Divorce is the equivalent of a tornado splicing through the foundations of the best laid financial plan. Australia Economic Outlook

Naturally, during separation (even if amicable) the goals and interests of the members of a separating couple diverge. 

Below we outline four key pillars or the foundations of a long-term financial plan and discuss how these may require reconstruction from the ground up.

Superannuation & Retirement Planning

Superannuation outside of the family home is typically our largest asset, particularly mid to late way through our career.

Commonly, superannuation balances are skewed toward the higher income earner, however in some instances, contributions are made into an older spouse’s account to allow for earlier access, if Social Security optimisation strategies have been implemented, the younger member may have a larger balance.

Member balances can reflect earnings differential, age-based planning, and the investment focus of one dominant partner.

Pre separation commonly “your super is ‘our’ super” is the mindset of both members of a couple.Divorce is the equivalent of a tornado splicing through the foundations of the best laid financial plan.

Separation can throw the choice of superannuation provider into a spin. A significant change in fund balance can result in existing products becoming unsuitable. Various superannuation funds offer tiered pricing and fee aggregation making them cost-efficient with scale.

Once member balances are split, the pre-existing funds may no longer be the most efficient choice due to much lower or higher balances.

Further, one member of the couple is often more engaged with the investment strategy and so the underlying investments should be reviewed during or post-settlement to ensure they fit with members’ potentially differing level of engagement and tolerance for investment risk.

In the case of SMSF clients, should the SMSF be retained?If the four key pillars of a couple’s sound financial plan are impacted by the cyclone that is separation, each pillar must be reconstructed individually for each party.

A new destination fund will be required if the couple owned a Self-managed Superannuation Fund (SMSF).  Who will leave the fund? Should the departing member commence a new SMSF or transfer to a retail/industry fund?

If a new SMSF is to be established, who should bear the cost? How should the assets be separated, is it a proportional split, or are some specific investments better suited to one member?

If a direct property is involved, will retaining the property be feasible? A financial adviser not involved pre-separation can provide advice to answer these questions.

InvestmentsFinally, disposable cash flow used to maintain insurances can change and affordability issues that may arise can be addressed with the help of a qualified financial planner.

Investments held personally whether shares or property will likely form part of a settlement.

Decisions need to be made as to whether the investment plan remains suitable, and who is capable of maintaining the investments.

One party may have a preference for shares the other property, or it may be that an investment property is to be sold, and then there are questions as to where to invest the proceeds.

InsuranceIn your new financial plan, ensure you check if disposable cash flow used to maintain insurances has changed and if affordability issues have been raised.

Post-separation, insurance protection needs to change as one member may become over-insured and the other under-insured.

A new mortgage is applied for in some instances for both parties separating, requiring Life, TPD and Income protection levels to be revised.

Alternatively, the obligation to repay a mortgage may fall on one member, where previously the repayment obligations were shared, creating a situation of underinsurance. Custodial arrangements can also impact on pre-existing insurance if work hours are increased or reduced.

Finally, disposable cash flow used to maintain insurances can change and affordability issues that may arise can be addressed with the help of a qualified financial planner.

Death Benefit Nominations on Superannuation & Estate Planning

Superannuation does not automatically form part of your Estate and superannuation nominations often need updating post-separation.

A new financial plan with solid foundations can provide clarity and a new direction to help achieve your financial goals.

With the guidance of an emotionally detached and experienced financial advisor, each party will benefit. Careful consideration should be given when updating nominations as a spouse is a natural choice and a tax-efficient beneficiary, it is critically important to review your entire estate plan post-separation without exception.

If the four key pillars of a couple’s sound financial plan are impacted by the cyclone that is separation, each pillar must be reconstructed individually for each party.

For More Information

If you require more information or would like to create a financial plan post-separation, please contact the family law team for a confidential review of your personal finance.

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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