The two most stressful circumstances a person can experience are divorce and the death of a spouse, according to the Life Change Index Scale (The Stress Test) (T.H.Holmes and T.H. Rahe. “The Social Readjustment Rating Scale,” Journal of Psychosomatic Research. 11:213, 1967.). We don’t want to contemplate either; however, if we face the prospect of both, we can develop a plan to ensure our financial position is protected. These two experiences have their own unique challenges, however there are common financial considerations.
We generally accept that we should insure our property and possessions, but sometimes we overlook the importance of insuring ourselves. Life, Total and Permanent Disability, Trauma and Income Protection covers allow us to insure our lives, our good health and our ability to earn an income. Many people have some level of personal insurance; however, it is estimated that fewer than half of Australians have enough Life insurance (Rice Warner ‘Underinsurance in Australia 2015’ report). If you suffer the loss of your partner before retirement, you may find yourself in the position of being the sole provider for your family. The same could also be true if your partner falls ill or is injured. Having a partner who has adequate personal insurance will relieve the financial burden. Additionally, the adequate insurance of the surviving spouse or single parent is of paramount importance. If your family relies on one income and you become ill or injured, the financial impact on your family can be devastating. Unless you are in the position to self-insure, it is vital to review your personal insurance arrangements to ensure the cover would protect your family and yourself in any eventuality.
Who looks after the Money?
Traditionally, men made most of the financial decisions of a household. Of course, in 2020 that is often no longer the case. For many reasons, one partner may take ownership of the household finances and the other partner relies on them to perform this role. We all have our roles in a relationship; although both parties should make sure they are fully informed regarding their financial arrangements. Do you know what the family balance sheet looks like? Could you assume full ownership of this role if your partner could not? Are you aware of where the funds are if your relationship breaks down? In cases where a spouse passes away, the accounts in their name will not be immediately accessible, even if you are the beneficiary of their Will. Everyone should have access to cash, either in their own personal account or through a joint account with two signatories and/or a credit card in their own name, even if the limit is not sizeable.
Depending on where you are in life, retirement can seem a long way off. You might be focused on raising small children and working a limited amount, so superannuation isn’t a priority. However, those circumstances can last for a significant number of years. Consequently, it can eventuate that you have contributed little to your retirement savings for an extended period. You may continue to work limited hours to care for children while they are at school and maybe later on, you will be the one to help look after your parents in their old age. All of these circumstances put many women on the back foot as they approach retirement; although there are a number of contribution options available to address this imbalance, as outlined in my article ‘Super Considerations for Women’. If you are on your own, you have sole responsibility for planning for your retirement and it is important to plan for the future.
Who gets the Money?
On the death of a member, the superannuation fund trustee determines the beneficiary. This might be reasonably straightforward; however, making a non-lapsing or binding death benefit nomination or directing the pension to revert to a spouse, whichever suits your circumstances, is a good idea. Where the beneficiary of funds in super is a dependant, the funds will be received tax-free. It is important to understand that even where all nominations are in place, it will take some time for the funds to be paid. This is another reason to have access to cash funds that can be accessed to meet a few months’ costs.
Regarding divorce and estate planning, it is important all parties seek legal advice before entering into an agreement or finalizing arrangements. You may well be able to come to an agreement amicably or be able to easily decide your beneficiaries; however there could be other details you haven’t considered, such as whether there should be a split of superannuation funds in a property settlement or whether your Will should include a provision for a testamentary trust. Another point to note: on separation it is important to review your estate planning arrangements including your Will, Enduring Power of Attorney and any Binding Death Benefit Nominations to ensure they continue to be in line with your wishes.
It is widely accepted that in the event of death or divorce, legal advice should be sought. However, seeking financial advice is also important. A Financial Adviser assists in identifying your goals and objectives and then provides recommendations to help you achieve them. We all enjoy the good times, but in bad times more than ever we need someone who can look at the situation objectively, understands the financial implications and will work in our best interests.
Disclaimer: Any advice included in this article is general and has been prepared without taking into account your objectives, financial situation or needs. As such, you should consider its appropriateness having regard to these factors before acting on it. Any tax information refers to current laws, is not based on your unique circumstances and should not be relied on as tax advice. Before you make any decision about whether to acquire a certain financial product, you should obtain and read the relevant product disclosure statement.