Surplus Income - Is surplus income spent or is it saved?

Q - Is surplus income assumed saved or spent in Voyant? 

A - The answer to this question depends on three factors:

a) The type of inflow;

b) Planned expenses, purchases, and contributions to savings and investments;

c) How you have the software set to treat surplus income, which is configured in Preferences. 

It is important to understand that Voyant will usually work out the future cash flow for you, provided you have entered the client’s incomes, expenses, and any liquid assets that should be taken into consideration. You don’t have to be very hands-on. The software will top-up income from liquid assets automatically, if assets are available, in order to prevent potential shortfalls in the cash flow, provided that you don’t deliberately place withdrawal limits on these accounts. The results are presented for review on the Let’s See screen’s Cash Flow chart.

 

Default Cash Accounts

When you create a new client case, each person in that case will be given a default cash account (e.g. John’s Cash, Susan’s Cash). These accounts, which are found on the Savings screen, are created by the software and cannot be deleted. Each default cash account will begin with an initial balance of £0 and serves as an empty container awaiting future cash inflows.

Modelled on a standard savings account, default cash accounts are designed to hold cash on hand. If at the end of a future planning year surplus cash remains after expenses are paid and contributions are made to savings and investments, the remaining cash may be swept into the owner’s default cash account, depending on the source of the surplus and other settings, which we will discuss in a moment.

Tip: If you are entering information about a client who has cash on deposit, we generally recommend that you enter these funds in a separate savings or current account and not in that person’s default cash account. Default cash accounts are meant only to serve as a temporary holding place for funds that are otherwise unallocated. These accounts do not have all of the features of a regular savings account and are handled differently in the cash flow, as we will discuss in a moment.

Once funds are swept into a default cash account, they will remain in this account until they are needed to meet expenses or you may set up a special sweeps rule (a special setting found under Advanced Settings) to automatically sweep funds out of surplus cash and into one or more accounts. The funds on deposit in these accounts serve as ready cash and will be the first stop for expense fulfilment, once annual cash inflows have been exhausted.

This surplus cash will be grown at the software’s default savings growth rate, which is set in Preferences > Plan Preferences > Default Inflation Growth Rates > Savings Growth Rate %. 

 

 

Like any account in Voyant, you can edit growth settings for these default cash accounts, if necessary, on the Savings screen > Advanced Settings > Growth panel. Settings set at the individual account level will override those taken initially from preferences.


Surplus Lump Sum Inflows

When lump cash inflows occur, the funds will be deposited into the owner's default cash account if they are not spent or deposited elsewhere – e.g. into a savings account, an investment or a money purchase.

Lump sum cash inflows include:

-          Lump sum withdrawals (one-off or recurring) money purchases,

-          Lump sum payments from final salary schemes,

-          Proceeds from liquidated properties/assets (items entered on the Property/Assets screen),

-          Future windfalls (entered on the Windfalls screen),

-          Surplus debt credits (from a new loan),

-          Lump sum pay-outs from protection policies,

-          Estate distributions at mortality,

-          Lump sum pay-outs from pensions (money purchases, drawdown pensions) to survivors. 

If these funds are proceeds from the liquidation of a jointly owned asset (e.g. a couple sells their home), the funds will be split between the owners and deposited into their respective default cash accounts, unless they are spent or deposited elsewhere.

 

 

 

Related Topics - Options for using lump sum inflows proactively

Possible ways to use lump sum inflows proactively within a plan include: 

Transfer (deposit) a lump sum inflow into a savings account, investment or money purchase

Use a lump sum inflow to purchase an onshore / offshore life fund or discounted gift trust

Use a lump sum inflow to purchase a property or other asset

Use a lump sum inflow to pay off a debt

Use a lump sum inflow to pay down a debt

 

Surplus Habitual Income

Habitual income, on the other hand, may be assumed spent if not saved, depending on how you set the software to operate. 

Habitual income includes:

- Employment income,

- Other income (entered on the Other Income Screen),

- Scheduled withdrawals (on-going or one-off) from investments or savings,

- Drawdown pension income,

- Yield (dividend and interest) from unwrapped investments that is taken as income, not reinvested into the fund,

- Annuity payments,

- Final salary payments,

- State pension benefits,

- Regular payments from long term care or income protection policies. 

 

Voyant is set initially to assume that any leftover surplus from these habitual income sources will be spent on miscellaneous unplanned discretionary expenses unless you schedule contributions to savings, investments, and/or money purchases to capture the surplus. This assumption is popularly known as Parkinson’s Corollary or Parkinson’s Second Law, which suggests that one’s expenditures inevitably rise to meet one’s income.

Although your clients may provide very detailed and seemingly realistic accounts of what they think they spend, there may be all manner of future discretionary expenses they cannot foresee. Assuming future surpluses will be saved may not be a realistic assumption for many clients as doing so may leave them with a large, improbable store of ready cash.

 

We generally think it safer to assume that surplus is not saved, which encourages you to have an active discussion with your clients about how they might best plan to save or invest these funds. You can then set up a savings and investment plan in their client case, perhaps as a what-if scenario, and demonstrate the advantages of future savings.

Future surplus habitual income that is not scheduled to be spent or saved but that is assumed spent is called unallocated income. You can view how much unallocated surplus is being assumed spent each year on the legend of the Let’s See Cash Flow chart. 

Voyant-Elevate Users Note: The Elevate version of the software is set to assume the opposite - that all surplus habitual income is saved, if not spent or scheduled to be saved or invested. 

 

Related Topics - Two Proactive Options for Saving Surplus Income

Aside from resetting the software's assumptions for surplus cash, possible ways to plan to save default cash would be to: 

Schedule Contributions - Capture future surplus income through planned savings, investments

Invest future surplus income into a pension (money purchase)

 

Preferences - How to set the software to assume all surplus habitual income is saved

Voyant is normally set to assume unallocated surplus spent. You have the option, however, to switch off this setting and assume the opposite. Leftover surplus can be assumed saved, if you think this approach is appropriate for your clients and their lifestyle.

This setting is found on the Preferences screen under Plan Preferences, to the right side of the screen. Expand the Calculation Settings panel. Tick the Transfer Excess Income / Credits to Savings is ticked. When this preference is ticked, all unspent, unsaved surplus will be assumed saved.

 

 

If you prefer this to be the software’s default assumption going forward, as you create new client cases, make the same change in the adjacent Calculation Settings panel to the left side of the screen, under System Preferences.

 

Sweeps - Set surplus cash to be swept from default cash accounts into savings, investments, or money purchases

Suppose you want to assume all surplus income is invested rather than kept in a cash account or that your client tops up ISAs with any leftover surplus. Aside from planned savings, you can also set a sweeps rule for default cash accounts.

The software has a facility for setting the annual sweep of surplus cash from the earner's/owner's default cash account (e.g. Simon's Cash) into to one or more target accounts. Sweeps can be set for these default cash accounts on the Savings screen's Annually Sweep Balance to Other accounts panel.

To set up a sweeps rule for a default cash account:

1. Go to the Savings screen and select the default cash account in the ledger, right.

2. Expand Advanced Settings.

3. Select Annually Sweep Balance to Other Accounts.

4. Click Add and select from the list a target account for the swept funds.

Sweeps are not percentage based.  The entire balance of the default cash account will be swept into the specified target account at the end of the planning year.  The only exceptions would be ISAs and money purchases, since both have contribution limits. If an ISA were set as the target account for sweeps, only up to the maximum allowable annual contribution could be swept into the ISA. If a savings account or unwrapped investment were listed after the ISA in the sweeps list, that account would receive the remainder of the funds when swept. Conversely, if a savings account or unwrapped investment were placed at the top of the list of sweeps accounts, that account would invariably receive one hundred per cent of the swept funds since neither have rules imposing contribution limits.

 

Further Reading

Cash Flow Basics - An introduction to the basics of cash flow in Voyant.