Going through a divorce? How to safeguard your finances
Around 236,000 people get divorced in England and Wales every year, according to the latest government figures, with the highest number between men and women aged 40 to 44.
Planning a divorce can be sad and stressful, but getting to grips with the financial implications early in the process can help to ease some of the inevitable strain. It will also cut your legal costs if you work out what you want financially from the process before you instruct a solicitor, as this will reduce the number of hours of negotiation for which you will be invoiced.
Support for children
There are many things you will have to consider along the way – the most important being continuing financial support for any children. But whether you have children or not, the other factors that all divorcing couples will have to settle include what will happen to the family home, savings, debt, pensions and investments, as well as the divorce costs themselves. From any agreements put forward to the courts, the judge will always seek to ensure that the settlement is fair and reasonable to both parties.
So when planning a divorce, the first thing both spouses need to do from a financial perspective is to establish how much money each of you need to cover your immediate needs, such as accommodation, food and bills – including any debts such as credit cards and personal loans. You should sit down and go through all your regular costs to work out the minimum you need in order to get by each month, and if possible, agree between you who will be responsible for which debts.
The family home
Then you can move on to the assets held jointly or individually, the biggest of which are likely to be property and pensions. Of course, the most significant and most emotive asset is likely to be the marital home. The main options are usually selling it and splitting any equity, or one spouse ‘buying out’ the other. Both of these scenarios are often deferred to a later date when children are involved, as often the parties agree that the parent with custody will remain in the property until the youngest child turns 18 or finishes university.
If you will be staying in the marital home and your ex-partner contributes to the mortgage, you need to ensure that payments are made promptly. The Building Societies Association has found that divorce and separation account for 8% of mortgage arrears. Failing to keep up with the repayments could put your home at risk of repossession and potentially damage your ability to get credit in the future.
Divorce settlement - pensions
With regard to pensions, legislation came into force in 2000 to ensure that all types of pension schemes can be divided, whether or not people are still saving into them, or they have retired and are withdrawing funds or receiving income. Divorce lawyers will seek to establish the size of pension funds available in order to work out what the ‘cash equivalent transfer value’ should be to the spouse requesting the pension share.
This is complicated, as it may involve taking projections of future worth into consideration. Once a pension share amount has been agreed upon, the transfer will be made to a pension held in the name of the beneficiary. Fees may well be charged for valuing and transferring pensions, so it is important to find out what they could be from the pension providers involved.
Planning a divorce is a complex process and the financial settlement will affect the rest of your life, so decisions should only be made after you have consulted professionals for advice.
Jo Jackson is Head of Financial Planning at Brewin Dolphin in Newcastle – firstname.lastname@example.org