Deborah Williams got divorced in November last year. Her ex-husband ended their 21-year marriage online in a process that took minutes and cost about £100. They have spent the past seven months making various arrangements and there are now only a few loose ends to tie up. The divorce should be finalised within weeks.
The next step for Deborah is to put herself on a sound financial footing as she reconsiders her retirement plans. The 43-year-old teacher has moved out of the family home and is renting a house in the centre of Leicester, close to the primary school where she has worked part-time for the past 13 years. She earns £17,500 a year.
The two-bedroom detached house that she is renting is owned by a friend who is travelling in Tanzania for two years, so Deborah is paying a reduced rent of £300 a month. Utility bills and her union membership, along with day-to-day living costs, are about £200 a month. Her only other big expense is car insurance and breakdown cover, at £418 a year.
Her ex-husband and 17-year-old daughter remain in the former family home, a three-bedroom detached house in a small village on the outskirts of Leicester and he has stated that he would like to buy her stake.
The property has been valued at £140,000 and there is £23,000 outstanding on the mortgage, which her husband is paying each month. Based on the current repayments, it will be cleared in ten years.
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Deborah is happy to sell her stake to her ex-husband, though the couple’s mortgage lender has told them to use a solictor. She has not received any legal advice at any stage of the divorce proceedings.
The sale of her share of the house would leave Deborah with a substantial lump sum — about £50,000 by her own estimate. She is unsure whether to use this to save for a deposit on a new home or invest it in a pension or savings for the longer term.
“I don’t have a problem with renting and I’m worried about taking on a new mortgage at this stage in my life,” she says. “Teaching is a tiring job and I’m getting old. It is not the kind of job that I can do for ever. I don’t want to be working until I’m 66.”
Deborah is looking forward to her retirement, but she is concerned about the size of her pension. She has worked full-time for only three of the past 22 years and her pension pot is small as a result.
The Teachers’ Pension Scheme has estimated that her annual retirement income will be £4,844 from the age of 66. She will also receive a £14,500 lump sum on retirement.
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Since 1994, Deborah has also been paying £27 a month into an AXA Sun Life additional voluntary contributions policy.
“I want to know that I will be able to live independently and survive on my pension,” she says. “With the best will in the world, I accept that I am never going to have loads of money, but I would like to know how I can boost my retirement income.”
The bulk of the savings accumulated with Deborah’s ex-husband have already been spent on a trip to New Zealand with their daughter to see a friend who emigrated recently. The trip will still go ahead despite their separation, but Deborah’s ex-husband will now go for the first three weeks of the holiday and she will go for the final two weeks.
Deborah has £3,300 left in a First Direct savings account, paying only 0.2 per cent interest, but she would like advice on alternative accounts that provide a better return. “I would like to get the most out of my money without tying it up for years,” she says.
As well as her savings, Deborah would like some help with her credit cards. She uses an M&S credit card when she is shopping for clothes in Marks & Spencer and uses a Sainsbury’s Nectar credit card to pay for her grocery shopping.
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She says: “I would like to stick with just one card, but I am not sure which one is the best to stick with.”
Though she uses both cards frequently, Deborah always clears the balance at the end of the month and has no other debts.
What the experts say
Pension: Jason Witcombe, Evolve Financial Planning
“Deborah should check whether the quotation she has received from the Teachers’ Pension Scheme is based on her work history to date or projects forward until her normal retirement date. She should get an update from AXA of what her pension is worth and what funds it is invested in. She should also obtain a free state pension forecast.
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“Armed with this information, she will have a much better picture about what her pension position might look like in retirement.
“She may also like to find out whether there is scope to increase her working hours, which would also have the effect of increasing her pension.
“Deborah should also make sure that any pensions that her husband has are taken into account as part of the divorce settlement.
“I would urge her not to focus only on pensions when it comes to retirement planning. Owning a house outright or building an Isa portfolio are equally valid ways of saving for retirement, particularly as she may not wish to be working into her mid-60s.”
Action plan
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Get an updated pension estimate from AXA and a free state pension forecast.
Consider increasing working hours to boost income and pension.
Include property or Isa portfolio in retirement planning.
Savings and investment: Danny Cox, Hargreaves Lansdown
“Deborah currently holds £3,300 in a savings account and should consider moving this to an Isa to save 20 per cent tax on the interest. She can place up to £3,600 a year in a cash Isa, so could add £300 before the end of the tax year.
“Once a divorce settlement has been agreed and paid, I would recommend that Deborah puts this in a high-interest savings account.
“Buying a house in her own right would probably involve using most of any settlement as a deposit and taking out a fresh mortgage.
“If Deborah decides to remain renting, she could consider longer-term investments with her settlement. She should hold a healthy cash cushion of at least £10,000 to cover emergencies. She should consider National Savings & Investments index-linked certificates, which pay a tax-free return of 1 per cent plus the rate of inflation.
“If Deborah is happy to take some stock market risk, she could also use her equity Isa allowance. The best introduction into stock market investing is probably to use a unit trust Isa.
“An equity income fund produces income that Deborah should reinvest initially, but which could be taken in retirement to supplement her pension. My favourite funds are Artemis Income and Invesco Perpetual Income.”
Action plan
Move savings to a cash Isa and put divorce settlement in a high-interest savings account.
Consider risk of higher interest rates on mortgage repayments.
Look at equity Isas.
Financial planning: Dennis Hall, Yellowtail Financial Planning
“If money was simple then a £100 online divorce may seem like a good idea, but for Deborah this is probably penny wise and pound foolish.
“Apart from the family home, pensions are likely to be the largest asset that Deborah and her husband own. Unfortunately, pensions are far from simple, and divorce merely adds to the complexity. The time spent at home raising their daughter, and subsequently working part-time, have a value that needs to be reflected in the overall settlement. It sounds simple and convenient to split the physical assets down the middle, but this ignores the unpaid and unpensionable contribution made to the household.
“It would make sense to plan for buying a new property because her savings are unlikely to support a lifetime rental commitment, and if she needs to get her hands on capital later in life, she will have the property to fall back on.
“Having a large deposit will make it easier to get a mortgage but Deborah should try to hold back some capital as a cushion against any emergencies or unforeseen expenditure. This presupposes that her husband will be able to raise sufficient finance to buy out her share of the property. If not, the property may have to be sold, and the current makret conditions are hardly ideal.
“Finally, if Deborah pays off her credit cards in full each month, the interest charge is of less concern, as are low introductory rates. She should look for cards with long interest-free periods on purchases and also those that offer perks that she uses. For example, if she likes to travel, she could eventually earn free flights with the Lloyds TSB Airmiles Duo card.
Action plan
Seek professional legal advice. Consider buying property with divorce settlement.
Switch to a credit card that offers more relevant rewards.
Deborah’s response
I am still not convinced that I have a right to take part of my ex-husband’s pension. I do not think it is fair, but I know that this is a personal point of view and the experts clearly disagree.
I will speak to a solicitor this week about dividing the house. I think my ex-husband can afford to buy me out and we have allowed the process to drag on for too long.
I will certainly ask AXA about the current value of my policy. I need to stand up for myself a bit and get to grips with my finances. Budgeting was always a problem before, but I have now bought an accounts book to keep count of my ingoings and outgoings.
I did not realise that cash Isas were often instant-access accounts and I have been worried about tying up my money while the divorce was still not finalised.
I haven’t thought about savings and investments but I will now. I will look at the types of mortgages available and consider the options for buying another house. I do not like the idea of paying off my mortgage until I am 67 but I could try to get a shorter term.
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