Divorce is one of the toughest times in anyone’s life. A ‘team of experts’ approach from the outset is essential to securing the right financial outcome from divorce.
The last thing clients need is financial worries or strains which could make this very difficult time even harder. There are a few financial considerations to start thinking about pre-settlement which will put clients in better long-term financial shape, and hopefully keep some of their concerns at bay.
Putting the right team together
A ‘team of experts’ approach from the outset is essential to securing the right financial outcome from divorce.
Engaging a team of family lawyers to begin proceedings is the start of the process, but who else needs to be on the team? There are other specialisms to engage at this early stage who will help clients understand their financial decisions and assess the various options open to them. Finding the right team and building a relationship with them from the outset will stand clients in good stead in the long term.
Financial planners and investment managers are typically engaged a little later in the process. But actually, by having conversations from the start, they can work with solicitors to make sure clients end up with the right amount of money in the settlement, paid in a way that suits them. Careful planning by the right team will ensure that a client’s lifestyle remains as unchanged as possible post-settlement.
To ensure clients can maintain a similar lifestyle in future, they will need to understand how much they’re spending today. From day-to-day outgoings to major bills, a financial planner will encourage clients to keep track of how much goes in and out of their account every month so any settlement can be linked to spending needs. This number will be crucial for the expert team to be able to start negotiating the settlement.
Next, a financial planner will start thinking about the budgeting for a client’s post-divorce lifestyle. The planner will ask important questions, such as whether or not clients expect to keep the children at the same school, whether they want to (or can) stay in the same house and go on the same holidays. This is to build a picture of what a client wants their life to look like post-divorce, and that will give the expert team an idea of a financial goal to aim for.
Investment managers and financial planners working together play a key role here. Your client may be faced with a choice between ongoing maintenance from their ex, or a lump sum. The former meaning the bank account is topped up every month, the latter meaning your client receives a clean break but now has a lump sum of cash which they then have to manage. But either way, how much is enough? Even though clients may have budgeted and have a rough projection of future spending, it’s still hard to imagine exactly how much they and their children will need to live off in 15 years’ time.
This is where a good financial planner will be able to help. If your client decides to go for ongoing maintenance, a planner will help you cost the family’s future life and account for variables your client may not have considered. This will be key to making sure that any monthly maintenance will be enough, both today and in the future.
A planner will also do a detailed analysis of any lump-sum payment being considered, to increase the likelihood that it will last for as long as the client and their children need. Using a budgeting forecast, they will project spending alongside assumed future interest rates and inflation, to calculate how much cash is needed in the long term.
If the financial planner is brought in to conduct cash-flow analysis after an initial financial settlement has been agreed, the opportunity to match any settlement to future lifestyle may have been missed.
Investment risk and return
A financial settlement is there to support your clients over the long term. Whether they receive a lump sum or ongoing maintenance, clients may want to use investment rather than pure cash as investments tend to outperform over the long term. This is where a financial planner and investment manager can work together to understand which investments might be able to deliver your client’s financial goals.
A financial planner will have looked at spending patterns both now and in the future and will have helped shape some initial financial goals for your client, such as remaining in the marital home and maintaining the children’s school fees.
An investment manager plays an important role both to clarify any investment growth assumptions, and to make sure they are realistic and achievable. The investment manager will account for your client’s feelings about investment risk, as well as their ability to withstand losses and their need to take risk. They will also consider charges, fees and tax payable over time to ensure that any settlement is realistic for that client. For example, a lump sum settlement may have been calculated based on a net growth rate which is unrealistic against historical investment performance rates. The settlement could then be challenged on that basis.
Any financial settlement is going to have to be carefully structured if it is to provide for your clients in the long term. The right products will make sure that income is withdrawn in a tax-efficient way, making sure that clients don’t drawdown more than they need to meet their income needs..
If pensions are being discussed as part of the settlement, it’s essential to take expert financial advice at outset. There are usually options to be considered, such as offsetting other assets against the pension, or sharing it. Expert technical advice from a financial planner will help guide your clients as to the most suitable outcome for them. If a large pension is shared it will need to be registered with HMRC to ensure that the proceeds don’t suffer a tax charge when taken.
During this very difficult time, the right financial advice can alleviate some of your clients’ stresses and strains. A detailed and thorough plan may allow for financial stability throughout this period of great uncertainty.
This article was first published by Thought Leaders 4 HNW Divorce Magazine on 6 August 2020 and is reproduced here with kind permission. Authored by Emma Watson, Laura Dempsey and Rebecca Tunstall.