Financial mistakes made by divorcees - How to avoid them

January 2021
couple divorce
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New “quickie” divorce law1 will remove the need to prove fault and speed up the legal process of divorce to 6 months.  This increases the need to consider the financial arrangements sooner, if the financial pitfalls of divorce are to be avoided. Here are some common mistakes made by divorcees: -

1.    Not considering the financial side of divorce early enough.

It is possible to get divorced before the financial settlement between the parties is finalised.  This can be agreed later by mutual consent and then endorsed by the court, or if no agreement can be reached, enforced by court order.
 
But once the decree absolute is granted the couple lose many of the financial privileges of marriage. These include an exemption from inheritance tax and capital gains tax on assets transferred between them, State bereavement payments and the loss of spouse pensions and lump sums payable from private pension schemes. 

Should one party die prior to the financial settlement being agreed, but post-divorce, the surviving party could lose £’000s of pension income and have tax bills which would not have arisen if still married. Agreeing the financial split before the legal split is essential.

2.    Not having a grasp of future income needs.

Both parties need to understand their future income and spending needs if a realistic financial settlement is to be agreed. Gaining the right to a settlement the other party cannot afford is unworkable. Retaining a family home, without money for ongoing running costs is futile.

Those considering divorce may find a budgeting app, such as Hummingbird, useful. It enables income, spending, savings and debt, with multiple providers, to be shown on one dashboard. LEBC clients can claim a free trial or buy the app for use with Apple or Android devices. 

3.    Ignoring the value of pensions because they are too complex.

In 2019 the Courts and Tribunals service reported that only 13% of financial settlements included division of pension assets. Yet for many divorcees pensions may be their biggest asset, even exceeding the value of the family home.  A final salary pension expected to pay £10,000 a year pension could have a value ranging from £250,000- £400,000. The average 65-year-old has £103,0002 of private pension value, with men owning 3 times as much pension as women on average at this age. 
 
The basic State pension cannot be shared on divorce, but the earnings-related element, built up before 2016, can be and may be worth up to six figures.

 Older women, who qualified for their state pension before 6 April 2016, may be entitled to an increase in their state pension based on their ex husband’s national insurance record. 

4.    Agreeing maintenance payments but not ensuring they will be paid in the event of death or ill health.

Maintenance payments are usually paid from the income of the ex -spouse. Insurance can be arranged to continue these in the event of the death or ill health of the payer. Alternatively,  a lump sum payable from a pension or life policy, can be earmarked to be paid to the ex- spouse in lieu of future maintenance. 

5.    Not fully disclosing assets.

Both parties to a divorce are required to fully disclose all assets and income. Failure to do so is contempt of court and family lawyers will always counsel against this. 

Getting valuations of all assets can be time consuming but a financial adviser can assist with this, acting for both parties, or one, to obtain independent valuations.

Those attempting to circumvent the law will often seek to persuade their spouse to complete the legal process without legal or financial advice, this could be suspicious behaviour and consulting a family lawyer and financial adviser is always to be recommended. 

How to Avoid the Pitfalls?

LEBC Group offer divorcees and their lawyers a mediation service to agree a financial settlement ahead of the legal process completing. This includes obtaining independent valuations, cash flow modelling and scenario planning to ensure that the settlement works for both parties and that arrangements such as pension shares or insurance are put in place prior to decree absolute.  Where mediation is not possible the service can be accessed by either party to inform the financial settlement. 

For a confidential discussion contact your LEBC adviser or email enquiries@lebc-group.com telephone 0800 055 6585.

Kay Ingram                              
Public Policy Director                            
January 2021


1.    The Divorce, Dissolution and Separation Act will come into force in the Autumn of 2021
2.    Understanding the Gender Pension Gap – Pensions Policy Institute July 2019

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts. 

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