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Divorce is a difficult time in anybody’s life and a process that most people, quite understandably, want to get through as quickly and painlessly as possible. But allowing emotions to cause you to abandon the thoughtful, sensible approach you adopt for other financial decisions may be costly.
Though divorce is about far more than money, especially if children are involved, it is a mistake to enable the upheaval, and often trauma, that typically comes with ending a marital relationship to mask a frank reality: divorce is one of the biggest financial changes you will ever experience.
The unique and drastic events of the pandemic in the past two years, especially the varying degrees of lockdown, have unfortunately meant more people are expected to be facing these changes. Stowe Family Law, the UK's largest family law firm, recently revealed their divorce enquiries surged by 95% in the first three months of 2021 compared to the same time in 2020.
Critical decisions must be made through the divorce process that will significantly impact both your immediate and long-term financial position. But while everybody sees the importance of a solicitor’s support through the process, it’s far less commonplace to seek the advice of a financial adviser.
“People are already going through big financial changes right now because of the cost-of-living crisis, which can both cause marital problems or exacerbate existing ones,” says Mark Rodgers, Independent Financial Adviser at Ascot Lloyd. “When they have to deal with divorce, people sometimes think that their solicitor will do everything, however most solicitors aren’t experts in personal finance planning."
“Often people may just want to navigate the easy route, which is understandable. But the easiest route isn’t necessarily the best one financially. If you're going through change from a personal financial point of view, you should be armed with as much information as you can possibly get. Any solicitor worth their salt should be recommending a financial advisor works alongside them.”
Last month saw a major change in divorce laws in England and Wales with the introduction of no-fault divorces in which neither side no longer needs to accept blame. This is a positive step which should make splits faster and possibly even less hostile, but financial decisions shouldn’t be rushed. Divorce not only means dividing assets but also re-adjusting financially for the future.
The division of assets is defined in a financial divorce settlement, which once agreed upon is made legally binding after a solicitor has drafted a consent order. If both sides can’t agree, they may need to ask a court to decide. Just like solicitors, judges are not personal finance experts. Both court and solicitor fees will also be costly, so advice from an independent financial adviser can be valuable.
With only one chance to reach a financial settlement, it’s crucial to understand the implications for both the present and far into the future. In a complex and often lengthy process, a financial adviser can keep you on the right track amidst the temptation to focus on the split itself, not how the split is done. The combined insights from your solicitor and your financial adviser will enable you to make better decisions.
The key areas they will navigate with you include how cash, properties and investments should be split and income divided, whether there should be maintenance payments, and what provisions should be made for retirement. Weighing up the various elements, and how they stack up against one other, can often leave people wishing they’d engaged with a financial adviser earlier in the process.
Given its tangible form and significant value, not only financially but also often emotionally, property can often dominate divorce settlement discussions. More often than not, selling the family home is the only option, and when the separated individuals then seek to buy new properties, they need to know what their mortgage capacity is. Maintenance income (or outgoings) can affect affordability assessments, so the advice of a mortgage expert may also be key.
Settlements often involve maintenance payments for a former spouse or for any children involved. The potential ability of a person who receives maintenance payments claiming against the estate of their former spouse should they die can be a contentious issue, while also adding uncertainty to the estate planning process. Appropriate protection, however, can be put in place.
Through the course of a marriage, many couples will accumulate numerous accounts in which they are both named. For the most part, contacting the various institutions to inform them of the split is reasonably straightforward, including bank accounts and credit cards. But there are other instances where untangling joint finances warrants a far more careful and thoughtful approach.
One example is investments. How joint investments are dealt with, and the timing of any asset transfers, will have tax implications. Transferring assets after the tax year of separation, for instance, could trigger a large tax charge which, without financial advice, you don’t see coming.
As well as helping you unravel joint investments, ensuring all financial decisions are tax efficient, your financial adviser will make you consider the split of assets more strategically. It may be beneficial for someone on a higher income to hold longer-term investments such as pensions, for example, while lower income earners with shorter-term financial needs might require more of the liquid assets, including cash savings and proceeds from the sale of jointly-owned property.
Meanwhile, in the race to close joint accounts, many couples can overlook the consequences of stopping direct debits on joint life insurance protection. Yet when they come to set up new life insurance protection individually – possibly ten years older than when they set up the last one and with more health issues now – they can soon find the premiums have gone up drastically.
Most misunderstood of all, and underestimated, are pensions. Though they are the key to a comfortable retirement, and often the most valuable assets owned by a couple, within the divorce settlement process their importance is often downplayed because they are future assets. A financial adviser will help you see the real value of pensions as well as outlining the ways they can be split through pension sharing orders, pension attachment orders or offsetting.
There are different kinds of pensions, including defined benefit and defined contribution, and the outcome of pension sharing orders can vary according to factors like age and gender. Amidst this complex landscape, an actuary also might need to be instructed to assess the pension benefits that have accrued and how they can be shared in a fair way to benefit both parties.
“Divorce is the biggest financial change you’ll probably ever experience but people tend to ride roughshod through it with very little planning,” says Mark Rodgers. “Don't go blindly cashing in ISAs or investment bonds when you don't need to, as you’ll quickly find you’ve caused an unnecessary tax burden. A financial adviser will help you look at your individual future circumstances, and your individual short and long-term needs, to see if you can apportion the assets more astutely.“
“A short-term focus may cause problems. Just like you wouldn't think about getting divorced without a solicitor, you shouldn't go into a divorce scenario without access to a financial adviser to run through the implications and opportunities that proper planning provides. It's a two-pronged approach that ensures you consider every element to walk away in the best position for you.”
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