Rebecca Williams, client director at Brown Shipley, says that cash flow modelling can make all the difference during divorce negotiations when securing the right settlement for your client and helping them to plan new financial goals for their future. The use of modelling tools enables lawyers and wealth managers to work together to support their clients going through a separation and create a structured plan for the long term.
Building a plan helps the client understand what kind of settlement they need and what they can achieve going forward. For those who have already received their settlement, it is about making sure they do not run out of money and managing realistic expectations of spending in the future.
The importance of cash flow planning during a divorce – preparing for the future
A cash flow model is effectively a client’s personal balance sheet. It takes into account all assets, liabilities, income streams and spending.
For clients going through a divorce, building a cash flow plan will help them understand how much income they need for the rest of their life. It takes into account day-to-day spending and any number of other requirements including; school fees, holidays, retirement and ad-hoc items such as buying a new car. Assumptions about inflation, investment returns and taxation are built into the bespoke model.
It may be that the client will not be able to maintain the same standard of living following the divorce and a cash flow plan can help prioritise spending and manage budgets going forward. A number of scenarios can be modelled to reflect different spending patterns so that comparisons can be made and discussed as part of the negotiation.
Once the required amount of income is agreed, the model is then used to look at the capital sum needed to produce it. It is important to ensure income – which might have to support a client for many years following a divorce – retains its spending power over time.
It is also important to take into account the client’s attitude to investment risk; a client with a more cautious approach may need a larger capital sum to generate the income they require.
Post-divorce – setting new goals
For clients who have already reached a settlement, the period after a divorce is about setting new goals for the future and planning to achieve them.
Where a capital sum has been awarded, a cash flow plan can be used to consider how to structure assets to provide income in the most tax efficient way and in line with a client’s attitude to investment risk.
Using a cash flow plan at this stage is essential for managing future expectations. Importantly, it will highlight if the client is spending too much and is likely to run out of money. It is better to know this at the start and review spending accordingly, than to have a nasty shock further down the line.
For many clients, ensuring sufficient income in retirement is key and often a divorce settlement will include a pension share that needs to be transferred into a new plan in their name.
A cash flow plan will consider the value of the pension share along with any other personal pension funds, charges on the new plan, the potential to make further contributions and likely investment returns – in order to give the client an idea of the income they can expect at the point they choose to retire.
If the client’s circumstances suggest they will not have a sufficient pension to fund spending in retirement, the cash flow plan can help look at other assets, for example downsizing a property to release additional capital.
For those who have significant pension funds, a cash flow plan will also highlight lifetime allowance issues and enable the adviser to work with their client to mitigate a possible tax charge.
Flexibility of cash flow plans
Cash flow planning is an interactive process and in order to be most effective should be demonstrated live on screen during a meeting. All cash flow models are a snapshot in time and are based on a set of assumptions being fulfilled.
The reality is that client circumstances and objectives change and it is important to build long-term relationship with clients and ensure that cash flow plans are reviewed regularly.
By working together, lawyers and wealth managers can ensure that clients going through divorce can undergo a smooth transition to their new lives. Cash flow planning tools are advantageous in ensuring that a client has sufficient money to fund their daily life, future needs and retirement.
Rebecca joined Brown Shipley in October 2015; she provides advice on risk management, investments, retirement solutions, estate planning and lifetime cash flow planning. Rebecca has experience of working closely with clients going through divorce and using lifetime cash flow to help clients structure their settlement tax efficiently and planning to meet future goals. Rebecca is a Chartered and Certified Financial Planner, a Fellow of the Personal Finance Society and the Chartered Institute for Securities and Investments. Rebecca also holds the Society of Trust and Estate Planners Certificate.