When the divorce settlement lands: keeping options open

For months, sometimes years, the numbers in a divorce are provisional, including valuations, offers, pension calculations and competing views of a fair division. When the transfer finally arrives, relief can quickly be joined by a new pressure: the feeling that something must be done with the money immediately.

The client may be exhausted, while also adjusting to a new home or deciding where that home should be, helping children adapt and reconsidering work. The amount received will be known, but the jobs it must do may not.

This is the moment to resist false urgency. The immediate priority is not always to settle a lifetime investment strategy. It may be to give the capital a considered home, keep it accessible and reduce the number of decisions competing for the client's attention.

Please note that investments can go down as well as up and clients may get back less than they invested.

Some clients may choose to keep part or all of the settlement in bank deposits while their immediate plans are being finalised. For a substantial balance, the considerations include when the money may be needed, how it is held, the tax treatment of any interest and the potential effect of inflation over time.

Deposit interest may be subject to income tax, depending on the client’s circumstances and available allowances, while inflation may reduce the money’s long-term purchasing power. Eligible deposits are currently protected by the Financial Services Compensation Scheme up to £120,000 per person, per authorised firm, should the firm fail. A balance arising from divorce or civil-partnership dissolution may qualify for temporary high-balance protection of up to £1.4 million for six months, although eligibility is assessed by the FSCS and supporting evidence may be required. Once any temporary FSCS protection ends, or where the balance exceeds the applicable limit, keeping eligible deposits within FSCS limits may involve using more than one separately authorised firm. Different banking brands can share the same authorisation, so separate accounts do not necessarily provide separate protection. National Savings and Investments (NS&I) accounts operate differently. As the government’s savings bank, money held with NS&I is backed by HM Treasury, meaning eligible NS&I savings are 100% secure rather than being subject to the FSCS limit.

Some of the settlement may remain in cash for immediate and short-term requirements. At scale, however, that position can involve active decisions and administration rather than being a wholly passive default.

Our Cash and Cautious Bond Portfolio may provide a middle course for capital whose purpose or timing is still being worked through. It combines cash and cash-like holdings with high-quality, relatively short-dated bonds. The portfolio is actively managed with an emphasis on preserving capital, liquidity and stability, while seeking the potential for competitive returns and taking account of the client’s tax position where appropriate. Tax treatment depends on individual circumstances and may change.

Holdings include cash, Treasury Bills, money-market funds, gilts and selected high-quality short-dated bonds issued by supranational institutions or government-backed agencies. Treasury Bills are short-term debt issued by the UK Government, commonly with maturities of one, three or six months. Gilts are UK Government bonds, while money-market funds invest in a range of high-quality, short-term instruments. Bonds issued by supranational institutions and government-backed agencies can provide further diversification.

These are deliberately cautious building blocks, but they are not risk-free. The portfolio remains an investment rather than a deposit account. Bond prices can move as interest rates and market conditions change, issuers may fail to meet their obligations and inflation may outpace returns. Short maturities and high credit quality are intended to moderate these risks, not eliminate them.

The portfolio’s features are designed to work together. It can be constructed around the client’s anticipated timescale, liabilities and tax considerations, while its highly liquid holdings allow funds to be accessed if circumstances change. The amount realised may, however, be affected by market movements, particularly where a bond is sold before maturity.

The usefulness of short-dated bonds in divorce cases is not simply that they are cautious. Their maturity dates can also be aligned with expected expenditure, creating a flexible solution that can be managed according to individual circumstances.

Consider a client who receives a substantial cash settlement but expects to buy a house within the next 18 months. There may also be school fees to meet and an amount earmarked for expenditure over the following two years.

Those liabilities can be considered separately from capital intended to provide income ten or 20 years from now.

A bond held to maturity has a defined repayment date. That makes it possible to construct a portfolio with known future requirements in mind. Investments can be selected so that capital is due to become available around the time it is expected to be needed. This is a rather different proposition from putting the entire settlement into markets and subsequently having to sell investments whenever cash is required.

Interest on a substantial bank deposit can create a sizeable income-tax liability. Certain bonds are treated differently.

Gilts normally pay a coupon, which is subject to income tax. Gains arising from increases in the capital value of gilts are generally exempt from capital gains tax for individuals. Some gilts trade below the amount the government will repay at maturity. Where a suitable gilt has a low coupon and is bought below its redemption value, a greater proportion of its potential return may come from capital uplift rather than taxable income.

Certain sterling-denominated, non-convertible bonds, including some SSA issues, may also be qualifying corporate bonds, for which gains are generally not chargeable to capital gains tax. The treatment depends on the individual security and must be checked case by case.

For some higher-rate and additional-rate taxpayers, these features can produce a more attractive post-tax outcome than receiving an equivalent headline return entirely as savings interest.

This is not a universal tax advantage. The outcome depends on the investments selected, their purchase price and maturity, the client's tax position and whether bonds are held until maturity. Tax treatment depends on individual circumstances and may change. Comparing headline yields alone can therefore be misleading.

A cautious bond portfolio should not automatically become the permanent home for an entire divorce settlement. As the client's requirements become clearer, different parts of the capital can be assigned different purposes.

One portion may need to remain immediately available. Another could sit in the Cash and Cautious Bond Portfolio against needs expected over the next few years. Capital with a much longer horizon may ultimately be invested in a diversified discretionary portfolio with a greater emphasis on growth.

The proportions will differ from client to client. The value of connecting financial planning and investment management is that liabilities and timescales can be established first, and then the assets structured around them. The cautious portfolio can also sit alongside longer-term investments, allowing different levers to be used as markets and liquidity needs change.

For clients approaching implementation, the immediate priority is often to make sure the settlement has an appropriate home while longer-term plans take shape. Some will already know how they intend to use and invest their wealth; for others, important decisions about property, expenditure and future capital needs will still be unresolved.

Early coordination between the family lawyer, financial planner and investment manager can establish what needs to remain accessible, what is likely to be required over the next few years and whether part of the capital has a sufficiently long horizon to be invested differently.

It can also make the transition feel less abrupt. A client who has never managed substantial wealth, or who no longer trusts an adviser associated with their former spouse, is not simply handed a large balance and a list of investment choices. They have a named person who understands the divorce context, can work with the wider professional team and can respond when plans change.

Divorce creates an awkward mismatch: the settlement arrives on a fixed date, but emotional adjustment does not. A client can be wealthy on paper and still feel tired, disoriented and vulnerable.

The Cash and Cautious Bond Portfolio cannot decide where the client should live, how work should change or what support their family may need. It can, however, keep capital accessible, professionally managed and tax-aware while those decisions become clearer. Seeing a relatively simple structure working can also help restore a sense of control, without asking the client to become an experienced investor overnight.

That is not standing still. It is preserving options at a moment when they are unusually valuable.

For more information about how we can help your clients, please speak to your usual Evelyn Partners contact.