I Have Received Capital Following My Divorce, What Should I Be Doing With It?
A client of ours recently received a signficant sum of money following her divorce. As with many people in her situation Sarah (not her real name) found herself in a position where, for the first time in her life, she was responsible for her personal finances and was nervous about it. She had received more than she was expecting and wanted to make sure it was dealt with appropriately. This article recounts the advice process we went through with Sarah to demonstrate the options available to people who find themselves in this position and are worried about what to do.
The first bit of advice I gave to Sarah was to take time to consider what was most important to her and what her financial goals were. There was no point committing capital to a financial plan that was inappropriate.
Once Sarah had given this some thought we were able to split her goals into short, medium and long term time frames:
Short term goals
Having not had this level of capital before it was important to Sarah that she did not expose it to too much investment risk. She also wanted to ensure she had enough to call upon should she need capital in the short term (she still had dependent children and was trying to get a small business started). As a result of this I advised Sarah that this short term capital be kept in savings spread between a number of banks so that there was no risk to capital from either stock market falls or bank insolvency (the current FSCS compensation limit for savings is £85,000).
Medium to long term goals
Once Sarah had decided how much she was comfortable keeping secure in savings she was able to designate the balance to her medium to long term goals. Whilst she had no specific plans for the money she wanted to have the option of helping her two children with deposits for houses. Other than that she wanted to ensure the value of her capital grew above inflation.
Having measured her attitude to investment risk we were able to recommend an investment portfolio for Sarah that was invested in a manner that was commensurate to a level of investment risk that she was comfortable with whilst ensuring she could expect the capital to grow above inflation over the medium to long term. The portfolio was therefore a mix of funds which invested in all the major asset classes (cash, fixed interest securities, UK and overseas equities and commercial property).
Once an appropriate asset allocation was determined the next stage was to advise on which tax wrappers were most suitable to invest the capital through. Sarah had sufficient pension funds in place so the advice centred around non pension wrappers. The starting point was to maximise the current year’s ISA contributions with the balance being invested in a portfolio of collective investments (Unit Trusts and OEICs) with the intention of funding subsequent years’ ISAs from the collective investment portfolio by using Capital Gains Tax allowances each year. This would ensure that overtime Sarah was increasing the tax efficiency of her capital.
While Sarah’s position was not overly complex it was important that appropriate investment decisions were taken so that she had peace of mind, knowing that both her short term and long term needs were accounted for.
In summary, the advice process that should be followed for anyone who has received money on divorce should be centred around the following checkpoints:
- Take time to understand what your financial goals are.
- Break these down to short, medium and long term goals.
- Ensure there is sufficient capital in savings to meet short term needs. This should include covering the potential for unexpected costs. The capital should be spread around the banks so that there is no more than the FSCS compensation limit.
- Have your risk profile measured properly to determine what an appropriate exposure to investment risk should be.
- Invest in a diversified range of assets that matches your risk profile.
- Invest in the major asset classes via tax efficient wrappers first to minimise the tax that is paid.
- Review your invesmtents on an annual basis to make sure they are still appropriate for your needs.
If you have recently received a sum of capital following your divorce and would appreciate investment advice click here.
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