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6th May 2024
Latest news Financial planning You and your finances

Untangling divorce financesGoing through a divorce is one of the most stressful life events that anyone will face and sorting out the finances and dividing assets will be a big part of any divorce settlement. For most people it also means re-adjusting their financial plans for their new future.

How can a financial adviser help during a divorce?

A financial adviser can be a valuable asset during a divorce process, alongside a solicitor. Typically, people consult a financial adviser only after their divorce settlement is agreed upon. However, involving a financial adviser early on can play a significant role in understanding and shaping the divorce settlement. Financial advisers can help individuals make informed decisions and put financial plans in place to help them take control of their financial future. 

While a solicitor's primary focus is on the legal aspects of divorce, a financial adviser takes a holistic approach, considering the long-term financial implications of decisions and their impact on your life. Financial advisers are there for you throughout the divorce process and beyond, ensuring you clearly understand your financial situation. They can also ease the burden of decision-making and administration by assisting with paperwork and deadlines.

Resolving joint finances and agreeing on settlement terms can be a complex and lengthy process. Your divorce lawyer will guide you through key financial areas within your settlement, such as the capital split, which includes cash, properties, and investments. They will also help you determine how income should be divided and whether there should be maintenance, as well as what provisions you would have in retirement, such as pensions or other future provisions.

When considering these issues, your divorce lawyer may work with other professionals such as your financial adviser, particularly when dealing with key areas.

Divorce and investments

Like many couples, you may have built up several investments during the course of the marriage. Care should be taken here, because there are important tax implications depending on how the investments are dealt with and in particular the timing of any asset transfers as an unexpected and potentially significant tax charge can arise if assets are transferred after the tax year of separation. It is important to ensure that you take advice from financial advisers to support the unravelling of investments and your financial adviser would be able to help do this. To maximise the assets available to you and your ex-spouse, it is important that all financial decisions are tax efficient.

Jo Bentley, Connect Team Relationship Manager at Ascot Lloyd highlights:

"It’s also vitally important to consider the order in which the assets will be required. For instance, if one partner has a higher income, this partner may well be able to financially recover quicker from the effects of the divorce and therefore elect to hold investments which may be longer term, such as pensions. The other spouse may have shorter term needs and require more liquid assets in the shorter term, such as cash deposits or property sale proceeds to supplement shorter term income needs and expenses. This will help longer term investment performance potential to increase and ensure shorter term capital is readily available for immediate needs, such as a house funding shortfall."

Divorce and Mortgage

Many divorce settlements involve buying new properties and this can only be done when you know what your mortgage capacity is and whether it is affordable. It is increasingly difficult to obtain a realistic opinion from lenders as to how much they would lend on a residential mortgage. There are also issues around long-term income, for example, some lenders will include maintenance income within their calculations, while others will not. 

With the current climate adding additional complexities and challenges, like accessibility to mortgages and the stamp duty holiday, it’s important to consider all aspects of affordability not just now but in the longer term and search the whole market for the right solutions.

Divorce maintenance payments

As part of the financial settlement, there is often a requirement for one party to pay maintenance, either to the former spouse or for any children. Should the person paying maintenance die, the other party may be able to claim against the deceased’s estate for future maintenance payments. This can create a lot of uncertainty for the estate planning process. However, it is relatively easy to remove this uncertainty by putting appropriate protection in place. This gives the person receiving maintenance much needed reassurance.

Pensions and divorce

Irpreet Kohli at Freeths solicitors reflects on how pensions are often misunderstood or underestimated within financial settlement because they are future assets and aren’t considered as important as other more immediate assets.

Irpreet Kohli comments:

"Pension schemes are often some of a couple's most valuable assets and are important for the future financial security they represent.  When it comes to sorting out your pensions, there are a number of options to weigh up…

1 - Pension sharing order: where a percentage of one party’s pension benefits are transferred to the other party

2 - Pension attachment orders: where a percentage of the death benefits, lump sum benefits and/or income are earmarked to be payable to the spouse at the relevant time

3 - Offsetting: where non-pension assets are shared instead of sharing pension benefits."

Irpreet also comments that it’s important to ensure that all pensions are not considered or compared as being identical as there are many different types of pensions (for example defined benefit and defined contribution) and the outcome of pension sharing orders will vary depending on many factors including the age and gender of the individual.

Typically, an Independent Financial Adviser will be instructed by parties to consider what they could realistically achieve from a pension share. An actuary may also need to be instructed by both parties as a ‘single joint expert’ to assess the pension benefits that have accrued and provide a solution as to how these benefits can be shared in a fair way, to the benefit of both parties.

Simon Annear, Independent Financial Adviser, Ascot Lloyd comments that:

"It’s also important to consider how to share your assets on divorce, for those with larger uncrystallised pension pots who may be close to the life time allowance, it can be more tax advantageous to consider taking other marital assets in return for a greater share of your pension to avoid future lifetime allowance tax charge.

And moving forward from your settlement, it is important that a rigid financial plan is put in place over the initial years to ensure long term housing needs continue to be met with your changed finances managed efficiently to help achieve your new objectives and longer term financial health."

Legal documents during divorce

During a divorce, it is important to review and update your legal documents, including your Lasting Power of Attorney (LPA) and wills*. An LPA is a document that allows someone you trust to make decisions on your behalf if you become unable to do so. It is important to review your LPA to ensure you still trust the person you appointed as your attorney and that they are still willing and able to act on your behalf.

Equally important is the review of your will to ensure it still reflects your wishes, especially if you have named your former spouse as a beneficiary or executor. Divorce doesn’t revoke a Will, nor does it mean your Will from before you were married comes back into effect. Your current Will remains valid, but for inheritance purposes, your ex-partner is treated as if they had died when your marriage or civil partnership was dissolved.  This can have a serious effect on your estate* and so it is crucial to update your Will to avoid any potential confusion, disputes, or other unintended consequences that may arise.  Making a new Will after a divorce allows you to:

  • Make sure your estate is disposed of in the way you want
  • Ensure any new partner is provided for
  • Allows you to make appropriate provision for any children

The divorce process can be emotionally and financially challenging, and it's important to seek professional advice to ensure that your rights and interests are protected.

Whether you are considering a separation, in the midst of negotiations relating to divorce or considering how best to maximise a divorce settlement for your future, Ascot Lloyd can give you the advice and support you need to make those all-important decisions.

Indeed, at this time you might be called upon to help family members who are also facing these kinds of challenges.  A financial Adviser can help you or them step aside from the emotion of it all and take an outside view.

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