More couples are deciding to part later in life

Divorce is not purely exclusive to the young or middle-aged, and we’re seeing a steady increase in what have been dubbed the ‘silver-splitters’ – couples who are deciding to part in later life.

This growth in ‘silver-splitters’ brings into sharp focus the impact divorce can have on retirement income. Pensions can be a significant source of accumulated wealth for those in their 60s. For that reason, it’s important that pensions are carefully considered in the context of a divorce.

Here are four important matters you might want to consider if you’re a ‘silver-splitter’ in this situation:

1. Make sure you have income for your retirement
Sometimes, one party wants to keep the house – after all, there might be memories of happier times there with young children. But taking on the whole mortgage can carry risks if you can’t afford it. Sometimes, downsizing and sharing a partner’s pension is a safer option. This is especially significant for women who have been stay-at-home mums, as they may not have their own pension, giving them a real gap in terms of what income will support them in retirement.

2. How to deal with a pension during a divorce
There are basically three ways in which a pension can be divided. Which one is right for you depends on your circumstances and the types of pensions involved. Taking legal and financial advice will help you make the right decision.

Pension offsetting: This is where a couple balance how much the pension is worth against another asset, such as the matrimonial home. For example, if one partner has a large pension and the couple jointly own a home worth the same amount, they may agree that one partner can keep the property and the other the pension.

Pension earmarking: A couple can arrange that when one party’s pension eventually comes into payment, a portion of it will be paid to the other party. Bear in mind, however, that divorce usually indicates the desire for a clean break, but earmarking means you have to keep an eye on your ex’s pension.

Pension sharing: This involves splitting a pension into two new funds, with each partner getting their own pension pot for the future. Since it involves more of a clean break, it’s often a preferred method.

3. Make a new will
As well as reviewing your pension during a divorce, it’s also essential to think about a new will.  If you don’t already have a will, then separating from your spouse is certainly a trigger event to prompt you to make one. Your new will should reflect your new situation to ensure the right people inherit from you.

4. Don’t forget to keep an eye on tax
If your divorce leaves you with assets worth more than £325,000, Inheritance Tax (IHT) could affect your estate in a way it didn’t when you were married, because your estate on death won’t get the spouse exemption, after you divorce. Assets which one spouse leaves to another are usually exempt from IHT.

What’s in your basket?

Diversifying your assets helps spread risk by lessening the potential for losses

Most investors are used to hearing the term ‘diversification’ – but it has a broader meaning than many realise. Diversification is the process of investing in areas that have little or no relation to each other. This is called a ‘low correlation’.

Spreading investment risk 
You can also invest in assets that have a negative correlation. This means that the assets will move in opposite directions to each other. Diversifying your assets helps spread risk because you’re lessening the potential for losses. If you had all of your money invested in one asset, sector or region and it began to drop in value, your investments would suffer.

By investing in assets that aren’t related to each other, while one part of your investment portfolio is falling in value, the others aren’t going the same way. Some assets may actually go up in value when others could decrease. It is also possible to diversify through investing in different markets, countries, companies and asset types.

Adverse market conditions 
Diversification is an essential part of building your investment portfolio. It can give you peace of mind that your investments will sustain in adverse market conditions and cushion losses. But it will not lessen all types of risk.

Diversification helps lessen what’s known as ‘unsystematic risk’, such as drops in the value of certain investment sectors, regions or asset types in general. But there are some events and risks that diversification cannot help with. These ‘systemic risks’ include interest rates, inflation, wars and recession. This is important to remember when building your portfolio.

Diversify by assets
Having a mix of different asset types will spread risk because their movements are either unrelated or inversely related to each other. It’s the old adage of not putting all your eggs in one basket.

Probably the best example of this is shares, or equities, and bonds. Equities are riskier than bonds and can provide growth in your portfolio, but, traditionally, when the value of shares begins to fall, bonds begin to rise, and vice versa.

Therefore, if you split your portfolio between equities and bonds, you’re spreading the risk, because when one drops, the other will rise to cushion your losses. Other asset types, such as property and commodities, move independently of each other, and investment in these areas can spread further.

Diversify by sector
Say you held shares in a UK bank in 2006. This investment may have been very rewarding, so you decide to buy more shares in other banks. When the credit crunch hit the following year sparking the banking crisis, the value of your shares in this sector (financials) would have tumbled.

So once you’ve decided on the assets you want in your portfolio, you can diversify further by investing in different sectors, preferably those that aren’t related to each other.

If the healthcare sector takes a downturn, this will not necessarily have an impact on the precious metals sector. This helps to make sure your portfolio is protected from dips in certain industries.

Diversify by geography
Investing in different regions and countries can reduce the impact of stock market movements. This means you’re not affected by the economic conditions of just one country and one government’s fiscal policies.
Many markets are not correlated with each other – if the Asian Pacific stock markets perform poorly, it doesn’t necessarily mean that the UK’s market will be negatively affected. By investing in different regions and areas, you’re spreading the risk that comes from the markets.

However, you need to be aware that diversifying in different geographical regions can add extra risk to your investment.

Developed markets like the UK and US are not as volatile as some of those in the Far East, Middle East or Africa. Investing abroad can help you diversify, but you need to be comfortable with the levels of risk that come with them.

Diversify by company
Spread your investments across a range of different companies. The same can be said for bonds and property. One of the best ways to do this is via a collective investment scheme. This type of scheme will invest in a basket of different shares, bonds, properties or currencies to spread risk around. In the case of equities, this might be 40 to 60 shares in one country, stock market or sector.

With a bond fund, you might be invested in 200 different bonds. This will be much more cost-effective than recreating it on your own and will help diversify your portfolio.

Beware of over-diversification
Holding too many assets might be more detrimental to your portfolio than good. If you over-diversify, you might not end up losing much money, but you may be holding back your capacity for growth as the proportions of your money in different investments will be too small to see much in the way of positive results.



Safeguarding your family’s lifestyle

We all want to safeguard our family’s lifestyle in case the worst should happen. But only a quarter (24%) of adults in the UK with children under 16 have any form of financial protection, a significant drop from 31% in 2013, according to the latest research from the Scottish Widows Protection Report. With over half (54%) of this group admitting that their savings would last just a couple of months if they were unable to work, a significant protection gap exists for families in the UK.

Real challenges for households
Almost half of households (46%) with children under 16 are now also reliant on two incomes, and a further 14% of this group state that parents or grandparents are dependent on their income. There would be real challenges for these households if one income were lost.

Childcare costs are another area that can be impacted by the loss of one parent’s income, equally so if grandparents could not continue to provide support. With more parents working and with increasing childcare costs, up 27% since 2009[1], 40% of those with children under 16 rely on their parents to help with free childcare.

Following the death of a parent 
While some government support is available in times of need, the current state bereavement benefits and support system is based on marriage or registered civil partnerships and doesn’t yet replicate the modern family we see today. Unmarried couples and long-term partners are left in a welfare grey area – particularly when it comes to looking after their dependent children following the death of a parent.

People are realistic about the support available, with only 1% of those with children under 16 believing the state would look after their family if something were to happen to them. 45% of this group also believe that individuals should take personal responsibility for protecting their income through insuring against the unexpected happening to themselves or a loved one.

[1] Family and Childcare Trust – Childcare Costs Survey, 2014.