3 reasons it’s important for your divorcing clients to seek financial advice early

the hands of two men writing notes in a meeting

When a couple decide to separate, who do they turn to for advice?

For most people, legal advice is likely to be the first port of call. However, many of the key questions an individual will have are financial ones:

  • Can I afford to live in my home?
  • What assets will I be entitled to on my divorce?
  • How do we split our savings, investments, and pensions?

Research published by FTAdviser has revealed that almost 2 in 5 of over-50s consider their divorce to be “financially unfair”, yet just 3% of people seek financial advice when going through the process.

Indeed, over-50s are four times as likely to turn to friends for advice when going through a divorce as they are from a financial planner.

With the number of divorces on the rise, seeking financial advice early on can give clients clarity and confidence. We’ll be running some webinars on these issues this spring, so look out for details! In the meantime, here are three reasons why taking financial advice early can be so beneficial.

1. It ensures pensions are not forgotten

You’ve previously read about how fewer than 1 in 7 divorcing couple split their pensions, despite them likely being one of the biggest marital assets.

If a separating couple is older, and they have been together for many years or decades, they are likely to have built up a significant amount of pension funds. While their focus might be on an equitable split of savings, investments, or property, taking advice early means that they won’t overlook the pension assets.

Remember that, according to a 2022 report in the Telegraph, pensions account for more wealth in the UK than property!

Additionally, clients with larger pensions can benefit from hearing about all their options as this can give them confidence when beginning negotiations around a fair division of assets.

For example, clients with large pensions facing Lifetime Allowance issues might benefit from giving up part of their pension during proceedings. Reducing their pension could bring them within the Lifetime Allowance, helping them to avoid a significant tax charge when they draw their funds.

By seeking financial advice early, clients have all the information they need to understand their position and their choices. As Pensions on Divorce Experts with more than 20 years’ experience in this area, we can help your clients with any advice they need.

2. Property issues could arise as interest rates climb

Property can be an emotive subject during divorce. Often, one party might have a particular attachment to the family home, especially if they have minor children still living there.

If one party wants to stay in the property, they may have to give up most other assets such as pensions or savings to create a “fair” split.

However, this can lead to problems later on where the party who remained in the home then doesn’t have sufficient pension savings to generate the income they need.

In addition, property is currently an important issue to consider early on as rising interest rates may change what is affordable for someone separating from their partner.

Higher mortgage rates may mean it’s more expensive for one party to take on the mortgage, while the other may have questions about how much they can borrow and what their living arrangements will be post-divorce.

3. The Capital Gains Tax regime is changing

Any transfer of assets between spouses takes place on a “no gain, no loss” basis for Capital Gains Tax (CGT) purposes. This means that no tax is payable on the transfer, with the receiving spouse effectively taking the other spouse’s base cost.

As of February 2023, this rule only applies up to the end of the tax year of permanent separation. So, clients currently have a very limited window to transfer assets to avoid a potential CGT liability.

However, under new legislation coming into force in April 2023, transfers of assets between ex-spouses will be available for:

  • Up to three tax years after the end of the tax year of separation
  • An unlimited time when the assets are transferred as part of a formal divorce agreement.

The government say this change “gives them [divorcing couples] more time to transfer assets between themselves without incurring a possible charge to Capital Gains Tax”.

So, if you have clients going through a divorce, and they have a range of property or investment assets to divide, they may want to consider deferring their formal separation until the 2023/24 tax year begins to take advantage of this more flexible regime.

Get in touch

Seeking financial advice early on can give your clients a clear picture of what is possible, and what their financial future might look like post-separation.

If you have clients that would benefit from this peace of mind, we can help. Email info@blueskyifas.co.uk or call us on 0118 987 6655.