Expense Fulfillment - In what order are expenses fulfilled and what funds are used to pay them?

Expense Fulfillment

Expense fulfilment is a complex aspect of the software. In this article we will show you how the software works out the cash flow and how you might control it. The software does offer some high-level control over the order in which accounts are liquidated based on investment category. Beyond this, withdrawals can be controlled, if necessary, by setting withdrawal limits and/or draw down strategies on individual accounts. We will show you how to do this in a moment. Otherwise, simply leave the software to work out the cash flow for you.

Expenses are always met first with any cash or credits available during the given planning year. After these funds are depleted, the software will then attempt to withdraw funds from cash accounts, and lastly from any available liquid assets in order to meet expenses and prevent shortfalls.

Funds can also be withdrawn from accounts regularly or as one off transfers, regardless of income need, using the software's draw down strategy and transfers panels.

Voyant fulfils expenses in four distinct stages.

1. Expenses are first fulfilled from income / credits.

2. If expenses remain, draws are made from ready cash accumulated in the default cash accounts (Paul's Cash and Cathryn's Cash).

3. If income and ready cash are not sufficient to meet expenses, funds will be drawn from available liquid assets (e.g. savings, unwrapped investments, ISAs).

4. Lastly, any property/assets set for liquidation "when needed" – as set on the Property/Assets screen's Liquidation panel – may be liquidated to help meet expenses.

Note: Preferred payment sources for expenses and withdrawal limits on accounts can override these stages.

Within each of these four distinct stages, the software checks for ownership and attempts to fulfil the expense first according to the person (or persons) who own it. For example, if an expense is owned by Paul, Paul's funds will be used first before moving to jointly owned accounts and then to his wife Cathryn's accounts.

Once the software reaches stage 3 of expense fulfilment, the Liquidation Order setting comes into play. Located in Preferences > Plan Preferences, the Liquidation Order setting allows you to specify a category-based order in which the expense owner's liquid assets will be liquidated. These general categories of assets are taxable, tax deferred or tax free. At this stage, if your client's tax free ISAs should be liquidated before taxable savings and unwrapped investments, move tax free up as the topmost investment type in the liquidation order. The default ordering, which can be changed, is taxable first, tax deferred, and then tax free assets.

 

Preferred Payment Sources Override the Expense Fulfilment Order

Preferred payment sources can trump the normal expense fulfilment order. Expense Payment Source is an advanced option on the Expenses screens that you to specify a preferred account from which to fund a given expense. Payment sources are merely an option designed to give you greater control, when needed, to specify how an expense will be paid. Otherwise, the software's default expense Fulfilment logic, as outlined, will be used.

An expense payment sources can be either:

- A Preferred Source, meaning that the software will draw funds from the preferred account first before using the usual expense Fulfilment procedure outlined above;

- The Only Allowed Source, meaning that the software will fulfil the expense only using funds from the specified account. If sufficient funds are unavailable in this account, a shortfall will occur.

The Expense Payment Sources will be the first or possibly the only account the software will go to fulfil the expense.

If you want to circumvent this ownership-based expense fulfilment logic, fulfilling an expense from a particular account, go to the Expenses screen and set an Expense Payment Source for the expense. This account will become the first stop for funds to fulfil this expense before the software starts stepping through the normal expense fulfilment logic.

    

Tip: If setting a preferred payment source, use the “Only Allow Preferred Source to Pay Expense” option very sparingly if at all. When ticked, this setting can create artificial shortfalls if the preferred source is inadequately funded to pay the linked expense. These artificial shortfalls can prevent the software’s need analysers from returning results.

When might you tick the “Only Allow…”option?  In most cases, we recommend only using this setting in a what-if scenario. For example, suppose your clients are saving for their children’s university fees and you want to run a test to determine if they are saving enough to a particular account. Even if the account is set as a preferred payment source, income and other assets sources will be used if the account does not have the funds to meet the linked expense. However, by ticking the “Only Allow Preferred Source to Pay Expense” option, you could in this scenario test the account for adequate funding. Again, we recommend using this setting sparingly and normally only in scenarios.

A preferred payment source can also be specified for debt payoffs, if needed. Debt payoffs can be scheduled on the Debt screen > expand Advanced Settings > click Payoff > select a payoff event. You then have the option to select a payoff source, if necessary. Otherwise, the payoff will be made from income and possibly liquidated assets, if needed.

 

Liquidation Limits Override the Expense Fulfilment Order

Liquidation Limits can also trump the normal expense fulfilment order. If you limit or disallow the software from taking ad hoc withdrawals from a savings account or investment, that account will be effectively removed from or limited in the expense fulfilment process.

 

Expense Fulfilment Order is Based in Part on the Owner of the Expense

The fulfilment of expenses is based first on the owner(s) of the expense. The software also uses complex logic when determining the order in which these withdrawals are made based on the owner(s) of the expense and the owner(s) of the accounts from which the withdrawal is being made.

For example, if an expense is owned by both Bob and Alice, the following order of accounts would be used to fulfil the expense, provided that the plan is configured (in Preferences > Plan Preferences > Liquidation Order) to liquidate taxable accounts before tax free accounts.

Bob and Alice's Joint Savings Account
Bob's Savings Account
Alice's Savings Account
Bob's ISA
Alice's ISA

Further to this, if an expense were co-owned by the primary client and the client’s son, the software will try to use credits owned jointly or by one of the two before using a credit owned by the spouse. If there are no credits available for the primary, son or spouse, the software would then check the default cash account first for the primary, then son, then spouse. If still not available, check cash accounts in the same order. The point being that we check each category, even for accounts/credits not owned by the expense owners, before moving down the priority list. The reason being, is that you wouldn't forgo the spouse’s cash and withdraw from a son's savings account to fulfil the son's expense if the spouse had cash to pay the expense.

 

Plan Preferences – Setting Asset Liquidation Order

The order in which assets are liquidated - step 3 in the overall expense liquidation order - can be set at a very general level, by investment category, in Preferences > Plan Preferences > Liquidation Order. The default liquidation order, which can be changed, is normally taxable assets first, then tax deferred assets, and ending with tax free assets.

    

 Taxable accounts include: 

- Current Accounts
- Savings Accounts
- Enterprise Investment Schemes*
- Other Trusts*
- Offshore Taxable

Tax Free accounts include:
- ISAs
- Venture Capital Trusts*
- Enterprise Investment Schemes*
- Charitable Trusts*

Tax Deferred accounts include:
- Draw Down Pensions (crystallised money purchases)**
- Life Funds (Bonds)

*Drawdowns are required to withdraw funds from some types of investments. See following section, "Investments Requiring Draw Downs"

** Enforced crystallisation (without tax free cash) is applied to all funds left in money purchases when the owner turns 75.

Some Types of Investments are Never Subject to Ad Hoc Withdrawals

Withdrawals are taken automatically from:

- Drawdown Pensions (except for when drawdown income is set to be taken “as needed”),

- Trusts (other than Child Trusts and only in certain circumstances),

-  Enterprise Investment Schemes,

-  Venture Capital Trusts,

-  Discounted Gift Trusts.

One exception to this rule are child trust funds, which may be used as the source of ad hoc withdrawals but only for expenses owned (or co-owned) by the child (e.g. education expenses), as set on the People panel of the Expenses screen. Also, the child must be 18 or older in order for expenses to be paid from a child trust.


Savings and Investments Owned by Children

Savings and investments owned by children are tracked as liquid assets and are considered part of the cash flow, at least until the owner turns a given age. Like other liquid assets, these accounts are potentially subject to ad hoc withdrawals, based on the ownership logic discussed earlier in this guide. Withdrawal limits and certain types of accounts may also remove an asset from contention as a potential source of funding.

Child owned accounts will be considered part of the cash flow until the child turns a given age. This age is set in Preferences > Plan Preferences > Default Ages, using the “Child Owned Accounts Available in Plan Until Age” setting. Once the child owner turns this age, the account will be dropped from the cash flow and assets charts and the funds will no longer be available as a possible expense payment source.

     

If the account is owned by more than one child, the age of the youngest owner will be applied. If the child is co-owned by a parent, it will remain in the plan for the duration of the parent’s life.

Note: This preference does not apply to properties and assets entered on the Property/Assets screen. Any child owned assets will be tracked for the duration of the planning timeline or until liquidated.

 

Further Reading

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