A divorce or separation is a time of transition. There are lots of things to think about, practical arrangements to sort, and difficult conversations to be had, so it’s no surprise that people sometimes overlook important financial considerations.
Sadly, this can lead to unequal financial outcomes, especially for women. Indeed, Legal & General found that women are more likely than men to face financial struggles post-divorce.
Fortunately, a financial planner can help you avoid any negative outcomes and help set you up for a secure financial future after you separate from your spouse or civil partner.
So, read on to discover four financial considerations that are commonly overlooked in divorce.
1. Completing your formal financial separation
You may think that a legal separation from your former spouse or civil partner also means a financial separation. Unfortunately, this isn’t always the case.
You and your former partner will have to decide how to split assets like:
- Pensions
- Property
- Savings
- Investments
If you can agree on how to divide your assets, you’ll need to draft a consent order and ask a court to approve it. This can protect you further down the line if, for example, your ex makes a financial claim against you.
If you’re unable to agree on how to divide your finances, you can ask a court to make a financial order. In this instance, the court will decide how your assets will be split.
Common-law partners have no financial obligations to each other when they separate, nor do you automatically share ownership of your assets. However, if you and your partner do come to a financial agreement, you can formalise it with a court order.
Elsewhere, it could also be a good idea to formally separate your credit file from your ex-partner’s.
It’s likely you and your ex had a joint bank account or mortgage. This will have created a link between your credit files and,if your ex falls into financial difficulties in the future, it could affect your ability to take out credit.
To protect yourself, you can request a notice of dissociation from credit reference agencies.
It’s important to note that this can only be granted when all joint accounts have been closed and ownership of joint property has been transferred to one partner or sold.
2. Factoring your pension into your divorce settlement
Your pensions could be the most valuable assets you and your ex-partner hold. However, couples often overlook the division of their pensions when divorcing.
Worryingly, the Standard reports that only 30% of divorcing couples include pensions in their divorce settlements. This means divorcing partners could be missing out on between £2 billion and £4 billion of pension savings they may be entitled to every year.
This could be a real problem if you and your spouse hold unequal pensions.
Unfortunately, women often have smaller pensions than men. As reported by Pensions Age, women on average retire with half the pension of men.
But, by considering pensions in your divorce settlement, you could protect your retirement finances.
Pensions can be split in several ways during divorce:
- Offsetting – The value of any pension is offset against other assets such as property or cash savings.
- Pension attachment order – The partner without the pension can receive an income or lump sum from it in the future.
- Pension Sharing Order – The pension is split at the time of divorce.
You can read about each of these methods in more detail in our recent article.
3. Reviewing your life insurance and other protection
You may have shared protection policies with your ex-partner such as life insurance or critical illness cover. If you do, you could run into some potential issues when divorcing.
Some joint life insurance policies offer a “separation benefit”, allowing you to split the policy. However, without a separation benefit, you’ll have to choose between one of you taking on the arrangement or cancelling the policy altogether and arranging new cover.
If you retain your protection, you may have to update the beneficiaries of any payout.
4. If you have a joint mortgage, there are some important things to be aware of
If you have a joint mortgage with your ex-partner, it’s important to carefully consider your options when separating.
You could choose to:
- Take on the mortgage payments yourself
- Continue paying the mortgage with your ex-partner
- Sell the property.
If you wish to take on the mortgage yourself, you’ll likely have to prove to your lender that the repayments are affordable to you based on your sole income.
Another commonly overlooked fact is that, if you decide to continue to pay the mortgage with your ex-partner, both parties are individually responsible for the total monthly payments and total debt on a joint mortgage. So, if your partner fails to pay, you will be equally accountable for the outstanding debt.
Get in touch
With so much to think about when divorcing, a financial planner can provide reassurance that you’re not overlooking any important financial matters.
To find out how we can help please email hello@solusfinancial.co.uk or call us on 01245 984546.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.