Cashflow Modelling

Question 1

Benefits of cashflow modelling

Answer 1

• allows advisor to compare the current income with their expenditure pattern
• adviser can stress test different scenarios
• to understand the impact various future events would gave on their ability to cover their expenditure
• allow adviser to identify potential shortfalls
• and put in place plans to avoid them
• it allows certain assumptions to be made
• these can be adjusted as circumstances change
• can use to help establish a suitable asset allocation

Question 2

Factors and assumptions when formulating a cash flow model

Answer 2

-expected future expenditure pattern
-expected pattern of gifting
-expected longevity
-likely need for long term care
-ATR
-CFL
- Expected growth rates of investments
- assumption for charges
-inflation rate assumption
-use of tax efficient wrappers/allowances and exemptions
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Question 3

Risks of using cashflow modelling

Answer 3

• assumptions maybe incorrect
• requires regular reviews
• objectives and circumstances can change
• cashflow returns are linear
• tax rules/ rate may change in the future
• does not allow for market risk /political risk
• doesn’t take account of liquidity risk

Question 4

Scenarios that should be discussed with D and J when carrying out a stress test on their cash flow model

Answer 4

• permanent loss of income
• future returns are lower than forecast
• income requirements are higher than forecast
• large unplanned capital withdrawal
• inflation higher than forecast
• living longer than expected
• adverse change in personal circumstances