Divorces rose as the pandemic put families under unforeseen new pressures last year, and now the usual post-Christmas wave of break-ups has begun.
A new law making it quicker and easier to divorce was passed in the summer and will take effect later this year, but it’s still important to sort out marital finances properly rather than rush through it.
Money experts offer tips on doing this fairly and explain the risks to avoid below.
Break-ups: A new law making it quicker and easier to divorce will come into effect later this year, but there is no date scheduled yet
1. Prioritise a financial settlement
A new ‘quickie’ divorce law will remove the need to prove fault and speed up the legal process to six months, says Kay Ingram, director of public policy at financial planning group LEBC.
But she warns: ‘This increases the need to consider the financial arrangements sooner, if the financial pitfalls of divorce are to be avoided.’
How do courts split assets in a divorce
The starting point is an equal division of the capital assets and pension provisions – but this is only the start, explains lawyer Fiona Wood of McAlister Family Law.
The law governing financial settlements is a law of discretion, so lawyers cannot predict precisely what settlement people will receive, she explains.
‘There are various factors that a judge must take into when considering what a fair settlement is.
‘These include the length of the marriage, the assets that you both brought into the marriage, your respective ages, your respective incomes and earning capacities and most importantly your respective needs.’
Couples are already allowed to get divorced before a financial settlement is finalised, with agreements made later by mutual consent, or enforced by court order if they don’t agree, but Ingram cautions against doing this.
‘The problem with this approach is that once the decree absolute is granted the couple lose many of the financial privileges of a married couple.
‘These include an exemption from inheritance tax and capital gains tax on assets transferred between them, the right to claim state bereavement payments and the loss of spouse pensions and lump sums payable from private pension schemes.
‘Should one party die prior to the financial settlement being agreed, but post-divorce, the surviving party could lose thousands of pounds of lump sum and future income payments and be landed with a large tax bill, which would not have been payable if still married.’
2. Assess your assets and needs fully – and honestly
It is important to assess how much money you will need to get by on after the divorce, when deciding how to split assets.
‘Focusing on gaining the right to retain a family home, without factoring in ongoing running costs can make the settlement unworkable,’ points out Ingram.
‘Both parties need to understand their future income and spending needs if a realistic financial settlement is to be agreed.
‘Gaining the right to a lump sum or maintenance settlement, which the other party cannot afford to pay, just ends up with more legal wrangles.’
Ingram stresses the importance of both partners fully disclosing all their assets and income during this process.
Kay Ingram: Any attempt to hide income or assets can land you in jail
‘Failure to do so is contempt of court and family lawyers will always counsel against any attempt to hide income or assets, which can land you in jail,’ she says.
‘Those attempting to circumvent the law will often seek to persuade their spouse to complete the legal process without legal or financial advice; this could be suspicious behaviour and consulting a family lawyer and financial adviser is always to be recommended.’
When it comes to the practicalities, Emma Hammond, financial planner at Charles Stanley, says: ‘Create a full list of assets and needs, as well as projected budgets for the future, particularly additional costs that may involve children or dependants.’
She says it’s important that expenses such as the cost of buying and moving to new homes aren’t missed. Meanwhile, she cautions that inflation can be overlooked when it comes to future spousal maintenance.
Emma Watson, head of financial planning at Rathbone Investment Management, says: ‘To keep a similar lifestyle post-settlement, it’s important to understand how much you require day to day.
‘Monitoring your daily outgoings, major bills and any expected future expenditures (such as private school fees) will give a goal to aim for when negotiating the settlement.’
3. Value your pensions
Pensions are often a divorcing couple’s second most valuable asset after the family home, and are sometimes worth even more, yet are frequently overlooked in financial settlements.
‘Always get your pension valued in the marital balance sheet when you’re discussing separation,’ says Laura Laidlaw, head of customer savings at Standard Life.
‘But remember, only the person who is a member of the pension scheme, or who has taken out the pension, can ask for this.
‘In Scotland, only those pension rights built up during the period of the marriage or civil partnership will normally be regarded as marital assets, unlike the rest of the UK where all pension benefits are generally treated as marital assets.
It is particularly important that those with a defined benefit pension recognise how valuable this important financial asset is
‘It is particularly important that those with a defined benefit pension recognise how valuable this important financial asset is and make plans for how it will be split. The value of this is based on how many years you’ve worked, and the salary you earned.’
Laidlaw says there are three main options when dealing with pensions in a divorce – offsetting their value against other assets, sharing them on a clean break basis, and one partner earmarking some of the income to be paid to an ex-spouse after retirement.
In 2019, only 13 per cent of financial settlements included the division of pension assets according to court statistics, says Ingram.
She says a final salary pension expected to pay £10,000 a year could have a value ranging from £250,000-£400,000.
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The average 65-year-old has a pension worth £103,000, although the value of a man’s is three times as much as a woman’s on average at this age, she adds.
Ingram says the basic state pension cannot be shared on divorce, but the earnings-related element which could be built up before the rules changed in 2016 can be and may be worth up to six figures.
Older women who qualified for their state pension before 6 April 2016 may be entitled to an increase based on their ex-husband’s National Insurance record, she says.
4. Don’t forget tax
Couples who split up assets and will be on separate incomes after a divorce should consider the tax consequences, and whether they need help from an accountant, financial adviser or planner.
For example, Laidlaw says the options for dividing pensions outlined above have different tax implications.
‘If you’re trading off a tax-free asset to get taxable pension rights, the tax hit must be reflected in the split of marital assets,’ she says.
‘The ability to share or offset pension assets can provide welcome flexibility and can help structure a settlement in a way that is tax-efficient.
‘However, if you chose to do this, the pension will be taxed on the owner’s income. So, if your ex-partner owns the pension you need to consider the tax being paid on their salary. You might end up paying more tax than you would on your own income.’
Laidlaw suggests asking pension providers for information about this, or getting free help from The Pensions Advisory Service.
Tim Stovold: Allow for a possible wealth tax in a financial settlement, if you might be liable
Meanwhile, rich divorcing couples should beware the possibility of the Government suddenly introducing a pre-dated wealth tax, as floated by an influential group of academics and tax experts last year.
‘The Wealth Tax Commission’s report says that to prevent individuals taking steps to avoid the tax once announced, the assessment date should fall before the date of that announcement – which could be before the divorce was even contemplated,’ says Tim Stovold, head of tax at Moore Kingston Smith.
‘If one spouse holds most of the family assets but will be required to transfer these to the other once the divorce is finalised, they could be left with the entire wealth tax liability but few of the assets the liability relates to.
‘Any couples divorcing who could fall within the wealth tax charge will need to allow for this in any settlement they reach.’
Changes to capital gains tax have also been proposed by the Treasury’s tax gurus, and though it is not clear whether the Government will take them up, it is worth keeping a eye on these developments too.
Atticus Kid, wealth planning assistant at JM Finn, says: ‘It is crucial that any individual considering divorce seek advice on the tax implications this may have for them as soon as possible.
‘Inheritance Tax, income tax and capital gains tax can all be impacted upon divorce and effective planning can help to minimise any cost.’
5. Consider your insurance needs
One pitfall in divorce is agreeing maintenance payments but not ensuring they will be paid in the event of death or ill health, says Ingram.
‘Maintenance payments are usually paid from the income of the ex-spouse. Insurance can be arranged to ensure these payments are made in the event of the death or ill health of the payer.
‘Alternatively, an asset, such as a lump sum payable from a pension or life policy, can be earmarked to be paid to the ex-spouse in lieu of future maintenance.
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‘The courts can require these as part of the financial settlement, but this is often omitted or not followed through.’
Watson suggests you look at whether you need insurance protection after a divorce.
‘Consider what could happen to your family should your income fall to zero, or if you became ill or passed away. Putting the right insurance in place would help protect you and your family and mitigate any risk should the unexpected happen.’
6. Keep divorce expenses in mind
‘Getting divorced is a costly process. Solicitors’ fees are likely to be high, even if a financial settlement has been negotiated and agreed,’ says Hammond.
‘If agreement has not been reached and the case goes to court, you could likely expect these fees to increase substantially, particularly if children are involved.
‘A divorce can materially impact upon all aspects of your life and continue to affect your plans for the foreseeable future.’
A mediator can help you reach a divorce settlement, and a financial planner can aid negotiations and help avoid a costly court case, she adds.
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