Avoiding the financial perils of divorce

Katherine Denham

If your marriage has broken down, the emotional strain can take its toll. But splitting your finances can make the divorce process a lot tougher.

Last year, the number of divorces among opposite sex couples increased by 5.8 per cent compared to 2015, according to figures from the Office for National Statistics.

But worryingly, stats from insurer Zurich indicate that adults who are divorced are twice as likely to have no savings or investments compared to those who are married.

From a legal perspective, the divorce process is fairly straightforward, says Wendy Hopkins, head of family law at Gordon Dadds.

“The law is quite simple in the sense that it deals with the income and housing needs of the person who is needy; it actually divides things equally, unless there is such a huge issue in which case a representation is made as to the inequality of contributions.”

Hopkins says you should try to reach some kind of outline agreement with your spouse early on in the divorce process. Of course, emotions often run high, and if an agreement can’t be reached, it’s sensible to find a solicitor who can be objective on your behalf, she adds.

While some people will hire expensive lawyers to go down the standard litigation route through the court, there are other ways you can save yourself from this huge cost burden by opting for mediation or collaborative law routes instead.

Here are some other steps you can take to avoid a financial sting in the tail as you go through the divorce process.

Seek closure

First, you should close any joint accounts and open new ones in your name. Not doing this could complicate matters, or could even lead to your ex-spouse using your savings, warns Peter Hamilton, head of strategic partnerships at Zurich.

But unravelling the various savings and investments you both hold can be tricky. Maike Currie, investment director for personal investing at Fidelity, points out that you can incur charges by selling your joint holdings and sharing the proceeds. And, of course, you incur costs again when you come to reinvest your share.

However, on a positive note, Currie says this gives you an opportunity to reassess and rebalance your savings and investments.

Protect your credit score

You might be surprised at how many financial products and agreements you share with your ex-partner.

“The longer you have been together, the more tightly wound up even your basic finances will be,” says Zurich’s partnerships boss.

Once you divorce, you will therefore need to build up your own credit report. Make sure you look at your independent score, and improve it if you need to, so you don’t get turned down for any future loans.

Read more: Pensions become key battleground for divorcees

Think about your pension

If you are going through a divorce, thinking about your pension is probably going to be the last thing on your mind. However, consider that after property, the pension fund built up by one or both partners is often the second largest financial asset owned by a married couple.

With such a huge asset at stake, it’s crucial to consider how this will be divided.

Currie says it’s important that the fund is split fairly. This is particularly the case for women who depend on their husband’s provisions. Women are still more likely to be paid less than men and are more likely to take career breaks, which means there is a gap between the amount men and women receive in employer pension contributions. This could lead to a huge shortfall by the end of a woman’s working life.

Where the main pension holder and breadwinner is the husband, ex-wives are often awarded a one-off lump sum or matrimonial home to manage. But the Fidelity director says substituting a regular pension income for a house might not be the wisest move given the volatility of property prices.

“There are various ways of splitting a pension, and it’s important that you understand each of the options available, along with the repercussions they could have on the financial situation going forward.”

It’s also worth contacting your pension provider to find out what you could be entitled to, and to make any necessary changes to payments into your pension fund.

Don’t neglect protection

Life insurance is designed to give your loved ones a financial safety net if you die. But if you divorce, it’s unlikely you’ll want your ex-spouse to get a cash lump sum on your death, so make sure you check the policy terms of your life insurance cover.

Some “joint life” policies include a separation option, which means that the contract can be amended to cover both parties individually.

Hamilton points out that many policies also include options which allow you to increase the amount of cover you have following life events, including divorce or separation, without needing further underwriting.

Taxing issues

If you are married or in a civil partnership, you can transfer assets between you without being hit by capital gains tax (CGT). Of course, the same tax relief does not apply if you are divorced, but you have a window of time to make any adjustments to an investment portfolio.

If you and your spouse have lived together, you can transfer assets between you at any time in that tax year without incurring a CGT charge.

So if you’re splitting up with your partner, make sure you transfer any assets within the same tax year that you separate in order to avoid a capital gains tax liability, Currie warns, adding: “leave it too late and you will face a tax charge.”

Willing to change

Any will you had in place prior to getting hitched becomes null and void. But the same rule does not apply when you divorce.

This means that your existing will is unlikely to be appropriate to your new circumstances. Therefore make sure you update your will as soon as possible to ensure that your wishes will be carried out when you die.

Hamilton says the first step in this process is to consider what assets are yours to pass down, and then to decide how you want these to be distributed. You might, for example, have a new partner you want to include.

Splitting your assets might not be at the top of your agenda during this difficult period, but it’s important not to overlook any of these elements, because they could affect your financial security going forward.

There’s no doubt that divorce can be a long and painful process. Don’t make it harder for yourself by not getting your finances in order.

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