Untangling your finances through divorce
Going 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.
The pandemic-forced lockdown has proven for many people that certain relationships are very important to them, however sadly it has also been a time that has challenged many and forced them to re-evaluate. The divorce rate as reportedly set to increase by somewhere between 20-40% as a result.
Irpreet Kohli, Family solicitor at Freeths comments:
"During the pandemic and since lockdown was eased, we have sadly seen an increase in new enquiries. Couples have spent more time together than usual and they’ve had the time and space to reassess their relationships and what they want for the future. Lockdown has also given couples who have been separated for some time already to begin to formally sort out their long overdue divorces."
If you or loved ones are facing divorce, there are many things to consider. During what is already a difficult time, you will need to make some critical decisions that will impact your immediate and ongoing financial position.
Often people realised, after going through a divorce, that they would have benefited from talking to a financial adviser and it’s hindsight that makes them realise how valuable it can be earlier on during the process. You only get one chance to negotiate and reach a financial settlement and an adviser can help you assess your current finances and implications and come up with figures that are at the right level for your financial future. They can also help understand some of the complexities and offer a perspective that combined with the legal view from your solicitor gives you a more rounded ability to make objective decisions.
Key financial considerations
Untangling your joint finances and agreeing settlement terms can be a complex and lengthy process. The key areas of your finances that your divorce lawyer will help you navigate within your settlement are what capital split there should be (cash, properties, investment); how the income should be divided and whether there should be maintenance; and what provision you would have in retirement (pensions or other future provision).
When considering those issues, your divorce lawyer will work with other professionals such as your financial adviser, particularly when dealing with the following key areas.
Unpicking joint 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."
Sorting out a new 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 of the marketing for the right solutions.
Protecting 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 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.
Dividing your pensions
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.
"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."
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. Your Adviser can help you or them step aside from the emotion of it all and take an outside view.
Working effectively with family lawyers, such as Irpreet Kohli at Freeths can also ease the burden for you and make the process of dealing with numerous professionals at this difficult time as efficient and easy as possible.
If you would like a referral to a legal firm to work in this way please talk to your Financial Adviser.
We are open for business as usual, our Financial Advisers are available on the phone so please contact us if you have any questions.