Britain has the highest
divorce rate in Europe, according to the EU’s statistical office Eurostat. So,
with divorce and separation an occurrence in many households, couples are
increasingly turning to financial advisers, as well as lawyers, to sort out
their financial affairs when they separate.
A family breakdown can lead to a wide range of
outcomes, partly depending on whether the couple are married or not. An
unmarried dependent partner is considerably less protected than a married
spouse, which often comes as a surprise to many people when they split up. A
dependent partner, however, could have some rights, as may any children.
If a married couple – or civil partners –
separate or divorce, the protection is much greater. Nevertheless the position
will vary considerably according to whether the split is a clean break or there
is an ongoing financial dependency.
The key areas where the financial adviser’s
skills and knowledge are critical include:
Pensions A couple’s pension rights are often their most important asset,
or at least their next biggest asset after a property or business. There are
three main ways to deal with pensions after divorce. The most popular is
offsetting, where each party keeps their pension rights untouched but their
value is taken into account in the division of the rest of the property. So, in
a simple example, John may have a pension fund worth £500,000, and the family
home after deducting the mortgage is worth the same amount. Under an offsetting
agreement John would keep his pension and his former wife would take the home
(subject to some adjustment for tax).
A less common approach is for the divorce court
to earmark one spouse’s pension so that part of it is paid directly to the other
spouse when the pension scheme member retires.
Alternatively, the courts can demand each
individual’s pensions rights be subject to a division at the time of divorce.
Each option has its pros and cons and there can be complications in valuing the
pension rights themselves.
The home is likely to be a matter of contention with particular issues
around arranging mortgages for the existing property or separate new ones.
Investments With people divorcing later in life, it is increasingly likely
that a couple will have a portfolio of investments. As each ex-spouse takes
their share of the investments, they often discover that their needs have
changed following the split.
Where they previously might have wanted to
maximise capital growth for the future, the higher priority might now be to
generate an immediate income. Likewise, a person who is now on their own for
the first time in many years might
develop a different view of the risks they are willing and able to take
with their investments.
Life assurance and other cover will need reappraising and probably
reorganising. Where one spouse is paying maintenance for children or to the
former spouse, it generally makes sense to insure the policy holder’s life and
probably their health as well. This might involve adjusting existing policies
and their associated trusts or it could mean taking out new ones.
Estate planning and wills also generally require some attention. Divorce will
automatically invalidate an existing will and most people prefer to change their
wills in any case under these circumstances.
The fact is there are a lot of technical
financial issues surrounding divorce and we are here to advise you should your
marriage or civil partnership come to an end. The value of your investment and
the income from it can go down as well as up and you may not get back the full
amount you invested. Tax and divorce/separation laws can change.
The FCA does not regulate will writing and
taxation and trust advice.
If you would like to find out more please about our tax
and financial planning services please contact edward.grant@in2matrix.com for more information.
The information is
intended to provide information only and reflects our understanding of
legislation at the time of writing. Before making any decision, we suggest you
take professional financial advice.
The value of investments can fall as well as rise and any
income from them is not guaranteed. You should be prepared to lose your
investment. Past performance is not a guide to future performance.
