The need for a New Approach to The need for a New Approach to Personal Financial PlanningPersonal Financial Planning

by:by: Paul A. OveryPaul A. Overy

The Business PracticeThe Business PracticeConferenceConference

St Helen’s Radisson Blu HotelSt Helen’s Radisson Blu HotelJuly 20July 20th th 20122012

Good Economy, bad planningGood Economy, bad planning HSE means test of Free Medical Cards HSE means test of Free Medical Cards

finds 95% of recipients should retain their finds 95% of recipients should retain their covercover

After close to 20 years of economic boom, After close to 20 years of economic boom, most people came out the other side with most people came out the other side with more debt than assetsmore debt than assets

This tells you that economic environment This tells you that economic environment does not dictate personal financial successdoes not dictate personal financial success

It is how you act, either in boom or bust It is how you act, either in boom or bust times, that dictates your personal financial times, that dictates your personal financial successsuccess

What has caused the poor results?What has caused the poor results?(forewarned is forearmed)(forewarned is forearmed)

Poor tax planningPoor tax planning Inflation dragging us all backwardsInflation dragging us all backwards Institutional fees & charges hidden Institutional fees & charges hidden

from viewfrom view Biased financial adviceBiased financial advice Isolated financial decision makingIsolated financial decision making

Tax PlanningTax Planning Tax is the greatest obstacle to achieving Tax is the greatest obstacle to achieving

our financial goalsour financial goals Oireachtas Committee reported in 2007 Oireachtas Committee reported in 2007

that that “Irish taxpayer’s routinely fail to “Irish taxpayer’s routinely fail to claim €500 million in annual tax claim €500 million in annual tax concessions to which they are concessions to which they are entitled”entitled”

Most people only give thought to the Most people only give thought to the matter when tax year is overmatter when tax year is over

No time for proper planning when always No time for proper planning when always working a year behindworking a year behind

Tax Planning Tax Planning (cont’d)(cont’d)

Financial success is about KEEPING Financial success is about KEEPING moneymoney

Planning taxation in ADVANCE will Planning taxation in ADVANCE will help you keep morehelp you keep more

This change means a change to the This change means a change to the way we take tax adviceway we take tax advice

Do we really understand the role of Do we really understand the role of our Accountants?our Accountants?

Tax calculationsTax calculationsCouple earning €100,000 per annum Couple earning €100,000 per annum

(Tax Calculator available online at www.hookhead.com)(Tax Calculator available online at www.hookhead.com)

Single IncomeSingle IncomeMale’s Income: Male’s Income:

€100,000.00€100,000.00Total Tax & Levies: Total Tax & Levies: € € 40,886.6440,886.64

Net Income Received: Net Income Received: €59,113.36€59,113.36

Double IncomeDouble IncomeMale’s Income: Male’s Income:

€70,000.00€70,000.00Females’ Income: Females’ Income:

€30,000.00€30,000.00Total Tax & Levies: Total Tax & Levies:

€30,321.28€30,321.28

Net Income Received: Net Income Received: €69,783.72€69,783.72

(18% MORE)(18% MORE)

Inflation Inflation (Tax’s evil twin)(Tax’s evil twin)

““Compound interest is the second Compound interest is the second most powerful force in the Universe”most powerful force in the Universe”

Any investment’s real return can only Any investment’s real return can only be judged after ALL costs have been be judged after ALL costs have been taken into accounttaken into account

After taxation and inflation, many After taxation and inflation, many people’s investments are delivering people’s investments are delivering REAL lossesREAL losses

3% inflation & 30% taxation3% inflation & 30% taxation

Due to the twin ‘costs’ of inflation & Due to the twin ‘costs’ of inflation & taxation, ALL your investments must taxation, ALL your investments must

deliver 4% + per annum Gross to deliver 4% + per annum Gross to Break Even!Break Even!

Institutional Fees & ChargesInstitutional Fees & Charges

Many costs ignored by the customers, Many costs ignored by the customers, many more hidden from plain sightmany more hidden from plain sight

Lack of independent guidance means Lack of independent guidance means buyers at a disadvantagebuyers at a disadvantage

Most loans, for example, have 5 – 7 Most loans, for example, have 5 – 7 separate costs attaching, while most separate costs attaching, while most borrowers perceive just oneborrowers perceive just one

Do you know the true costs of your home Do you know the true costs of your home or investment loan, your Pension, your or investment loan, your Pension, your Stock Portfolio….?Stock Portfolio….?

The True Cost of Property The True Cost of Property PurchasePurchase

€€500,000 property purchased over 20 years on 500,000 property purchased over 20 years on Capital & Interest Loan costs €802,000 to repay Capital & Interest Loan costs €802,000 to repay (60.4% MORE)(60.4% MORE)

Top rate tax and levy payer has to earn circa Top rate tax and levy payer has to earn circa €1.6M over 20 years to pay the debt€1.6M over 20 years to pay the debt

Over 20 years outlay is: -Over 20 years outlay is: - € €500,000 on Property500,000 on Property € €302,000 on Interest302,000 on Interest € €800,000 on Income Tax800,000 on Income TaxTo keep pace with inflation of 3% p.a. property To keep pace with inflation of 3% p.a. property

needs to be valued at €903,055 net (€1.075 M needs to be valued at €903,055 net (€1.075 M gross of 30% CGT) to retain original valuegross of 30% CGT) to retain original value

If an Investment PropertyIf an Investment Property(assuming a 4% p.a. rental yield)(assuming a 4% p.a. rental yield)

Property has to grow by 11% per Property has to grow by 11% per annum to give the investor a 5% annum to give the investor a 5%

per annum REAL return!per annum REAL return!

Why? To pay the institutional Why? To pay the institutional charges and taxes!charges and taxes!

Biased Financial AdviceBiased Financial Advice

Generic Financial Products being SOLDGeneric Financial Products being SOLD Manufacturer’s/Salesman’s profit already Manufacturer’s/Salesman’s profit already

enshrined in terms & conditionsenshrined in terms & conditions Placing your profit in no better than third Placing your profit in no better than third

placeplace Vast array of financial products ignored by Vast array of financial products ignored by

“advisers” as they cannot get paid for “advisers” as they cannot get paid for delivering themdelivering them

He who pays the piper calls the tune!He who pays the piper calls the tune!

Pensions underperformingPensions underperforming

Along with property, a corner stone of Along with property, a corner stone of efforts to provide for our future.efforts to provide for our future.

Excellent tax breaks, but poor products Excellent tax breaks, but poor products and high chargesand high charges

90% + of pension savings invested in 90% + of pension savings invested in Managed Funds, delivering an average Managed Funds, delivering an average annual growth of just 0.9% per annumannual growth of just 0.9% per annum

Private Pension Funds can help, but most Private Pension Funds can help, but most advisers cannot get paid for their deliveryadvisers cannot get paid for their delivery

Isolated financial decision makingIsolated financial decision making

Probably the most costly mistake all Probably the most costly mistake all of us makeof us make

Multiple advisers but no one person Multiple advisers but no one person taking an overall viewtaking an overall view

Allows financial inefficiencies to Allows financial inefficiencies to infect our financial livesinfect our financial lives

Most costly mistake of all: Most costly mistake of all: “borrowing “borrowing your own money and paying for the your own money and paying for the privilege”privilege”

Profits can appear bigger….Profits can appear bigger….

Profits made in one area of your life, Profits made in one area of your life, can be eroded by anothercan be eroded by another

Pre-tax profits may be positive, but Pre-tax profits may be positive, but net of tax and inflation, Gross Profits net of tax and inflation, Gross Profits quickly become REAL lossesquickly become REAL losses

It is not the number that dictates It is not the number that dictates profit, it is the valueprofit, it is the value

Lessons to be learned?Lessons to be learned? Educate yourself as much as possible, you are the one most Educate yourself as much as possible, you are the one most

interested in your moneyinterested in your money Spend 80% of your time creating income and 20% of your Spend 80% of your time creating income and 20% of your

time creating wealthtime creating wealth Stop taking financial advice from those paid to make other Stop taking financial advice from those paid to make other

people profitpeople profit Pay for your financial advice, otherwise the “piper” is Pay for your financial advice, otherwise the “piper” is

playing someone else’s tuneplaying someone else’s tune Change how you plan taxation, seek out the help you need Change how you plan taxation, seek out the help you need

and pay only the taxes you must payand pay only the taxes you must pay The most important first step? - Create a The most important first step? - Create a

Personal Financial Plan, with clear Personal Financial Plan, with clear objectives and timeframes, and obey the objectives and timeframes, and obey the basic rules of planningbasic rules of planning

Questions?Questions?

Financial Intelligence Coaching Financial Intelligence Coaching Available now fromAvailable now from

PAO Communications Ltd,PAO Communications Ltd,26, Beaverbrook,26, Beaverbrook,Donabate,Donabate,Co DublinCo DublinPh: 01-8085000Ph: 01-8085000Email: paulovery@paocommunications.ieEmail: paulovery@paocommunications.ie