Expense fulfilment is a complex aspect of the software. In this chapter we will show you how the software works out the cash flow and how you might control it. The software does offer a level of control over the order in which accounts are liquidated based on investment category. Beyond this, withdrawals can be controlled 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.0
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Funds can also be withdrawn from accounts regularly or as one off transfers, regardless of income need, using the software's draw down strategy and transfers panels.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 three 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) as well as other cash accounts entered on the Savings screen (i.e. current accounts, savings accounts). Note that if you want to exclude cash from being used as income or have an emergency fund you wish to ringfence then you can go to the Advanced settings> Liquidation limits and planned withdrawals> under liquidation limit set to "do not allow" this will prevent the cash from being used in the plan to meet income need.
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).
Plan Preferences – Setting asset Liquidation Order
The order in which assets are liquidated (step 3 above) in the overall expense liquidation order - can be set at a very general level, by investment category, e.g., Taxable, Tax Deferred, Tax Free, or more specifically by account types, e.g., Annuity, Bypass Trust, Charitable Trust, Current Account, etc., or a mix of the two. in Preferences > Plan Preferences > Liquidation Order, the default setting is by Investment category with the liquidation order as follows: taxable assets, tax deferred assets, tax free assets.
If you need to change the liquidation order, select an asset class and use the arrow buttons to move the selected asset class up or down in the list.
In our release for the United Kingdom:
Taxable accounts include:
- Unwrapped Investments (e.g. OIECs, unit trusts, shares, investment portfolios)
- Enterprise Investment Schemes*
- Other Trusts*
- Offshore Taxable
Tax Free accounts include:
- National Savings Certificates
Tax Deferred accounts include:
- Draw Down Pensions (crystallised money purchases)*
- Life Funds (Bonds)
In our release for Ireland:
Taxable accounts include:
- Portfolio Accounts
- Offshore Taxable*
Tax Free accounts include:
- Offshore Taxable (can be used as a tax-free option). Otherwise, there are no specifically tax-free accounts, at present.
Tax Deferred accounts include:
- ARF/AMRF Accounts (i.e. crystallised DC pension benefits)
- Unit-Linked/Investment Trust accounts (Bonds)
The Add Button - Set a Liquidation Order by Specific Account Types
If you want to further specify by asset type, click the "Add" button, make your selection from the list of 27 asset types, and arrange it accordingly in the liquidation order.
For example, if you want to liquidate an Offshore Bond before drawing from a Drawdown Pension, both of which are tax-deferred investments, click the "Add" button, select Offshore Bond and position it above Tax-Deffered in the Liquidation Order list to ensure the software draws from the Bond before the Pension.
* Enforced crystallisation (without tax free cash) is applied to all funds left in money purchases when the owner turns 75.
Some types of UK investments are never subject to ad hoc withdrawals
Withdrawals are never taken automatically from:
- 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.
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
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.
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.
Plan Preferences vs. System Preferences
Changes to this setting on the mirror Liquidation Order panel in System Preferences, on the left side of the screen, will be used only going forward, as you create new client cases. System Preferences are used as a template only for new client cases. Changes to System Preferences will not retroactively affect your existing client cases.
If you want to change this preference in any existing client cases, you will need to open and edit them individually, in each case's Plan Preferences.
For further reading
Cash Flow Basics - An introduction to the basics of cash flow in Voyant.
Retirement Income (Webinar 2)