Wealth Check: 'I need a strategy after my divorce'

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Working as a part-time customer services administrator, Stephanie earns £9,200 a year, though this is boosted by tax credits and it is possible she may also receive maintenance payments in the future.

She has £2,000 in a savings account and £1,500 in each of her children's savings accounts. Not helped by Christmas spending, Stephanie's credit card debt has risen to £2,000. She is likely to receive a settlement of about £20,000 from her husband.

Stephanie's main concern is that her children have a home and are well-provided for but, aware that she is newly independent and has a lack of financial knowledge, she's also worried she'll end up with debts she can't afford.

We asked three independent financial advisers for help: Ashley Clark, from Needanadviser.com, Anna Bowes, from Chase De Vere, and Danny Cox from Hargreaves Landsdown.

Case notes

Stephanie Clark, 29, West Lothian

Personal: Stephanie is a part-time administrator and earns £9,200. With child benefit, tax credit, working tax credit and childcare payments, her monthly income amounts to about £1,450.

Property: Looking to buy her first home for herself and two children.

Debt: £1,300 on Virgin credit card with 0 per cent interest for eight months and £700 on Tesco credit card at 14.9 per cent.

Savings: £2,000 in her own account and £1,500 in each of her daughters' accounts. All accounts are direct access ones with Intelligent Finance. Stephanie is considering opening an account with Bank of Scotland for the children, as she has heard it pays 10 per cent at the end of the year. She is expecting about £20,000 in the divorce settlement.

Pension: Not currently saving.

Income protection: Stephanie has £100,000 of critical illness cover and £100,000 life assurance with Axa.

DIVORCE

Separation and divorce is stressful enough, even without considering the financial impact of such a major life change, says Clark.

He thinks that Stephanie should consult an independent financial adviser or a solicitor to make sure she gets the best possible deal from the divorce settlement. She is not yet 30 and there are all sorts of long-term issues to consider - lost private pension benefits, lost state pension benefits, reduced saving capacity and so on.

The divorce laws in Scotland differ from those in England and Wales, where all assets accumulated before and after the marriage will be considered for sharing. In Scotland, some of a couple's assets will only be shared if they were accumulated after marriage. Clark is particularly keen that Stephanie gets advice on pension sharing, because she may be entitled to part of her husband's pension fund in the future.

MORTGAGE

Bowes thinks that the most important thing for Stephanie to do right now is nothing. She should hold off making major financial decisions until she knows what her ongoing situation is going to be.

While her priority is finding a place to live, she should look at renting for the time being. Once her divorce settlement is finalised, she can start looking for a property she likes and can afford.

Cox says that, in the past, divorcees on low incomes, would have found it tough to get a mortgage. However, in 2003 John Charcol launched the first ever divorcee mortgage, to cater specifically for those who depend on their former spouse for income.

The mortgage enabled those who received regular maintenance payments from their former partner to obtain a loan in their own right, without needing to go through the courts.

More recently, Yorkshire Building Society and Accord Mortgages have teamed up to launch their own version of the divorcee mortgage. Lending is based on maintenance payments as well as income, and the mortgage is available across the majority of their products. Loans to value of 100 per cent are allowed.

Stephanie will have a sizeable deposit to put down on a home with her £20,000 settlement, says Clark. Her net income of £1,450 a month - plus potential maintenance payments - gives her a good chance of getting on the property ladder, as houses in Scotland are generally cheaper than in England.

Clark reckons that Stephanie could get a decent two- or three-bedroom home for between £80,000 and £100,000. Many lenders will take maintenance payments and tax credits into account - though not child tax credits, he adds. As a guide, borrowing, say, £60,000 would cost £365 a month for five years.

Though borrowing this much may not look realistic based on Stephanie's salary - it would represent a loan more than six times her annual pay - it is crucial that she explains to lenders that she has other sources of dependable income - especially the tax credits.

SAVINGS

At this stage, Stephanie's savings need to be kept in accessible accounts for potential legal and new home costs, says Clark. Online instant access accounts pay the best rates.

First Direct offers 5 per cent a year on a minimum balance of £1, and ING Direct - which has been consistently competitive for several years - pays 4.5 per cent.

For the children, the Bank of Scotland 10 per cent regular savings account is good. The interest is paid at the end of the year. But the money must be left untouched and £100 must be paid into each account every month. That's not affordable just yet, though Stephanie could drip-feed money in from her children's existing accounts.

Alternatively, the First Direct or ING accounts can be opened on behalf of children, who don't need a specialist savings product. Stephanie should fill in an R85 tax form so that savings providers can pay interest without tax being automatically deducted.

Cox suggests that, in the short term, Stephanie should invest her £20,000 in a high-interest account with easy access until she knows whether she will be buying property. Nottingham Building Society is currently paying 5 per cent on its telephone savings account, he points out, as good as anything that is available online.

Stephanie would benefit from saving a small amount each month into a tax-free cash individual savings account (ISA) to get her used to the idea of saving for one-off events such as holidays and Christmas, adds Bowes. It will mean less debt at these times of the year, but the money will also be accessible in emergencies - everyone should have a contingency fund in case unexpected expenses crop up.

One of the best ISAs available at the moment is at Halifax, which pays 5 per cent tax-free.

DEBT

Bowes says that Stephanie is in a better situation than she may realise. As long as she continues to use the 0 per cent credit cards and pay off the debt, she will hopefully be free of her liabilities as soon as possible. She should pay off the expensive £700 card first or transfer this balance to a 0 per cent card.

PENSION AND PROTECTION

Stephanie should check the benefits that her employers are offering, advises Cox. As a part-time worker she should have the same rights to join the pension scheme as a full-time member of staff. Stephanie may also be entitled to life assurance (death in service benefits) and sickness benefits. This could be a way of saving money - she may be able to drop the insurance she currently has.

Clark stresses the importance of paying as much as is affordable in difficult times. There is no point starting a pension only to stop it soon afterwards. If an occupational pension is not an option, £20 a month in a stakeholder pension is better than nothing at all, he says.

In addition, Stephanie should consider a small sickness insurance scheme, to ensure that she can still afford mortgage and living expenses should she be unable to work. £15 a month with Holloway Friendly Society would give nearly £400 a month income after just four weeks of sickness, payable until she is aged 60.

WILL

Stephanie needs to make a will urgently, stresses Clark. Dying without a will, known as intestacy, can be very distressing for family members as the courts would have to get involved.

The issues can be tricky. What if there is a dispute over who looks after Stephanie's children in the event of her death? In such a situation, they could be placed in emergency care. Does Stephanie want her ex-partner to have control over any of money that may be held in trust for her children? Possibly not. She should consult a solicitor as soon as possible.

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