Most financial advisers understand the important role that lifetime cashflow planning plays in helping clients understand their financial position, now and in the future.
Cashflow forecasting is usually provided to clients using either deterministic or a stochastic modelling and there has been much debate about which one is most appropriate.
Whilst actuaries talk about the advantages of stochastic modelling, most clients (and many advisers) find it very difficult to explain how stochastic modelling works and how it has generated the client outputs being discussed.
Our Lifetime Cashflow Modeller addresses this issue by introducing a 3rd way.
Specifically, it uses deterministic rates, but allows the user to enter a different value for each year within a “growth set”. For example, the adviser could create a growth set which is averaging 5% per annum over a 10 year period, but year 1 could be -10%, year 2 being +3.5% and so on.
This approach allows the adviser to show sequencing and volatility but in a manner which the client will understand.
You could also introduce stress tests into the modelling. For example, recreating the impact of the 2008/09 financial crisis by using the actual drops and recoveries in the markets within the modeller.
Having the ability to produce a lifetime cashflow for a client using a deterministic model but with variable growth sets will still allow the adviser to control the input values in line with their company’s investment view including allowances for a sequence of poor returns and more importantly, the numbers can be easily explained to the client.
Cashflows within DB Transfer APTA
The recent FCA Guidance Consultation GC20/01 confirmed that good practice for cashflow modelling was where a firm used the same growth rates in its cashflow as those used in the KFI so a client could see consistent outcomes. This is a very deterministic approach.
Following on from this, the FCA confirmed in policy statement PS20/6 that cashflow modelling was not a mandatory part of an APTA but demonstrating suitability of a transfer without cashflow would be difficult. PS20/6 also stated that from 1 October 2020, a cashflow being used as part of an APTA must be in real terms, relevant stress testing undertaken and with reasonable assumptions used for tax bands and limits.
We provide a lifetime cashflow modeller that also includes full income tax calculations and full integration with our DB Pension Transfer Analysis tool.
FinCalc – In the Press
This has been referenced in Money Marketing as part of ‘the future of Cashflow Modelling‘ feature.