I still surprise some of my clients, sitting in front of me with a pressing need for legal advice on a family law matter, when I take an avid interest in the identity of their other professional advisers and enquire about the financial planning that I expect to see in place. I suppose they expect me to launch into questions about unreasonable behaviour or compromising comments on their spouse’s Facebook timeline.
I’m always surprised that they are surprised. I wouldn’t dream of dealing with, say, a client who is facing divorce proceedings who owns a business, without talking to his or her accountant or financial planner. I will want to understand how the business, and the family unit, ticks and how both may be affected by the advice I will be offering.
As a family lawyer dealing with divorce, civil partnership or separation issues I always have one eye on the financial planning issues that will arise in a case. When I refer to financial planning, I do not mean sitting down with a divorce client and simply subtracting the outstanding mortgage from the value of the matrimonial home to work out the net equity. No, I mean something much more sophisticated and, in general terms, beyond the skill set (and regulatory authority) of lawyers.
I will set out just a few examples.
Financial planning in divorce and civil partnership dissolution
With the exception of the most straightforward of divorce cases, perhaps one where there are no children or little or no assets, I would look to import financial planning advice for my clients. The following scenarios are familiar ones:
- The family home may need to be sold but this will involve exploring realistically the mortgage capacity of each spouse. How much can be borrowed and what would be taken into account by a mortgage lender as income? Will bonuses count? If a wife is to receive maintenance payments from her husband after divorce, will this count as income in her name and improve her ability to obtain a mortgage advance?
- How much money will there be to live on: now, in five years’ time, or at retirement? When family lawyers sit down with their clients to complete financial disclosure they need to detail all the outgoings their client will face. Speaking frankly, for most lawyers, this has always been a bit of a chore. There’s nothing exciting about working out utility costs or the public transport costs for your client to get to her new job. Where’s the law in that? So it tended to be done in a pretty slapdash way. But this exercise is crucial. The outcome impacts directly upon your client’s quality of life after divorce. It deserves some time and attention. Financial planners use fairly sophisticated cash flow software that models the fluctuations in income and outgoings for clients over a long period of time. In other words, they properly plan for the future. This data is invaluable for the family lawyer who wants to negotiate the best outcome for their client in any divorce settlement.
- Never mind the family home, what about the pensions? How many times have I had a client say to me: “My husband says it’s not worth bringing pensions into it. We should ignore them”. It is surprising how often pensions appear to be ignored. I don’t ignore them. I have them valued and then I decide whether they can be ‘ignored’. Pension valuation can be difficult. And let me make one thing clear. £100 of pension funds for a female client is not the same as £100 for a male client. You see, women live longer (just have a look at the figures kept by the Office for National Statistics). So that £100 for a woman has to stretch further. In simple terms, it will not yield as much income in retirement. And here is another common refrain: “My husband says we should split the pensions in half. That’s fair”. Well it’s sounds fair, but it probably won’t be in the long run. Any family lawyer who fails to obtain advice from an appropriate expert, such as a financial planner, with the relevant pension expertise, is selling their client short.
- Maintenance payments for a spouse or children may have been agreed. But what happens if the payer of maintenance dies? I don’t understand why more lawyers don’t obtain advice for their clients on cost-effective insurance policies to pay out in the event of death. This solves any cash flow problems for the ex-partner who would otherwise struggle with the financial burden of any children of the marriage. And it also helps to prevent claims against the estate of the deceased under the Inheritance (Provision for Family and Dependants) Act 1975.
Financial planning for cohabitants
- The law in England and Wales does not provide adequate protection for couples who have cohabited, in some cases, for many years, and even had children. Living Together Agreements can provide a sensible financial planning exercise for the relationship ahead. It is particularly important where property may only be owned by one party or there is a common purchase but with unequal monetary contributions. It is crucial for Wills to be put in place if proper provision is to be made for the other partner. It is also possible to put in place nominations for death benefits under certain pension entitlements. Life insurance, again, can become a sensible step to take to ensure that untimely death does not leave partners or children in the lurch.
I am fortunate in my day job as I can call upon my colleague, Sam Jermy, a financial planner, to help my clients. The need to import financial planning advice is so integral to the family legal work that my firm undertakes that we formed a joint venture with a firm of chartered financial planners. A free initial consultation is perfect to identify the issues that I need to concentrate on in obtaining the best outcome for my clients. I appreciate that not everyone has access to a chartered financial planner. But, if you find yourself encountering some of the issues raised in this blog post, ask your lawyer if financial planning advice is needed. Don’t leave it until the doorstep of the court or the drawing up of the negotiated settlement – an opportunity for prudent and informed financial planning will have been missed.
STOP PRESS: I’m pleased to announce that Sam Jermy, a financial planner with Family Law Financial Planning, has offered some guest blog posts on the financial planning work he conducts with family law clients. In keeping with the vast Divorce Finance Toolkit budget at my disposal I have agreed a package of chocolate digestives and tea for Sam’s blogging contribution. If I judge his blog posts to be particularly helpful for my readers I will even let him dunk the biscuits. Watch this space.