Cash flow modelling was historically used by businesses to forecast future costs and income, looking at the assets and income of a company and measuring these against current and future liabilities. It is now also widely used as a useful tool for personal financial planning.

Traditionally, cash flow modelling has been thought of as integral to planning for retirement. Have I saved enough to be able to retire? If not, how much more should I save? How much can I afford to live off once I retire? It can bring out some difficult but important questions and truths, but ultimately, should help to reduce any unwelcome surprises in the future. 

However, its use is not only reserved for those seeking to determine whether they have enough money to retire. Cash flow modelling can be just as useful for those who recognise they probably have more than they’re likely to need in their lifetime, but don’t know what to do about it.

Open discussion with your financial planner is key to creating an initial cash flow plan. From this discussion, your planner can gain insight into how you see your financial life mapping out and your timeframe for it. This can help you gain a better understanding of any strengths and weaknesses within your plan, so together you can start to work meaningfully towards making your goals become a reality.

This cash flow plan can also be adjusted in the future if there are any life changes.

How do I use cash flow modelling for wealth transfer planning?

Consider first your current financial situation. What are your incomes and expenses? Does your income cover your expenditure, or is there a shortfall? If there’s a surplus, what do you do with it? And if there’s a deficit, what do you do about it?

Next, think about your future income and expenditure. Is it likely to change much from what it looks like now? Will it be higher or lower than it is today? Don’t focus solely on your costs of living, like utilities, council tax and household bills - make sure you account for your lifestyle costs, too. What sort of holidays do you want to go on, and how often? Where do you want to live? What sort of cars do you want to drive? What hobbies or passions do you want to pursue, and what do these cost?

Then make a statement of all your assets and liabilities. Pensions, investments, ISAs, cash savings, Premium Bonds, shares, mortgages, car finance, credit cards - everything. 

Having done all of that, you’re ready to create a cash flow model which will project how your finances might change in the years ahead. Will your assets be depleted in order to meet your financial needs and wants? Or are you likely to have surplus capital which will be passed on to your nearest and dearest when you die?

If it’s the latter, you’ll also need to consider whether or not there’s likely to be any inheritance tax payable by the executors of your estate (and how they’re going to pay it). The November 2024 Autumn Budget statement confirmed that, from April 2027, most pensions will be included in a person’s computation of their inheritance tax position. As a result, inheritance tax is becoming an ever-more important area for examination within the cash flow plan for families. 

Empowered with this information, you can start to make some decisions about how you plan to transfer your wealth to your family. Can you afford to make gifts during your lifetime, to mitigate inheritance tax, but without jeopardising your own financial security? Will you pass on all of your wealth through your will after you’re gone?

And the point of all this?

Whatever decisions cash flow modelling helps you to make, the most commonly missed next step is to share these thoughts with your family. Not only does it keep them informed of your wishes, and enable them to make plans, if appropriate, but it provides them with an opportunity to talk to you about it. Maybe they’d rather you did something different with your money – although that doesn’t mean you will, of course! But understanding each other’s views could lead to better outcomes and fewer problems later on, when it may be too late to do anything about it.

Get in touch

If you’d like to know more, please don't hesitate to get in touch with myself, a member of our Wealth team, or by filling out the short form below.

Disclaimer: Johnston Carmichael Wealth Limited, now owned by Partners Wealth Management, is authorised and regulated by the Financial Conduct Authority.

 This communication should not be read or considered as financial advice. While all possible care is taken in the preparation of this communication, no responsibility for loss occasioned by any person acting or refraining from acting as a result of the information contained herein can be accepted by this firm.  

 All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices. Legislation and the levels and bases of reliefs from taxation are subject to change and are dependent on your individual circumstances. 

 The Financial Conduct Authority does not regulate tax and estate planning.