Financial planning in the event of divorce

Recent data from the Ministry of Justice highlights the largest number of applications for divorce in a decade. There were more than 33,200 applications between April and June this year.

The pandemic undoubtedly put many relationships under extra strain, but mounting financial difficulties caused or compounded by inflation and fuel costs are a key cause. 

As a financial adviser, you could help to minimise some of the long-term impacts of divorce, by helping clients to untangle their finances and make well-planned, rational decisions about key assets, at a time when emotion often clouds people’s judgement. 

How can a financial adviser help? 

Most people turn first to their solicitor when they decide to divorce, approaching their financial adviser only after their settlement is agreed. However, it can make a lot of sense to involve the financial expertise and foresight of an adviser during the early stages. 

A financial adviser can look at the long-term effects of the decisions being made, and how they will work in real life. It’s all about guiding your client through the process and into their future, making sure that they really understand their financial status going forward. While a solicitor concentrates on the legal aspects, a financial adviser helps clients organise and optimise their resources for the next stage of life. 

You can also ease the burden of paperwork and administration, helping clients to make decisions and meet deadlines. 

Sorting out pension problems 

A pension is often one of the major financial assets to consider during a divorce, so it’s important that people seek expert financial advice early. There are essentially three approaches to dealing with a pension during the divorce settlement. 

• Pension sharing order: This divides any pensions between former partners. The sum awarded is called a pension credit and is a percentage of the transfer value of the original pension. The credit can be put into a new or existing scheme
• Pension offsetting: This offsets the value of a pension against other assets. For example, if one partner has a large pension, they could keep it, while their ex-partner retains the marital home. This approach can be problematic, as one partner might end up with no pension provision when they retire – it’s not easy to divide assets with total fairness 
• Pension attachment: This approach – called earmarking in Scotland – gives part or all of the benefits from a pension to an ex-partner when the pension pays out. It’s the duty of the court to instruct the pension provider to make payments to the recipient. A disadvantage of pension attachments is that they keep divorced people’s affairs connected and don’t allow for the ‘clean break’ afforded by a pension-sharing order 

Savings and investments  

Dividing up savings and investments is usually a simpler matter than dealing with pensions, but again, good financial advice is key because there are tax rules and charges to consider. 

ISAs are inherently tricky during a divorce settlement that seeks to divide everything between ex-partners, because they can only be held in one person’s name. Try to split them and you lose the tax benefits.  

Other investments, such as Venture Capital Trusts (VCTs) or the Enterprise Investment Scheme (EIS) can create more complicated problems.   

With VCTs, tax benefits are linked solely to the individual investor, much like an ISA, and transfer of ownership can get very complicated.

With regards to EIS, upfront income tax relief can be clawed back if transferred to a fomer spouse or civil partner, but this only if it happens within three years of the investment being made. 

It’s really important to remember that exact rates of tax relief are dependent on personal circumstances and can change. 

Home and mortgage 

What to do with the family home is naturally one of the biggest financial decisions during a divorce. As a financial adviser, you can help to guide clients through the maze of options that face them.  

• Sell the home with both parties moving out: This relatively simple option gives both partners the chance to make a fresh start, and provides money towards financing new homes
• A buyout: It may be possible to reach an agreement where one party buys out the other completely, leaving the home in their sole ownership
• Keep things as they are: In this option, one of the partners could remain living in the home, even though both still legally own it. This can be a good option where children are involved – keeping a degree of stability until they leave school or reach 18
• Transfer part of the property’s value: By moving a proportion of a property’s value from one partner to the other, this sum can be treated as part of the divorce settlement, but the recipient still has a ‘stake’ in their home. When the property is eventually sold, both parties benefit from a share 

Inevitably, many people who file for divorce have a joint mortgage and are aiming to change the status of their loan so that just one partner has their name on it. Whether this can be achieved easily depends on various factors, which an experienced financial adviser or mortgage adviser can help with. 

There are several advantages to putting the mortgage in a single name: 

• The partner whose name is removed should be able to arrange more borrowing to finance a new home than if they were still named on their ex-partner's mortgage 
• The person who stays in the original house doesn’t have to worry about relying on their ex-partner to maintain the mortgage
• Both partners should be able to establish independent credit files. When people have a joint mortgage or loan, their credit files are connected, so creditworthiness remains interlinked. Breaking this tie can be an important step towards starting afresh 

Knowledge and expertise at a difficult time 

Divorce is complicated, and decisions made in the heat of separation can last a lifetime. Measured, impartial and timely financial advice can be invaluable – and the earlier the better.

With extra financial burdens being imposed by rising costs and economic uncertainty, the value of professional advice for divorcing couples should not be underestimated.