While the introduction of the “no-fault” divorce rules in the UK has been designed to reduce conflict between partners, a marital split can still be one of the most stressful life events.
Clients will be going through a period where they lose their friend and partner, and must adapt to living as a single person. These emotions can often be heightened if there are children involved.
Consequently, it’s perhaps no surprise that the financial aspects of separation may take a back seat to other more pressing practical and emotional needs. Yet, tackling these issues might be hugely important to a client’s future stability or security.
So, here are five commonly overlooked financial aspects of divorce, and why clients need to consider these issues.
1. Pensions
Recent research by Scottish Widows has revealed that just 3 in 10 divorcing couples include pensions in their settlement.
Perhaps worryingly, almost 2 in 3 divorced women did not talk about pensions in their divorce, and almost 1 in 3 did not know that they should even form part of the discussion.
Scottish Widows has calculated that this failure to include pensions in a divorce settlement means that individuals are missing out on between £2 billion and £4 billion of pension savings every year.
For those couples who do consider pensions in their settlement, many agree on a broad “offsetting” arrangement where, for example, one party might take the family home while another retains the value of other assets, such as savings, investments or pensions.
While this may solve a short-term need, it can leave one party short of income later in life if they have little or no pension provision of their own.
A Pension Sharing Order can ensure the equitable split of pension assets – and a financial planner can help your clients understand the implications of this and set up a scheme to receive any shared assets.
2. A formal financial settlement
Many couples believe that the legal ending of their marriage also means formal financial separation, but this is not the case. They may also assume they do not need a court order if they can agree on how to split their assets.
However, personal agreements like this are not legally binding. Consequently, one partner could still bring a financial claim against the other, even when the divorce is granted.
Your clients may want to obtain a financial consent order from the courts. Without one, clients may not realise that they are still financially connected to their ex-spouse. This can cause problems further on – which brings us to…
3. Borrowing and credit issues
If clients do not obtain a formal financial separation from the court, they can run into problems with credit and borrowing in the future.
For example, when a couple enters a joint financial arrangement (such as a joint bank account), a financial link between them exists on their credit files. This can then become a problem if one party does not then manage the account well or keep up repayments on a debt such as a loan or credit card.
In this instance, both parties can see their credit rating suffer – and this could make it difficult to secure financial products in the future.
Moreover, if one spouse has typically taken care of the finances, with all the bills in their name, the other party could find themselves without a credit history after divorce. Without any credit in their name, it can be difficult to secure something like a mobile phone contract.
The way for an individual to tackle this is to request a notice of disassociation from credit reference agencies such as Experian or Equifax.
However, this can only be completed when all joint accounts have been closed and ownership of property purchased through a joint mortgage has been transferred to one partner or sold.
4. Mortgages
Many divorcing couples will have a joint mortgage. When separating, they may come to an informal arrangement as to who continues paying this (and other debts) during the separation.
However, many clients don’t realise that, if they have a joint mortgage, they are responsible for:
- The total debt
- All of the monthly repayments.
So, if one party decides not to pay the mortgage, the other will be responsible for that entire payment – not just half as many commonly believe. This could then negatively affect the credit rating of both partners, as they are jointly liable for the debt.
Moreover, if the exiting spouse then tries to get a mortgage for a new house, the amount they can borrow will likely be affected by their ongoing responsibility for the existing mortgage.
Finally, the leaving spouse must also ensure the buildings insurance is maintained. If they don’t, they could be liable for a mortgage on a house that no longer exists and cannot be sold to clear the debt.
5. Protection
Finally, with everything going on during a divorce, it’s easy for couples to overlook their protection needs.
If a couple has a joint life insurance or critical illness policy, it’s unlikely they will be able to “split” these when they separate.
If one party either decides to remove the other from a policy or simply stops paying the premiums and lets the policy lapse, both parties could then be short of cover. If they have children or are responsible for a mortgage and other commitments, insufficient cover could leave them and their family in a difficult position on diagnosis of a serious illness or death.
Even if the policy remains, it’s likely that an individual will need to change the beneficiary of any payout to reflect their new circumstances.
Many financial planners will now recommend two individual plans rather than a joint-life plan when arranging protection, as this allows them to recommend bespoke cover. It is also easy to update the beneficiary details – removing the ex-spouse and adding their new partner in.
Get in touch
If you have clients who would like to understand the financial implications of their divorce, we can help.
We can use cashflow modelling to show them what their future financial position will look like after any settlement and help with practical advice on areas such as pensions, property, and protection.
To find out how we can add value, please email hello@sovereign-ifa.co.uk or call 01454 416653.
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 Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
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.
