The financial impact of divorce or separation

Divorce & Financial Impact

There are many instances where we generally feel less numerate and financially savvy, especially when we are bombarded with information about 0% credit transfers, pensions, ISAs, bonds and switching mortgages, energy providers, or phone contracts. But for many, the realisation that they only understand part of their family finances is never more stark than when faced with divorce or separation.

It’s fair to say that when a relationship breaks down, the initial reaction is emotional – whether you’re relieved it’s over or devastated that it happened. But in the immediate aftermath, almost anyone who’s separating begins to wonder, “will I have enough to live on?”

While it may feel overwhelming to confront unfamiliar aspects of your finances, below we provide some guidance on the financial impact of divorce and cover some of the things you will need to think about and agree.

It’s important to remember that divorce isn’t just about completing paperwork, you need to untangle your financial ties, which is an essential step towards creating a secure, independent future.

At NFM our mediators are experts in helping separating couples to reach agreement on issues relating to divorce, including finances and property, and we can help you navigate through this next stage of your life. For more information, or to make an appointment with a mediator, call us on 0300 4000 636; or email us on mediation@nfm.org.uk or book an appointment.

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Where to start?

Let’s look at the starting points… The law and the courts take the view that where there is a legal relationship (marriage or civil partnership) then the starting point for financial discussions is fairness and equal division. This is often not the endpoint, as there are a range of things to be taken into consideration such as:

• ongoing needs of any children
• each person’s earnings and mortgage capacity
• ability to accumulate a pension, and
• where there are enough resources, any significant contributions of each partner in the relationship.

The starting point is that the needs of the children now are met and then, on the basis that children do better when their parents are happy, the needs of the parents are met. Sometimes there are not enough resources to arrange things fairly at the time of separation, and parents will make agreements to meet the children’s needs now … and their own at some time in the future when the children are more independent.

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Pensions & Divorce 

It is important to ensure you include consideration of pensions when you face the end of your marriage or civil partnership. Even though you may be some years away from an age where you can access pension funds, these count as assets, just like money you might have in a bank or savings account.

It sometimes feels tricky to get the correct up-to-date information about the value of your pension, but unless you do, you won’t be able to provide the correct financial information that you need.

A pension can be a valuable asset (sometimes the most valuable asset) that has been built up during your time together. Depending upon the length of your marriage and your ages, you will need to consider your income in retirement.

You will hear the term Cash Equivalent (CE) of your pension. This is the figure that your pension provider will produce when looking at the value of the fund. It is the amount that the pension provider would need to produce if the fund was being transferred from one fund to another. Some pension schemes provide the CE figure when producing their annual statements.  It may be necessary to contact your pension provider for the figure.  Unless the pension is in payment, the provider has to produce one CE calculation per year free of charge. The not-for-profit website Advicenow provides a useful free ‘survival guide to pensions’ on divorce here.

You can read more about pensions and divorce here.

The end of a relationship can be a stressful and emotionally challenging time, and pensions may be the last thing on your mind. Gerontology expert and Professor of Sociology at The University of Manchester, Debora Price, together with Dr Hayley James of UCD, have created an informative video, giving free and factual information on how to reach a fair financial settlement – which can be viewed here. 

NFM clients Terry and Susan Selby are divorcing after 30 years of marriage. Mediation has saved them thousands of pounds by sorting out a problem with their pension that neither of their solicitors had spotted, watch this short video which shows how mediation helped them:

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Supporting Children Financially

When parents separate they both remain responsible for the care and financial support of their children. Most parents think it is important for the children’s lives to be affected as little as possible by the separation and for them to have a similar standard of living when they are spending time with each parent. The law takes this view too.

Sometimes this means that one parent gives the other a regular amount of money, known as child support or ‘paying maintenance’, to contribute towards for example maintaining a home with heat and light, providing food, school uniform and other clothes, paying for school materials and out of school activities, and generally ensuring that their health and welfare needs are met.

Because every family has different needs the government thinks it is important that parents negotiate their own arrangements for child support, and provide support to help do this.

You can find out more about family-based arrangements and making arrangements yourself on the gov.uk website.  It has resources to help you, including a child maintenance calculator to help you think about calculating how much to pay and, if you absolutely can’t agree between yourselves, find out more about statutory arrangements for paying maintenance.

The statutory Child Maintenance Service (CMS) applies charges to both the giving parent and the receiving parent for this service. For up to date charging information use the links above.

Wills

Although you may be thinking about the big issues such as parenting or financial arrangements, it’s also important to think about other things that will need to be tied up such as wills.

If you separate, but are still legally married, your will remains valid and your spouse will be entitled to inherit as set out in the terms of the will. If you don’t want your spouse to benefit then it’s important that you write a new will stipulating your new wishes.

Divorce doesn’t revoke a will, nor does it mean your will from before you were married comes back into effect. Your current will remains valid, but for inheritance purposes, your ex-partner is treated as if they had died when your marriage or civil partnership was dissolved. Meaning whatever they were set to inherit will be passed on to the next beneficiary who is entitled to it, in line with the terms of the will. Therefore your ex will not benefit from it, and they would no longer be able to act as an executor or trustee under your will.

It’s therefore a good idea to update your will to ensure your wishes are updated and you have chosen new executors if needed. Willfully offer free will writing services from their charity partners, visit www.willfully.co.uk/charity-wills to find out more.

You can find more answers to the money related questions our mediators are frequently asked here