18th April 2024
general
It’s never a good idea to rush into anything too drastic following a major life event. But there are a few areas you should consider to help ensure your financial security after a divorce.
Splitting Assets
Dividing your assets may be straightforward. If you have both contributed roughly equally, a 50:50 split of marital assets, plus keeping anything you owned before the marriage is the standard procedure.
But if one partner has built a career and the other has taken a step back to care for children, it might not be as simple. The higher earning spouse might have more in income and assets, but this may not have been possible without the support of their partner. Similarly, the partner might have less in savings, as well as a limited earning potential due to supporting their spouse’s career.
If an agreement can’t be reached, you will need to go to court. The court will take into account income, assets (accumulated before and after marriage) lifestyle, age, and the ability to make more money. Financial responsibilities and parental roles will also be considered.
Court proceedings can take some time and there are costs involved. An amicable divorce can quickly turn vindictive with solicitors on both sides pushing for the best deal.
Generally, the best outcome is a clean break with no ongoing financial responsibilities by either party.
Review Your Budget
Going from a dual income household to single income makes everything more expensive. Housing costs and bills will mostly remain the same, regardless of one less person living in the home. Typically, someone living alone spends 92% of their disposable income, compared with 83% for households with two adults. It’s important to have a good idea of your income and expenditure, as you may not be able to maintain the same lifestyle as when you were married.
Married couples can receive a number of tax benefits, including combined personal allowances and Marriage Allowance. It’s important to account for any increased tax liabilities and reduced tax planning opportunities in your budget.
One of the most important decisions will be whether to sell the family home or for one spouse to buy out the other. Mortgage or rental costs will need to be factored into your budget.
If you are the main breadwinner, it is possible that you will need to continue providing your former spouse with financial support, as well as child maintenance if you have children not living with you full-time.
If you earned a lower income or are the primary carer for children, you may be entitled to maintenance, but it’s never a good idea to rely on it. Financial circumstances on either side can change, meaning that payments are stopped. You can find out more here.
If you are on a low income, you might be entitled to benefits which can help remove some of the financial pressure.
Retirement Planning
If one partner was a higher earner during marriage, it is also likely that they have more in pension benefits.
Pensions built up during the marriage can form part of a divorce settlement. This may involve a share of the pension being allocated to the spouse. Alternatively, they may receive a higher proportion of other assets to compensate. This will depend on the assets you have, the values, as well as the preferences of both parties.
Once you are clear on the pension benefits you will have post-divorce, it’s a good idea to obtain some projections to get an idea of the retirement income you could achieve. Don’t forget to include the State Pension. You may want to increase your contributions, or make voluntary National Insurance contributions if you are missing any years in your record.
Financial Protection
It’s generally recommended that couples have life insurance to provide benefits to their family in the event of their death. It’s worth reviewing your life cover if you get divorced as you might need to alter your cover amount or change your beneficiaries.
Critical illness cover and income protection are also important, as they can provide a financial cushion if you are unwell or injured. This may be even more important after divorce as you can no longer rely on the support of a spouse.
Estate Planning
You will need to review your Will when you get divorced. While it does remain valid, your ex-spouse will be excluded as beneficiary and executor unless you specify otherwise.
If you are on good terms, you might still want to include them in your Will, although perhaps not to the same extent. Alternatively, you might want to exclude them altogether, and will need to consider what you wish to happen instead. If your ex was the sole beneficiary and you do not nominate anyone else, the rules of intestacy will apply.
The situation can be even more complicated in the case of blended families and second marriages.
Divorced couples no longer benefit from the joint nil rate band or joint residence nil rate band. This could mean paying more Inheritance Tax overall.
Financial and legal advice is recommended, particularly if you have a large estate or complex family situation.
What if You Are Not Married?
It is a common misconception that common law marriages provide any degree of legal protection in the event of a split.
Unmarried partners do not have any claim to their ex’s income, assets, or pension. Child maintenance is covered under the same rules whether or not you are married, but there is no obligation to provide financial support to someone you were not married to.
It may be a good idea to seek legal advice or contact Citizens Advice to understand your rights in the event of a split.
Divorce is not a pleasant thing to think about, but even if you are happily married, it is worth considering what would happen if the marriage broke down to ensure fairness on both sides.
Please do not hesitate to contact a member of the team if you would like to find out more about financial planning.
