Cashflow Planning: Helping To Answer ‘What if…’ Questions
When you begin making a financial plan, you could be looking several decades ahead, and we all know the unexpected can derail even the best-laid plans. So, as you’re setting out goals, it’s not uncommon to wonder if you’d still be able to meet them if things outside of your control have an impact.
When you start putting together a financial plan one of the valuable tools that can put your mind at ease is cashflow planning.
What is cashflow planning?
Cashflow planning is a tool that helps forecast how your wealth will change over time. We can use this to show how your assets will change in value in a range of circumstances, such as average investment performance or income withdrawn from a pension. It’s a step that can help you have confidence in the lifestyle and financial decisions you make.
However, the variables can be changed to highlight the impact of what would happen if things don’t quite go according to plan. Whether it’s down to a decision you make or something out of your control, cashflow planning can highlight the short, medium and long-term consequences on your finances and goals. As a result, it can be a useful way of answering ‘what if’ questions that may be causing concern.
Answering ‘what if’ questions
If you’re asking ‘what if’ questions relating to your financial plan, they can be split into two categories: the ones you have control over and those that you don’t.
Those that you do have control over often stem from wanting to take a certain action but being unsure if your finances match your plans. These types of questions could include:
- What if I retire 10 years early?
- What if I provide a financial gift to children or grandchildren?
- What if I take a lump sum from investments to fund a once in a lifetime experience?
Often with these questions, there’s something you want to do, or at least thinking about, but you’re hesitant to do so because you’re worried about the long-term impact. You may need to consider the effects decades from now, which can be challenging. Cashflow planning can help provide a visual representation of the impact a decision would have.
We often find that clients’ finances are in better shape than they believe, allowing them to move forward with plans with confidence.
The second type of ‘what if’ questions, those you don’t have control over, often stem from worries about the future. These could include:
- What if investments returns are lower than expected?
- What if I passed away, would my partner be financially secure?
- What if I needed care in my later years?
Cashflow modelling can help you understand how these scenarios would have an impact on your short, medium and long-term goals. It can highlight that you already have the necessary measures in place, allowing you to focus on meeting goals.
Alternatively, you may find there’s a ‘gap’ in your financial plan. However, by identifying this, you’re in a position to take steps to put a safety net in place. If you’re worried about the financial security of loved ones if you were to pass away, for example, this could include purchasing a joint Annuity, providing a partner with a guaranteed income for life, or taking out a life insurance policy.
Confronting concerns about your future can be difficult, but it’s a step that can lead to a more robust financial plan that you have complete confidence in.
The limitations of cashflow planning
Whilst cashflow planning can be incredibly useful, there are limitations to weigh up too.
First of all, how useful the forecasts are will be dependent on the data that’s input. This is why it’s important to consider assets and goals when gathering information, as well as keeping the data up to date.
Second, cashflow planning will have to make certain assumptions. This may include your income over an extended period or investment performance, which can’t be guaranteed. This is combatted by modelling different scenarios and stress testing plans, helping to give you an idea of how your financial plan would perform under different conditions.
Cashflow modelling is just one of the tools that can support your financial plans and it can be an incredibly useful way of giving you a potential snapshot of the future and easing concerns. If you’d like to discuss your aspirations and the steps you could take to ensure you’re on the right track, please get in touch.
Accessing your pension: Annuity vs Flexi-Access Drawdown
In the past, the majority of people saved for retirement over their working life, gave up work on a set date and used their pension savings to purchase an Annuity. However, as retirement lifestyles have changed, so too have the options you’re faced with as you approach the milestone. If you’re nearing retirement, you may be wondering if an Annuity or Flexi-Access Drawdown is the right option for you.
Since 2015, retirees have had more choice in how they access a Defined Contribution pension. If you want your pension to deliver a regular income, there are two main options – an Annuity or Flexi-Access Drawdown – to weigh up. So, what are they?
Annuity: An Annuity is a product you purchase using your pension savings. In return for the lump sum, you’ll receive a regular income that is guaranteed for life. In some cases, this can be linked to inflation, helping to maintain your spending power throughout retirement. As the income is guaranteed, an Annuity provides a sense of financial security but doesn’t offer flexibility.
Flexi-Access Drawdown: With this option, your pension savings will usually remain invested and you’re able to take a flexible income, increasing, decreasing or pausing withdrawals as needed. Flexi-Access Drawdown provides the flexibility that many modern retirees want. However, as savings remain invested they can be exposed to short-term volatility and individuals have to take responsibility for ensuring savings last for the rest of their life.
There are pros and cons to both options, and there’s no solution that suits everyone when considering which option should be used. It’s essential to think about your situation and goals at retirement and beyond when deciding.
It’s worth noting, that pension holders can choose both an Annuity and Flexi-Access Drawdown when accessing their pension. For example, you may decide to purchase an Annuity to create a base income that covers essential outgoings, then using Flexi-Access Drawdown to supplement it when needed. It’s important to strike the right balance and other options could affect your decision too, such as the ability to take a 25% tax-free lump sum.
5 questions to ask before accessing your pension
- What reliable income will you have in retirement?
Having some guaranteed income in retirement can provide peace of mind and ensure essential outgoings are covered. But this doesn’t have to come from an Annuity. Other options may include the State Pension or a Defined Benefit pension.
Calculating your guaranteed income can help you decide if you need to build a reliable income stream or are in a position to invest your Defined Contribution pension savings throughout retirement. If you decide Flexi-Access Drawdown is an appropriate option for you, it’s a calculation that can also inform your investment risk profile.
- What lifestyle do you want in retirement?
When we think of retirement planning, it’s often pensions and savings that spring to mind. However, the lifestyle you hope to achieve is just as important. Do you hope to spend more time on hobbies, with grandchildren or exploring new destinations, for instance? Thinking about where your income will go, from the big-ticket items to the day-to-day costs, can help you understand what income level you need.
- Do you expect income needs to change throughout retirement?
This question should give you an idea of how your income will change throughout retirement. Traditionally, retirees see higher levels of spending during the first few years before outgoings settled, with spending rising in later years again if care or support was needed.
However, your retirement goals may mean your retirement outgoings don’t follow this route. If you decide to take a phased approach to retirement, gradually reducing working hours, you may find that a lower income from pensions is required initially. Considering income needs at different points of retirement can help you see where flexibility can be useful.
- Are you comfortable with investing?
Flexi-Access Drawdown has become a popular way for retirees to access their savings. There are benefits to the option but you should keep in mind that savings are invested. As a result, they will be exposed to some level of investment risk and may experience short-term volatility. Before choosing Flexi-Access Drawdown, it’s important to understand and be comfortable with the basics of investing.
Investment performance should also play a role in your withdrawal rate. During a period of downturn, it may be wise to reduce withdrawals to preserve long-term sustainability, for instance. This is an area financial advice can help with.
- Do you have other assets to use in retirement?
Whilst pensions are probably among the most important retirement asset you have, other assets can be used to create an income too. Reviewing these, from investments to property, and understanding if they could provide an income too can help you decide how to access your pension.
We know that retirement planning involves many decisions that can have a long-term impact. We’re here to offer you support throughout, including assessing your options when accessing a pension. If you have any questions, please get in touch.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
The World In A Week – Interim Update
Two important publications have been produced since our update on Monday. Firstly, we had the OECD’s (Organisation for Economic Co-operation and Development) Economic Outlook, which was predictably gloomy.
As part of our macroeconomic monitoring, we track the OECD’s Composite Leading Indicators on a monthly basis which gives us a broad-based indication of where each economy sits in the business cycle. As expected, we have seen a sharp slowdown in economic activity with the data for the UK looking particularly poor. The recent surprise unemployment numbers in the US has shown however, that it is currently extraordinarily difficult to measure or forecast the impact of the Coronavirus shutdown.
Secondly, we had the latest meeting of the Federal Open Market Committee, the group within the Federal Reserve who decide on US monetary policy. As we fully expected there were no surprises, however, Jerome Powell has erased all doubt around the short-term future of US interest rates. In the projections that accompany their statement, the consensus amongst the committee members is for rates to remain between zero and ¼ percent until the end of 2022.
So, the markets are faced with a dire warning of an historic 6% decline in world GDP, which is not a surprise to anyone, and conversely being told that central banks will be in accommodative mode for the foreseeable future.
Markets are reacting to the ambiguous outlook, reflecting the current macroeconomic uncertainty and unclear guidance on the next phase of combating the virus. Our own investment positioning, of being globally diversified and neutral on equities, reflects the risk of this rise in volatility.
The World In A Week - The Sky's The Limit
Risk assets enjoyed another strong week at Friday’s close, led by US equities. It is almost incomprehensible to think that the S&P 500 and the US dollar are almost back to the same levels seen at the beginning of 2020. Positive data helped spur the rally; US non-farm payrolls surprised to the upside, climbing 2.5 million in May, a very different outcome to the 7.5 million loss that analysts had forecast, unemployment also fell to 13.3%, defying expectations of a rise to 19%.
The ECB continue to do ‘whatever it takes’ to support the Eurozone; following the announcement that Germany had agreed a stimulus package of €130 billion. Christine Lagarde, Chairwoman of the ECB, announced that they would raise the Pandemic Emergency Purchase Programme or, PEPP for short, by a further €600 billion, taking the programme to €1.35 trillion in total. The programme has also been extended and will run out in June 2021 at the earliest.
In the UK, there has been a step change in the Government’s view on the hospitality industry, specifically pubs, restaurants and hotels. Previously, the sector was due to open in July at the earliest, but a new plan outlined by the government, means that pub gardens could be open as soon as 22nd June. The ‘Save Summer Six’ led by Chancellor, Rishi Sunak, has a clear mission to get the economy up and running after being warned by Business Secretary, Alok Sharma, that 3.5 million jobs are at risk.
The World In A Week - Interim Update
They just keep on coming. The latest in stimulus packages, at a modest €130 billion, comes courtesy of Germany. This is for Germany rather than the Eurozone and was much larger than expected, with the emphasis firmly on increasing demand. It will include a cut to their VAT, several infrastructure projects and €300 for every child. This should make the meeting of the European Central Bank today a happier place and will help underscore the need for both fiscal and monetary support to continue unabated during this time.
While the headlines about COVID-19 start to diminish, the void is quickly replaced with political upheaval. The reigniting of the US vs China battleground has taken to the skies, with the proposed suspension of passenger flights arriving from China. China currently operates flights to the US but only with four domestic airlines. The friction comes from their continued ban of allowing US airlines to operate the route and the latest move adds pressure to release that ban, keeping the political leverage of tensions between the two countries firmly in place.
Another airline that is feeling the pressure of the lockdown is EasyJet, having been demoted to the FTSE 250 during the quarterly shake-up of the UK equity indices. Yesterday’s reshuffle saw airlines and travel companies among the sectors being relegated from the FTSE 100. Promotions to the FTSE 100 were companies with a digital focus, such as gaming company GVC Holdings, cyber-security firm Avast and home improvements business HomeServe. The FTSE 250 also had a similar focus for its promotions, with gaming firm 888 Holdings and online electrical retailer AO.com.
Is this an indication of what we have all been up to during the lockdown? Stockpiling frozen goods, DIY and playing online bingo.
The World In A Week - Lockdown Wind-down
The last week saw a broad risk-on sentiment emerge, with global Equities as measured by MSCI ACWI return +2.1% in GBP Terms. This was driven by Japanese and European Equities, while US Equities lagged driven partially by a weakening Dollar vs the Pound Sterling. Interestingly, “Value” equities strongly outperformed “Growth” equities by almost +2.0%. The Value segment of the market, which includes firms operating in the energy, financials and materials sectors, had been unloved by the market for some time – but has now potentially reached a point whereby they are so cheap relative to their Growth counterparts that there is room for significant upside.
It looks like the market is positioning for a scenario whereby economic growth picks up strongly following the pandemic lockdown, with an associated increase in inflation and a weakening of the ‘Almighty Dollar’ from historical highs. There is a reasonable basis for this positioning. Last week saw the continued advancement of a proposed €750bn recovery fund for the Eurozone, funded by mutually issued debt for the first time. This financial burden sharing would be one step towards resolving the structural flaws in the single currency.
Significant downside risks remain however, the principal one being that the economic recovery falls short of what the market is expecting or there is a significant second spike in coronavirus cases. To add to this, we face increased tension between China and the West over the latter’s designs on Hong Kong, as well as an upcoming US election amid rioting across American cities.
The World In A Week - Interim Update
News flow is beginning to contain something other than easing of lockdowns and vaccines.
Economies around the world are beginning to re-open, ahead of the schedules that were first announced back in the middle of March, and infection rates look to have largely been contained. The worst-case scenarios that made the headlines three months ago, now have a much lower probability of actually occurring.
Let us not forgot that any signs of market weakness have been met with additional support from central banks and governments. Japan’s announcement yesterday of an additional $1.1 trillion fiscal stimulus package continues that theory.
Whilst all of this is generally good news, the world’s media needs to find the next dramatic headline and as we wrote on Tuesday, the souring relations between the US and China are taking a more serious step. Last night, US Secretary of State, Pompeo, stated that the US could not consider Hong Kong as being autonomous from China, which does have significant consequences, as it may affect Hong Kong's special trading status with the US.
The political leverage that Donald Trump seeks to gain from managing the US/China relationship is becoming a key element in his re-election campaign. As we wrote last year, when the Phase 1 deal was penned, this New Cold War is not something that will dissipate anytime soon.
Finally, Brexit has once again hit the headlines. The EU have told Westminster that Brussels remains open to extending the transition period by up to two years. Talks on what the trade deal will look like remain unresolved, with the original target date of 30th June 2020 looking less likely to be met.
The World In A Week - Crunch Time
Tensions are running high. The balance between keeping economies locked down in order to protect the health services, and the desire to loosen lockdown measures in order to lessen the long-term impacts, is coming to a head.
Here in the UK, there has been tentative rhetoric that we are preparing to lift restrictions, but attention has shifted towards accusations that Boris Johnson’s senior aide broke lockdown rules. All nations will need unity to help with smoothing the economics of a bounce back, and Dominic Cummings’ actions will certainly be an unwelcome spanner in the planning.
In the US, we have already commented on the increasing pressures between itself and China, mainly at the finger of Trump’s Twitter account. Over the weekend, it was the turn of China’s foreign minister to ratchet up the tension, accusing the US of pushing relations to a New Cold War. All of this could mean short-term volatility in financial markets.
However, support for markets from both central banks and governments remains significant. Last week, France and Germany proposed a €500 billion Recovery Fund that would represent a significant step towards fiscal mutualisation in the Eurozone. What does this mean? The idea is that the distribution of the Fund’s resources will be based on need, while the burden of the repayment will be based on ability. This will treat the Eurozone as a whole, with the arguably stronger nations, such as France and Germany taking on greater burden, while less well-off nations, such as Italy and Spain, can benefit from the resources of the Fund.
We knew the route to combat COVID-19 would be uncertain and we appear to be at another inflection point. While the short term remains unclear for markets, the monetary and fiscal support appears to be the one constant.
The World In A Week - Interim Update
It is happening again. President Donald Trump has been busy with his Twitter account this week and the focus of his attention is China. Trump’s increasingly critical comments of China could be a worry for the longer-term economic bounce back.
Whilst pent-up demand during lockdown is potentially a boost for US growth in the short term, restoring the level of growth to where it was before COVID-19 will require a stronger underlying economy, and reawakening trade tensions with China will not help.
There is more at play here than meets the eye though; casting China as the villain has been successful in the past for Trump’s approval ratings, and in a recent survey amongst Republican voters, disapproval of China is at 72%. With the US Presidential Election not far off, seeds are already being planted for campaign strategies. For the Trump team, it will be a difficult balancing act of building political support and ultimately keeping the trade deal alive.
In the UK we saw the official rate of inflation drop significantly from 1.5% in March to 0.8% for April, and below economists’ expectations of 0.9%. Driven downwards by falling commodity prices, as well as reduced spending and increased savings, a result of having so many people in lockdown. This has prompted the Bank of England to make a U-turn on the possibility of negative interest rates in the UK.
The Governor of the Bank of England, Andrew Bailey, confirmed that policy had changed slightly and that they were reviewing all tools possible to help alleviate the impact of the coronavirus. He did stress that the Bank needed time to consider the implications of such a move and they want to see how the economy reacts to the previous rate cut to 0.1% before enacting further monetary policy.
The World In A Week - Schools Out
A recent rally in equity markets has seen the S&P 500 only down by -2.6% in 2020 in Sterling terms. However, the FTSE All-Share remains the poorest performing equity asset class; down -23.0% for the year. The S&P 500’s recent upsurge partially attributes to the depreciation of Sterling which continued to drop last week amid stalling Brexit negotiations between the UK and the EU.
Rishi Sunak has extended the Government furlough scheme to the end of October as he aims to curb the number of job losses caused from the virus. Already 7.5 million workers are on the furlough scheme, which equates to 23% of the total working population. The Government initiative is estimated to cost £14 billion per month and could reach £80 billion.
The reopening of schools appears to be the biggest debate as Michael Gove discussed his intentions to reopen schools providing conditions were met that include smaller classes and staggered arrivals. Denmark was one of the first countries to reopen schools back in April, prioritising its younger children to return to class, whereas Germany has given precedence to their older students. Much of Europe have reopened their schools and have taken precautionary measures to ensure a safe environment including regular breaks to use hand-washing facilities. Globally, almost 1.6 billion students have been affected by the pandemic and further guidelines are expected to be revealed later this week.
The renewable energy sector has flourished in recent months from lower electricity demand and brighter weather conditions with solar farms powering almost 30% of the grid. The UK has now reached 34 days without operating with coal as of the 14th May. Global energy demand has declined 3.8% in Q1 of 2020 with coal demand falling by 8% and oil demand by 5%. Besides a greener environment, the pandemic has highlighted the importance of international co-ordination and co-operation, as we have seen social distancing operated on a global scale. If a similar stance is taken going forwards, the hope is that the fight against coronavirus will transpire into a successful global response to climate change.