Everyone wonders what life would be like without enough money. For people facing up to the reality of divorce or the dissolution of a civil partnership, understanding how the finances will work when they are on their own can feel like one of the biggest worries of all. Basic maths tells you that running two homes and paying two sets of bills is going to cost more than a single household, and the reality is that many people do find their finances constrained after divorce. That is why it is essential to create a clear financial plan if you are heading towards a separation.
While it is not actually true that divorces peak over Christmas, people do start taking stock over their lives over the festive period. Research from family law solicitor network Resolution has found that the number of people making online enquiries about family law and separation does spike upwards in January. Research and planning are crucial if you want to make your divorce as painless as it can possibly be. Here’s our 10-point checklist for reducing the financial pain of separation.
Don’t rely on your friends for financial and legal help – speak to a professional.
Friends will always tell you what you want to hear, which may not be the truth. Divorce is an incredibly stressful process, but speaking to an expert can lay to rest misconceptions that may have been keeping you up at night, and even stopping you from heading for the door. For example, it is common to meet women who have spent 20 years looking after the children who do not appreciate that this means they are treated as contributing to the household wealth at an equal rate to the principle breadwinner.
It’s not all about the house – don’t forget about the pension.
The person who will end up doing most of the caring for children, which is usually but not always the wife, often wants one thing above all else – to stay in the family home after divorce. It can be tempting for the woman to want to keep the house and for the man to want to keep the pension. The roles can be reversed, but the reality is that it is usually this way round. Women should avoid this kind of deal as they will find they have nothing to live on later in retirement.
We are all used to the idea that our home is our biggest asset, but pension benefits can be worth even more. If one of the parties in a divorce has a final salary pension worth £20,000 a year from retirement, that has an actual cash value of around £600,000, potentially worth more than the family home. So it is important to factor in the full value of any pension assets into a financial settlement. In England, Wales or Northern Ireland the total value of all pensions built up will fall within the settlement calculation, whereas in Scotland it is only the value of your pension built up while you are married or in your civil partnership.
There are a number of ways pension assets can be recognised in the settlement – through a pension sharing order, where the other party receives a share of the pension, through offsetting the value of the pension against other assets, such as other investments or the value of the house, or through deferred pension sharing, where payments are made from a scheme at a later date when you or your former partner have started receiving the pension payments.
Downsizing – you don’t have to do it just yet, but it may make sense in future.
Many people – particularly women looking after children – find they cannot face the idea of leaving the marital home while the divorce process is ongoing. This desire for a safe and familiar environment at a time of extreme stress is entirely understandable. But over the longer term this may not be possible. The cost of running a big family home may be too high to fund out of your post-divorce income, and releasing equity by moving somewhere smaller can make a big difference to your overall finances. You don’t have to cut the cord connecting you to your family home right at the time of the divorce, but you should consider building into your long-term financial plan that you will move six months after the divorce has taken place.
Avoid court proceedings if at all possible.
Unless your ex is completely unreasonable, stubborn and set on having their day in court, do everything you can to avoid aggressive legal proceedings. Taking divorce proceedings to court is a bad idea emotionally, financially and can adversely impact your long-term relationship with your children. However much you dislike your former partner, it is in your interests to separate on the best terms possible – remember that you will want to be able to feel comfortable going to your child’s graduation ceremony or 21st birthday party years down the line. What’s more, court documents are public documents, which is why celebrities tend to opt for non-adversarial dispute resolution processes to protect their privacy.
Don’t go rifling through his or her possessions looking for evidence.
Evidence that has been obtained by covert means will not be admissible in the proceedings, so if you find your ex’s key to their secret drawer, there is no point sneaking in and photocopying all of his or her documents. But it is worth starting asking more questions about financial matters, pensions and other assets if you are getting close to the point where your relationship is about to end. It is quite common for one party to deal with financial matters, leaving the other party in the dark about what assets and liabilities the household shares. Start finding out what your household outgoings actually are – once you are on your own you will be responsible for all of these.
But do take action if your ex is hiding assets.
If you are worried that your ex is starting to siphon off funds to hide it from the settlement process you can make an emergency application for an emergency injunction to freeze his or her assets. You need to have started court proceedings to do this, but if you find yourself in this situation it is fair to say it is unlikely that collaboration, mediation or arbitration is going to work for you.
Maximise state tax credits.
The idea of ‘going on benefits’ may not appeal to you, but tax credits are different and lots of people receive them these days. Child Tax Credit and Working Tax Credit are both designed to assist families with children who are struggling to make ends meet. Neither Child Tax Credit nor Working Tax Credit impact your ability to receive Child Benefit. The system is complex, but if you have one child and a household income of up to £26,200 then you would be entitled to Child Tax Credit. With two children you are likely to benefit if you have a household income of up to £32,900. Working Tax Credit is for families on low incomes, and is based on the number of hours worked.
Make sure you don’t pay too much Council Tax
Council Tax is made up of two components – 50 per cent is a property tax and the other half is a personal tax, based on two people living in the property. As soon as your partner moves out, or you move into a property alone, make sure you get your single person discount. This will reduce your bill by 25 per cent.
Rebuild your state pension
Many spouses, usually women, find that they have not built up full entitlement to state pension. To receive the full state pension you need to have worked and paid National Insurance Contributions for a minimum of 35 years, although you do get credit for periods you were not working when you were at home bringing up children under the age of 12. Up until 2016 it had been possible for a divorcee to rely on their partner’s National Insurance Contributions record for the purposes of calculating state pension entitlement. But changes introduced in April 2016 mean this is no longer possible.
If you are on course to have an incomplete state pension contribution history by the time you retire then it often makes sense to buy extra years through ‘Voluntary National Insurance Contributions’. These are good value, enabling you to buy around £230 a year for life from state pension age, for a one-off cost of £733. Over a 20-year retirement, that £733 would pay back £4,600.
Invest your settlement carefully
If you have been the financially active party to the relationship, the chances are you will have a clear understanding of how to manage your finances going forward, and crucially, you could well continue to receive regular income through work. But if you have been staying at home looking after children, things can be very different. While the children are still around your settlement may entitle you to regular maintenance payments from the departed spouse. But once the children leave home you will be reliant on whatever money was agreed in your settlement.
Some people who are unlikely to get a suitable job will find they have to live on their settlement lump sum for the rest of their life. This may look like a large amount of money, but it will have to cover decades of expenditure, so it is important to get advice from a financial planner.
They will help you understand your finances and understand what lifestyle you can afford in the future. A financial planner will do a full lifetime cash flow looking at your future income and spending, and building in assumptions about investment growth, inflation and future taxes.
Based on these inputs and assumptions it will show you whether you’re going to run out of money. If this model shows you are going to run out of cash you can run “what if” scenarios to see what the impact will be if you work longer than anticipated, downsize or cut your expenditure.
This will give you the knowledge you need to see exactly what you can afford and when.
If you are going through divorce or contemplating divorce and would like to discuss your situation please email me at [email protected]
photo credit flickr/_DrJohnBullas