Divorce is one of the most significant and stressful life events an individual can experience. And, according to Office for National Statistics (ONS) figures, 41% of couples who married in 1996 had divorced before reaching their silver wedding anniversary.
For many people separating from their spouse or civil partner, it can be an uncertain and emotional time. And, as well as dealing with issues surrounding housing and arrangements for children, there can be an awful lot to think about – with the financial ramifications likely featuring high on the concerns list.
If you are considering a divorce, or you have decided to separate, your likely first port of call is a legal professional.
However, working with a financial planner could potentially provide more clarity and give you more confidence in the decisions you have to make – and your rights as you move through the process – than a solicitor.
Read on to find out how financial planning can provide vital support, both before and after your divorce.
Just 3% of people seek financial advice while going through a divorce
According to a study by Legal & General, more than one-third (38%) of over-50s consider their divorces financially unfair, yet just 3% of people sought financial advice when going through the process.
The research revealed that over-50s are four times as likely to seek advice from friends when going through a divorce as they are from a financial adviser.
Working with an expert from early in the process can have huge benefits in several key areas.
Housing and property
Property can be an emotive subject during divorce proceedings. For example, you or your spouse might have a particular attachment to the family home, especially if you have children still living there.
So, if you or your ex-partner want to remain in the property, you may have to give up a share of other assets such as pensions, savings, or investments to achieve a “fair” split of assets.
Whilst you might arrive at what you consider a fair split – you take a home worth £1 million while your ex takes savings and pensions worth the same amount – this can lead to problems later on. For example, if you chose to remain in the home then you might later find you don’t have sufficient pension savings to generate the income you need in retirement.
Additionally, property can be an important issue to consider early on as rising interest rates may influence what sort of home is affordable for someone separating from their partner.
You or your former partner may need to understand what you can afford, how much deposit you’re likely to have, and what sort of mortgage might be accessible to you. You’ll also need to understand whether you’ll be able to meet your monthly repayments.
Pensions are likely to be one of the biggest assets of any marriage, and so it’s staggering how often couples overlook them when it comes to dividing assets in a divorce.
Research published in The Times reveals that just 80,290 of the 602,491 divorces that were settled in court between 2016 and September 2021 – around just 13% – included any orders to share retirement savings fairly.
Legal & General research found that, during a divorce, just 1 in 8 people consider pensions when dividing assets with their partners and a quarter (24%) actively waive their rights to the value of them.
It’s likely that your combined pensions will be one of, if not the, largest assets you hold as a couple. So, failing to tackle this area – or not understanding the implications of your choices – could leave one party seriously disadvantaged.
As an example, a £100,000 “defined contribution” (DC) pension and a £100,000 “defined benefit” (DB) pension may, on the face of it, look the same. However, their true value could be substantially different, and, in most cases, giving up the DB pension could leave you worse off financially.
Working with a financial adviser early in the process means that you can understand what might constitute a fair division of assets. It can also ensure you establish a new pension scheme before the decree absolute has been granted, enabling the seamless transfer of funds through a Pension Sharing Order.
It’s just as important to work with a financial planner early on if you want to identify what choices are available to you and whether you need to take any specific actions. For example, you may need to draw down on the pension to assist with the purchase of a new property.
Lifestyle after divorce
One of the main concerns divorcees come to us with is: “Can I afford to divorce?”
If your finances have become tangled with your ex-partner over many years, with joint property, savings, and investments, it can be hard to understand whether you’ll have “enough” to live the lifestyle you want after the separation.
Again, this is where a financial planner can provide the insight a legal professional perhaps can’t.
We can help to devise a lifelong cashflow plan that looks at the lifestyle you enjoyed during the marriage, and what resources you’ll need to continue having that (or as close to) that lifestyle after divorce.
For instance, we can work out whether any monthly maintenance or support payments will be enough, both today and in the future.
We can also look at a lump sum option and use cashflow modelling to forecast spending alongside future interest rates and inflation, to calculate how much wealth you will need in the long term.
One of the key reasons to work with financial planner early is because the opportunity to match a divorce settlement with your future lifestyle could be missed if it happens after an initial financial settlement has been agreed.
It’s much better for you to understand what you need from the settlement to help you during negotiations.
Financial planning is also beneficial after your divorce
One of the key benefits of financial planning is that it’s designed to be a lifelong process rather than simply one transaction.
You’ll meet with your financial planner on a regular basis to ensure that you’re on track to reach your goals and to adjust your plan as your circumstances evolve.
This can be particularly beneficial after a divorce when your situation might change quickly and often. This can be especially true if children are involved, as issues concerning the timing and amount of maintenance can be crucial to you achieving your goals. It’s a vulnerable time and a financial planner can help make the right decisions.
Additionally, pension arrangement orders can vary depending on the final court decision, so you may need to make adjustments after the decree absolute is made.
Post-divorce, you may also need to consider other areas of your finances, such as:
- Protection – Joint-life protection policies may have been cancelled or reassigned during the divorce, and there may be gaps in your life, health, or income protection.
- Savings and investments – You may need advice on the best way to structure your portfolio based on your risk profile and your post-divorce needs.
- Tax planning – Couples have the benefit of making double use of individual tax allowances, and this will clearly change if you are now on your own. You may need advice on how to mitigate your tax liabilities.
A holistic approach to planning can look at the bigger picture when looking at all your financial needs.
To find out more about how a financial planner could support you during your separation, please get in touch. Contact us online, or call 020 7400 4700.