Divorce is always a difficult subject and couples going through the process understandably tend to focus their concerns over custody of the children, maintenance, and the marital home, but seeking financial advice during the early stages is crucial. Pensions and investments can be a large part of the family assets and equitability should be key.
A recent report states that 40% of divorcees believe the process is financially unfair, yet only 7% seek financial advice.[1]
Talking to a financial adviser during the early stages of divorce can stop you missing out on money that should be yours – or giving away money that isn’t technically theirs! Seeking guidance too late or not at all can have an immense impact on your financial future as certain investments may be taxed in different ways and could have consequences when the assets are finally shared.
Financial protection planning
It becomes more likely after divorce that families will face financial difficulty in the event of death or the inability to work due to serious illness. This is especially true for those with children and who also rely on maintenance payments as part of their income. It’s therefore vital to ensure that the right level of cover is in place for the new circumstances.
Life cover: the right amount for new circumstances
If a joint-life policy was arranged while the couple were together, it might be possible for one party to take over the ownership of the policy while the other establishes a new plan.
On the other hand, if individual life cover policies were in place during the marriage, it’s likely these policies can continue to run separately. In either case, the change of circumstances needs to be considered, particularly regarding the length of term and amount of any new mortgage arrangements.
So key points to consider include the following:
- the updating of beneficiary designations on existing policies, as these do not automatically change
- considering whether your current coverage level remains adequate for your new circumstances
- factoring in any loss of death-in-service cover that a former partner’s employment may have provided
- reviewing whether any life policies should be held in a trust for children
Income protection: preserving your lifestyle
The report also revealed that women’s financial futures are more at risk following divorce, seeing their household income fall by 41 per cent following a divorce, compared to 21 per cent for men.[2]
Household incomes typically decrease after divorce while expenses may increase with the need to support separate homes. The cost of the process may impact your emergency funds and you might find yourself with increased financial commitments through maintenance payments.
An ex-spouse’s income can no longer be relied on for support in times of being unable to work due to ill health. It may be possible to split any income protection policy you may have had within the marriage but it’s important to check the options provided by your insurance company.
Thought must be given to protecting any agreed maintenance payments in the event of the death or serious ill health of the spouse responsible for paying the maintenance.
One option is a family income benefit plan, which is designed to pay tax-free regular monthly income to your family if you die or are diagnosed with a terminal illness. These can be arranged for a set term, such as your children finishing their education.
Wills and estate planning
Statistics show that nearly 900,000 divorced individuals in the UK have not updated their wills to exclude former partners![3] Reviewing your will should be a priority and can take place at the outset of the process.
Updating your will does not need to be costly and will give you peace of mind that your intentions for the division of your estate have been newly documented.
Any trusts that are in place should be reviewed and you should reconsider your Inheritance Tax (IHT) position to reflect the changes in your family structure.
Mortgage reviews
Divorce will often involve either selling or refinancing the family home and there are several options available here too. White Mortgages, a subsidiary of Mattioli Woods, can review your mortgage raising capacity and see whether releasing equity from your home is advisable, explaining the options available to you.
Pensions – a valuable asset in divorce
Pensions are highly complex and require expert advice. They can be one of the largest assets in high-net-worth divorce cases and yet are often overlooked, with only 12% of financial orders on divorce containing a pension sharing order.[4]
Women are more likely to be adversely affected, with 30% waiving their rights to their ex-partner’s pension compared to just 17% of men.[5] These statistics are alarming and the long-term financial impact for those missing out can be substantial.
There are several options available when dealing with pensions in divorce, with many people simply not aware of their choices:
- pension sharing orders offer a clean break by allowing the transfer of an agreed percentage of one spouse’s pension pot to the other
- pension offsetting involves keeping the pension pot intact while the ex-partner receives a larger share of other assets
- pension attachment orders (formerly earmarking) allocate a percentage of pension income to the ex-spouse when benefits begin being drawn, with various options available, such as annuities, fixed-term annuities and drawdown arrangements
How we can help
Each of the above approaches has different tax implications and long-term outcomes. At Mattioli Woods, our wealth management consultants can find solutions to best fit your circumstances, providing advice on pension valuations, scheme rules and lifetime allowance considerations.
It’s vital to get it right, as once an agreement is made, an alternative settlement will not be available.
Strategic wealth management
For high-net-worth individuals, the divorce process should involve a comprehensive review of wealth strategy. Savings and investments acquired and accumulated during the marriage are generally considered to be marital assets and would therefore be subject to splitting upon divorce.
If any of these assets are encashed, there may be a liability for Capital Gains Tax or the loss of ISA status. The right financial advice will involve the following:
- tax-efficient restructuring, to help mitigate potential tax obligations
- the reassessment of investment portfolios to ensure they align with your new financial goals and risk tolerance
- consideration of business interests, especially if both spouses are involved in the business; a professional valuation is essential to ensure fair division, and succession planning may need revisiting
- a review of any financial liabilities; spouses are usually jointly responsible for any borrowings taken out during the marriage
Take control
While the emotional circumstances of divorce can feel all-encompassing, it’s also important to keep some focus on the other side of it.
It’s important to set yourself new goals and dreams for the future, goals that can be achievable with the right help:
- consider long-term financial security, not just immediate settlements
- examine the tax implications of each of the financial decisions
- regularly review the plan as your circumstances evolve
- include something to look forward to!
Contact Mattioli Woods for a confidential discussion about protecting your financial future.
One of our dedicated financial advisers will contact you and arrange an initial meeting, which is complimentary. Any follow-up work will be agreed before being implemented.
If you’re already a client of Mattioli Woods, please contact your consultant to discuss your options.
Sources:
1 Financial struggles delay recent divorces | Legal & General
3 Financial struggles delay recent divorces | Legal & General
4 Divorce Day: The importance of splitting pensions | MoneyWeek
Content correct at time of writing (April 2025).
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