The Lump Sum need analyser determines the additional lump sum cash inflow that would be needed at any given point in the timeline (lump sum timing event) in order to prevent any future shortfalls from occurring thereafter in the plan.
What Does the Software Assume is Done with the Lump Sum Inflow?
When run, the lump sum inflow is used to pay expenses and any remainder is deposited into the primary client's default cash account (e.g. John's Cash) and drawn upon in subsequent years of the plan, following the goal event, as a primary source for expense payments. If the primary client is deceased by the selected goal event, funds will instead be deposited into the surviving spouse or partner's default cash account.
This default cash account is found on the Savings screen. The lump sum deposit to this account will be grown using the growth rate on the default cash account. To see what the growth assumption is and to possibly reconfigure it, check the growth and fees settings for the primary default account (the first shown on the Savings screen). This setting can be found on the Savings screen under Advanced Settings > Growth. Unless it has been changed previously, it will be set to the software's default growth rate and fees for savings accounts. This default can be found on the Preferences screen in Plan Preferences (right) > Default Inflation / Growth Rates > Savings Growth Rate %.
Different assumptions could be applied, however, for purposes of the simulation by editing the growth assumptions for the primary client's default cash account.
Other assumptions for the default cash account will apply. If you have the balance of the default cash account is set to be swept annually to another account (or accounts), the lump sum inflow from the simulation will also be swept accordingly. Sweeps rules ca be set for default cash accounts on the Savings screen under Advanced Settings on the Annually Sweep Balance to Other Accounts panel.
Using the Lump Sum Need Analyser and Determining Protection Needs
The Life Insurance Need Analysis is essentially a lump sum needs analysis that uses a simulated early mortality event and the subsequent distribution of the deceased's estate to determine whether additional life cover is needed and if so, how much additional coverage.
If you create and what-if plan and use the drag and drop replacement Mortality event, found on the Time screen, to model an early mortality, you could then use the Lump Sum Need Analyser to find the same sort of lump sum protection need yielded by the Life Insurance Need Analysis.
Sweeping Funds and Solution Errors when running the Lump Need Analyser
A word of warning. If you have funds set to be swept automatically from default cash into another account, say an unwrapped investment, and have in turn set the account to disallow or restrict withdrawals (by using advanced settings on the Liquidation Limits / Planned Withdrawals) you might create a problem the need analyser will be unable to solve. The result would be a simulation error. When running the simulation, the Amount Needed field would show a result of "solution error".
The same problem would occur if you were to have a sweeps rule set to move funds automatically into a special type of account that the software does not take ad hoc withdrawals from in order to top up income. These are accounts with special tax treatments.
Ad hoc withdrawals are never taken 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.
Normally you would need to set a drawdown to pull any funds from these accounts, however, having all funds automatically swept from default cash into one of these special account types will likely cause a solution error when running a needs analysis.
Another Common Cause of Simulation Errors - Restricting Expense Payment Sources
Another common cause of solution errors are expense payment sources. For expenses you have the option to specify whether a preferred source, usually a particular savings or investment account, should be drawn upon to pay a given expense before other possible payment sources such as incomes are taken into account. For example, if your clients are saving into a special fund to pay for their children's future university fees, you would likely set this account as the preferred payment source for these fees on the Expense screen > Advanced Settings > Expense Payment Source panel. There is no harm in doing this if needed. The software will draw first from the specified account when attempting to pay the expense and if the account does not have adequate funds it will draw from other sources.
There is an additional option on the Expense Payment Source panel to "Only allow preferred source to pay expense". This setting can create problems for the need analysers. By ticking this option you will prevent the software from fulfilling the expense from any source other than the preferred payment source. Use this option only very sparingly and we recommend only using it in what-if plans. It could be useful, for example, in testing a case to discover whether your clients are saving enough into that education fund to fully fund their children's future uni fees. Incomes and other liquid assets are taken out of the mix when paying these future expenses and if the account is being underfunded, shortfalls will be shown in the cash flow chart, usually above the black need line to note that then shortfall is an artificial one. Other income and assets are available but the software is not being allowed to draw upon them.
If you use the "Only allow preferred source to pay expense" option and the account in question goes underfunded, the software will never be allowed to draw from other sources to pay the given expense. When running a needs analysis, this will result in a "solution error" because the software cannot find a solution to the shortfall. The life insurance and lump sum need analysers deposits funds into default cash accounts. The annual savings need analyser deposits funds into a hypothetical "needs analysis" account, modelled on an unwrapped investment. None of these simulations will place funds into a preferred payment source account, unless of course the preferred payment source is a default cash account. Incidentally, there would normally be no need to set a default cash account as a preferred payfor top-up ment source since these accounts are already the first source of cash withdrawals for top-up income, once the year's inflows are exhausted.