How to set the future capital growth of an investment, plus their dividends and interest
The settings for investments and pensions, on the Growth and Yield panels, are divided into three main components, which can be set according to the nature of the investment.
Growth = Capital Growth. Growth above and beyond the Purchase Value (i.e. the cost basis for the investment) is considered gains and will be taxed at the gains rate whenever gains are realised - i.e. usually when all or part of the investment is sold. Of course, CGT is calculated accounting for any previous capital losses on the ledger as well as the owner's (or owners') annual gains allowance.
Dividend Yield = Dividends paid and taxed annually at the dividend rate. If the Reinvest Yield option is ticked, the dividend will still be taxed annually at the dividend rate but not taken as an income. It will instead be reinvested into the fund and added to its cost basis. Read more >>
Interest Yield = Interest paid on the investment, which is taxed annually as income (at income tax rates).
Using asset allocations to set account growth
An asset allocation refers to how an investment is split by underlying asset classes. For example, we could define an investment as being made up of 70% UK Equity and 30% Fixed Interest.
Asset allocations (and market assumptions behind them) are one of two options in the software for calculating the capital growth on investments.
The other is using a simple fixed growth rate.
Unlike a fixed growth rate, asset allocations derive an average 50th percentile return, which the software uses as the investment's assumed rate of return, as well as an upside and downside range or return, each being two standard deviations from the 50th percentile. This range of return can also be equated to a level of risk.
Because of the range of return an asset allocation provides that a fixed growth rate cannot, there are some features in the software require at least some investments to be grown using asset allocations if they are to be used. These features include the Asset Allocation Overview as well as the Monte Carlo and Historic simulations.
Deriving yields from market assumptions
If you use asset allocations (i.e. model portfolios) to derive growth from market assumptions in the software, an asset allocation may or may not be inclusive of yield, depending on the market assumptions you use.
The software's standard assumptions are not inclusive of yield, which means the asset allocation you choose relates only to capital growth. Any yield, be it interest or dividends, would need to be entered manually for the investment on the Growth panel.
Custom market assumptions may, however, be set to be inclusive of yields. This is done in Preferences > Market Assumptions.
If Above Assumptions Include Yield is ticked on the Market Assumptions panel, then the yields on the software's Growth panels will be greyed out (disabled) whenever the option to Use Asset Allocation is selected.
Yield will then be derived based on the settings on the Preferences > Market Assumptions >Yield Data panel.
Setting a default assumption for reinvesting yield
The Reinvest Yield preference allows the yield on investments (unwrapped investments and ISAs) to be defaulted to either reinvest or pay out annually. Voyant is currently set, by default, to pay yields out annually rather than reinvest them.
The setting in Plan Preferences, to the right side of the Preferences screen, will apply to the client case that you are presently viewing. This assumption can also be edited on a per scenario basis within the client case.
The setting in System Preferences, to the left side of the Preferences screen, is used only as an initial default in newly created client cases.
When this setting is left unticked, the yield will be paid out annually, as illustrated below in the Let's See > Cash Flow chart shown in its detailed view.
Yield payments will be shown as a category of income and a colour in the charts.
The yields paid annually will be shown on both the Cash Flow and Investments tabs of the chart details panel.
When this default setting is ticked, yields will be reinvested and added to the cost basis of the investment. They will not appear as an inflow in the cash flow.
In either case, any taxes on these yields (interest or dividends) will be paid in the year they are received.
Like most preferences, this default setting can still be changed for the individual investments within a plan. You will find the Reinvest Yield setting for individual investments on the Investments screen, under Advanced Settings > Growth & Yield.
Calculating the interest earned on cash holdings and savings
Regardless of whether market assumptions are inclusive of yield data, whenever an investment is set to be grown using an asset allocation, Voyant will calculate the interest earned on any percentage of the asset allocation that is comprised of Cash holdings and will tax the annual interest accordingly, as income. All market assumptions must include Cash as an asset category.
The "growth" assumption for cash is used to calculate the interest earned on cash holdings within an investment, as shown in the chart details below, next to the abbreviation Int.
Use market assumptions (a cash allocation) to set future returns on savings
Cash accounts, which are entered separately on the Savings screen, will also earn interest derived from the market assumption for Cash if, on the Advanced Settings > Growth panel, the Use 100% Cash Allocation setting is ticked.
Income from interest will be taxed in the year earned and reinvested, unless it is needed in that year to pay expenses.
First Published 02 September 2015, Release 4.0.19