We recently held a webinar in partnership with Alison Porter of Pennywise Consultants and Sarah Searle, an Independent financial adviser at Milsted Langdon.
This helpful online event covered many topics to help spouses and families who have been affected by the financial impact of separation and divorce.
To give you an overview of the things that you may need to consider if you are facing a divorce, here is a summary of the issues that were covered.
When do you think is the best time for someone to seek financial advice?
At the same time clients seek legal advice! Very often pension sharing is arranged and, depending on the type of pension, you may need to find a new suitable provider for the funds being shared.
If a relationship has already been established with an adviser, then this will be discussed and the client will have a plan already lined up when the funds are released.
It’s also important to review fully any plans that are currently in place, including protection and investments.
It could be that investments may have penalties for withdrawing, so it is important that clients are aware of this, before splitting any of the funds.
How could going to see a financial adviser help with the divorce process and financial impact of separation?
Clients going through a divorce are very often at their most vulnerable. They can feel overwhelmed emotionally by the prospect of having to make lots of decisions, many of which are connected to finances.
You often find one partner was in the habit of dealing with the domestic finances, and if the other partner has to pick up the reins when the relationship breaks down it can be another factor that increases the level of stress.
Often when relationships break down, people make decisions in haste and repent at leisure. Is that something you see happening in practice?
Unfortunately, when emotions are running high and lives are turned upside down, clients can end up making poor decisions.
Often keen to break all ties, they look to cancel direct debits, including for protection plans.
However, it is very important NOT to cancel anything until the plans that are in place have been fully reviewed.
How much do clients tend to understand about their pensions and how can you help to educate them?
Pensions are very complex and many clients do not fully understand what they can and can’t do with their pension, particularly in the situation of pension sharing.
Some clients have a share of a defined benefit pension whereas others have a defined contribution pension. It is vital that clients understand the important differences and the impact of the various rules associated with each type of pension.
We can help clients understand exactly what their pension provides, the risks associated with it and also the age at which they can access the money.
A timeline is useful as very often pensions become payable at different ages and many clients like to have a plan that we will continue to review with them at annually and ensure they are on track to achieve their goals.
What happens if clients get divorced and have maintenance in place but their former spouse or civil partner dies? Does income stop? And how should people deal with this situation?
Protecting the maintenance payment should be high on the priority list so that payments can continue if the person paying maintenance were to die or have a critical illness that could impact the maintenance payments.
Insurance called Family Income Benefit should be considered in the event of the ex-spouse passing away. This will ensure that the income will continue to be paid for the same duration as the maintenance was due.
It’s generally paid free of tax and can be included as part of a divorce settlement as the maintenance stops on death so it’s important to have a plan that will protect the family from a loss of income agreed in the divorce.
What would be your advice to those who come out of a divorce with a large lump sum?
Clients need to be aware of all of their options for their funds. It is important to have a rainy-day fund, up to five year’s savings and then a long-term plan for the settlement they receive. The ideal position is to get a balance of these.
We often see clients who are very nervous about spending their money and worried about their funds lasting long enough.
In this instance, it can help to show them how their income stream is going to work and how and when they will need to draw down on savings.
Telling someone they would need to live until they are over 100 to spend all their money can help encourage them to enjoy their funds and spend them responsibly.
Am I right in thinking that pension sharing orders can prejudice your lifetime pension allowance?
Yes, the lifetime allowance for pensions has varied over the years from £1.8 million to currently £1,073,100. Individuals were given the option to apply for certain protection on their pension funds as a result of this.
For example, Primary Protection and Individual protection can both be impacted by a debit to their funds caused when a pension sharing order is implemented. Enhanced and Fixed protection doesn’t allow further payments, so any debit could prejudice existing protection if future pension top up contributions were made. It is a very complex situation but an area that should be looked into prior to any funds being shared.
How can Milsted Langdon help couples experiencing separation and divorce deal with their finances?
We take the time to review each person’s financial affairs in details and speak with them using easy-to-understand language, to avoid the jargon that is all too often used in the financial services industry.
We can work through the various areas of financial planning together and help clients understand their current financial situation, so that they can be confident to make decisions and don’t feel that they have to face everything on their own.
We would hope to continue to provide financial advice, not just around the divorce, but beyond so that they have an appropriate plan in place for the rest of their life.
To find out more about our specialist financial service for divorcing and separating couples, please click here.