Despite predictions that divorces would rise during Covid, as couples worked and lived together at home, the latest figures from the Office for National Statistics show that they actually fell in 2020.
That said, if you are going through a divorce, you might have agreed to a settlement that includes a substantial lump sum. If so, you could be asking yourself: “how do I use my lump sum settlement to secure my financial future?”.
Read on to discover three shrewd ways you could use your lump sum to ensure your long-term financial security.
1. Use it to meet your short-, medium- and long-term goals
Creating a financial strategy could help you ensure you can meet your goals in life and maintain your existing lifestyle. This could include creating an emergency fund to make sure you can deal with life’s future curveballs, inflation-proof your lump sum, and generate an income that will support you.
A financial planner can help you create a plan that considers all your wealth, to ensure you’re maximising your growth potential as tax-efficiently as possible. As well as providing peace of mind, it might also allow you to look forward to a brighter financial future.
2. Boost your pension
If you have received a divorce settlement, consider starting a pension or boosting contributions to your existing fund. Money that’s put into a pension typically receives tax relief, so if you’re a basic-rate taxpayer every £100 that’s paid into your retirement fund will only cost you £80.
If you’re a higher-rate taxpayer it will cost just £60, and as an additional-rate taxpayer you’ll pay £55 for every £100 contributed.
The amount of contributions that receives tax relief is limited to your Annual Allowance, which, in 2021/22, is the amount you earn or £40,000, whichever is lower. If you are an additional-rate taxpayer, you may trigger the Annual Allowance tapering rules, which could reduce your allowance to £4,000 (2021/22).
If your lump sum is sizeable enough, you might also want to consider using “carry forward”. This could allow you to use three years’ worth of unspent Annual Allowance to boost the amount you can contribute and receive tax relief on.
For example, in the 2021/22 tax year, you may be able to contribute up to £160,000 and receive tax relief.
3. Invest to protect its value
A major threat to the long-term value of cash is inflation. This is the rising cost of goods and services and has the potential to devalue your lump sum in real terms, as £1 in the future is likely to buy less than it does today.
Research by pension provider Royal London reveals that a sustained rate of 5% inflation over 10 years could reduce £10,000 worth of savings to just £6,564 in real terms. This is based on the savings account paying 0.67% and assumes no tax is paid on interest.
When you consider that the Guardian recently reported inflation reached 5.5% in January 2022, and could exceed 7% by April 2022, ensuring your money keeps pace with the rising cost of living is more important than ever.
One way you could do this is to invest in a Stocks and Shares ISA, which offers growth potential and tax efficiency. As ISAs are not subject to Capital Gains Tax or Income Tax, any growth it makes and income you decide to take will be tax-free.
To demonstrate why investing could be a better way to inflation-proof your money, consider the Barclays Equity Gilt Study of 2019. It tracked the performance of £100 invested in cash, bonds, and equities between 1899 and 2019 and makes for interesting reading.
It found that £100 invested in cash in 1899 would have been worth around £20,000 in 2019, compared to £2.7 million if the money had been invested in the stock market. The study also revealed that the stock market outperformed cash in 91% of 10-year periods.
Please remember that past performance is no guarantee of future performance, and investing should never be entered into lightly, as you could receive less than your original investment.
You could also use your lump sum to help tackle climate change
You may not be aware that you could use a pension or investments to help combat rising global temperatures. According to Pension Age, research revealed that using sustainable funds could be one of the most effective ways to combat climate change.
The article explains that, if you have a pension of around £100,000, putting it into Environmental, Sustainable and Ethical (ESG) funds could save up to 64 tonnes of carbon dioxide a year. It adds that using ESG funds could be 40 times more powerful in tackling climate change than switching to a renewable energy provider.
Get in touch
If you are wondering about the best way to use your lump sum divorce settlement, or would like to discuss ESG funds, please get in touch. You can contact me at email@example.com or by calling my office on 01793 766 123.
Alternatively, call my mobile on 07525 177 046. Please note that while I offer high standards of service and ensure any plan is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.