Divorce

Dealing with financial decisions can be one of the most challenging elements of the divorce process. Amidst the emotional turmoil, thoughts inevitably turn to finances and how to protect your financial security at what is a difficult time.

Most people facing divorce understand that decisions taken can have lifelong implications, and will therefore look to use a solicitor to help negotiate the legal aspects of the divorce process. Alongside specialist legal advice, seeking independent financial advice during the divorce process can provide valuable assistance in negotiating the numerous decisions that need to be made. To make best use of a financial planner, those going through divorce would be well advised to seek advice throughout the process, rather than just at the final stages, when decisions have largely been reached.

There are a number of key areas where seeking financial planning advice can help throughout all stages of the divorce process, from considering the financial implications at the point of separation, to making the right decisions with a divorce settlement.

Gathering information on assets

Parties to a divorce need to provide full disclosure of assets and a financial adviser can assist in obtaining valuations of marital assets, from savings and investments to pensions. Investment products can often be complex and understanding the true value of an asset can sometimes prove challenging. Obtaining an accurate valuation of all assets is crucial in establishing the starting point for financial negotiations.

Pensions are a particular area where financial planning advice can make a real difference. Many people going through divorce are surprised to learn the impact the value of pensions can have on a divorce settlement. Anyone with long standing service in the public sector may well have accrued significant pension benefits. Similarly, high earners or self-employed individuals may well have made substantial pension contributions over time, which can build into a sizeable pension value.

Preparing a budget

One of the first considerations at the early stages of divorce is how to meet any immediate financial obligations and this is an area where independent financial advice can assist, in assessing income, expenditure and affordability. Likewise, a financial planner can help determine the level of capital required from a divorce settlement to maintain a desired lifestyle, which can help navigate decisions that need to be reached in respect of existing marital assets and each spouse’s income streams. This can prove very helpful when negotiations between spouses, or the mediation process, is taking place.

Tax Considerations

Decisions reached to sell or transfer assets during or after the divorce process has completed, can carry tax consequences. The transfer of assets between spouses is normally exempt from Capital Gains Tax; however, this may not be the case after the relationship has legally ended. Likewise, the disposal of investments could potentially have tax consequences if they are sold as part of a financial settlement.

Understanding retirement planning options

Pension assets accrued through an individual’s lifetime are taken into account when assessing the value of pension assets. As each divorce settlement is different, the treatment of existing pension arrangements will differ from case to case.

Where significant pension assets are held, it may well be necessary to obtain an actuary report, which is often prepared to assess the pensions held by both spouses. These reports can be long and difficult to understand. We can review the report and use the findings to help individuals make appropriate plans for existing pension arrangements they may receive as part of a pension sharing order, or assist those whose pensions are to be split to make the right decision on which pensions are divided or transferred.

Once an order has been implemented, we can help provide advice on how an individual can make best use of their remaining pension savings, and the likely income that could be generated in retirement.

Assessing protection needs

One area that is often overlooked are ongoing insurance and protection needs. Many couples will have joint life insurance policies which provide cover over existing debts, or to provide funds for family in the event of death. It is important to review such policies to make sure that they provide adequate cover for your future needs. Many people rely on Death in Service provision offered by their employer, and again it is important to review the beneficiary on these policies once a marriage has come to an end. Finally, spouses often benefit from cover on family health insurance that could be provided through their employer. Again, it Is important to review options to provide ongoing cover.

Create a new financial plan post divorce    

By working with a financial planner through the divorce process, you can begin to establish a relationship whereby the planner can really get to understand your circumstances, needs and objectives post divorce.

One key area where advice is often crucial is in respect of retirement planning. For many individuals going through divorce, established plans for retirement savings may need a major overhaul. We can ensure that pensions are invested appropriately and plans drawn up to establish an affordable pattern of contributions to rebuild pension pots.

We often see clients who receive a lump sum capital payment as part of the divorce process. We can provide advice on the most appropriate investment strategy, either to provide a tax efficient income stream or aim for capital growth over the longer term.

At FAS, we provide truly independent and holistic advice, taking into account all aspects of our clients’ financial circumstances. Our advisers are experienced in assisting those going through divorce, and are very used to working collaboratively with other professionals, such as Solicitors. Speak to one of our advisers to start a conversation.

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.

Pension decisions

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.

Protection needs

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.

A ‘divorce boom’ has been predicted as a result of the coronavirus lockdown, and one of the most complicated – and most hotly disputed – areas in divorce proceedings involves pensions. But there are some other divorce pitfalls that good financial planning can help you to avoid.

According to Citizens Advice, life in lockdown during 2020 has placed an “enormous strain” on relationships. Since April it has noticed a sharp spike in website searches for guidance on divorce proceedings. And, on the first weekend of September, views of its divorce webpage shot up 25% compared to last year. In response to the increasing demand, a number of family solicitors are now advertising ‘fixed fee’ divorces that will help couples to end their marriage without spending an exorbitant amount on legal fees.

Most people understand the value of using a solicitor to work through the legal aspects of their divorce, but a professional financial planner can really prove their worth also if you have more complicated financial arrangements that could take time – and money – to resolve. Worryingly, however, research from Legal & General found just 3% of couples in the process of divorcing have sought financial advice, but they were four times as likely to take divorce advice from their friends. That could prove to be very costly in the long run.

Getting your financial affairs in order

Once a solicitor has been appointed and the divorce petition is drafting, one of the next key steps should involve both parties (the petitioner and the respondent) completing Form E, which is available to download on the gov.uk website. Both parties are encouraged to volunteer their financial information, including all of their pension holdings, at an early stage, as it will help to move negotiations along and increases the likelihood of reaching an amicable agreement and avoiding having to go to court.

Of course, making a full list of everything you own, including where your pensions and other financial assets are kept and how much they are worth, can be a very time-consuming and daunting prospect. This is especially true if you were not heavily involved or familiar with managing the finances during your marriage. But failing to make full disclosure can have serious consequences during a divorce case, particularly if one party tries to conceal pension assets from negotiations. Engaging a financial planner early on can help you to avoid any oversights that could come back to bite you.

Non-disclosure can also sometimes happen by mistake, particularly in the area of pensions, so getting a financial planner involved at this point can make the whole process a lot easier. It means you can trust them to gather all of the information you need about your finances and assets, including contacting pension providers to find out how much your pensions are worth, leaving you with more time to focus on other things.

Making the most of your finances

Seeking financial advice early on in the divorce process can prove beneficial in other ways too. During the divorce process, your solicitor is focused on ensuring that the necessary legal steps are taken to end the marriage. It’s not their role or responsibility to ensure your finances are kept in order. A financial planner, on the other hand, will be able to recommend some important and valuable changes to your finances that could improve your financial situation after the divorce. If you leave it until the settlement stage, you may miss opportunities for a financial planner to recommend some important and valuable changes.

For example, if any assets are liable to capital gains tax (CGT), a financial planner might be able to help you organise an ‘inter spouse CGT exemption’ (assuming any transfer of assets is completed before the end of the tax year in which the separation occurred). And there are other areas where a financial planner might be able to give you valuable impartial advice about your situation, and can help you to avoid some of the most common financial mistakes that people end up living to regret after their divorce.

Mistake one – focusing on the home and neglecting other areas

One of the most difficult aspects of any divorce is figuring out what to do with the marital home. Many people become highly attached to the family home during a divorce, especially where children are involved. This can often lead to many taking over the mortgage borrowing during a divorce settlement in order to keep the family home, but at the expense of losing a proportion of their spouse’s pension.

You may want to consider whether keeping the family home is the most sensible decision. In most cases, the better course of action is to sell the marital home, buy something more affordable, and take a slice of the former partner’s pension. Of course, this may not always be the right choice for everyone, which is why seeking professional guidance on your own personal circumstances is essential.

Mistake two – accepting an equal pension split

While equally splitting your partner’s pension provision might seem the fairest course of action, you should carefully consider this option before agreeing to it. This will not necessarily result in an equal level of income in retirement. Quite often, it is better to push for an equal income share, rather than a simple 50/50 split of the capital, as this may give you a higher level of income in retirement. In light of this, working with a suitably qualified financial planner can help you understand how the different options available to you could affect your retirement planning.

Mistake three – failing to check pension valuations

As we mentioned earlier, it’s very important that both parties complete their Form E, and legally disclose all of their assets. Even so, this is one of the areas where financial planners frequently deliver the most value to clients. Money brings out the worst in people, and you might be surprised at the number of spouses who attempt to conceal the value of their pensions or their businesses during divorce proceedings. An experienced financial planner will be able to help you obtain all of the relevant documents needed to value these assets, and help to ensure you get the fairest deal in the final settlement.

Helping you to move forward

No one who gets married thinks it will end in divorce. And whether the decision to separate is taken by you or your spouse, it is one of the most difficult and emotionally draining experiences anyone can go through. Over the years, we have supported a large number of clients during their divorce and our experience tells us that seeking financial advice early on can help to put your mind at ease and help to bring some much-needed clarity and stability.

But one of the best parts of financial planning during divorce is that it gives you the chance to start thinking of life beyond your divorce. It means you can take charge of your own finances, and focus on the things that matter to you most. This is a key time for you to review your assets thoroughly, help to establish your own personal financial goals, particularly around retirement, and to work on a plan to help you achieve them.

If you would like further information on the above, please get in touch with one of our experienced financial planners here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Divorce is one of the most emotional experiences a person can go through and dealing with the financial implications of this can be one of the most daunting parts of it.

Most people use a solicitor to work through the legal aspects of their divorce but a Financial Planner can really help if your dissolution or financial situation is fairly complex. Needless to say, the financial decisions you make at this time will impact the rest of your life so its important to get the right type of advice at the outset. Handling things on your own can cause you to overlook things, but the appointment of an experienced Financial Planner means that you will be able to explore and be advised on all of the financial options available to you.

In this article, we present some of the key financial aspects of divorce that you need to think about and suggest some common mistakes to avoid.

Immediate Financial Aspects of Divorce to Consider

Naturally after a separation, the immediate financial concern is figuring out how to stay afloat. This is a very unpleasant time, as you go into survival mode. Can you afford to pay your bills, and will you be able to avoid falling into debt with some careful budgeting?

Your prime focus will be the need to provide financial stability for yourself and any dependents you are responsible for. Avoid making any drastic banking decisions such as switching to another provider, especially if you have not agreed this with your former partner.

Money is often tight after a separation, and it’s important that you do not fall into debt. Moreover, it’s crucial that you protect yourself as much as possible from the effects of your former partner falling into debt. As you will still be legally married at this point, this debt certainly will affect you.

If your spouse is the sole name on the mortgage for the family home, then you might want to consider registering a Notice or Restriction. You have a legal right to live there, and this helps in preventing your spouse from taking the unilateral decision to remortgage or sell the home.

Considering the Family Home

One of the trickiest aspects of any divorce is figuring out what to do with the marital home.

It might be in your children’s interests and in your interests, for one of the adults to remain living in the property. However, this might actually be a hindrance to you in terms of moving on with your life.

You also need to consider whether keeping the family home is the most sensible financial decision. Depending on your circumstances, it might make sense to stay put. In many cases, however, the more rational option is to move somewhere more affordable.

You will be faced with monumental, highly-emotional decisions. However, in our experience, we can help clients to bring a lot of clarity to this difficult situation. Indeed, many clients have contacted FAS after their marriage dissolution, thanking us for raising the question about the family home and for the guidance we have been able to provide and in helping them towards making a decision they might not have had the strength to carry out alone.

Other Important Areas of Divorce Planning

You are most likely to have marital assets other than your home which you will need to plan accordingly after a separation.

This is a key time for you to review your assets thoroughly with the help of an experienced Financial Planner. At FAS, we can help you establish what your assets actually are, where they are located and whether these are still appropriate for you, given your dramatic change in circumstances.

For instance, some common questions our Financial Planners present to clients include:

• Has your attitude to investment risk changed since change in circumstances?
• Is it now appropriate or sensible to keep your Buy-to-Let property?
• Do you need assistance with any existing pension arrangements or Pension Sharing Orders?

Pensions may or may not need to be divided following your Divorce. It depends on your particular situation. In light of this, working with a suitably qualified Financial Planner can help you look at how this affects your own retirement planning.

Financial Mistakes to Avoid During Divorce

Focusing on the home and neglecting other areas.

Many people become highly attached to the family home during Divorce, especially where children are involved.

This can often lead to many taking over the mortgage borrowing during a divorce settlement in order to keep the family home but at the expense of losing a proportion of their spouse’s pension. In most cases, it is better to sell the marital home, buy something smaller, and take a slice of the former partner’s pension. Of course, this isn’t the right choice for everyone, which is why seeking the right guidance is essential.

Accepting an equal pension split

Whilst equally splitting your partner’s pension provision might seem the fairest course of action, you should carefully consider this option before agreeing to it. This will not necessarily result in an equal level of income in retirement. Quite often, it is better to push for an equal income share, rather than a simple 50:50 split of the capital so discussing options with a Financial Planner makes sense.

Failing to check valuations

This is where our Financial Planners often provide the most value during a client’s Divorce. Both spouses are legally required to disclose all their assets during Divorce, including businesses and pensions. However, these two areas are quite complex and it is possible to conceal actual values. A Financial Planner who is experienced in this field will be able to help you obtain the relevant documents you need in order to value these assets, ensuring you get a fairer deal in the final settlement.

Regardless of the circumstances, Divorce is one of the most painful, stressful experiences a person can go through and it’s important to surround yourself with trusted family and friends who can support you.

It’s also important to pay attention to your wealth and finances during this difficult time. Your assets, investment strategy and financial future are likely to all be thrown into chaos by a marital split and therefore, it can be hugely helpful to seek a professional financial planner to manage these areas sensitively, and sensibly.

Where financial planning appears during Divorce

Over the years, we have supported a large number of clients during their divorce and it is much better to seek financial advice early on in the process, if possible. Once you have appointed your solicitor and started completing Form E (listing your assets), consider contacting a financial planner at this stage.

If you leave matters until the settlement stage, then you may miss opportunities for a financial planner to recommend some important and valuable changes. At this point, the assets have been distributed and the window has closed to conduct the careful planning required to avoid unnecessary taxes or damage caused by the splitting of your assets. An example of this can be demonstrated through Capital Gains Tax (CGT). If any assets are liable to CGT, then a financial planner might be able to help you organise an inter spouse CGT exemption (assuming any transfer of assets is completed before the end of the tax year, during which time your separation occurred).

A financial planner can also be invaluable at the “Form E stage”, helping you gather all of the information you need about your finances and assets. This can be especially useful if you were not heavily involved or familiar with managing these areas during your marriage. It is really important to make a full list of everything you own, where they are and how much they are worth. Failing to do so can have serious consequences during a divorce case, particularly if one party tries to conceal an asset from negotiations. Non-disclosure can also sometimes happen by mistake, particularly in the area of pensions. Again, this can have serious ramifications, so engaging a financial planner early on in the process can help you to avoid any oversights or mistakes in this regard.

Post-settlement financial planning

Financial planning can be valuable during divorce negotiations, but it is also highly beneficial once the settlement is completed and the time has come to move on with your life. During your marriage, it is likely that you and your spouse made joint financial decisions about your future together. You likely both shared the same lifestyle and perhaps took a similar approach to investment risk and loss. Now you have a new life, it is quite likely that you are faced with a different set of financial goals, risk tolerance or lifestyle. You might imagine a different future, which requires a new financial plan to get you there.

Engaging a financial planner at this stage can help you set out a new strategy to achieve your new aspirations and put things in order for your own future. Doing so can help give you a new sense of purpose, security and peace of mind about the road ahead.

In the short term, it is usually wise to keep a reasonable portion of your assets in cash, in case of emergencies and to help get you back on your feet. As you navigate the first few months and years following the settlement, a financial planner can help you start moving assets into a more appropriate place once everything is clearer.

The immediate financial concerns are, of course, to ensure you can meet your necessary expenses month-by-month and avoid falling into debt, which can easily spiral out of control. However, at the right time, it is also important to start planning for the longer term, paying attention to areas which are often neglected by divorcees such as their pension. A financial planner can help you invest in these areas with the right timing, helping to bring focus to those important areas in need of attention.

If you need to discuss your current situation or financial plan with one of our experienced team here at FAS, please do give us a call.