Divorcing later in life: What should you do with your settlement?

September is traditionally a busy month for divorce proceedings, but new research has highlighted the financial challenges facing couples who separate later in life.

For many people, divorce can mean a major change to their finances as well as an emotional upheaval: it could mean selling the family home, splitting savings and investments, and working out what happens to your pensions.

And if you receive a large lump sum as part of the settlement, you then have another important decision to make: what should you do with the money?

A £154,000 financial fresh start

Research from Flagstone, which surveyed 500 people who had separated later in life, found that the average settlement from the sale of the marital home was £154,302.

But receiving a large sum of money doesn’t necessarily make deciding what to do with it any easier.

On average, those surveyed took five months to decide what to do with their money. One in three said they would leave a six-figure settlement in a current account.

That may feel like the simplest and safest option while you work out your next steps. But a current account may pay little or no interest, meaning your money could be sitting there without earning much, and possibly even falling behind the rate of inflation, meaning it’s losing value in real terms.

And it’s also important to think about how to protect that lump sum, should your savings account provider go bust. Let’s break the decision down into steps.

1. Don’t allow yourself to feel pressured or rushed

A large settlement could feel like a financial fresh start, or it could feel like a weight on your shoulders. Either way, it could feel like you need to make decisions NOW. However, a rushed decision could be one you later come to regret.

There may be some immediate costs that need to be factored in, but that doesn’t mean you need to immediately invest, spend or make any other major financial decision about the total lump sum.

So take your time.

Start by thinking about your short-term, medium-term and long-term needs.

For example…

Short term: Do you need money for somewhere to live, legal costs, bills or other immediate expenses?

Medium term: Do you need money to buy another property, replace a car or make other large purchases?

Long term: Will the money be needed to provide an income in retirement or help support you later in life?

Once you have a clearer idea of when and how you might need the money, you can start thinking about where it should be held.

2. Keep some money easily accessible

If you’re going through a divorce, having access to cash can be particularly important.

You may have unexpected costs or simply want the reassurance of knowing that you can cover your bills without having to sell assets or investments.

An easy-access savings account could therefore make sense for some of your money, particularly if you expect to need it soon. However, don’t automatically assume that your existing current account is the best place for a large lump sum.

A savings account can offer significantly higher rates of interest on your money. We make recommendations for the top savings accounts paying the highest rates of interest here.

Before putting your money anywhere, always check whether the account is covered by the Financial Services Compensation Scheme (FSCS).

3. Consider how much of your money is protected?

The FSCS currently protects eligible deposits of up to £120,000 per person, per authorised bank, building society or credit union if the firm fails. Importantly, the limit applies to the banking licence rather than each individual account. That means having several accounts with different brands that share the same banking licence does not give you separate £120,000 protection for each account. So check with the provider whether they are part of a particular banking group.

That said, the FSCS provides temporary high-balance protection of up to £1.4m for six months for certain major life events. This includes money received following a divorce or civil partnership dissolution, meaning settlements kept as one lump sum in one account up to the value of 1.4m are protected for up to six months after you receive them.

This six-month period is designed to give you time to decide what to do with a large amount of money following a major life event. However, you should check the FSCS rules and keep evidence showing where the money came from in case you need to make a claim.

4. Don’t forget about your pension

It’s understandable that much of the attention goes on the value of a family home when making divorce arrangements. However, don’t forget about your pension! It is often one of the biggest assets involved in a divorce, and is easily overlooked.

Private pensions will usually need to be considered when deciding how finances are divided. Depending on your circumstances, you could receive a share of an ex-partner’s pension, or your own pension could form part of the settlement.

This is particularly important if you are divorcing later in life.

You may have fewer working years left to rebuild your pension if you give up part of it as part of the settlement. Equally, keeping the house instead of receiving a share of a pension could have implications for your future income.

Pensions can also be complicated to value and compare with other assets. Getting advice from a pensions-on-divorce expert is particularly important in more complicated cases. We provide an IFA matching service here.

5. Explore whether investing is right for some of the money

If you don’t need all of your settlement in the short term, you may eventually want to consider investing some of it.

Investing can potentially give your money greater scope to grow over the long term, but it also means accepting that its value can rise and fall.

The right approach will depend on factors including:

• how much money you have
• when you expect to need it
• your other sources of income
• your pension arrangements
• your attitude to investment risk
• how much you can afford to lose without affecting your lifestyle

There is no single investment that is right for everyone, and you don’t have to invest the whole settlement.

For example, you might want to keep money you expect to need in the next few years in an easy-access cash savings account, while considering investing money that you don’t expect to need for much longer.

6. Don’t overlook tax

A large lump sum can also have tax implications depending on where you put it and what you do with it.

For example, interest earned on savings can be taxable if it exceeds your available Personal Savings Allowance. Investments held outside tax-efficient wrappers can also create tax considerations.

Using tax-efficient accounts such as ISAs may therefore be worth considering, depending on your circumstances.

But don’t let the prospect of saving tax push you into making a rushed decision. It is more important to understand what you need the money for first.

7. Check if your divorce settlement is legally binding

There is also an important distinction between agreeing how you will divide your finances and making that agreement legally binding.

In England and Wales, if you and your ex-partner agree how to divide your money and property, you can apply for a consent order to make the agreement legally binding. This can cover assets including property, pensions, savings and investments.

If you cannot agree, you can ask a court to make a financial order.

The rules are different in Scotland and Northern Ireland, so make sure you get advice relevant to where you live.

8. Think about the bigger picture

Receiving a six-figure settlement can make it tempting to focus on where you can get the best interest rate or investment return. But the bigger question is what you actually need the money to do for you.

If you are divorcing in your 50s, 60s or beyond, your settlement could form an important part of your financial security for the rest of your life.

Before making major decisions, take stock of your new financial position. Work out your income, essential spending, pension income, savings and other assets. Then think about how much you need to keep accessible and how much you can afford to put away for the longer term.

How to get help with your finances

Divorce can be complicated – and stressful.

A financial adviser can help relieve some of that pressure and help you look at the bigger picture, including how your settlement fits alongside your pension, savings, investments and future income needs.

If you’d like help finding an adviser, use our Find an IFA service to be matched with a qualified Independent Financial Adviser.