In our weekly series, readers can email in with any question about their finances to be answered by our expert, Charlotte Ransom. Charlotte has 30 years’ experience working in financial services and wealth planning, including 10 years as a partner at Goldman Sachs. She co-founded Netwealth, which specialises in low-cost investing and financial planning advice. If you have a question for her, email us at money@inews.co.uk.
Question: I am a recently divorced mother of two children and feel I need some help managing my finances now. With a divorce settlement lump sum of £460,000, I can’t justify ignoring the potential benefits of investing as I am financially independent and in a good job. How should I invest my money and maximise my current £300 a month pension contribution to make them go as far as possible?
Answer: Any lump sum requires careful consideration and you are right to consider the potential benefits of investing. It’s important initially to make sure your settlement is secure, and then you can take the appropriate steps to secure your future.
First, make sure your money is safe. While typically up to £85,000 is guaranteed for organisations covered by the Financial Services Compensation Scheme (FSCS), if you have a temporary high balance (up to £1m) you have protection for up to six months from when your account was credited. So make sure your money is in an institution covered by the FSCS and that you are earning a decent rate of interest even if the money is held in an instant access account.
Next you should think about a checklist of sensible things to do, and paying off any debt is likely to occupy the top of the list. This includes credit and store cards, and any outstanding loans you might have. Once that is done, you will have a clearer idea of where you stand and how much you can invest towards your future.
This clarity is essential. Research by Stephen Jenkins, a professor at the London School of Economics, found that working women’s income, on average, suffered much more than men’s after a divorce. Women have also historically faced greater challenges to get appropriate advice to help with financial planning, especially since our pension pots are typically smaller than men’s.
There is no need to rush to make a decision and you will want to ensure you are confident that you are able to do what is best for you and your children. Setting aside some additional cash that could cover you for three to six months in the event of an emergency will also potentially provide you with greater peace of mind during a period of transition.
Now let’s get back to the interest you expressed in investing your settlement. Long-term investing has proven to be the best approach to outpace inflation and to boost the overall value of retirement pots and you are absolutely right to consider your options. Since you are contributing to a pension already, you may consider putting a chunk of your settlement into a pension over the next few years and then to drip-feed the remainder into an Isa to give you more flexibility.
Both pensions and Isas have valuable tax-free advantages that you will not get with a bank deposit, and this is an important consideration despite the more tempting levels of short-term interest rates currently. The chance to build up investment returns in a tax-free format is very valuable, particularly if you are able to achieve the right balance between readily accessible Isas and a pension that can be accessed once you are aged 55 or above.
You mention that you have a good job, so hopefully you can make the most of your annual pension contribution of up to £60,000 a year over the next two to four years. You don’t say how long it is until you intend to retire and maybe it is still some way off. The longer you are able to continue earning a salary, the more likely you are to be in a position to take on investment risk. This is because there is a longer timeframe for the value of any investments to recover should they suffer short-term market-based losses and you have your salary to rely on for immediate cash needs.
As part of an assessment of your overall finances, it may also be an opportune time to review the pension you already have and check that it is fit for purpose: ensure you are not overpaying to invest (your all-in annual fees should come in at 1 per cent or less) and that your pension is invested in a diversified set of asset classes (such as stocks and bonds) in order to benefit from each at different points in the economic cycle.
If you discover your pension is not up to scratch – either you are paying too much in fees or it is not appropriately invested – now would be a good time to find a more appropriate provider while you still have a long time to accrue additional value to your retirement funds. As I have written about many times, a 1 per cent saving in fees every year amounts to thousands of additional pounds in an individual’s retirement pot and we should all make sure we are not giving it away to others unknowingly.
The Isa annual allowance is lower – at £20,000 – yet apart from tax-free growth, you also have the advantage of easy access to your Isa funds should you need them. This may be of particular benefit if you are intending to help your children pay for their education or wish to contribute to their future in another way. Additionally, you may want to kickstart their own financial journey by putting a lump sum into a Junior Isa (Jisa), and get them into the habit of looking after money and seeing the positive impact that even small amounts can make over time. Parents can contribute up to £9,000 per child each year to a Jisa.
Getting divorced is one of the stages in life when circumstances can meaningfully change – as is true with other key events such as building up to retirement or receiving an inheritance – and this is also when financial planning advice can be very worthwhile. In your case, it may be helpful to understand better how much investment risk you could or should be taking to meet certain personal financial goals, for example.
This could make a substantial difference to how much money you have to live off in years to come. You may also want to review the ideal ratio of pension and Isa investments to help with cashflow planning, or consider inheritance planning – an unbiased viewpoint can work wonders to help identify what you should do and what you should avoid.
The choices ahead may seem a little daunting. Making decisions about money management can feel complex and understandably causes a certain amount of anxiety. This is why I would reiterate that you take your time to evaluate all aspects of your finances. However, now is a good opportunity to think about your future and that of your children – potentially with the help of a qualified adviser if need be – to define a clear path to meet your long-term financial goals.