Cash flow modelling – the benefits of protection

Cash flow modelling has become an increasingly important tool for financial advisers as they create effective long-term financial plans for their clients.

A survey of advice firms carried out by the FCA as part of the retirement income advice thematic review published in March 2024 showed that around 80% of firms were using cash flow modelling¹.

We know that not all advisers use cash flow modelling for all clients and not at all stages of planning. That said an Intelliflo survey, published in 2021, found that 34% of firms were using cash flow modelling for all clients².

One clear benefit of cash flow modelling, certainly if used correctly, is that it helps advisers to help their clients visualise their current and future financial position, speaking to the Consumer Duty principle regarding client understanding.

We know that many advisers are using cash flow modelling to illustrate the likely impact of pension and investment contributions on cash flow in later life. The Intelliflo survey even suggested that cash flow modelling helped ease some clients’ fears about their finances during the pandemic.

Modelling the impact of income shocks

But have advisers considered how cash flow modelling might help model the impact of other more individual financial shocks?

At Guardian, we would make a case for the use of cash flow modelling to help clients better understand the impact of illness and/or the inability to work on their finances and the potential impact on their long-term plans.

We would argue that seeing this clearly set out in a cash flow forecast can help clients understand why having cover is so important.

Anecdotally, we know some wealth advisers believe that by helping their clients build substantial wealth, it means they don’t need to consider significant protection insurance.

Some advisers will feel that they’re helping their clients get to a level of prosperity where they are effectively self-insuring and for the top end of the income and wealth scales that is likely to be the case.

However, our challenge to advisers is that they consider the impact of a substantial financial disruption, perhaps earlier or at the mid-point of a financial plan where a critical illness or income protection payment could make a very significant difference to future planning.

There are many reasons why we as a protection brand would make this case. Potentially it means more people buy the protection they need. At the same time, we know that we’re discussing the advice process and want to be mindful that is very much your territory, your advice and your business. But it’s a conversation we’d like to start.

A good time to review how cash flow modelling is used

In addition, we think it may be an opportune moment to consider how and how extensively cash flow modelling is being used and where protection may fit into the process as well.

First the retirement income advice thematic review, mentioned above, called for changes to the way in which some advisers are using cash flow modelling. Protection was not front of mind for the regulator, but it could represent a good time to consider where cash flow modelling fits into your advice processes more broadly.

Second, we know that the landscape for inheritance tax planning faces a significant shake up as invested pension wealth will be considered as part of an estate for inheritance tax purposes from 2027.

Officials are no doubt considering responses from the sector to the technical consultation which closed in late January³, but we know that advisers are beginning to have those conversations with clients with predictions it will also drive demand for advice⁴.

Life cover and inheritance tax – even more in the mix

Life cover has always had an important role to play in inheritance tax planning for passing on wealth on to families and other beneficiaries, so it does feel appropriate that it’s in mix.

Aside, from current changes, we would also point out that in our ‘On the Front Foot’ white paper published in 2022⁵, financial planners also noted how a lump sum might help bridge any gap in risk appetite and capacity for a surviving spouse, if the higher or sole earner died.

These are, of course, very particular advice scenarios but we welcome the opportunity to begin a conversation about these matters with advisers. We know that many advisers are keen advocates of the use of protection because they believe that it not only covers the client in the case of illness or worse; it could also safeguard their financial plan.

Rupert’s article was published in FTAdviser on 31 March 2025.

Source

1. FCA, Thematic Review TR24/1. Retirement income advice thematic review, March 2024. Survey 977 adviser firms and found that 78% (765 firms) were using third party cash flow modelling tools. A further question regarding whether and how firms calculate safe withdrawal rates from pension pots had 83% (810 firms) using CFM for this purpose.

2. ftadviser.com, Advisers urged to unlock potential of cashflow modelling, 6 January 2021.
3. www.gov.uk. Technical consultation – Inheritance Tax on pensions: liability, reporting and payment. 30 October 2024.
4. ftadviser.com, IHT changes will create surge in demand for advisers, 13 November 2024.
5. Guardian, on the front foot, December 2022.