3 important financial planning matters to consider if you’re getting divorced

Getting divorced can be an emotional experience and you might feel overwhelmed by everything you need to organise.

From where you’ll live to how you’ll coordinate childcare arrangements with your ex-spouse or civil partner, there’s a lot to think about.

However, protecting your financial future – and that of any dependents you have – is no doubt high on your list of priorities.

So, here are three important financial planning matters to bump to the top of your to-do list if you’re getting divorced.

1. Pension sharing

Pensions are often one of the most valuable assets to a person’s name, and in a marriage may represent a huge portion of your combined wealth.

Yet, according to data released by the Institute and Faculty of Actuaries (IFoA) and Scottish Widows, published by the Standard, only 30% of divorcing couples in the UK include pensions in their divorce settlements.

As a result, divorcing individuals are missing out on pension savings worth between £2 billion and £4 billion a year that could have been included in their divorce settlements.

What’s more, failing to include a pension sharing arrangement in a divorce settlement may have a disproportionately negative effect on women.

This is due in part to the gender pension gap, which exists for several reasons including the fact that women are more likely to take time out of paid employment to care for their families.

Indeed, figures published by NOW: Pensions, in partnership with the Pension Policy Institute, show that women who retire at 67 have average pension savings of £69,000. This is £136,000 less than the average man, who will have accrued £205,000 in his pension pot by the same age.

With these figures in mind, failing to consider pension wealth during your divorce could increase the risk of an unfair financial settlement.

Practical steps to consider:

There are three main pension sharing options that you could include in your settlement:

• A Pension Sharing Order (PSO) – A PSO is issued by the court and will stipulate what proportion of each pension you and your ex-spouse are entitled to.
• Pension offsetting – This allows you and your ex-spouse to retain the full value of one party’s pension, in exchange for another asset of similar value (such as the marital home).
• A Pension Attachment Order or “earmarking” – A court order which states that some or all of one person’s pension benefits must be paid to the other party when the pension becomes payable.

A financial planner can explain the merits and potential drawbacks of each approach. This may help you make an informed decision about the most suitable option for your circumstances, needs and goals.

2. Dividing debts

While you might think that legally ending your marriage means that you are automatically separated from your ex-spouse financially, this is not the case.

You and your ex-spouse must apply to the courts for a “financial consent order” to make your agreement legally binding.

Failing to do so could mean that you remain liable for your ex-spouse’s past and future debt. Alternatively, you could be left with an unfair burden of your shared debt or face issues with your credit rating.

As such, it’s crucial that you consider your individual and shared debts when discussing how to divide your finances.

Practical steps to consider:

When dividing debts with your ex-spouse, you might find it helpful to:

• Obtain credit reports from an agency such as Equifax – This will give you a clear picture of your debts and whose names are attached to these.
• Clear as much debt as possible before your divorce is finalised – If this is not possible, prioritise paying off short-term borrowing with high interest rates, such as credit cards.
• Agree on how to manage any remaining shared debt – If you struggle to reach an agreement you might find it beneficial to work with a professional mediator.
• Dissolve joint accounts – This may involve cancelling credit cards, refinancing loans, and so on. You could then transfer any remaining balances to individual accounts, in line with your agreement about how to split your debt.

A financial planner can play a valuable mediating role as an objective third party. They can work with both you and your ex-spouse to help you overcome any points of disagreement and find a way forward.

3. Reviewing protection policies

With all the other administrative, organisational and emotional matters you’re likely to be juggling during your divorce, it might be easy to overlook your protection needs.

Yet, reviewing your protection policies and reassessing your requirements is crucial to ensure financial security for you and your dependents.

If you had joint cover, such as life insurance, it’s unlikely that you’ll be able to “split” these policies. Some providers might allow one of you to take over the policy, or you might decide to cancel it and each take out individual cover.

Whichever option you choose, it’s important to ensure you have adequate cover for your new financial situation and needs.

This is true for any individual financial protection you have too. For example, if you have death in service cover that names your ex-spouse as a beneficiary, you may wish to redirect this to your children or other family members.

Practical steps to consider:

• Review your new financial protection needs – It’s likely that your needs may change when you get divorced. For example, if you become the sole breadwinner in your household, you might wish to enhance your income protection cover.
• Agree on how to manage shared policies – Speak to your provider to explore the options available, as these vary between providers and policies.
• Amend your individual cover – This might include removing your ex-spouse as a beneficiary and replacing them with your children or other loved ones.
• Consider additional cover – You may need different or more extensive cover after your divorce. For example, you might wish to take out life cover on your former spouse to protect their spousal support or child maintenance payments.

A financial planner can help you understand how changes in your circumstances might affect the cover you need and support you in exploring the most suitable options.

Get in touch

If you’re looking for a financial planner in Bristol to help you plan your finances both during and after your divorce, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.