It can be of enormous value for separating couples to have input from an independent financial expert when looking at options and trying to reach an outcome regarding their separation and the division of assets.
For Mediation Awareness Week 2020 I interviewed financial expert, Karen McGrath, to find out more about the role a financial expert can have within the mediation process.
Karen McGrath is a Chartered Financial Planner with Skerritts Consultants. She is also a Pension Transfer Specialist, and her main area of expertise is in pensions. Karen has been a financial adviser for 12 years and has a wealth of experience in advising on all aspects of pensions and retirement planning. Karen can also help with investment advice and recommend life insurance protection where appropriate. She is an accredited member of Resolution and abides by the Resolution Code of Practice.
What type of financial issues do you see commonly arising for couples who are getting divorced or separated?
The most frequent need I see is for help with understanding the pensions. It can be pretty daunting for people trying to interpret pension statements, understand that all pensions are not alike, and get to grips with the way their pensions are valued – especially when there is so much else going on in their lives at the time.
They may want to know what the options are for dividing the pensions and what it will mean for them now and in the future. For some people the divorce process brings the pensions into the limelight and forces people to start thinking about where their income will come from in the future when they stop work.
The way pensions are taxed can also be challenging to understand, and people with large pensions want to know what their position is and whether they will be affected by annual allowance or lifetime allowance.
For older couples, pensions can present an immediate source of capital and/or income and they need advice on how benefits can be accessed and the tax implications.
What role can an independent financial expert have in mediation?
I think getting a financial expert involved in mediation can help bring clarity around specific areas of the financial settlement. For example, we can provide income projections or produce cash flow charts and identify when and how pensions could be used. A pension expert will also be able to advise on what would be an appropriate share of the pension should a pension sharing order be made.
They will also be able to help clients understand some of the quirks of pensions and explain why pensions of seemingly similar value might not provide a future equal income.
In the mediation process, the expert is completely independent and impartial, and is working for the good of both parties.
There needs to be a clear picture of what the financial situation is to enable outcomes to be reached within mediation. How can a financial expert help with this?
Most of the financial information will have been obtained prior to mediation, and a financial expert would be able to take the time to review the information and be able to ask further questions that might bring greater clarity.
They will also be well placed to advise when a more in-depth valuation report might be needed on the pensions and when this might be worthwhile.
It is not for the financial expert to say what should happen, but they can offer guidance on what the consequences could be of solutions proposed by the parties.
Many divorcing couples just want to deal with the here and now and leave pensions out of it. What are the main risks to them of doing this?
This can be a real temptation, especially for younger couples where the benefits of the pension will not become available for many years.
People don’t always appreciate the true value of the pensions. A good example is a couple where one partner has a final salary pension, and the other an employer’s money purchase scheme. They pay a similar contribution each month, and so may think they have broadly similar future pensions. In reality the two schemes are completely different and the final salary one is likely to have a much higher value, which might be overlooked if professional advice is not sought.
Offsetting is a popular way for the value of pensions to be shared – but again there is a risk of understating the value of a pension if advice isn’t taken.
A barrier to reaching an outcome at mediation can often be concern about what the future holds and uncertainty around financial security, particularly if within the relationship to-date one of the couple has not had to deal with budgeting and financial management. How can a financial expert help with this?
If there is an imbalance and one party is not comfortable with talking about financial matters, a solution could be for the mediation process to agree that the less confident partner should meet with a financial adviser. This will give them the opportunity to talk through the issues, ask questions and empower them to go back into mediation with better understanding and able to make decisions with more confidence.
You are an accredited member of Resolution, what does that mean and what added value does that enable you to bring to the mediation process?
I am one of only a handful of accredited financial advisers in the country, and the only one in Sussex. The exams to pass are pretty rigorous, but do help prepare us to deal with this area of work. I’m also a Chartered Financial Planner and pension transfer specialist.
Resolution has a code of conduct that we follow, and also provides ongoing training.
I would like to think that clients can have confidence in the work I do, and that I have the background knowledge and experience to add real value to the process.