When partners split up, there are a host of financial implications for mortgages, savings and tax that need careful consideration to avoid hardship
Splitting up with a long-term partner, particularly a spouse, can be devastating. But while you grapple with the emotional implications of this major life change, it can be easy to neglect your financial plans for the long term, which may have knock-on effects. Here is why it pays to bear your finances in mind when dealing with divorce.
The financial impact of divorce
While it is possible to divorce without incurring large legal fees, most couples will find the process expensive. Solicitors’ fees for a negotiated financial settlement will be in the low thousands of dollars – and if the case gets to court, you could be paying tens of thousands. If there are children involved, or large amounts of joint assets, the costs could be even higher.
Such costs may be unavoidable, but they are likely to leave you in a vulnerable financial position. And your day-to-day living costs may increase as you move from joint outgoings for housing and bills to running two separate households.
A divorce can also call your retirement planning into question, as in some cases your pension may have been set up to share the income between you and an ex-spouse leaving one, or both of you with a retirement shortfall.
Making the most of your cash, rethinking your long-term financial goals and ensuring your money is still invested as tax-efficiently as possible is vital after your bank balance has received this shock. As with any other major life change, it is important to involve a wealth manager in the process to make sure you have taken a holistic approach to your changed finances and life goals.
Financial equality is the goal
While many divorcing couples will require a mediator or lawyer to divide their assets, using a wealth manager as well, will ensure that everyone’s money is protected. It could even avoid a costly court case if an adviser helps you divide things equally.
The ideal scenario in a divorce is for the court to endorse a financial agreement that has already been agreed by the couple, with a process known in the UK as a consent order. Coming to an amicable agreement in advance will help this to happen.
Generally, the principle in divorces, is to achieve financial equality between a couple, taking into account the length of a marriage and the assets accrued during that time. It is important to consider where your divorce will take place as this is not always the case in every country.
How a wealth manager can help
Visiting a wealth manager with full information about all the assets you hold jointly and separately, as well as projected budgets for both of you and costs involving any children or other dependants, will help you to achieve a financial agreement that takes everything into account.
Where a divorcing couple are seeking to collaborate to get the best outcome for everyone, a wealth manager can act as a neutral party, giving guidance but not advice.
They could also advise both parties on the cost of buying or renting a new home, getting suitable life cover and how to share pension benefits and other assets in the most tax-efficient manner possible.
Once a settlement has been agreed, a wealth manager can also help with implementing it. This might include the complex matter of splitting UK pensions and QROPS without either person breaching annual or lifetime pension allowances.
In the UK for example, orders related to this must take place before a divorcing couple apply for a decree nisi – the first step towards a divorce being granted. Six weeks after the court grants a decree nisi, unless either party has an objection, the decree absolute is issued, and the divorce is complete.
Financial advice after divorce
After a divorce, it is important for both parties to review their finances and legal positions to ensure everything reflects their new status. This includes reviewing who will receive your pension or other benefits in the event of your death.
You may also need help with mortgage finance for a new property and updated pension provision, and protection policies for any child maintenance that you will have to pay.
Without financial advice, the complex process of divorce could leave you financially vulnerable for many years and may also leave your family unprotected.
Contact us today for a free financial planning consultation and ensure you have everything set up on a good footing as you begin your new life.
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