What to do with a lump sum payment after divorce or dissolution
You may get a lump sum as part of your financial settlement. If you haven’t already decided what you’ll use it for, think about your options carefully. Take professional advice if you’re unsure about what to do.
Looking after your lump sum in the short term
Put the lump sum in a savings account while you weigh up your options resulting from the court order, unless you already know exactly what you want to do. Keep a ‘buffer’ in your current account or in an easy access savings account to pay for unexpected expenses.
Keeping your lump sum safe
Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS). The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.
It is worth noting that some banking brands are part of the same authorised firm. If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.
Money in National Savings & Investments is guaranteed by the government, no matter how much you have.
Find out how your savings are protected by reading our guide, Compensation if your bank or building society goes bust.
Securing your future
There’s no ‘one size fits all’ approach to securing your financial future. How you do it will depend on:
- How much money you have to save or invest.
- Whether you have any existing debts to pay off.
- How long you can leave your money in a savings account or invested.
- How much risk you are prepared to take and whether you can leave your money invested for the long term. For example, would you panic if you invested £10,000 and it was worth £9,000 six months later? Bear in mind that your attitude to risk may vary depending on what you’re investing for.
Dos and don’ts
- Do take time to work out what your immediate financial priorities and your long-term goals are.
- Do make sure you have six months’ expenses in savings before you think about investing.
- Do take independent financial advice unless you feel comfortable choosing your own investments.
- Do think about your attitude to risk. Many people who lose money investing do so because they cash in their investments when prices have fallen.
- Don’t make long-term financial decisions when you are feeling under pressure, as you may not make the best choices.
- Don’t invest until you have paid off debts such as your store card, credit card or bank loan.
- Don’t invest in anything that you don’t understand.
- Don’t think investing has to be all or nothing: you can always invest a small amount and see how you feel about it after six months or so.
Read more in Action plan – make an investment plan.
Buying a new property
Work out what you can afford if you need to buy a new home.
You can check this on our Mortgage affordability calculator.
If you only have enough for a small deposit (say, five or ten per cent), you may be able to borrow through the Help to Buy scheme. Read more in the article Help to Buy scheme: everything you need to know.
Don’t forget that you will have a number of fixed costs to pay, such as stamp duty, survey fees and legal costs.
Estimate the overall buying and moving costs using our guide.
Investing in a pension
Don’t forget your pension. You may feel that there are other – more immediate – financial priorities. But don’t put off for too long paying into your pension or starting a new one.
You may have a lump sum from your ex-partner’s pension that you need to invest. If that’s the case, you may need advice about what to do with it.
Start by gathering information on the pensions you already have. Work out what your State Pension is likely to be, and how much you think you might need to live on overall when you retire.
If you’re employed, your employer will already have a pension scheme you can join or will offer one by 2018. This is likely to be a better option than setting up your own pension, as your employer will pay into it as well.
Read more in our guide on Automatic enrolment – an introduction.
Securing your children’s future
You may want to invest some of your lump sum to pay for the costs of your children’s education or the costs of bringing them up.
Think about using a tax-free account, such as a Junior ISA (or a Child Trust Fund if your child was able to have one). There are limits on how much you can pay into them every year. You can choose a cash or stocks and shares investment ISA, or you can split the money between them.
Read more in our guide Junior ISAs.