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The ideal time to review your financial planning arrangements

Many people are still unsure about the role of financial planning. They often think it means being sold a financial product or having to invest cash to get some advice. This is not the case necessarily, and if you don’t have a financial plan in place today, the need for one has probably never been greater.

The coronavirus has had enormous repercussions across our societies, global economies and markets, as well as our day-to-day lives – so it’s more than likely to have had an impact on our financial future. This doesn’t necessarily mean that it has put paid to all your hard work and plans for the future, but it does mean it’s important to reassess your situation and make sure you have enough contingency in place. A review of your finances now could help to reassure you that your plans are still on track, or help you to make adjustments to ensure you will still meet your long-term goals.

How does financial planning work?

First and foremost, it should be a conversation with a wealth adviser to discuss what you are planning for: is it your children’s school or further education fees, for a comfortable retirement or wealth transfer to the next generation? Or perhaps just building some contingency for unexpected and challenging times? Sometimes it can be all of these at once.

By creating a bespoke financial plan, a professional wealth adviser can assess where you are now in terms of available income and assets and where you may be later if you take up the advice. A financial plan essentially provides a roadmap of how to get you to your required destination. Most importantly it can account for ‘bumps in the road’ such as the market volatility we are currently experiencing.

It’s also very important to review your plan at least once a year, or more frequently if there has been a significant change in your personal circumstances – perhaps you can no longer commit to the plan – or to assess whether the assumptions made have been correct, such as underlying investment returns.

At Canaccord Genuity Wealth Management, when creating a financial plan for our clients, we tend to usually assume conservative investment growth rates (between 2% and 4% per annum depending on your risk profile). This provides a more realistic outcome so that in practice there is a higher chance of the actual result being better than expected. A plan with high growth rates looks great, but you would be in for quite a shock – when it comes to retirement, for example – if the assumed growth rates were actually lower in real life. However, a conservative growth rate allows for market events, inflation and reduced valuations without affecting your long-term goals.

This can best be illustrated using cash flow planning.

How does cash flow planning work?

First, we build a picture of your finances by assessing your current and forecasted wealth, along with your income and expenditure. We then try out different scenarios to see how they might work for you.

No one knows exactly how long they are going to live or what financial challenges they might face over the years, but cash flow planning can help to alleviate your concerns. It can confirm that your current arrangements (such as your pension and savings accounts) are right for your needs or show any shortcomings that need to be addressed.

Scenario planning

While we might not have predicted the current crisis, a cash flow plan can include alternative solutions for various eventualities. And it can illustrate different ‘what if?’ scenarios – such as ‘What if markets fall by 25%?’ ‘What if I don’t get paid for 12 months?’ ‘What if I can’t contribute fully to my pension?’ ‘What if I don’t get the big bonus I was expecting?’ ‘What if my partner becomes ill?’

Retirement reforecasts

Reviewing a financial plan is equally important for those coming up to or in retirement. Often – following a time of market volatility like the one we are just experiencing – you may need to change the amount you were planning to draw, as your savings might otherwise be depleted.

Ultimately, your individual cash flow plan will be based on your hopes and objectives. It will allow for growth, inflation, interest rates and potential market volatility, so you can be confident it is as accurate as possible.

Cash flow planning case study

The graph below shows the financial situation for clients Sarah and Jack over their lifetime, before they’ve made any clear financial plans. This graph is based on a number of carefully made assumptions (for example, how much Sarah and Jack spend each year, how their investments grow, inflation and how long they are likely to live), but of course these assumptions may change.

The graph shows that:

  • Until they retire, Sarah and Jack will earn more than they spend (black line)
  • Their savings, annuity and state pensions (which start at age 67) will be enough income for their first six years of retirement
  • At age 71 their savings are reduced, and they cannot spend as much as they would like – this shortfall is shown by the red bars in the graph.

The next graph shows how Sarah and Jack could manage their money with a financial plan. We’ve made the same assumptions as in the first graph.

With this new plan:

  • If they have any surplus income in the years before they retire, this is used to make extra pension contributions and invest in ISAs
  • This increases their pension income when they retire and makes sure their investments will last longer
  • There is no shortfall during their projected lifetimes.

Fortunately, it is unusual for the markets to drop 25% as we have just seen, but we have stress-tested the plan to withstand such a market fall. While the projected value of their savings and investments is lower, the plan is still on track to generate Jack and Sarah’s required income for life – giving them the reassurance they need at this unprecedented time.

If you would like us to create a cash flow plan for you, taking account of different scenarios, please contact us. We’ll be delighted to answer your questions and help put your mind at ease or at least provide some ideas to get you back on track.

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.

Photo of David Goodfellow

David Goodfellow

Head of UK Financial Planning

David specialises in financial planning and tax driven investment planning. He has over 15 years' experience in advising on and investing in VCTs, EISs and tax driven property structures, and is part of the CGWM Advice and Solutions Committee. He is a member of the Personal Finance Society and The Chartered Insurance Institute.

44 (0)20 7523 4738

Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.

Investment involves risk and is not suitable for everyone.