How To Avoid The Financial Pitfalls of Divorce

July 2020
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LEBC has introduced a suite of services to help divorcing couples avoid some of the financial pitfalls. While it is not necessary to agree a split of financial assets prior to obtaining a divorce, (this can be agreed after the decree absolute is issued), it is advisable to do so beforehand. Once the decree absolute is obtained the couple are no longer legal spouses and the financial benefits of marriage or civil partnership fall away. For this reason, agreeing the money side of things early is important.

Ways in which an ex-spouse or civil partner can lose out financially, if divorced before the finances are agreed, include:-

  • Loss of the right to a dependant pension and lump sum death benefits from the former spouse’s pension scheme on the ex-spouse’s death.
  • Loss of the right to receive State Bereavement Payments should the ex-spouse die.
  • Loss of any State dependent’s pension in respect of State pension built up by the former spouse before 2016.
  • Loss of the right to inherit any property automatically from the ex-spouse’s estate. Divorce sets aside any previous will and an ex-spouse has no automatic inheritance rights under the law of intestacy.
  • Loss of the exemption from inheritance tax and capital gains tax on assets received from the ex-spouse.
  • From April 2020 the main residence relief applying to the family home will reduce from 18 months post occupation to 9 months, so that the party who leaves the marital home could be liable to capital gains tax on their share of the property, when sold or transferred to the ex spouse.

Resolving the financial arrangements early in the process and working with one set of lawyers and a financial adviser can avoid disputes and legal wrangles later, resulting in a fair and realistic settlement between the parties. 

Long Term Financial Considerations
While ownership of the marital home and custody of children tend to be the focus of a divorce settlement, often the longer-term financial consequences are ignored.

Since 2000 it has been possible for pension benefits to be shared between ex - spouses and for a transfer of pension funds to be made from one to another. Pension benefits can be worth more than the main residence.  Despite this, research by Scottish Widows shows that 71% of divorcing couples do not take pensions into account* and only 13% of divorces in 2019 included pension assets in the court order. (1) 

While the basic State pension cannot be shared, the earnings- related component can be split but is often overlooked.

The split of assets needs to leave both parties with the ability to maintain a home.  A realistic assessment of running costs and the amount that can be borrowed on a mortgage, with adequate life cover to protect mortgage and maintenance payments is essential.  Gaining a maintenance award which is unaffordable to the other party, is likely to lead to non-payment and further legal wrangles.  Where agreement cannot be reached the courts will determine a financial settlement.

LEBC’s Financial Planning on Divorce service offers a suite of services to promote agreement of a financial settlement which is fair and realistic.
It includes:-

  •  The Hummingbird app to monitor spending and keeping track of asset values, essential help in completing the financial disclosure required in divorce and establishing income needs of the parties.
  • Long term cash flow analysis to help both parties see how differing splits of assets and income are likely to work out.
  • A pension sharing service.
  • A mortgage service, enabling couples to obtain a realistic idea of how much each can borrow and if required, obtain a mortgage or remortgage.
  • A Life and critical illness assurance service to ensure that debts and maintenance payments are covered in the event of death or serious illness.
  • A will writing service to provide for the post-divorce distribution of estates.

While it is not always possible to avoid disagreement and even the most amicable of divorces are stressful, our approach is to promote agreement and mediation, working with couples and their lawyers to preserve the financial assets of the marriage.

The Financial Conduct Authority does not regulate estate planning, tax advice or wills.

Kay Ingram                            
Director of Public Policy

*Scottish Widows Women and Retirement Report 2017.
1. Family Law Court Statistics 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. A pension is a long-term investment. The fund value may fluctuate and can go down. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.  If you are unsure of the suitability of any investment or product for your circumstances, please contact an adviser. All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.

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