Dealing with divorce is undeniably difficult, both emotionally and financially. During such a challenging period, it is crucial not to overlook the financial issues that will inevitably arise as you untangle your shared life. Safeguarding a brighter future requires addressing these matters, including the potential loss of assets, reduced income, increased child support costs, and the subsequent impact on retirement planning.
In many cases even, one spouse will have relied on the other for financial support during the marriage, leaving them exposed to financial uncertainty post-divorce.
While it takes time for finances to recover following the collapse of a marriage, seeking professional financial and legal advice from the start is crucial to the process of rebuilding. So, it’s best not to delay taking such steps, even if you may feel vulnerable.
In the immediate aftermath of a separation
It’s crucial to think carefully about daily expenditure after a divorce since your household income will likely drop and you’ll need to stretch your resources to support two households. This will include modifying your home budget to account for your new circumstances and adjusting your standard of living.
You can make a more realistic budget by being aware of your monthly costs, which include your part of any pre-divorce debt, rent or mortgage payments, home bills, school fees, and pension provisions. It’s crucial to include any changes to government benefits, child support, or spousal support in your income adjustment.
Another essential component of financial planning is setting up an emergency fund. Your emergency fund should ideally be sufficient to cover your living expenses for at least six months. This fund can help you stay out of debt and relieve some of the stress associated with money by acting as a safety net for unforeseen expenses.
Start saving towards your emergency fund whenever possible. Having this financial buffer will bring peace of mind and ensure you can handle unforeseen expenses without compromising your financial stability.
The marital home
In most relationships, family home is the biggest asset they will own, and during divorce proceedings can be complex. There are four main options to consider:
- One person can buy the other’s share outright.
- Sell the property quickly and share the profit.
- Keep the property and change the owner legally.
- Transfer all or part of the property in an overall financial settlement.
Many couples choose to sell the house after divorce for a clean split. Alternatively, transferring a joint mortgage to one person has advantages:
- The person staying in the home will not rely on the other for the mortgage.
- The person leaving the mortgage can seek another home loan elsewhere.
- Both parties can separate their joint debt.
To transfer a joint mortgage, you need to prove your ability to make monthly repayments. If you can’t, you can apply for a guarantor mortgage with someone else’s help.
If your name is on the mortgage and you aren’t making payments or splitting expenses with your ex, you need to take immediate and serious action since you will remain responsible for the debt until you have your name removed or the mortgage paid off.
It’s crucial to get in touch with the mortgage provider right away to let them know you and your partner are divorcing, especially if you think your partner might not complete their end of the bargain by failing to make payments on time. You may also request that your spouse not be allowed to raise the mortgage amount in any way.
If children are involved in your divorce or separation, it’s best to resolve differences and divide assets amicably. However, if court is necessary, understanding where you stand concerning the family home is crucial.
The court prioritises a secure and stable home for children, which may impact who can stay in the property. In England and Wales, a “Mesher order” allows one partner to remain in the home until a specific event occurs, such as the child’s 18th birthday. A “Martin order”, on the other hand, grants joint ownership but gives one partner the right to stay in the home for life or until they remarry.
Retirement & Pensions
When going through a divorce, it is crucial to consider retirement planning as part of your financial planning.
Ensuring that you have enough retirement savings to support yourself is essential, but you should expect that you will have review and adjust your savings strategy in line with your new circumstances in order to meet your retirement goals. Importantly, you should aim to save for retirement as a single person, at least for the time being, even though it’s likely that you may eventually want to enter into a new relationship at some point.
When it comes to pensions, these are typically included in the financial settlement along with other assets and properties.
Once a divorce settlement is reached, it is important to have a solicitor draw up a consent or court order to make the financial settlement legally binding. Without a formal agreement, both parties can make claims on each other’s pensions, even after a long period of time since the divorce.
While a consent order is not mandatory, it can help protect your pension during the divorce process. Remember to declare all your assets, including pensions, during the divorce proceedings, as they will be taken into consideration when evaluating the total value of both pensions, including pre-marriage savings (in England, Wales, and Northern Ireland).
There are five main options for dividing a pension upon divorce:
- Pension sharing order (PSO): take a percentage share of your former partner’s pension pot or transfer it to a scheme in your name.
- Pension offsetting: use the value of your pension to offset other assets, like property.
- Pensions attachment order: some of your pension is paid to your former partner when you withdraw it.
- Deferred lump sum: receive a lump sum when your former partner retires.
- Deferred pension sharing: delay taking your pension entitlement until you reach pension age.
It should be noted that pensions can still be divided in cases when you and your ex-partner are both retired; however, a share cannot be taken as a lump sum.
Get your Estate in order
You’ll likely need to revise your Will and powers of attorney after a divorce, as it intrinsically changes a family structure.
When creating a will while married, many individuals designate their spouse as a beneficiary, trustee, or executor. However, after the final order to terminate the marriage is issued, the terms of the will automatically change. In the event of your ex-spouse’s inclusion in your will, their rights would be treated as though they had passed away on the date your marriage legally ended. Consequently, their intended inheritance would be transferred to the next eligible beneficiary as outlined in the will. If your spouse is the sole named beneficiary without any other designated beneficiaries, your estate would be handled as if you had died without a valid will (commonly referred to as dying “intestate”).
Failing to update your will following a divorce can lead to an unintended division of your estate. This means that stepchildren and cohabiting partners may not receive recognition under intestacy rules, jeopardising any inheritance you had planned for them. Thus, it is crucial to engage in the necessary action to ensure your will reflects your desired intentions post-divorce.
At the very least, you’ll need to remove beneficiaries of life insurance policies and investment accounts, as well as property gained or lost in the divorce. If your spouse was your executor in your Will, you’ll probably want to name a new executor You can just write a new Will to solve these matters, but amending a Will by writing a codicil will often suffice.
Resolving financial issues during a divorce is never easy. There can be serious and enduring repercussions to making rash decisions in the heat of the moment, when blinded by emotion. It’s seldom easy to estimate how much money you’ll require. However, collaborating with a financial advisor and family lawyer to create a customised cash-flow plan will help you visualise the kind of life you might lead following a divorce and how to get there.
