Emma Watson, head of financial planning and advisory services at Rathbones, gives her key considerations for protecting your long-term finances during a divorce.
"There are some considerations that individuals can start thinking about pre-settlement to put themselves in a better position financially in the long-term."
No matter how amicable, going through a divorce or the breakdown of a civil partnership will be a difficult time for everyone involved. With so much to agree upon the process can take time, and when financial settlements are involved, it can be lengthy. However, this shouldn’t mean putting all your financial plans on ice. There are some considerations that individuals can start thinking about pre-settlement to put themselves in a better position financially in the long-term. The next year will look uncertain so being in control of your finances where you can, will help you feel prepared for the future.
Emma Watson, head of financial planning and advisory services at Rathbones, gives her key considerations for protecting your long-term finances during a divorce:
1. Have the right team behind you
Engaging a well-practiced family lawyer will evidently be beneficial, but what other experts should you have on your team? Bringing in a financial planner will help you to understand your financial situation and help to ensure that you end up with the right amount of money, paid in a way that suits you. Read our previous article on putting the right team together.
2. Understand your day-to-day budget
To keep a similar lifestyle post settlement, it’s important to understand how much you require day to day. Monitoring your daily outgoings, major bills and any expected future expenditures such as private school fees, will give a goal to aim for when negotiating the settlement.
3. Create a financial plan that’s aligned with your goals
Your financial settlement can be received in two ways, a lump sum or ongoing maintenance payments. While you may have budgeted and have a rough estimate of your future spending, it’s hard to know how much you’ll need in fifteen years' time. This is where a financial planner can help.
A financial planner will get to know you and your family, understanding what you want now and in the future. They will cost your future financial lives and account for any variables that you may not have considered. This will be key in working out whether any lump sum and/or monthly maintenance offered in negotiations will be enough. Using a budget forecasting tool, they will project spending alongside future interest rates and inflation to calculate how much cash will be needed in the long term.
"The key is engaging with a financial planner early in the process. If the financial planner is brought in after an initial financial settlement has been agreed, the opportunity to match the settlement with future lifestyle could be missed."
The key is engaging with a financial planner early in the process. If the financial planner is brought in after an initial financial settlement has been agreed, the opportunity to match the settlement with future lifestyle could be missed.
4. Consider investing
Investments tend to outperform cash over the long term, so you may consider investing some of your lump sum or ongoing maintenance. Your financial planner can work with an investment manager to help you put cash that is not needed in the short term to work for you in the long term.
The investment manager can also clarify any assumptions made on investment growth to make sure they are realistic or achievable. For example, a lump sum may have been calculated based on a net growth rate which is unrealistic against historical investment performance rates. If this is flagged by the investment manager, the settlement could then be challenged on this basis. The investment
manager will consider factors such as your risk appetite and ability to withstand loss, as well as the charges, fees and taxes payable over time.
5. Think about the long term
For many married couples, one partner may have a more substantial pension than the other. The assumption would be that this would be shared at the point of retirement. Therefore, a pension also needs to be considered as part of the financial settlement.
If pensions are being considered, it’s essential to take expert financial advice from the start. This is because there are usually options to consider such as offsetting other assets against a pension, such as one party keeps the family house, the other the pension, or sharing the pension. A financial planner can help you decide what the best outcome would be for you.
6. Consider whether you should have protection in place
As a newly single parent, consider what could happen to your family should you become ill or pass away. Putting the right insurance in place could help protect you and your family and mitigate any risk should the unexpected happen. If your former spouse is paying maintenance on which your family depends, some form of protection of their health and life should also be considered.
7. Lay out your financial priorities
Once the dust has settled, you should start thinking about your financial priorities. There are a lot of questions you’ll need to ask yourself and a good financial planner will ask them too and will come up with questions you hadn’t thought about. For example, you may want to focus on your children’s or parents’ financial futures, such as education or care costs, or you may simply want to focus on your own. If you start thinking about your financial priorities now, your financial planner can start putting together a plan for cashflow and budgeting, and help you feel comfortable and confident about your financial position.
Going through a divorce can be difficult, taking these steps to protect yourself financially should help you be in a better position post-settlement and long into the future.
If you would like to find out more about any of the topics discussed above, or to arrange an initial meeting with one of our financial planners to discuss your situation, please get in touch with us.