Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

Divorce is a time of massive change.  Besides the many emotional issues that you must deal with, there will be massive financial changes. 

You and your partner were on a particular financial trajectory and now that has come to an end.  There will be less available cash than you were used to as your combined basic living costs will have increased.  The two of you, for example, will no longer be living in one dwelling so your fixed costs like rates and rent will have doubled.  You must recalibrate your finances. 

Budget

The first thing to do is to draw up a budget. As you no longer have two incomes coming into the same household, your expenditure pattern will be different. It is rare that people can maintain the same lifestyle immediately after a divorce.  You need to understand how much will be coming in, adapt your lifestyle and manage your expenses accordingly.  I have an easy-to-use budget spreadsheet that I can send you if you have not drawn up a budget before

Protect your children’s income

You then need to check that your children will be financially okay should anything tragic happen.  Check that you have sufficient life and disability cover to ensure that they will be looked after if you are no longer around or are unable to work.  If you are receiving maintenance payments check that there is risk cover in place should the payer die or become disabled. 

Retirement savings

Your partner is entitled to a share of your retirement savings and you are entitled to a share of theirs. If you can, avoid the temptation of taking this as a cash benefit.  Not only will you pay tax on this, but it could also create financial problems in the future when you may not have sufficient retirement savings.  I would recommend that you invest the proceeds into a preservation fund.  You will not pay any tax on the money, and you will have the option of making one withdrawal from this fund should you run into financial difficulties later.

Change beneficiaries

Beneficiaries on your policies and retirement funds will probably need to be changed.   I have come across several cases where ex-spouses are still the nominated beneficiaries on policies.  This can cause a lot of unnecessary complications.  I would recommend that you get your financial adviser to run a database search and draw up a complete list of all your policies so you can change your beneficiaries.

Update your will

You will probably need to amend your will.  You must ensure that you have the right structures in place to manage the financial arrangements of any minor children.  You must ensure that any money you leave them actually goes to and supports them.  I have seen a lot of unhappiness caused by a sloppily written will resulting in the children’s inheritance being used to support the second family’s lifestyle.

Invest payouts wisely

When assets are divided, there will often be a cash payment made to one of the parties as part of the settlement. Avoid the temptation of leaving this in your bank account as you could end up using  this money to support a lifestyle that is beyond your means.  Remember, when you get divorced, there is a very good chance that your disposable income will be less than it was when you were married.  Rather invest this money where it will grow but be accessible in an emergency.