Here are some things to bear in mind if you find yourself in this position:
Sudden need for financial planning and advice
Divorce often necessitates a complete reassessment of financial goals and plans. Here are some critical questions to consider:
- Living arrangements: Who is going to live where? Do you need to save for a new house?
- Cash flow: What is your new cash flow situation, and do you know how to plan your financial future with more clarity? Do you need to go back to work if you are not currently working?
- School fees: What is happening with school fees? Do you need to contribute towards school fees, especially given recent tax-driven increases?
- Lifestyle: What kind of lifestyle can you afford post-divorce?
Addressing these questions requires careful financial planning and, often, professional advice to ensure that your new financial goals are realistic and achievable.
Financial literacy
In many relationships, one partner typically handles the finances. Post-divorce, the other partner may need to quickly become financially literate. This sudden need for financial education is crucial, especially if you receive a lump sum of cash as part of the settlement.
Without proper knowledge and advice, there is a risk of making poor financial decisions, such as keeping money in low-interest accounts or inadvertently making high risk or complex investments that you may not fully understand. You may not feel like you are ready to trust a new adviser right away so arm yourself with some of the key questions to ask and make sure you don’t make any long-term decisions too quickly.
Take a look at our list below of questions to ask when selecting an adviser.
Changes in financial entitlements
One financial implication of divorce that is often missed is the change in certain financial entitlements. For instance, the loss of spousal benefits on gifts and transfers can have a substantial impact. This is particularly important if you have children and the worst happens unexpectedly.
When married, the surviving spouse would inherit tax-free and could continue to support the children or pass wealth on. However, following a divorce, inheritance tax could be liable on the death of either parent if the estate exceeds the threshold. This will also apply to pensions from 2027 following recent budget changes.
Recommendations for managing wealth through a divorce
1. Inform relevant financial institutions: Notify your bank and other financial managers about your situation. Under the new Consumer Duty regulations, you might be considered a vulnerable client, and your advisers and those who look after your money need to recognise your specific circumstances and act in your best interests.
2. Take your time: Do not rush into any financial decisions. Focus on becoming more financially literate. Conduct due diligence and seek appropriate financial advice from reputable sources. When selecting a financial adviser, consider asking the following questions:
- Have you advised many divorcees before?
- How many female customers do you have? (assuming you are a newly divorced woman)
- Are you able to support me in my changing circumstances? How?
- How flexible is the firm?
- How do they work, and how can I work with them?
3. Look for silver linings: Despite the anguish and cost of separating assets, divorce can offer some benefits, particularly for wealthier clients with large pensions. In some instances, a pension sharing order can see pension pots split, allowing both parties to benefit from the maximum tax-free lump sum and draw funds out more efficiently.
4. Stay vigilant: Financial fraud and scams are ever-present threats that have become increasingly sophisticated, exploiting vulnerabilities during difficult times of personal and financial upheaval. Being able to identify common scams is key, and our article provides practical steps to protect yourself from fraudsters.
Divorce is undoubtedly a complex and emotionally taxing process, but with careful planning and the right advice, individuals can navigate the financial implications effectively. By understanding the changes in financial entitlements, reassessing financial goals, becoming financially literate, and seeking professional advice, you can ensure a more secure financial future post-divorce.
Remember, taking the time to educate yourself and make informed decisions is crucial in safeguarding your wealth and achieving your new financial objectives. If you need any help in better understanding your potential, and how to adapt to your changing circumstances, please get in touch.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted solely to our services. We do not consider the whole of the market, nor offer advice in relation to tax compliance, insurance products, or the transfer of defined benefit pensions.
