A divorce can be one of the most stressful and emotional experiences you could face, and dealing with the financial aspects of the divorce can be the most challenging.
Decisions taken at this time can have lifelong implications, and whilst it is possible to deal with the divorce process without professional help, most individuals going through a divorce will look to use a solicitor to work through the legal aspects; however, many aren’t aware of the role a financial planner can play in providing advice, particularly in complex divorce cases where property, pensions and investments are held by the couple.
Disclosure of assets
To achieve a financial settlement following divorce, both spouses will need to provide a full disclosure of their assets and income. This includes all pension arrangements, and in some cases, assessing the value of a pension for this purpose can be difficult.
Other than the marital home, the value of pensions can be the largest assets held, although many divorcing couples initially overlook pensions and focus on property and savings. There are different types of pensions and in the case of Defined Benefit or Final Salary pensions, the true value may not be immediately apparent; however, by obtaining a Cash Equivalent Transfer Value (CETV), it is possible to compare the value of a Defined Benefit pension against a Defined Contribution arrangement.
Once the pension value has been established, spouses can begin to take decisions about how pensions are dealt with as part of the overall financial settlement. There are three core options as to how pensions are dealt with.
The first is a Pension Sharing Order, where the value of a pension is divided as part of the settlement. Once a settled position has been reached, the value agreed is transferred to another pension arrangement in the name of the recipient. Spouses in receipt of a pension credit will need to hold a pension to receive the pension credit, and this is where obtaining independent financial advice can help the spouse receiving the credit to arrange the pension transfer into an appropriate pension plan, which is invested in accordance with their needs and objectives. An advantage of this option is that a clean break can be achieved, which is often desirable.
The second option is a Pension Attachment Order. This differs in that pensions are not separated, but instead, a percentage of the pension is paid at the time that the ex-spouse receives their pension. This is normally arranged in respect of Defined Benefit pensions and can provide both an ongoing income and/or a lump sum. This option does not provide a clean break and can delay payment of the pension until the point is reached when the ex-spouse draws their pension. It also leaves one party with control over the ability to manipulate the pension to their advantage, such as drawing a pension flexibly, which could leave the other out of pocket.
Finally, Pension Offsetting is an option some couples consider as being the most appropriate way to deal with pension assets. This is where pension assets are offset against other assets held by the couple. As an example, often seen, an ex-spouse may forego receipt of a share of a pension in exchange for sole ownership of a property. These decisions can be far reaching and taking independent advice can help identify important points to consider. For example, not receiving a pension can leave a shortfall of retirement income, which may be difficult to replace.
Investments and savings
Achieving an appropriate split of existing investments can be difficult, and there can be tax consequences to consider. In particular the loss of tax efficient savings vehicles such as Individual Savings Accounts (ISAs) can lead to unintended tax liabilities, if investments are divided as part of a financial settlement. If investments are sold as part of a financial agreement, gains made on the investments sold could give rise to Capital Gains Tax.
The family home
One asset that has more emotional connection than others is the family home. Getting the right financial planning advice can assist in determining whether keeping the family home is a realistic proposition, and taking a holistic view can help consider wider affordability issues and longer-term considerations, such as planning for retirement.
One aspect that is often overlooked is to assess the level of life assurance, critical illness and other cover, in light of the changing circumstances. For example, a spouse may have relied on a Death in Service benefit from their ex-spouse to cover an outstanding mortgage. Once the divorce has been finalised, alternative cover may well need to be arranged.
After the divorce
Once the divorce has been finalised, seeking independent advice can help restructure your financial arrangements for the future ahead. Part of the divorce settlement may involve the receipt of a lump sum, and seeking advice can help to invest this in a tax-efficient manner, to suit your needs and objectives in the short and longer term.
Seek professional guidance
It may not be an instant thought to contact a financial planner in the event of divorce. There are, however, many areas that holistic advice can add value, in terms of looking at the potential consequences of a particular course of action and helping restructure financial arrangements post-divorce.
Our experienced planners at FAS often work closely with solicitors in Kent and the South East to assist clients in their divorce planning requirements. Speak to one of the team here if you need assistance.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.