Divorce is regarded as a significant life event, often considered on a par with bereavement, both from an emotional point of view and in terms of planning for a future without any financial burden. In this latest case study for Financial Planner Magazine, Gemma Davies CFP^CM explores how she helped a woman going through divorce.


Case Study Brief
Geoff and Alison had been married for 25 years but were now seeking a mutual divorce. They had two children, Megan and Joanne, who worked full time.
Alison was introduced to me by a family law specialist to help her conclude how the proposed settlement would affect her before the Financial Dispute Resolution hearing took place in eight weeks' time.
Alison wished to remain at the family home and Geoff agreed to this. She worked as a part time teacher and was an active member of the Teacher's Pension Scheme. Geoff worked abroad as an engineer on an oil rig and his earnings were remitted back to the UK for tax purposes.
He was paying the outgoings for the property and agreed to pay Alison maintenance for a readjustment period but had not yet agreed the terms of this.
They had joint savings and Alison was considering using all of these to pay off part of the mortgage. 

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This is a real life case study. Names and some other details have been changed to protect confidentiality.

As Financial Planners, we are mindful of the emotional ordeal that clients like Alison may be going through and will continue to go through before the divorce finalises and the decree absolute is awarded.

However, it is important for us to ascertain as much qualitative and quantitative information about her during our initial meeting so that we can give clear advice, both in respect of any issues that are pertinent to her financial settlement, in the short term, and also for her long term future.

Before any work was undertaken in an advisory capacity, it was important to ask Alison how the divorce has impacted upon her view of her long term future. Had this event changed any of the goals that she previously set for herself? Did she feel in control of her future? At what age was she looking to achieve financial independence and did this coincide with finishing her work as a teacher?

Sharing her concerns, passions and hopes with us would help us better understand how Alison would like to lead the rest of her life and how her assets (both included in the settlement and in the future) needed to work for her.

We would begin any long term client relationship with compiling a bespoke Cashflow Forecast. In Alison's case, this took into account her post-divorce assets including the marital home, which was subject to an existing mortgage, her income (both her teacher's salary and the maintenance for the agreed period of time) and the cost of her lifestyle going forward, which may change.
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We needed to agree some fundamental assumptions, such as inflation and assumed growth rates on income, the property and other assets. It was important for Alison to be aware that she had complete ownership of her Cashflow Forecast and, therefore, she aimed to make it as accurate as possible.
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This exercise would provide a clear answer to Alison's question as to whether she was on track, financially, for the rest of her life. If there were any shortfalls in capital presented we had time on our hands to come up with an appropriate strategy. Her salary was £2,500 per month gross, before any contributions to the Teachers' Pension scheme, plus there was proposed tax free maintenance of £1,500 per month from Geoff. What we didn't know, at this stage, was how long the maintenance would be paid and whether this was sufficient for Alison.

We asked Alison to provide her total expenditure, that is the full cost of her lifestyle, not just that relating to the home so that we could assess whether her cashflow position was positive in the short term, as she readjusted to a new lifestyle. If her outgoings were expected to exceed her income this should have been reviewed and it could potentially have provided grounds for Alison's solicitor to argue for a higher income from Geoff.

We also needed to ascertain whether the two children, Megan and Joanne, were still financially dependent upon Geoff and Alison. Thought needed to be given towards any future financial provision required for them and who had responsibility for this. Expected future costs could be regular, such as financial support or ad hoc in nature such as weddings or training/education costs. Clarity over these costs and outlining responsibility at this point would prevent any conflict, post-divorce, and should be factored within Alison's Cashflow Forecast.

I recommended that Alison kept an accurate log of her new expenditure for the next few months so that a trend could be identified and this could be used to improve the accuracy of the cashflow. It was important to assess whether her income was sufficient to meet all basic expenditure and we would need to be aware of Alison's own ad hoc spending plans, ideally for the next few years and plan how these should be funded. We asked her whether there is any prospect of her income increasing in the future (either through promotion or increased hours), which may help bridge any income shortfall once the maintenance from Geoff ceases and Alison becomes solely liable for the mortgage payments, which may have been reduced following a partial redemption from savings.

In relation to Alison's proposed part redemption of the mortgage this could be modelled within the Cashflow as a "what if" scenario. Further details of the mortgage would be required, such as the interest rate, payment and the term and whether it is tied into a particular rate so that we could ascertain whether there are any financial penalties involved in redeeming part of the mortgage in the near future.

If Geoff were to be removed from his mortgage liability and ownership of the property, as part of the settlement, it was also important to have him removed from the mortgage deeds and property via the Land Registry so that he did not have any future equitable claim on the property. If Alison were to assume sole liability of the mortgage she would need to inform her mortgage company of her change in circumstances, which would almost certainly have prompted the need to review her mortgage. As interest rates were at an all-time low, and to provide a predictable expenditure stream, it was advisable for Alison to consider a new mortgage (either with her existing lender or a new lender) with a payment level that was comfortable.

The question of whether Alison should use all of her joint savings to partially redeem her mortgage depended on her need for a suitable emergency fund, her own assets and her affordability requirements, given that a mortgage represented a large expense on a monthly basis. We used a risk profiling tool to assess Alison's views of risk in terms of strategy and any future investment and her views may have changed during the course of her divorce and so it would be important to regularly assess her risk and factor this in to any subsequent advice given.

If there are post-divorce assets that were not required for short term purposes, we would consider a suitable long term investment portfolio, using wrap platform technology and keeping the administration as simple and cost effective as possible to help Alison gain better control over her financial position.

Attention was given to the effect of certain catastrophe positions on Alison's family and her financial position including premature death and/or any long term disability/illness. Was her financial position robust enough to cope with these events, should they arise? Were her wealth pass to the people of her choosing upon death?


As a teacher, there wasn't any scheme in place to provide Alison with long term income replacement and so private provision was considered but this was in the context of her own health and any capital requirement arising from this event. If she already had this cover in place we could assess whether it is enough or whether further immediate capital provision is needed.

The cashflow would identify to what extent there is a shortfall. It was also important to know, legally, what provisions are in place to protect Geoff's income, as his sickness and/or disability could affect his income and this in turn may affect his ability to meet the maintenance payments. It was wise to check if there are any plans currently in place to protect Geoff's life and/or to cover long term sickness/disability- this could have been provided by his employer or held previously to protect their mortgage.

Any decisions regarding existing or new cover would need to be factored into the settlement before the decree absolute, if it is demonstrated that the loss of the maintenance would impact upon Alison's financial position. We advised Alison to draft a new will once her decree absolute has been granted. A Lasting Power of Attorney would also ensure that in the case of serious illness or losing mental capacity either her financial or health/welfare matters (or both) could be attended to and I suggested that consideration is given to an attorney (or attorneys) who could best support this role.

While it was clear that Alison was subject to many changes to her life over the coming few months/years and a period of readjustment was to be expected, the aim of our work with her was to provide her with peace of mind and a thoroughly considered plan of action that will take her through the next few months and beyond. Part of any successful long term plan will involve regularly reviewing the progress of her Financial Plan against her goals and for it to be flexible enough to cope with any unforeseen changes.

The collaboration of Legal & Financial Planning professionals, as a tripartite relationship, can provide that all important support structure, as both professionals ultimately focus on their clients best interests. 

What happened next

As the Financial Dispute Resolution hearing had not already taken place it was an ideal time to advise Alison. We would always recommend being instructed at this stage so that the legal and financial issues can be considered cohesively.

We worked closely with Rhian Howells of Wendy Hopkins Family Law practice during this important stage and the Cashflow Forecast had concluded that the proposed settlement was sufficient for Alison's needs on the basis that Geoff's maintenance continued for a period of at least two years. As Alison was to assume sole responsibility of her mortgage, we recommended that she used half of her joint savings to repay part of the mortgage.

Her remaining cash assets were used to provide a suitable emergency fund and long term investment portfolio. She applied for a new mortgage in her name. Six months later, Alison has emerged as a more confident and assertive individual who is now clear of her future direction.

Biographies

Gemma Davies of Uniq family Wealth

Gemma Davies is the Financial Planning Director and Certified Financial Planner^CM Professional for UNIQ Family Wealth,a firmspecialising in providing advice and wealth services to individuals, families and family businesses.
She is currently the vice chair of the South Wales branch of the Institute of Financial Planning and is a regular commentator for BBC Radio Wales.

This email address is being protected from spambots. You need JavaScript enabled to view it. 029 20782330

www.uniqfamilywealth.co.uk

Rhian Howells of Wendy Hopkins family law practice

Rhian Howells is a director with Wendy Hopkins Family Law Practice. She has over 25 years' experience as a family law specialist and has been a member of the Advanced Family Law Panel since 2002.
She is one of the most experienced family law practitioners in Wales and is also a member of Resolution.

This email address is being protected from spambots. You need JavaScript enabled to view it. (029)2034 2233 www.wendyhopkins.co.uk