What are the financial considerations I need to know when getting divorced?

Ensuring you and your family have a financially secure future is vitally important. But resolving financial matters during divorce or dissolution can be a tricky challenge. If you’re feeling daunted by the thought of dividing your assets and disentangling your financial arrangements, you’re not alone. Here, we outline the most important financial considerations, along with advice that can help pave your way to a stable future.

What is a Financial Settlement?

Every marriage or civil partnership has a unique set of financial circumstances. At the end of a relationship, just as you are going your separate ways, your monies and any financial commitments must be separated too. And this can be a complex job! A financial settlement is an agreement made about how your jointly held assets will be divided. It also covers your financial responsibilities after divorce. Importantly, it sets out how you will share your property, savings, pensions and any other financial obligations you might have.

Once a financial settlement is agreed, a family law solicitor will help you to record the terms in a Consent Order. A Consent Order provides certainty for the future and enables enforcement action if it’s needed.

Achieving Financial Settlement

Whatever your situation, when it comes to finances, working together in the spirit of honesty and fairness is key. Reassuringly, most cases are resolved by negotiation and solicitors can provide several methods to help you reach agreement, including:

· Mediation: a process where an impartial mediator helps both parties discuss and reach a mutually acceptable agreement

· Arbitration: a private process where an independent arbitrator makes a binding decision to resolve the financial disputes

· Collaborative law: a legal process where both parties and their solicitors agree to resolve disputes without going to court, working together to reach a settlement

There is an expectation by the courts that parties will put forward a reasonable settlement for consideration as soon as it can be arranged. These conciliatory methods can help you to avoid stress and heartache and will ultimately save you both time and money.

If you or your partner do not reach agreement over your finances, you can ask the court to make a ‘Financial Order’. This is known as the 'contested' route or an 'Ancillary Relief Order'. In this case, the court decides how your assets will be split between you.

Legal Considerations

The Matrimonial Causes Act 1973 requires the Court to “have regard to all the circumstances of the case” with “first consideration” given to the welfare of any child under the age of eighteen.

Whether imposing a Financial Order or by approving the terms agreed by parties, the court will consider:

· current and future financial needs

· income, future earning capacity, property and financial resources held, or those that people are likely to have in the future

· the ‘standard of living’ enjoyed before the breakdown of the marriage

· the age of the parties and the duration of their marriage

· any physical or mental disability of parties involved

· contributions made to the welfare of the family, including work and taking care of the household

· conduct – in cases where this has a bearing on finances

· the value of any benefit that will be lost to a party because of the divorce

If you have children, the court will consider:

· the needs of the children

· a child’s income and any earning capacity, property or other financial asset

· how a child was being educated … or how the parties expected the child or children to be educated

· any physical or mental disabilities a child may have

Financial Disclosure

In most cases, both of you will need to provide full and frank financial disclosure, including details of your income, assets and your liabilities. Your assets typically include:

· Your home and other property you may own

· Your possessions and the contents of your home

· Savings, investments and pensions

‘Hiding stuff’ at this point is definitely not a good idea for either party. Squirrelling money away for a rainy day or ‘forgetting’ to disclose that you own 3 properties your spouse is unaware of is likely to come out in the end and a judge could view such behaviour very unfavourably.

Liabilities include the debts you may hold as an individual, such as for credit cards or bank loans. The mortgage owed on a property you own is also considered a debt. If one of you ‘took on’ the debt of the other, this also needs to be taken into consideration.

It’s paramount that both of you disclose all your assets and liabilities to begin the process fairly. Failure to provide full and frank financial disclosure is a serious matter that can have serious consequences in the eyes of the law. Not doing so may also incur additional costs.

Dividing Assets

A court will look to ensure that the division of your assets is both fair and equitable. There should be no discrimination between parties … and the starting point is usually a 50/50 split. The court may depart from this arrangement in various circumstances. These include:

· where one party has made an exceptional contribution to the wealth (known as a stellar contribution)

· where behaviour or conduct is so serious that it cannot be ignored (and there has been financial impact)

· where there is a new asset, or one which has increased in value since separation

· where the asset is considered to be non-matrimonial property

· where there is a well-founded “need” which won’t be met by an even split

The Family Home

You may find you have a strong sentimental attachment to some of your assets and this is often felt with the family home. Usually the home has been bought together and can be full of special memories. It’s not uncommon for it to mean more to one of you than the other. If you did buy it together, both of you are legally entitled to remain there until a legal settlement is reached.

If you have children, try asking yourself what would be best for them? Can either one of you afford to stay in the family home? As strongly as you may feel, keeping the family home going may be disadvantageous to you – and by downsizing to a more affordable property you could reduce your stress and achieve financial stability.

Either way, if one of you does remain in the home, a financial agreement will be needed to determine who and when the other party will ‘buy the other out’ of their share in the property.

Joint Current Accounts

You may have a joint account … and, if so, during your divorce, both of you will have a need for money to manage your routine outgoings and pay any professional fees encountered.

In the early stages of divorce, try not to make any rash decisions and be reasonable and fair with one another to avoid either one of you getting into debt. If you have children, prioritise their needs and wellbeing to help maintain stability during this difficult period.

Savings, Trusts and Investments

Unless you have a pre-nuptial or post-nuptial agreement in place, your money and investments are considered shared. So, they will need to be split as part of a wider settlement. Where savings and investments are concerned, it’s vitally important that you seek specialist financial advice to understand their true value and avoid unwanted surprises. There may be tax implications and it’s important that you gain a full picture before making any agreement.

Take time to consider whether you have any less obvious assets to consider such as trusts and international assets. It’s necessary that you disclose and examine all assets and liabilities. Understanding them can be a complex process. You may need to take advice from a specialist solicitor experienced in handling high net worth divorce cases.

If you have a business …

Similarly to savings and investments, businesses are generally considered a joint asset. This means that if you own a business your ex will get a share of it, even if they weren’t actively involved in the running of it. It often isn’t practicable to divide a business and a court will usually avoid disrupting a solvent one. It’s common for a business to be valued as part of the divorce and for one party to buy the other out.

Debts

You will need to disclose details of any debts you hold individually or jointly. During a divorce, debt is usually considered a joint responsibility, regardless of whose name is on a credit card or loan agreement. The Citizens Advice website explains how to find out about your debt. And, other websites like Experian, Equifax or Trans-union can provide reports on liabilities that you hold.

Ideally, all your debts should be repaid as part of a financial settlement and you should try to pay off those with higher interest rates first. This can help safeguard your credit rating as you may need credit again in the future.

With mortgages, it is typically not feasible to settle these debts outright. Ask your mortgage provider for an up-to-date Redemption Statement to understand any outstanding mortgage debts.

Pensions

If you or your partner has a pension, either one of you could be entitled to a portion of it upon divorce. Be sure to disclose all the details of the schemes and request a report for the other party’s pension too. There are three distinct ways that pensions can be handled during divorce:

1. Pension Sharing Order

2. Pension Offsetting

3. Pension Attachment

Both a Pension Sharing Order and Pension Offsetting allow you to achieve a clean break. With Pension Attachment, a court will instruct future pension payments to an ex-partner when the pension pays out.

Regardless of the way your pension is handled, seek advice before making an agreement. Without full and proper consideration, one party could be left without an income for their retirement.

Budgeting for your Future

The process of mapping out your future should be done in parallel to the division of assets. You should identify and detail all your foreseeable costs. It’s helpful to make yourself a spreadsheet of future income and expenditure for yourself as well as for children if you have them.

You should include:

· living expenses, including costs of mortgage, rent and bills

· future income

· child maintenance payments, if applicable

· children’s school fees, if applicable

Consider what life will look like in retirement. By creating a detailed budget for the future, you stand a better chance of achieving a sustainable financial outcome. You can use the figures to demonstrate your needs during a negotiation process or in court.

Life Insurance and Wills

Your spouse will often be the recorded beneficiary of your pension, any life insurance payouts or your will. It is highly recommended that you revise the details of these after divorce to reflect your new wishes.

Make sure you have an up-to-date will and, if you have children, consider taking out life insurance. Both are a way of safeguarding your children’s financial future in the event of your premature death.

Conclusion

In terms of financial settlements, understanding your legal obligations at an early stage is essential. This, alongside full and frank financial disclosure, will build the right foundations for obtaining a fair and realistic financial settlement for both parties.

At K J Smith Solicitors, we understand that when it comes to divorce and finances, everyone faces a degree of uncertainty. Our team is highly experienced in negotiating financial settlements. We tailor our advice to your needs and never shy away from unpicking the most complex of financial arrangements to find a workable solution.

Find out how we can help you by arranging a FREE 45-minute consultation. We’re always invested in achieving the best financial outcome for your future.