I was delighted to be invited to present at Brodies BInformed Blended Families seminar on 7th June. I am an Assistant Director at Brewin Dolphin, providing Financial Planning advice to our clients at all stages of life.
When considering a Blended Family situation, I decided to break down the advice I would provide at three different stages.
Firstly, I considered an individual who has just separated from their partner.
From a practical point of view, I would recommend agreeing short-term finances. This could include the ongoing payment of a mortgage, the running of a joint bank account, covering school fees, amongst many other individual concerns.
In terms of pension assets, these are held in Trust rather than owned individually by a client.
I would therefore recommend reviewing the nominated beneficiary of death benefits and update this accordingly.
If any new assets are inherited after the point of separation, it is important to ring-fence these and keep them separate from any marital assets.
In terms of investments, it is prudent to retain any tax-efficient assets held individually e.g. ISAs, as these could be valuable to provide tax-free income.
I would also suggest reviewing the investment strategy for any existing investments.
It is likely that each individual has their own attitude to investment risk. It may be that investments are higher risk than that individual is comfortable with.
If it is likely any investments will be sold upon the divorce settlement, I would recommend immediately reducing the equity content, if possible and thus reduce volatility which that individual may not have the time to recover from.
Spouses and civil partners are able to transfer assets to one another free of any Capital Gains Tax implications.
However, this allowance is lost in the Tax Year following the year of separation.
It is therefore important, from a tax point of view, that any asset transfers where there is a large capital gain, occur in the tax year that the couple separate, if possible.
I would recommend reviewing any protection arrangements. It is likely that any joint policies are no longer relevant. Each individual will also have to consider their own protection needs for their new circumstances.
In terms of pensions, I would analyse the types of arrangement held by the individuals. It is possible to "share" pensions as part of a divorce settlement.
If secure and guaranteed income in retirement is the individual's main objective, then any Final Salary or Defined Benefit scheme benefits should be retained, where possible.
If an individual has already or is likely to exceed the Lifetime Allowance (currently £1 million) before retirement, then it may be appropriate to share some of their pension assets to reduce the value below this level and thus avoid a future tax charge.
The Annual Allowance should also be considered. This is the maximum that an individual can contribute into a pension each tax year.
The current Annual Allowance is £40,000 per annum, however this reduces to £10,000 per annum for those with earned income exceeding £210,000 per annum.
It is therefore important to consider that, if a pension share does occur, if that individual will be able to rebuild their pension assets before retirement.
If a lump sum is received as part of a divorce settlement, it is very important to take financial advice at this stage.
A financial planner and investment manager can work together to provide recommendations to invest the lump sum according to the individual's personal circumstances and objectives, to meet their future long-term goals.
Finally, I considered a client who is re-marrying. This is another significant change in circumstances and time to re-review individual financial affairs.
Protection policies should again be considered if they are still relevant and the couple should consider their joint protection needs, particularly if they are purchasing a new property together and securing a mortgage.
Now may be a good time to consider a Trust for pension death benefits.
The expression of wishes form is useful for indicating an initial beneficiary for death benefits, however a Trust can provide income to the surviving partner for their lifetime, with the capital passing to the original pension owner's children, rather than being passed to their partner's own children.
If there is excess income, then individuals may wish to begin passing assets to their children.
The Junior ISA limit is currently £4,128 per annum. The government has also recently introduced the Lifetime ISA for individuals who are saving for their first property purchase. This allows individuals to save £4,000 and the government tops that up by £1,000.
In conclusion, it is very important to take advice every time circumstances change.
Having a financial adviser and investment manager who know your circumstances and who can help you plan for the future can add so much value by understanding your needs and objectives, and simplifying your financial options.
I would be happy to speak to anyone who wants to review their current arrangements and future needs. Any initial meeting is free of charge with no obligation.
Please contact Jo on [email protected] or call +44 (0)131 300 2878.