Your Industry  

How sensitive is cash flow modelling to rising living costs?

This article is part of
Guide to rising living costs

How sensitive is cash flow modelling to rising living costs?
Credit: Hollie Adams/Bloomberg

In April the spotlight is often on making the most of Isa allowances.

But upcoming rises in the energy price cap, national insurance contributions, tax on dividends and a predicted peak in inflation highlight the importance of not just tax, but financial efficiency.

“When we do any cash flow modelling, we assume that clients’ expenses are increased by 2 per cent a year,” says Louise Higham, financial planning director at Tilney.

“Obviously at the moment inflation is higher than that and energy bills are going up quite significantly. So particularly for our clients, any increase above that 2 per cent should be factored in.”

A real danger is the squeeze on what people see as non-essential, warns Mike Gummerson, business development director at Unique Financial.

“For example, we are already seeing the cancellation of life cover. Advisers can help clients mitigate some costs by, as always, ensuring they are making full use of all allowances and tax reliefs.”

Clients with greater assets are more likely to have wider scope to make use of allowances and tax reliefs.

“A typical wealthy person will have assets in different places,” says Ketan Patel, chartered financial planner at Kingswood.

“The way they turn the tap on different forms of income can always be flexible and change, and that’s how we would try to approach it.

“So for example, if there’s going to be an increase in tax, and the client has part of their assets exposed to that tax, it might be that they take more from another pot, so respond accordingly.”

Individual impacts of inflation

When looking at CPI, including owner occupiers’ housing costs (CPIH) for December, the largest upward contributions to the 12-month inflation rate came from housing and household services and transport.

“Inflation is quite a broad metric,” says Nicholas Sinclair-Wilson, chartered financial planner at BRI Wealth Management.

“It captures a number of different things, from fuel prices to food prices. Depending on a client’s circumstances and preference, they might not be as impacted as the metric might suggest.

“A simple example: a big driver of inflation over the past 12 months has been fuel and petrol prices. But if you don’t drive, you’re probably not going to be impacted by the price at the pump.”

Jamie Smith, partner at Foster Denovo, likewise says it is important to make clients aware of their risk to inflation.

“There’s always a danger that we assume that people understand what inflation actually is and how it impacts them.

“So we make them aware of how that might impact them in the short term, but really how it could impact their longer-term planning, and generally we look at ways to mitigate that.”

Cash flow planning against rising costs

The important thing to consider is the assumptions that feed into cash flow planning, says William Stevens, head of financial planning at Killik & Co.