Money can smooth the path of a divorce. But it brings with it a full set of problems

Brian Tora on the Second Horseman of the Financial Apocalypse
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The Independent Online
Divorce is hardly the most pleasant of events and is likely to prove costly to just about everyone involved - except the lawyers. This second horseman of the financial apocalypse can be almost as devastating as the first - and to both parties involved.

For a man it may mean a lower standard of living, a new and less expensive house and the dispersion of savings built up over a number of years. To a woman it is likely to be the uncertainty that comes with not knowing whether there is enough income to keep the family on an even keel.

Money can smooth the path of a divorce, but it also brings with it a full set of problems. I was once asked to advise the wife of a wealthy businessman whose husband had left her for another woman.

They had four children, all at private school and by mutual agreement had moved out of the rather splendid family house. He had bought her a not significantly less splendid place nearby. When the husband decided to remarry, he felt a "sudden death" pay-off would be preferable to continuing to make regular payments to his wife.

The six-figure sum agreed seemed large to my client, particularly as it came with a gift of the house. But rather like the lottery winner finding that the prize was not enough, the reality of a sudden-death payment in a divorce is that you have to make your expenditure match your income. In this case it was to prove difficult.

The problem we faced was surviving the hump of high expenditure while her children were still at school. True, the husband was still meeting the cost of the school fees, but children do not come cheap, with clothes and parties and allowances.

With ages ranging between nine and 15, it seemed we had a 10-year problem. After that, expenditure should decline significantly. But my client was young, so investing for maximum income over 10 years could damage future earning prospects from her capital.

In the end we adopted a two-tier approach. Maximum contributions were made to personal equity plans, which were allowed to accumulate in the expectation that their growth, free of tax, would help counteract any capital under-performance from the rest of the portfolio.

No pension arrangements were in position - nor could they be as pension contributions can only come out of earned income. To try to compensate for this, premiums were paid into a Maximum Investment Plan, which would be available to provide an income after 10 years, although funds could be allowed to accumulate if appropriate. Together with the Peps, I hope that I had the post-10 year period covered.

It was then a case of finding suitable convertible stocks, investment trust income shares, gilt-edge securities and other high yielding investments to provide the required income.

Some spending of capital was necessary, principally to fund the Pep and MIP contributions, but two-thirds of the way through the scheme it seems to be working out. What is more, she has become used to the less extravagant lifestyle that divorce has given her. Lowering expectations can be quite important in these circumstances.

Pensions are an emotive issue in divorce settlements. The growth of the personal pension market and the realisation that people need resources to look after themselves in old age have led to a re-examination of a spouse's entitlement to a retirement fund in the event of divorce.

Even so, there are many pitfalls. One woman I know lost an entitlement to a pension when her ex-husband died. He had been in an occupational scheme, but had changed jobs. His new company's pension arrangements provided little for her because of the short duration of his employment, while the company he had left, for which he had worked over many years and where his paid-up pension entitlement could have been quite great, had no provision for paying money to the ex-wife of an employee who had died while not in service.

The biggest problem for woman with divorce is much the same as that which occurs with death. Faced with looking after their financial affairs for the first time, women often do not know where to go for help.

They may feel intimidated by the advisers they have to consult and are often upset at the turn of events that brought them to this position. In such circumstances it is often easy to make a wrong decision when agreeing a settlement. Increasingly, though, divorce lawyers will have on hand financial advisers able to give guidance as to what is achievable with whatever settlement is secured.

In these days of falling house values, it is often less easy to decide what to do about the family home. A husband may be unable to hand over the keys knowing that there is still a substantial mortgage to repay, which in turn will inhibit him from purchasing a home of his own. Even the tax relief on mortgages is now so small that a divorced couple gain little advantage from each taking out a mortgage. Typically the saving will be less that pounds 400 in a full year.

You cannot plan for a divorce as you can plan for death, but planning is crucial, and it is just as important to take good advice. Do nothing in haste. Make the best use you can of limited resources.

Brian Tora is chairman of the Investment Strategy Committee at Greig Middleton & Co.

DOS AND DON'TS OF DIVORCE

do

Expect a reduction in your standard of living, and plan your lifestyle accordingly.

Seek professional financial and legal advice from the start.

Balance short-term income needs against preserving some long-term capital.

Rush to sign a settlement until you are satisfied it is the best possible deal.

Forget to look into the question of pensions as you negotiate a settlement, especially if you are the woman.

Let emotions cloud your judgement. An agreed settlement is in the financial interests of both parties.

don't

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