Present Value vs. Future Value settings

The Present Value / Future Value setting is used in a variety of ways depending on the item you are dealing with but generally speaking, it means should the values you enter for a future purchase, a future transfer, or a future step up or step down be considered in today's terms (present value) and therefore subject to inflation if occurring in the future or are these to be future values.

For example, I am downsizing a home in 10 years time. The home is presently worth 500,000 and I want to downsize to a home worth half that, 250,000. Between now and then, the home will (hopefully) appreciate in value and the purchase price of the future home will probably inflate. We think it safe to assume that you and your client are thinking of these values in present value, which is the system's default for most value. Being set in present value, the software will work out the appreciation of the home and the inflation of the market value of the future home for you.

A case where future value is a better choice would be a transfer. You will notice that the Transfers / Additional Contributions panels are set (I think intuitively) to handle things as future values. For instance, you know that in 10 years time your client will be receiving 250,000 in tax free cash when his pension is crystallised. You want to transfer that exact amount, 250,000, into an unwrapped investment. This is a future value, not one that should be inflated.

Generally speaking, leave the system's default in place unless you are dealing with a special case where  value should not be inflated.


Related Topics

Default Inflation / Growth Rates - Inflation Rate