA comes in.

Those of you who are keeping up with the acronyms will remember that APTA stands for “Appropriate Pension Transfer Analysis”.  Where the TVC provides a standardised, statutory calculation, APTA occupies a kind of half-way-house between this and a full suitability report.  Rather than being just an exercise in box-ticking, it’s an opportunity to demonstrate the fact that you know your client, and to make a recommendation that’s specifically tailored for them.

In its Guidance on Assessing Suitability (COBS 19.1.6) the FCA state that

     “a firm should only consider a transfer to be suitable if it can clearly demonstrate that the transfer is in the retail client’s best interests.”

In order to meet this requirement, we need to do two things:

1. we need to establish the client’s objectives, or reasons for wanting to transfer
2. we need to “clearly demonstrate” how transferring will help them achieve these objectives.

Back in May, Rory Percival published “An Ex-Regulator’s Guide to Cash-Flow Planning”, which he followed up recently with the slightly-less catchily-titled “An ex-regulator’s guide to Defined benefit transfers suitability and controls”.  In this latest guide, Rory notes that:

“The single most important change that should occur is that greater colour and detail about the client’s objectives should be included and more time spent on the personalised explanation of why the recommendation is suitable and the personalised disadvantages.”

The key word here is “personalised”.  This, in my eyes, is the defining characteristic of APTA: it gives you the opportunity to create a report that isn’t standardised, but that reflects the specific circumstances and objectives of your client.  From a suitability perspective, this is gold dust.

Imagine, for a second, that you recommend that Bob accepts his £700,000 transfer offer.  You move this money into a SIPP for him, and he subsequently decides he no longer needs your services.  Over the next decade, he squanders his retirement savings, and then decides he wants someone to blame for the fact that he faces potentially another 30 years of retirement, with just the state pension to see him through.

Which do you think will serve you better, in terms of defending yourself against Bob’s complaint: an off-the-shelf “APTA”, or a personalised, tailored cashflow report, which clearly illustrates Bob’s stated objectives, outlines the pros and cons of transferring, and shows that you have communicated these to Bob?

What should my APTA look like?

Because APTA isn’t, and shouldn’t be, a standardised report, the FCA can’t tell you exactly what it should contain.  If anyone tells you that all APTAs should look a certain way, or contain standardised elements, you should carefully consider whether that framework helps you meet the following guidelines.

According to COBS, as an absolute minimum, your APTA should do the following:

• Clearly state your client’s Objectives
  Why are they considering transferring?  This is something that Rory Percival’s DB transfer guide covers really well – he looks at how you can triage DB transfer cases, and certain types of client for whom transfers are, generally speaking, more or less likely to be suitable.
• Illustrate the client’s understanding of the safeguarded benefits that they may be giving up
  They refer to this as “attitude to risk”, and really it’s just as important to their attitude to investment risk.  Many advisers keep audio recordings of their discussions with clients on attitude to risk, and perhaps it would be wise to treat this conversation in the same way.
• Illustrate the client’s understanding of their attitude to investment risk
  In a sense, this is the one thing we’re losing by dropping the Critical Yield illustration from TVAS.  Although these were quite poor at communicating the relative value of the CETV to the client, they gave you a number which you could directly compare to recommended portfolios or funds, and the client’s attitude to risk.  You can still include a Critical Yield illustration, if you wish to do so – the important thing is that, however you decide to tackle it, the client’s understanding of and attitude to investment risk should be clearly illustrated by their APTA.
• Highlight the client’s “realistic” income needs
  One of the things that cashflow modelling in general helps highlight is that what a client claims about their expenditure on a fact find is often dramatically different to their real-life spending patterns.  Often, as advisers, you’ll have a better idea of how clients’ spending may change in retirement than they do.  They’ve never retired before, but you’ve dealt with countless retirees.  Your experience, along with their plans for the future, will help paint a “realistic” picture of what they might need in retirement.
• Potential “impact and trade-offs” of transferring
  This is specifically with reference to the client’s income needs.  Are they looking at taking a tax-free lump sum up front, with a lower ongoing income than their DB scheme offers?  Perhaps they want to take a higher level of income, on the understanding that it might not be sustainable.  Maybe they’re going the opposite way, and not taking any income at all, and using their DC pension to ring-fence assets for estate planning purposes.  In each case, we need to ensure that APTA illustrates that we’ve communicated the disadvantages and trade-offs.
• Alternatives to transferring
  This needs to refer back to their objectives – can this client’s specific objectives be met using other means.  If the client is looking to pay off their mortgage, could they be better off using savings and keeping their safeguarded pension benefits?

Often, as advisers, you’ll have a better idea of how clients’ spending may change in retirement than they do.  They’ve never retired before, but you’ve dealt with countless retirees. Your experience, along with their plans for the future, will help paint a “realistic” picture of what they might need in retirement.
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Getting to know Bob

Let’s get back to Bob.

We’ve given Bob his standardised TVC, which shows that he’s about £150,000 worse off transferring than staying in his DB scheme.  In order to give him “appropriate” advice, we now know that we need a little bit more about his objectives; what other sources of income he might have, and his income needs in retirement.

So let’s try and build a more detailed picture of Bob for his APTA:

• He wants to pay off his mortgage.  He doesn’t know if he should do this using his tax free cash, or a combination of tax free and taxable income from his pension after transferring.
• He wants to retire at 60.  His DB pension had a normal retirement age of 65, and had heavy penalties for early retirement.  He’d like to look at whether transferring would help him to retire earlier.
• He doesn’t think he needs the rest of his pension.  After paying off the mortgage, and filling the gap before his State Pension kicks in, he’d like to keep the majority of his pension fund intact to pass on to his children and grandchildren.  He wants help in deciding if this is possible.

Let’s look at the other sources of income which Bob has now and in retirement:

• He’s expecting to get his full state pension. That’s about £8,500 of income a year from age 66.
• He has £200,000 in savings, which he doesn’t want to draw on.
• And he thinks he needs £20,000 a year to live on in retirement.

Having established and recorded all of this information on Bob, we now need to “clearly demonstrate” whether or not transferring would be suitable and appropriate in Bob’s case.

The role of Cashflow…

Just by recording all of this information, we’re still not meeting the APTA requirements.  The FCA state that the client needs to be provided with a comparison of their financial future if they were to transfer or not to transfer.  This is where, in the view of Rory Percival, amongst others, cashflow planning becomes invaluable as part of the transfer advice process.  Not only does it help us to fulfil the criteria of “clearly demonstrating” different outcomes to the client, it also helps us to look at whether Bob’s income needs are “realistic”, and so if transferring is a good option for him.

In the second part of this blog, we’ll build a really simple cashflow for Bob, and look at how Cashflow Modelling software helps you meet, and in some cases even exceed, the requirements of APTA.

The post Cashflow Modelling puts the A in APTA! appeared first on Prestwood Software.

From Lifetime Allowance planning to optimising contributions to make use of Annual Allowance and carry-forward, we’ve been beavering away to make life in general, and pension planning in particular, easier for our customers.  And we’ve got plenty more in the pipeline…

New DB Pension item

Later this month we’ll be unveiling a new, improved DB Pension item.  We believe we’ve managed to simplify our DB Pension item, while making it more powerful at the same time, to make it easier for you and your client during planning meetings.   You can quickly enter known benefits, or use the new calculator to help you work them out.   We’ll automatically create early retirement factors based on reduced accruals, and allow you to amend them with known scheme details.   We’ve linked retirement to a key date, so you can see the impact of retiring early on the cashflow charts,  with the capability to drill down behind the scenes.

What does this mean for you?  It means you’ll be able to input a DB Pension with ease, while retaining the powerful calculations (such as Deemed Contributions and accrual rates) behind the scenes.

TVC & APTA

In September, in line with FCA requirements, we will be launching the TVC (Transfer Value Comparitor), as well as a dedicated APTA (appropriate pension transfer analysis) tool, making DB transfer analysis easier than ever.

We’ll tell you more nearer the time but this really will be an innovative tool which allows you to go beyond the FCA requirements.  As we all know, it is overlaying different options that really enables clients to visualise their choices, and make informed financial decisions.

These changes will be available in time for the October deadline.

The post More Pension Planning enhancements in the pipeline appeared first on Prestwood Software.

With the debate raging about whether you have to be using Cashflow Modelling software to undertake pension transfer business, it’s not surprising that some advice firms who have never used Cashflow Modelling are starting to become curious.  How do you go about choosing a cashflow modelling tool from the many options available on the marketplace?  What are the differences between them, and how do you know what’s right for you, your business and, ultimately, your clients?

You should definitely have a free trial (if available)… but nobody has the time to trial a dozen different pieces of software.  Here’s 5 essential questions we think you be asking yourself when choosing which cashflow modelling tool or tools to add to your shortlist, so you can spend more time seeing clients!

1 – What kind of tool do I need?

Some cashflow tools focus on answering specific questions in a very straightforward way.  Others are more “holistic”, and give you the ability to model highly complex cases and answer very specific, bespoke problems.

What kind of questions do your clients ask?  If they’re matter-of-fact issues, such as:

• Should I transfer out of my DB pension?
• Should I pay off my mortgage?
• Do I need additional life assurance?

Then perhaps a simple tool, which allows you to give them a simple answer is all you need.

If, on the other hand, your clients have more complex needs, you may find that a simple tool just whets your clients’ appetites.  They may then ask questions your simple tool can’t answer.  Do you need two cashflow tools – one for simple cases; another for complex ones?  Can one tool offer the flexibility to provide for both types of clients?

2 – Who will be using it?

Bear in mind that different staff may use different aspects of the tool – administrators might complete fact-finds; paraplanners might prepare for meetings; advisers might see clients…  If a number of staff will be using the tool, it makes sense to pick one they will all be comfortable with.

By all means delegate the research aspect of the decision to a single member of staff, but it’s essential that the tool you choose should be something everyone is happy with – from data entry right up to the client meeting and beyond.  Choosing a tool that only works for some, but isn’t a good fit for your business as a whole, could be a costly mistake in the long run.

If you can have a demonstration, make sure all relevant staff are available so they can ask the questions which will affect their day-to-day interaction with the tool.

3 – Who’s pulling the levers?

Some tools are more “black box” than others: calculations are carried out by mysterious gremlins hidden behind-the-scenes.  You have only limited access to the assumptions being used, and the tool makes assumptions for you.  Some tools give you control over absolutely everything.  There’s inevitably going to be a trade-off between simplicity of use and how much control a tool gives you.

If a tool makes assumptions on your behalf, you really need to know what’s going on behind the scenes.  Are these assumptions reasonable, reasoned, and in-line with your way of thinking?

Ask the provider which assumptions you have control over and which you don’t.  Make sure you understand the key assumptions which can affect a client’s cashflow.  All the relevant people within your firm will have passed exams that ensure they know the intricate calculations and tax implications of products and income.  Don’t blindly assume that all tools are correct.  Do some simple tests to prove to yourself that the calculations are accurate and when you’re confident, you can trust the model.  Simulate income/sales/withdrawals/contributions/rates/frequencies and question the impact on the model.

4 – Do I/my staff/my clients “get it”?

This is perhaps the most important aspect of choosing a cashflow modelling tool: you need to be able to understand the tool.  If you can’t understand how it works, how can you hope to explain it to a client?  In an ideal world, the tool should be so transparent that it requires no explanation, but there’s nothing worse than a client asking you a question you just can’t answer during a meeting.

“The cashflow should be a ‘big reveal’ moment…”

But as well as simply understanding it, you need to buy in to the concept behind the cashflow.  More importantly still: so do your clients.  The cashflow should be a “big reveal” moment – you’ve built up to it pre-meeting, and now the clients are seeing the rest of their financial lives presented to them in a way that should be new and exciting to them.  If their response is to stare blankly at the screen and ask “so what”, is the tool really working for you?  The relevant people should put themselves through the tool. Look at your own situation – does it feel right?  What opportunities arose from seeing your own model and will you make decisions that will impact on your future.  Has it answered all your questions?

5 – What kind of support is available?

It’s vital that, whatever tool you choose, you have access to whatever support and training services when and where you need them.

• Does your chosen provider offer training?
• If so, how much does it cost?
• Do they offer online or telephone support?
• Is there a price for this?
• What are their operating hours?
• How often is the tool updated by the provider?

Working out how to choose a cashflow modelling tool is hard enough the first time around – it’s not a decision you want to be making twice.  If you choose a tool, you need to ensure that the provider offers the training and support you need to get all staff up-and-running as quickly as possible.  Is the tool being updated regularly?  Are there innovations?  Does it keep up with legislation promptly?

Try before you buy!

If at all possible, make use of any free trial periods available.  There are some fundamental differences between the way in which some of the most popular tools deal with such fundamental things as expenditure and tax.  You won’t know if a tool is the right “fit” for you and your business until you’ve tried it.

Try arranging a meeting with a long-standing, trusted client.  Tell them the tool you’re going to be using is something you’re trying out, which you hope will allow you to enhance the service you can provide to them.

You should look at both the input and the output of the tool – i.e. data entry and on screen/printed reports.  Do these “make sense” to you?

It isn’t a question of how to choose a cashflow modelling tool, but more how to choose the right software for your staff and your clients.  You need to choose a tool which makes sense for your business, with a mentality and a logic you can understand and relate to, and which ultimately helps you to provide improved outcomes for your clients.

The post How to choose a Cashflow Modelling tool appeared first on Prestwood Software.

Protecting Client Wealth – 20th June 2018

Date:       Wednesday, 20th June 2018
Venue:   Thorpe Park Hotel & Spa, 1150 Century Way, Leeds LS15 8ZB

Hosted by Transact/Solidus/Prestwood, this is a great opportunity to learn more about managing your client’s wealth and protecting descendants.  Our very own Julie Lord is presenting a joint CPD session at this free event.

This event will start at 13:30pm and finish approximately at 16:00pm.  Please contact Sandra@prestwood-group.co.uk if you would like to attend.

How can technology improve the client experience and benefit your business? – 21st June 2018

Date:     Thursday, 21st June 2018
Venue:    The Mere golf & country club, Knutsford, WA16 6LJ

threesixty will be hosting a technology themed morning at The Mere Golf & Country Spa.  This event is free for all Prestwood customers.

In the morning we will look at client portals, back office software, client planning, and data security tools.  We’ll discuss how the use of this technology can improve the client experience and deliver benefits to your business.

This event will qualify for a potential 4 hours CPD, speakers include MoneyInfo, Time4Advice, and Brookland Computer Services.

This event will start at 9:00am and finish approximately at 14:00pm.  Please contact Sandra@prestwood-group.co.uk if you would like to attend.

The post Two great CPD opportunities… appeared first on Prestwood Software.

An expensive alternative to Excel!

Following the FCA consultation paper on Appropriate Pension Transfer Analysis (APTA), Prestwood published our white paper Addressing the Pensions Timebomb in November 2017.  In this paper we recommend “mandatory use of cashflow modelling to make the consequences [of transferring out of DB pensions] clear to consumers”.

These consequences are various and complex: both negative (sacrificing secure income; exposure to market risk; loss of death/disability benefits) and positive (control and access over pension funds; generous transfer value offers; option to use pensions in IHT planning).

We looked forward, optimistically, to the FCA’s response, and how it would address the complexities of this difficult and often controversial area of advice.

This is the section of the Policy Statement where the FCA discuss the feedback on incorporating cashflow modelling into APTA:

Advisers will be best placed to assess the needs and circumstances of their individual clients. So we do not intend to provide detailed rules and guidance on the relevant elements to include for each individual. We consider that it is for firms to decide whether a critical yield approach remains valid in some circumstances. Firms should be aware of the risks of using critical yield over uncertain future lifetimes where income would not be secure, or where consumers may not understand it.

Firms are not prevented from using cashflow modelling software or any other type of software. However, advisers should consider the part these tools play in explaining the options to individual clients. The limitations of software cannot be used to limit advisers’ responsibility for providing suitable advice.

It would appear, from this, that the FCA see the primary role of cashflow modelling in the DB transfer advice process as helping advisers calculate critical yield.  If this is all you think you need cashflow modelling software for then don’t waste your money – the “RATE” formula in Excel will do the job for you; so, for that matter, can an investment calculator or your smartphone.

If critical yield approach is only valid “in some circumstances”, surely there should be an alternative suggestion?  What exactly does the critical yield approach tell us, what ARE the alternatives, and how can cashflow models help?

Why a critical yield approach is fundamentally flawed

Critical yield is based on trying to create parity between the client’s cashflow were they to remain in their DB pension, and their cashflow if they were to transfer out.  What rate of return would the client need in order to replicate the income they would get under their DB pension scheme?

Surely the whole point of transferring out of a DB pension is that the client probably doesn’t want the level of income they would get from their DB pension scheme?  If they wanted that exact income, the most prudent course of action would be to advise them to remain in the scheme, where the probability of achieving that level of income is 100%!

Why introduce volatility when success is guaranteed?

The client, in all likelihood, is considering a transfer because they DON’T want to take an escalating income from a date set by a scheme administrator, which will leave them with more income at age 100 (when they aren’t in a position to enjoy it) than at 60 (when they are).  They want control of their pension fund, and the freedom to use it as an IHT planning vehicle, or to take ad-hoc withdrawals from it as and when they are required.

Beyond Critical Yield

While a critical yield calculation could, and perhaps should, be a good starting point; this should not be the primary focus of DB transfer advice.  Is there any value in comparing one situation the client doesn’t want to be in with another which they equally have no desire to be in?

The primary focus of DB transfer advice should be whether it’s in the client’s best interest to transfer out of their pension scheme.  This analysis HAS to take into account what the client’s objectives are – whether that might be enjoying a better lifestyle in early retirement; or shoring away money for their children or grandchildren.

The value of Cashflow modelling is that it helps facilitate the decision making process by illustrating to the client not just the difference between staying in their DB pension and drawing an identical income from a drawdown fund/SIPP, but more importantly the difference between staying in the DB pension and doing what they actually want to do with the rest of their lives.

What Truth’s lifelong cashflow model allows clients to see is a straightforward graphical representation of whether or not they can afford to do what they want to now and for the rest of their lives.  Cashflow modelling software, used well, helps the adviser to go far beyond just critical yield.  It takes into account clients’ aspirations and allows them to see whether they will be “better off” in a holistic sense, rather than just being better/equally well off in relation to a specific financial transaction.

Why APTA doesn’t go nearly far enough…

The FCA Policy Statement acknowledges that a cashflow model is of some benefit in critical yield illustrations, but ignores the fact that the primary reason for clients wanting to transfer out of their pension is to wrestle control of their funds away from pension scheme administrators.

By providing clients simply with an illustration of how a hypothetical pension could provide the same income as their DB pension, we’re not actually helping them.  The value that cashflow modelling can add to DB transfer advice lies in illustrating to clients the difference between where they are now and where they want to be.

But this is just a starting point.  APTA addresses market volatility (albeit briefly), but makes little or no reference to the other significant concerns that we should be helping clients to consider: what if they die?  What if they are disabled, and in need of long-term care?  These are the kind of questions that cashflow modelling software can help you to answer.  More importantly, it helps illustrate to the client the wide-reaching implications of what is a complex and important life decision.

Whether you choose to use cashflow modelling software or not, these are the fundamental issues which we should be helping all clients understand before they choose to go ahead with their pension transfer.

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