Use your divorce settlement wisely
Veronika Handsley 33, lives with her husband in Forest Hill, south-east London – however, she and her husband are currently in the process of divorcing.
Born in Slovakia but with British citizenship, Veronika is an ex-fashion model. She doesn't have an income at present and lives on £75 a week that she receives from her husband. When her decree absolute is granted, however, she will receive a settlement of £50,000.
Veronika has current accounts with NatWest and Nationwide; she currently owes £500 to Lloyds TSB Bank, which she is paying back on a payment plan of £1 a week.
She hopes to travel to Israel in the next six months, where she plans to marry her Cypriot boyfriend, and wants to use some of the divorce settlement money on the wedding and as financial support while the couple look for work.
Veronika's main concern is how best to manage the lump sum she will receive from her divorce: how to transfer money easily from the UK to Israel and the best investment strategy to adopt.
The couple don't yet know where they will settle in the long term, so Veronika wants to keep her options open.
Peter Weston, a partner at Thornton Springer Chartered Accountants in Norwood, south-east London, thinks Veronika's first step should be to plan carefully.
The most important thing for her is to work out where she and her future husband will live. At present, they have no home in Israel, nor any work.
Once her divorce completes Veronika will receive £50,000, of which she will get £47,500 straight away. The remaining £2,500 will be paid to her before she leaves the UK to settle any outstanding bills.
Weston says her £500 debt to Lloyds TSB should be given priority. Veronika is the subject of a county court judgement, which ruled that she should pay back £1 a week. So once she receives her lump sum, she should clear this debt first.
Some of the remaining money needs to be spent on shipping her belongings to Israel and establishing her new life there. This includes wedding costs and rent while the couple seek employment. However, Weston advises that she keeps this expenditure to a minimum.
For her day-to-day expenses in the UK, Veronika should keep using her Nationwide and NatWest accounts and not attempt to open any more before she leaves for Israel.
Weston explains: "Veronika has encountered difficulties in opening UK bank accounts due to her lack of credit history, so she needs to use her existing accounts.
"As she has never previously entered into a financial agreement [her husband dealt with the financial matters], she has not registered on the electoral roll and so has no evidence of a permanent address. In other words, she has no financial history that can be proved."
Weston offers some general advice on how Veronika can improve her credit rating: "She should avoid living in properties of multiple occupation and making multiple applications over a short period for credit cards or other credit arrangements.
She should also sign onto the electoral roll, obtain a credit card and use it correctly, and keep her finances separate from any other individual."
To prepare for her move abroad, Weston suggests Veronika places the majority of her funds in her Nationwide Flex account – foreign withdrawals from Nationwide accounts are currently free of charge until November.
Weston also recommends a SWIFT transfer when she needs to put her money into an international account. This can be done through her Nationwide account by completing a transfer form and taking it into her local branch.
But as this costs £20 a transfer, Weston warns she should only use SWIFT for large amounts of money.
Veronika could also use a pre-loaded debit card for her spending money while abroad. These are available, for example, from the Post Office, Nationwide and the Co-operative Bank.
"Exchange rates on these cards tend to be better than on other cards. Also, they don't usually incur the same sort of charges when using ATMs abroad, but will give you the same protection," adds Weston.
If Veronika settles in Israel, he recommends opening a local bank account once she has a fixed address. "She should transfer some of her lump sum to support herself, but keep some funds in the UK until she's more certain of her future."
To open a foreign bank account, proof of identity and address is required, and the application must be in person.
Develop an investment strategy
One of Veronika's financial objectives was to save around £10,000 of her divorce settlement. She needs an investment strategy if she decides to return to the UK after some years.
Weston recommends that she invests the money in the UK before leaving for Israel, so it can accrue interest.
"If she's risk-averse, she could consider a long-term fixed-rate deposit account and arrange for interest to be paid gross, as she'll have no other UK taxable income," he says.
"If Veronika wants to actively invest some of the money, I'd recommend a cautious/balanced portfolio of investment funds, unit-trust style." Weston stresses, however, that she should get advice about these options before she makes a commitment.
In the longer term, he points out that Veronika will have to reconsider her will as her existing one will become invalid on her new marriage.
She should draw up a new will in the country that becomes her place of residence, and include any assets she owns there. In addition, she should update her British will, which will cover any assets she has in the UK.
Finally, Weston urges Veronika to think carefully about the money she'll receive from her divorce settlement, and budget prudently to preserve her funds for as long as possible.
As she has been living on a modest sum up until now, it may be hard to suddenly have to manage a large amount of money.
Veronika found the makeover very informative as it gave her some idea of how to prepare her finances for moving abroad. "It's difficult because I don't know anything certain about my future.
But it helped with questions about my bank accounts: if I settle in Israel, I'll open a savings account there, and leave the money in sterling," she adds.
Peter Weston is a partner at Thornton Springer Chartered Accountants in south-east London. Visit thorntonspringer.co.uk or call 0208 771 8661
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.