Projection Rules

• Target levels of pension contributions are determined by settings in the strategy. Other types of investment are only considered once these have been met.
• After essential spending, discretionary spending and pension contributions have all been taken into account, any cash left over is first used to repay any debts for which early repayment is allowed. After that, any further remaining cash is reinvested according to the level of risk indicated in the strategy. ISA allowances are utilised in preference to taxable investments.
• Where income is insufficient to cover spending, liquid assets are sold to meet the shortfall, priority being given to the least tax-efficient assets.
• Various numbers may change randomly from year to year, according to the rules of probability in your assumptions, which are set at the bottom of the Plan page. Randomisation includes the rate of inflation, investment growth rates and property growth rates. Also, if you've specified a range of bonuses for an employment, then the bonus each year is randomised within that range. Your changed financial position each year takes into account all randomly generated values.
• Investments are gradually rebalanced from the starting level of risk towards the terminal level of risk, as specified in the strategy. This is sometimes known as a 'glide path'. Lower risk means less random but smaller returns on average, whereas higher risk means more random but greater returns on average.
• A target proportion of total spending may be specified by the strategy to control the purchase of new lifetime annuities, once any member has retired. Each year, new annuities are bought only if the resultant total guaranteed lifetime income (including any state pension, existing annuities and/or Defined Benefit pension income) fully covers the target proportion of spending.
• The growth rate of any new annuities is determined by the setting in your strategy, which can be either Level, Fixed or Indexed.
• If there are two members, new annuities are allocated between the members as specified by the strategy.
• For retired members in pension drawdown, the level of drawdown is normally determined by the strategy, but may be exceeded should other sources of cash be insufficient.
• Based on gender, date of birth, region and optional manual adjustments, a member's life expectancy is determined based on probabilities found in mortality tables published by the Office for National Statistics.
• Any cash flow shortfall after using all sources of income is made up by drawing down on investments, subject to any restrictions on withdrawals (e.g. from pension funds). Taxable investments are prioritised, followed by ISAs, then pension funds (over and above the target pension drawdown setting in the strategy).
• When members retire, they take any available tax-free lump sum from their pension plan(s) according to the strategy. If phased drawdown is enabled they only take the tax-free portion pro rata to any taxable withdrawals. If drawdown is not phased then they take the full tax-free lump sum from their pension plans immediately. Unless needed to cover outgoings, the lump sums are reinvested utilising any available ISA allowances.
• If there is still a cash flow shortfall, any extensible and repayable debts are drawn upon, including an assumed overdraft facility based upon a combination of the current net worth and gross income.
• If this still leaves a shortfall and the plan has any tangible assets other than a main home, then the shortfall is reduced or eliminated by making sales from these.
• If this is still insufficient, equity is released as a reverse mortgage if possible, based on the value of any main home.
• If all of the above steps fail to raise sufficient cash then the plan is deemed to be insolvent. However, the program still continues projecting until the death of the last member but with zero discretionary spending. Any cash shortfall is filled by borrowing at a punitive interest rate (5% higher than the unsecured rate specified in the assumptions). In real life of course, any remaining assets might be sold to pay off existing loans. The punitive interest rate assumed by the program is designed to reflect the fact that being forced to sell up is highly disruptive to lifestyle, and to 'discourage' the optimisation away from insolvency. In some cases a scenario may end up with negative net worth (ruin); unsurprisingly the program treats this as the most undesirable outcome of all.