Monthly Archives: September 2015

Your Personal Financial Landscape – Cash Flow Modelling

Some of you will have been lucky enough to have been through this process with us and I have to say, we really enjoy the interaction this involves!

Our job is to ensure you can live the life you wish without running out of money in the process. Cash flow modelling is therefore an essential tool as it can illustrate where you are now, where you would like to be and what you need to invest to get you there – or how long your will money last.

This detailed picture of your assets includes existing investments, debts, income and expenditure. These are all projected year by year, using assumptions for the rate that your wealth will grow, rates of inflation, wage rises and interest rates.

There are some of you who will have a clear plan for your life but don’t know if you’re on track to achieve your goals. However, there are many of us who don’t have a long-term financial strategy at all. Others may have a goal, but no method of determining whether it can be achieved.

Without some form of financial model, it’s very difficult to make financial decisions about critical things such as:

  • When can I retire?
  • How much do I need to sell my business for?
  • Can I afford to buy a second property or a new car?
  • What level of investment risk do I need to take to achieve my financial goals?
  • What level of tax will apply upon my death and my partner’s death?

The cash flow modelling can help you to answer these questions and assist Carpenter Rees in mapping out your personal financial planning landscape. The output from the cashflow modelling is easy to understand and, in many cases, it helps to provide clarity to our clients’ financial affairs.

Inevitably, there will be unexpected twists and turns along the way, so it’s necessary to regularly review the plan in order to ensure you remain on course. The cash flow therefore becomes the centre of your financial plan.

If you’d like to see an example of a cash flow model and how it works, please contact us and we can forward an example to you.

Too much too young?

I remember that during the 1980s, The Specials were at their peak and both business owners and professionals were encouraged to put as much into pension schemes as possible due to the generous tax advantages.  At the time, many major employers had a superb final salary pension scheme, sadly not available to those small to medium sized enterprises.  Interest rates on mortgages were 15 per cent and inflation was well into double digits. Ah, those were the days!

The game has now changed and the needs of austerity measures have driven the Government to introduce the Lifetime Allowance.  More clients are being caught out by the introduction and subsequent amendments to the Allowance, which is enabling the Government to raise more tax. It was brought in by the Government in 2006 and is a cap on the amount that a client can build up in a pension scheme(s). The Lifetime Allowance applies at the time that benefits are taken and any excess funds are taxed at 55 per cent of the fund, or an extra 25 per cent above a client’s marginal rate of tax, if taken as income.

The cap started at a level of £1.5 million and rose to £1.8 million in 2011 and was expected to affect only a small number of people. Since those heady heights, the Allowance has been reduced over the last few years by 0.8 million to the level of £1 million from April 2016. This new figure will increase with inflation but, as inflation is currently close to zero, there will be little improvement over the short term.

A fund of £1 million may sound quite substantial but it would only provide maximum income of around £54,000 for a 60 year-old after drawing their tax-free cash sum.

Reaching the cap is easier than you may think, as a 30 year-old looking to reach a fund of £1,250,000 paying in a contribution of £1,000 per month would reach the figure before age 57, assuming an annual investment return of 5 per cent per year. As a result of this, it’s important that people look at their pension projections earlier than a few years prior to retirement, as by then it could be too late.

The Lifetime Allowance is very important for a client who is a member of a final salary pension scheme, or those that have a benefit from a previous employer with such a scheme. The pension figure from such a scheme is multiplied by 20 and, as such, they can take up a large part the Lifetime Allowance as the income earned up to the date of leaving will generally be increased by inflation or a fixed percentage up to the date of retirement. For example, a benefit of £10,000 per annum for a 40 year-old leaving service with a retirement age of 65 would equate to approximately £21,000 assuming 3 per cent per annum increase which would use up £420,000 of the lifetime allowance.

It is possible to plan ahead to avoid hitting the maximum by either taking benefits early, reducing the risk and therefore, the expected return on your investments within the pension or stopping contributions. In addition there will be an option for this tax year to elect for Fixed Protection which will allow for the current Lifetime Allowance cap of £1.25 million to be maintained, but no further contributions can be paid by them or their employer.

This is a complex area and one in which will become more and more involved, advice from a specialist is vital and clearly, that is where we can help.

What is it you ‘do’?

I  often think about how we articulate what we do – our ‘elevator pitch’! We will do this as a group shortly and that should be interesting! To be honest I’ve struggled to articulate this for years. I dread that dinner party question, “so, what do you do?” For some reason saying you are a Financial Planner/Adviser tends to elicit a nervous or negative response from the enquirer, as if I am about to sell them a pension or give them the next hot investment tip.

The stuff we do

Sure we draft Financial Plans, do cash flow planning, pension planning, income and capital gains tax planning, risk profiling, arrange investments, select tax ‘wrappers’, recommend protection contracts in case of disaster, identify when Wills, Lasting Powers of Attorney and Trusts are needed, support our clients’ other professional advisers (solicitors, accountants, mortgage brokers), tell people to save more if they aren’t going to achieve their goals or suggest that they give money away if they have too much, provide an Annual Planning Service, respond to personal, economic and legislative changes…I could go on. But that is the ‘stuff’, albeit very important ‘stuff’ we do. But what is it that we really ‘do’?

What our clients tell us we do

So I have done what I often do and listened to what our clients tell us we do for them. That’s when the magic begins. Our lovely clients tell me that we provide ‘peace of mind’, give them ‘space to think’, we are their ‘sounding board’, we ‘keep them organised’, that they welcome our nudging (and sometimes nagging), that we are proactive, we simplify complex stuff, we introduce them to other professionals when needed and perhaps, the greatest compliment, the second person their wife/husband/partner/son/daughter would call in the event of a disaster. Wow! That really makes us feel proud and reminds us of exactly why we do what we do.

If anyone knows how I can boil all of that down into a snappy one liner, I’d love to know. I may even look forward to dinner parties again!

Holiday Home Succession Simplified

For those with Holiday or second homes, the EU Succession Regulation – which came into force on 17th August – will be very relevant. The regulation gives much more freedom to families as to how they pass on assets they own in the European Union (EU) in their wills.

This could be particularly important for UK families with holiday homes in the EU or for those with parents and grandparents living in the EU.

George Hodgson, Deputy CEO of STEP, the professional body for specialists in family inheritance and related areas commented: “Many European countries have so-called ‘forced heirship’ rules, where the law lays down precisely how someone’s assets have to be passed on within the family after death. Until now, for example, a UK family with a holiday home in France had very limited options as to how that could be passed on through the family. The new regulations change that, and should be a prompt to everyone with EU assets to review their inheritance plans”.

Mr Hodgson cautioned that the new rules are complex, but even though the UK itself has opted out of the Succession Regulation, they still give potentially valuable new rights to those with property or other assets in the EU. Given the complexity, however, it would be wise to seek specialist advice for changing any inheritance plans. British owners of holiday homes in EU member states such as France should update their wills and draw up French ones to avoid the country’s forced heirship rules.

The EU Succession Regulation has the potential to affect the estates of any individuals with any connection to any EU Member State in which the Succession Regulation has direct application.

Details on the new regulation can be found at and an example of how the new rules might work is covered below.

Clare is a British citizen who is resident in England but has a French holiday home she uses a few weeks each year. French forced heirship rules would oblige her to leave her holiday home to her husband and children, with clear rules as to how it would be divided. She would like instead to leave it to her brother, since it was bought with money from their grandparents.

Until today, the law governing who receives the French house on Clare’s death was generally French law. But as of 17 August 2015, this need no longer be the case.

The new regulations state that someone can generally choose the law applicable to their inheritance. This can either be the law applying where the deceased had their ‘habitual residence’ at the time of death, or the law of the state of nationality at the time of making the choice, or at the time of death.

As a British citizen, therefore, Clare can now opt to have her French holiday home treated under English law and leave it to her brother.

The new rules do make things a little simpler and it is great to see some sensible legislation in this respect.