Hello, and welcome to the second in our series of Insightful Planning with Astute videos. I’m Elliot Unsworth, Head of Client Proposition at Astute Private Wealth, and today I’m excited to show you how we helped a client discover the most suitable method of saving for retirement, and to show you visually how cashflow planning assisted us in explaining our rationale. Allow me to introduce you to one of the cashflow forecasting tools that we use. This is a powerful tool that revolutionises how we plan for and visualise your financial future.
Cashflow forecasting allows us to paint a detailed picture of your financial landscape, helping you make informed decisions and steering you toward your goals, which you will see here.
So, let’s get started.
We began, as we always do, by collecting our client’s financial data – income, expenses, savings, investments, debts, and future plans. We then organise this information into clear visuals, giving them a bird’s-eye view of their financial life.
We don’t just stop at the present; we can forecast finances into the future. We can include as many life events as you like, such as with this client who wants to upsize the family home at age 45, send the children to private school between ages 50 and 55, retire at 67, go on the holiday of a lifetime at 68 and buy a luxury car at 70.
By accounting for outside influences such as inflation, interest and investment growth assumptions, we can project how finances might evolve. This foresight empowers us to make proactive decisions today, ensuring a secure financial position tomorrow.
Let’s first look at the client’s basic cashflow graph to get an idea of the information it’s showing us. Take a look at this: all we have in this client’s Plan so far is an assumption of David’s basic cost of living: £30,000 per annum (p.a.). This level of spending is assumed to continue for the rest of David’s life, and the reason it keeps increasing year on year is because of the impact of inflation. The total expenditure is represented by the black line.
The reason the bars each year are red is because currently, there is no income (for example, salary) or capital (for example, assets to make withdrawals from) built into the plan to cover his expenditure yet; hence, there is a shortfall every year, shown by the red. Having red in the Plan is a sign that your finances may become stretched at some point.
Now, fortunately, David is working and earning a salary of £50,000, and so we can add this into the Plan.
Now you can see the blue income line is surpassing the total expenditure. Where the blue is above the line, it means there is a surplus over expenditure, and David is capable of making some regular savings. The blue, or income, stops at age 67. This is because David has told us that this is when he would like to retire. Because we have nothing else built into the Plan yet, the red emerges again past this point, as there is no income or capital available to cover his expenditure requirements in retirement.
In reality, our client may have resources set aside for retirement, such as some pension funds and savings, as well as an eventual entitlement to the State Pension, which we will build in later.
To summarise, this screen shows us ongoing lifestyle costs and how they can be met by income and capital withdrawals. Ideally, a Financial Plan would have an absence of red, or shortfalls, meaning you are expected to remain financially secure for the rest of your life.
Not all plans will look as simple as this, however, as I’m sure you know, the number of changes that can occur in a lifetime is numerous and vast, and your own cashflow forecast is more likely to look something like this.
The software will also show us how the value of his capital might change over time and when he might run out of money. We can also test various ‘what-if’ scenarios, including different retirement dates, spending habits, investments, and withdrawal and tax planning strategies. This helps us anticipate how changes, like buying a house, retiring early, or adjusting investments, may affect his financial trajectory. However, the focus of this video is the conversation we had around saving for retirement.
Let’s take a look at the power of the scenario comparison tool and how it has been used to drive our conversations and decisions.
David is currently working and has a surplus income of £5,000 per year. By the time he retires at age 67, he knows that he will be entitled to a State Pension and a Final Salary pension scheme from a previous employer that will cover the bulk of his lifestyle requirements. Taking this into account, we have projected that he will have a shortfall of income of £6,000 p.a. in retirement, and the client would like to know the best place to save his £5,000 p.a. now so that it can be used to generate his required £6,000 p.a. in retirement.
After discussions, we focused on 2 possible solutions, and used our cashflow forecasting tool to compare them: ISA versus Pension. In the first projection, we can see the impact of contributing £5,000 into his ISA every year until retirement, and then making withdrawals of £6,000 p.a. in retirement. We have assumed investment growth of 1.5% above inflation. You can see that this is achievable for some time, but we hit a shortfall before the end of the projection.
If we instead contribute £5,000 per annum into a pension, we get a slightly different result. Firstly, for our client, every £80 paid into a pension, the government would add £20 in tax relief, subject to certain limits and maximums. This means that gross contributions would be £6,250 per annum in this case, a whole 25% higher than when contributing to an ISA. You can see that the increased contributions to retirement make this plan a lot more sustainable, with the desired withdrawals of £6,000 in retirement being plausible until age 100.
Of course, there is more to consider when comparing an investment into an ISA vs a Pension. For example, ISAs do not benefit from tax relief on the contributions, but they grow tax-free, and withdrawals aren’t subject to taxation either. With a pension, although your contributions benefit from tax relief on the way in, your withdrawals could be subject to income tax on the way out. However, it’s worth considering that for this client (as is often the case), he will be in a lower tax bracket in retirement than in his working life, meaning the rate of tax relief when he contributes to his pension is likely to be higher than the tax paid when drawing an income from his pension. In addition to this, the client can withdraw 25% of the pension tax-free.
Furthermore, we explained that pensions are generally exempt from Inheritance Tax, whereas ISAs are not. ISAs can be accessed at any time, whereas Pensions can only be accessed after age 55, rising to 57 – this is not a problem for our client, who wishes to wait until 67 to make these withdrawals.
Ultimately, both the ISA and pension have their merits. For our client, pension contributions were the most suitable option, but the choice depends on an individual’s specific financial objectives and circumstances. Cashflow enables us to visualise these scenarios for the client’s specific circumstances, empowering us to make informed decisions in our financial planning journey.
So, we’ve covered some considerations when looking to save for retirement, and how we came to the most appropriate course of action for our client. Next time we will dive into a more complicated case.
We hope you have enjoyed this video – if you have any questions, please don’t hesitate to contact your financial planner.
See you next time.
