Going through a divorce is undoubtedly an incredibly stressful event for your clients, and failing to consider key financial aspects can further intensify the challenges they face.

Financial considerations can be one of the most complicated formal elements of a divorce. Indeed, it is even sometimes the reason that couples reconsider their decision.

A survey reported in Money Marketing found that 11% of married people had considered divorce but did not go ahead with it, with the most common reason (40%) being that they felt they were unable to afford the split.

But if your clients are proceeding with a divorce, it’s important that they don’t ignore the crucial financial details that can have considerable implications on their financial stability and wellbeing.

Read on to discover three important financial aspects commonly overlooked in divorce.

1. Pension sharing

Many divorcees conclude their formal legal proceedings without an agreement on how to share their pensions. This is often because they simply don’t know that their pensions can be divided and that there are methods in place to facilitate splitting them.

Research reported in the Standard found that only 30% of divorcing couples included pensions in their settlements, meaning between £2 billion and £4 billion per year in pension savings are missed out on.

The Standard goes on to cite further research that found that women disproportionately end up worse off than men due to this oversight. A quarter of women do not know their spouse has a private pension, and 77% don’t know the value of it. Moreover, 28% of women are unaware that pensions can even form part of the divorce settlement.

So, if you have divorcing clients, it may be a good idea to inform them that pensions can be included in their settlement and that there are three main options for splitting them:

• Pension sharing – This is the most common option, where the pension assets are split at the time of the divorce. One party transfers a percentage of their pension into the other party’s pension pot, giving both parties their own pension funds to manage independently.
• Pension offsetting – In this approach, the value of the pension is offset against other assets. For example, one party might keep their pension, while the other might receive a larger share of the family home to balance the overall settlement.
• Pension attachment – With this option, one party pays part of their pension directly to the other party when they access their pension. This approach is less common because it ties the receiving party’s financial future to the other party’s retirement decisions.

Which option your clients choose will depend on their respective circumstances, though both parties generally need to agree or else a court will decide on their behalf.

2. Mortgages

If your clients are divorcing and own a property together, the divorce may not immediately affect their mortgage and both parties remain legally responsible for paying it until a formal agreement is made.

This means that if one party fails to keep up with their repayments, the property could be repossessed and the credit ratings of both parties could be negatively affected.

When deciding how to split their property or the mortgage repayments, your clients might decide to:

• Sell their shared home and both move out.
• Arrange for one party to buy the other out.
• Keep the home and not change who owns it. One partner could continue to live in it, perhaps until their children leave home.
• Transfer part of the value of the property from one partner to the other as part of the financial settlement. The partner who gave up a share of their ownership rights would keep a stake in the home, so when it’s sold, they’ll receive a percentage of its value.

Changes to property wealth could have a significant effect on your client’s financial plans and progress toward their goals, so they may want to speak to a financial planner before deciding how to split the value of their home.

3. A formal financial settlement

Divorcing couples often assume that the legal dissolution of their marriage entails a financial separation, but this is not the case.

Your clients may also believe that they don’t need a court order if they have agreed on how to split their assets. However, personal agreements such as these are not legally binding, which means that one party may be able to make a future claim against the other, even after the divorce has been finalised.

For this reason, you may want to recommend your clients obtain a financial consent order from the courts. A financial consent order is a legally binding agreement that outlines the division of assets, liabilities, income, and childcare responsibilities between the divorcing parties.

The agreement can be reached through negotiation between the parties or through a court order if they cannot agree.

Your clients may benefit from working with a financial planner after a divorce

A financial planner can help your clients manage the complexities of pension sharing and asset division, as well as work with them to restructure their plans based on changes to their finances.

They can assist your clients in creating a new budget, establishing new independent goals, and developing saving and investment strategies based on their altered financial position.

By working with a financial planner, your clients can gain confidence and clarity as they move forward from the challenges of a divorce, helping them rebuild their financial stability and secure their long-term wellbeing.

To find out more about how a financial planner could help your clients, get in touch.

Email info@blueskyifas.co.uk or call us on 0118 987 6655.

Please note

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