01 Aug 2024

Planning for financial security after divorce

The end of a marriage is a difficult time, emotionally and financially. The divorce rate is rising, and it’s now estimated that more than 40% of married couples in the UK will split up. Their chances of building a happy and successful new life will increase if the financial implications are addressed as early and as fully as possible.

More than a quarter of divorced people see their wealth increase but one in three see it fall. Achieving the best financial outcome depends largely on having expert advisers on your side who can advise on divorce strategies from asset division to planning your financial future.

Asset division

When a couple decide to separate, they need to divide up their possessions. A straight 50/50 split of marital assets is the guiding principle but it is not a hard and fast rule. Untangling shared ownership of assets such as the family home, pensions, investments, and savings can be tricky.

There are several ways of dividing pension pots. If a clean break is the preferred option, a pension sharing order can be made. Alternatively, pension offsetting allows one partner to keep their pension pot in exchange for, say, giving the marital home to their former spouse.

Savings and investments will form part of the settlement and business assets are also usually included, even if only one partner is named as the owner. One partner may need to buy out the other to avoid selling or breaking up the business.

Despite the emotional ties, keeping the family home does not always make sense, especially if there is a sizeable mortgage. Downsizing may be advisable to ease the financial pressures.

Spousal maintenance should be given careful consideration. Also known as alimony, this is basically a regular payment, usually monthly, made by one former spouse to another to help with their living costs. Alternatively, a one-off lump sum payment can be made as part of a clean break. Getting clarity on how these payments will affect your post-divorce wealth is vital.

Tax: Marriage confers many tax advantages which no longer apply when you divorce. Timing the transfer of assets is crucial. The taxman will not seek capital gains tax on property or investments transferred to your partner before your divorce is finalised. It’s a complex issue so getting early advice is important.

Timing the transfer of assets is crucial. The taxman will not seek capital gains tax on property or investments transferred to your partner before your divorce is finalised. It’s a complex issue so getting early advice is important.

Crafting a financial strategy

Budgeting: Divorce is a giant step into the unknown but putting a budget plan in place can help you to feel in control.

The first step is to work out your income from employment and other sources. Then balance this against regular expenses, from bills and mortgage payments to school fees. Keeping a watchful eye on discretionary expenditures such as holidays and finding better deals on items like mobile contracts can boost disposable income.

Asset evaluation: Getting an accurate valuation of your assets – from pensions and property to investments – is vital for any divorce discussions. You can’t divide assets fairly if you don’t know what they’re worth and getting it right will affect your future financial wellbeing.

The fair market value of some assets, such as cars, can be found on appropriate websites. However, given market volatility, expert advice may be needed to work out the fair value of other assets such as artworks, homes, investments, and pensions.

Financial independence: Going solo can be hard but financial independence is achievable if you put a strategic wealth plan in place.

By working out your goals for this new stage of your life, you’ll be clear what you need from your divorce settlement and be able to make informed decisions about your financial future.

Protecting your wealth

Updating your estate plan: Divorce involves a fair amount of legal and financial paperwork. Updating your succession planning to reflect your new circumstances will be one of the main jobs you will want to do.

Getting divorced does not automatically revoke your existing will. You’ll need to update it to ensure that it reflects your current wishes on asset distribution. Other documents, such as powers of attorney and beneficiary designations for personal pensions and insurance policies, should also be updated.

If your ex-partner remains named in your will as a beneficiary, executor, or guardian this could cause problems with your estate later.

Insurance coverage: You may need to change the beneficiaries of your existing life policy or, indeed, take out insurance for the first time. You may also wish to consider health, disability, and long-term care policies. Knowing that you have the right coverage in place, and have named the beneficiaries, contributes to your financial certainty.

Investment strategies: It may be sensible to make an investment plan for your share of the matrimonial assets if left with a lump sum. A well-diversified portfolio, allocating your money to the right combination of cash, bonds, and stocks, could provide income and growth for your new lifestyle. It will be tailored to match your risk appetite, maximise tax efficiency, and help meet your financial goals.

Seeking professional guidance

Divorcees can find themselves in a perfect storm of unfamiliar legal rights, new financial arrangements, and adjusting to single life. Trusted expert advisers can help you steer through the maelstrom.

With the so-called no-fault, DIY divorces now available online, many divorcees are choosing to represent themselves in proceedings. However, research shows that most regret not seeking professional legal advice at an early stage.¹

Getting robust financial advice early in the process is important. Only 6% of divorcees take advice from a wealth manager² but doing so can make a real difference to your future financial security.

Finally, divorce can be emotionally gruelling, and most people need reliable support to get through it. Family and friends are invaluable here, but for some it’s worth considering counselling services and support groups to help cope with the stress and process emotions in a healthy way.

How we can help

Divorce can be tumultuous, but with careful financial planning and strategic guidance, divorcees can secure their financial future and embark on a new chapter of their lives with confidence. By crafting a tailored financial strategy, protecting their wealth, and seeking professional guidance, divorcees can navigate this transition, ultimately enabling them to build a solid foundation for their financial future.

Our trusted expert advisers can guide and support you through the financial maze and help you make informed decisions to secure a brighter, wealthier future.

Please get in touch if you’d like to speak to one of our financial planners today.

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