What is the difference between a need and a want? At a recent conference run by Distribution Technology, a senior member of the Financial Conduct Authority, Head of Life Insurance and Advice Supervision, Debbie Gupta, said, “Advisers consider what a client wants, but few consider what the client really needs”.
Put simply, needs are something that you must have for survival. Wants, on the other hand, are good to have, but arguably not necessary for your survival.
Humans are fascinating and we often tend to confuse needs and wants. For example, you or a colleague has had a tough day at work. They might say, “I really need a holiday!” Is that right? Is it the case that the only way you are going to survive is by taking a holiday? Well, it’s possible that is the case, but the chances are they meant to say, “I really want a holiday!”
Financial Planning looks at both needs and wants and considers the availability of both. By looking at a person’s assets and liabilities and income and expenditure throughout their lifetime, the Financial Planner can help the client to understand what their needs are (food, clothing, the cost of having a roof over their head etc.) and whether or not they will have enough financial resources to pay for the things that they want (holidays, a new house in the country or money to gift to their children or grandchildren).
The challenge, though, is identifying what is truly a need and what is more likely to be a want. It gets even more complicated because many people would argue that a financial life which solely pays for your needs is not necessarily going to result in a fulfilled life. At Wells Gibson we believe real wealth is a fulfilled life and one characterised by contentment.
This leads us to an essential financial planning question, “Are you prepared to risk not having enough later in life to pay for your needs, to satisfy your wants in the shorter time frame?”
It usually comes down to degrees of risk. If there is a modest risk of running out of money later on in life but having a fulfilled life now, many might be prepared to take that risk. This is particularly true for many people who have been a member of a defined benefits pension scheme, one that provides a “guaranteed” income for life in retirement. Such pension schemes often offer a capital sum now (referred to as a, cash equivalent transfer value) if the scheme member is prepared to give up their guaranteed income. This money is then transferred into a personal pension plan from which the plan owners can, under current rules, extract as much or as little as they wish (typically, as long as they are over age 55).
So, would you be prepared to give up a guaranteed income for a capital sum? “Which would you prefer, a lump sum of £1 million today or £1,000 per week for the rest of your life?”
How would you answer this question? It might well depend upon several factors, for instance, how old you are; your current state of health; how you feel about any investment risk associated with having that £1million; how you might feel about spending all that money and not having enough later in life.
It might also depend upon whether the guaranteed pension income you are giving up was going to be enough, on its own or in conjunction with other income, to pay for your identified needs. It will also depend upon your needs and your wants and whether one overrides the other.
Ultimately, Financial Planning isn’t just about the numbers. It’s more about life. Your life.