The financial implications of a “DIY divorce”
Going through a divorce can be emotionally stressful, and making unadvised financial decisions could worsen this stress. Learn about the pitfalls of DIY divorce.
Divorce can be expensive. This simple fact may keep you awake at night if you are going through the process of separation. Not only is it emotionally taxing, but it may have a significant financial impact too.
Sharing assets, selling your home to purchase a new one on your own terms, and paying legal costs can all accrue thousands of pounds in fees. Plus, you may be going from being a dual-income household to funding your own lifestyle as a single person.
In fact, Legal & General reveals that 280,000 divorces in the last five years were delayed for financial reasons. Moreover, 40% of divorcees believe the process is “financially unfair” but only 7% seek professional financial advice.
Here, you will discover three key financial factors that could be affected by your divorce, and how working with a financial planner could improve your position and secure your future.
Your pensions could be a sticking point, but advice may help
Although your private pensions are likely to be one of the most valuable assets you hold as a couple, many do not even discuss them upon divorce.
The last available ‘Great British Retirement Survey’, conducted by interactive investor, says that:
- 67% of divorcees did not discuss their pensions during divorce proceedings
- Women were less likely (75%) than men (56%) to do so.
Usually, there are three ways divorcing couples can share pensions:
- Pension sharing, which is a court-ordered even split, leaving each party with an agreed-upon amount of pension wealth. This is a popular option for those wanting a “clean break”.
- Earmarking, which sets aside a portion of one person’s pension to be claimed by the other party in retirement. There are several stipulations applied to this option, including that the claimant won’t be able to access their share until the pension holder chooses to take their benefits. It also ties divorced couples financially even after they split, potentially for several decades.
- If one party is leaving the marriage or civil partnership with another very valuable asset, such as their shared home, the other may request to offset this by taking both pensions. While an agreeable decision for some, it’s important for both parties to ensure this option is right for their long-term financial stability.
Without advice, you could rush into a decision, feel pressured by your ex-spouse, or simply want to ignore the issue of pensions altogether.
A financial planner can offer bespoke advice, using cashflow modelling software to project the long-term outcomes of your pension decisions upon divorce.
Without the right advice, your spouse may be able to make future claims against your wealth
Most people would prefer not to remain financially tied to their ex-spouse or civil partner, aside from scheduled child support payments if necessary. If you agree with this sentiment, it’s important to obtain the right documentation and seek advice to ensure your ex-spouse can’t make a claim against your wealth in future.
Fortunately, it’s relatively simple to do this. You and your ex-spouse would need to sign a Clean Break Order, a legal document preventing each person from claiming wealth from the other in future.
However, the Legal & General research found that only 31% of divorced people have signed a Clean Break Order.
What’s more, before you sign this document, it is crucial to ensure that no stone is left unturned. If you come to an arrangement you are not 100% happy with, and sign a Clean Break Order, you can no longer go back on your decision, meaning your future financial stability could be compromised.
Working with a financial planner and experienced solicitor may help you make an informed decision.
Your household income may fall, leading to a change in your retirement and gifting plans
According to Legal & General, the average divorced person experiences a £9,000 drop in annual income. Naturally, if you previously combined your earnings with that of your spouse or civil partner, you will notice the difference when you are funding your lifestyle entirely on your own.
Depending on how much your income falls by, and other factors contributing to your financial stability, you could find that this ongoing difference in income leads to:
- Delayed retirement plans. If you had originally planned an early retirement, a significant decrease in household income may necessitate a change to your timeline. Not only might you need to save more for big-ticket plans like worldwide travel, but your day-to-day life may be more expensive as a single person too.
- Fewer lifetime gifting opportunities. We all want to provide our children with a stable future, and if you had planned to gift wealth to your loved ones (for example, to support them buying their first home), you might need to revise your plans after divorce.
- Reduced tax breaks. Married or civil-partnered couples are often able to access “double tax breaks”. By sharing assets, you could utilise tax allowances relating to Inheritance Tax, Capital Gains Tax, and Income Tax. Once you are single, you will not benefit from these advantages.
By taking bespoke advice at the point of divorce, you can set yourself on a path towards financial freedom, stability, and peace of mind. Even if you hold less wealth now that you are single, this does not necessarily mean all your plans must be altered. A financial planner can help you to accurately project your future circumstances.
We’re here to help divorcing individuals secure a brighter future
Divorce is never an easy process to undergo, but despite its difficulties, you can create a life that suits your needs and helps you meet your goals.
In addition to the topics discussed above, there may be a range of worries, administrative tasks, and questions on your mind. We offer an empathetic approach that focuses on your wellbeing and helps to ensure your finances are managed professionally and efficiently.
To work with a financial planner and gain peace of mind before, during, or after divorce, email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Kellands financial planners are not responsible for any advice obtained from a legal professional and operate independently from these services.
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.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, or tax planning.
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.