If you've taken the decision to divorce, you will need to find a way to untangle your shared finances in the fairest way possible.
We all hope that marriage will last forever, but the truth is that some 42% of marriages in England and Wales end in divorce, according to the Office for National Statistics.1
Unfortunately, divorce is not something that we can insure against. The nearest thing to it is a pre-nuptial agreement, which, although not yet recognised in statute, the UK courts will at least take into consideration when making a settlement.
With the help of a trained mediator or solicitor, couples may be given the opportunity to reach agreement without necessarily going to court. However, lots of break-ups become acrimonious because couples can’t agree how to split the finances; and those cases will often end up being put before a judge.
Rules of disengagement
The process for separating finances and property on divorce in England and Wales is a discretionary one. That means there is no set formula that the courts follow. However, both parties must be left in the position of equal standing and there must be no discrimination between the respective roles of breadwinner and homemaker, which are regarded as equal.
When deciding a case, the courts will look at income, earning capacity, property and other financial resources which each of the parties has or is likely to have in the future, as well as future financial needs, obligations and responsibilities. Clearly, where there are dependent children, this will be the first consideration when deciding division of the matrimonial assets.
Your home will likely make up a considerable portion of the value of your assets, but ownership of a property is not reflected in a divorce settlement. It is not unusual for each party to receive an equal share of the equity even if the property was only in the name of one of them. The court can also order a property to be transferred from one party to another.
“A court could order the sale of a property and share out the proceeds between both parties in any way it chooses; or it could split the ownership differently so that one party retains an interest in the property until a later date,” says Obi Nnochiri, head of division at St. James’s Place
For some couples, particularly if there are no children, it will normally just be a question of selling the home and sharing any proceeds equally. For families with children, it is more a case of trying to disrupt them as little as possible, while ensuring that accommodation is in place for the other parent.
Bear in mind that who gets the marital house in a divorce is closely linked to child custody, with the court typically awarding the right to the primary care-giver.
You must disclose all your financial assets when coming to a fair settlement in a divorce, including any pensions you have built up or are claiming. This covers both workplace and personal pensions.
Courts can order a pension to be split, with part of the benefit transferred to the other party. Alternatively, the pension assets may be ‘earmarked’, meaning that all or some of the member’s pension will be paid to the ex-spouse or civil partner when it comes into payment.
In some cases, the court decides that each person keeps their own pension schemes, but that other assets are used to offset the value. So, for example, if one person has a large pension pot, the other may receive a larger proportion of a share portfolio.
“Bear in mind that if each person keeps their own pension, the ex-spouse is unlikely to receive any entitlement under the deceased’s pension after the divorce,” explains Nnochiri.
Wills and lasting powers of attorney (LPA)
Unlike a marriage, divorce does not automatically invalidate a Will*. Instead, anything that you have left to your ex-spouse in your Will would be dealt with as if they had died on the date that your marriage legally ended. Consequently, whatever they were set to inherit would be passed on to the next beneficiary who is entitled to it.
If you have made an LPA** then the effect of divorce will usually mean that the appointment of your spouse as attorney will be revoked. It’s therefore vital that you review your LPA to ensure that someone else can make decisions on your behalf, should you fall ill or lose mental capacity. Once a replacement attorney is chosen is normally quite straightforward to have the LPA amended.
Many couples have joint life insurance policies in place, often with the premium being paid by just one of the parties. If that person stops paying or cancels the policy after a divorce, then the other partner could be left without cover.
Therefore, it can be prudent to arrange your own life cover and/or maintain a life insurance policy on your ex-spouse with a benefit amount high enough to replace maintenance income, for example.
Amid all the upheaval, it is all too easy to overlook these issues, but doing so can leave you unnecessarily out of pocket. Financial advice is therefore crucial.
“In any divorce situation it’s not just a lawyer who needs to be engaged. It is equally as important to engage with an experienced financial adviser who can work with your lawyer in reaching the right settlement,” says Nnochiri.
* Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place. Wills are not regulated by the Financial Conduct Authority.
** Please note that advice given in relation to a Power of Attorney will involve the referral to a service that is separate and distinct to those offered by St. James's Place and is not regulated by the Financial Conduct Authority.
1 Office for National Statistics, 26 September 2018.