If you’re going through a divorce, one of the best decisions you can make is to consult with an independent financial adviser before your divorce is finalised. While your attorney will no doubt have experience in divorce law and proceedings, there are a number of financial planning considerations that need to be taken into account, some of which are highly technical and may require the advice of an experienced adviser. Before signing a divorce settlement, you may want to talk to your financial adviser about the following:
Options for preserving capital from member spouse’s pension interest
If you are entitled to a share of your spouse’s pension interest, be sure that your claim is correctly calculated. If your spouse is invested in a pension, provident or preservation fund, the pension interest is the total benefit to which he would have been entitled to in terms of the funds rules if his membership had terminated through resignation at the date of divorce. In the case of a retirement annuity, the pension interest is the total of his contribution to the fund up to the date of divorce, plus simple interest at the prescribed rate. Before making any decision regarding the pension interest you are entitled to, it is important for your adviser to unpack the options available to you so that you fully understand the financial implications of each. If you want to withdraw the full amount in cash, bear in mind that the lumpsum will be subject to tax as per the retirement fund withdrawal tables, which could substantially diminish the value of this asset. If you would prefer to transfer the capital to a retirement fund of your own, your adviser will be able to assist you in selecting a vehicle and investment strategy that is appropriate to your needs and investment horizon, bearing in mind that you will not pay tax on such a transfer and the full amount will therefore be invested for your future. Depending on your financial position at the time of divorce, you may need to withdraw some of the funds to tide you over financially until you get back on your feet, while investing the balance in a retirement funding vehicle, and your adviser can guide you on the most appropriate withdrawal for your specific needs. If your spouse has retirement funds invested in policy retirement annuities, it is important to factor into your calculations any penalties or fees that may be charged due to early cancellation of the policy, as this could affect the value of the pension interest you receive. Ideally, you would want to transfer the full pension interest into a retirement fund of your own so as to avoid paying withdrawal tax and to provide a mechanism for the funds to continue growing for your future security. If you do require access to capital in the short-term, your planner will take a holistic view of your entire portfolio to determine the most tax-efficient way in which to do so.
Insurance on life of maintenance payer
If the proposed settlement agreement makes provision for your spouse to pay maintenance, it is worth including a clause to the effect that the maintenance payer (i.e. your spouse) will take out sufficient life cover to protect his future maintenance obligations in the event of his death or disability. If you are comfortable with the level of maintenance outlined in the settlement agreement, your adviser will be able to quantify the correct level of life and capital disability cover your spouse will need to take out in order to honour his obligations. From our experience, maintenance payers very rarely have disability cover in place to protect their maintenance obligations, so be sure to insist on this. Bear in mind that the life policy must be correctly structured with the maintenance payer as the life insured and you as the owner or beneficiary of the policy. While your child does have a right to claim maintenance from your spouse’s estate should he die, this process can take months – even years – to complete, assuming that there is sufficient liquidity in his estate to honour the claim.
The family home
If you have a sentimental attachment to the family home and are considering holding on to it, be sure to understand the financial implications of doing so. As difficult as it may be, try to remove the emotions from the decision and consider what it will mean to retain ownership of the property. By keeping the property, it could mean that a large portion of your share of the divorce will tied up in fixed property. If you need access to capital in the short- to medium-term, this could create a problem for you and may result in you having to access your investments which, in turn, could have tax and CGT consequences. Further, property is expensive to maintain and you need to factor the costs of upkeep, building maintenance, cleaning, garden maintenance, rates and taxes into your post-divorce budget to ensure that you can actually afford to continue living in the home. Further, if you hold onto the property and then realise you need to sell it at a later stage, bear in mind that you will need to pay estate agents’ fees which will leave you in a less favourable position than if you had split the proceeds of the sale at the time of divorce. On the other hand, if you choose to sell the family home, you then have the option of renting a smaller, more manageable home while at the same time investing the proceeds into an appropriate strategy to ensure growth in line with your timeline and return objectives. It will also ensure that you have access to capital should need it, and that you won’t find yourself in a position where you are forced to sell your property at a lower value due to cashflow problems.
Adjusting risk cover
Most couples take a financial knock following a result of divorce and, as such, need to tighten up their budgets. One way of doing this is to review your insurance cover with your adviser. If you previously put life cover in place to make financial provision for your spouse in the event of your death, it is likely that you no longer need this cover and cancelling it will result in some premium saving. From our experience, many policyholders have been over-sold dread disease cover, so if you have an excessive amount of cover you may want to consider reducing it. However, before adjusting your risk cover, allow your financial adviser to do a full review of your cover, bearing in mind that as a soon-to-be single parent, your needs will have changed significantly and, as such, a full review is probably warranted.
If the divorce settlement proposes the selling of any assets or a part of certain assets, it is advisable to let your financial planner calculate whether there are any tax or CGT implications you need to be aware of. The disposal of unit trusts or the sale of a holiday home can have tax and CGT implications, so be sure to fully understand the net effect of what is being proposed in the settlement agreement.
Before agreeing to a maintenance proposal, let your adviser assist in drafting a realistic post-divorce budget. Besides for the fact that you may have legal bills that need to be attended to in the months following your divorce, give consideration to other costs such as after-care facilities, au pairs, child transport, domestic help and garden services that may arise as a result of being a single parent. Test your post-divorce budget against your earnings and the proposed maintenance amount to determine whether it realistically meets your needs.
Forward planning and modelling
While the amount offered in terms of the settlement agreement might seem like a sizeable amount of money, it is important to know exactly what the proposed settlement means for you over the longer-term. Your financial adviser will be able to prepare various investment scenarios for you to demonstrate what level of income you would be able to draw from your investment, assist in drafting a post-divorce budget taking account of any maintenance payments and ensuring that the modelling is inflation-adjusted, quantifying any shortfalls, and establishing your income objectives going forward. If going through an acrimonious divorce, you may be tempted to cut your losses and accept a settlement that may not be in your financial best interests, although this is seldom advisable. Ensuring that you obtain the best possible financial settlement from your divorce is important if you want to rebuild a financial future for you and your children.
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