In the UK, it is estimated that 42% of marriages now end in divorce. Surprisingly the number of people aged 55+ divorcing has reached an all-time high. Divorce can have devastating effects on your emotions and finances. Making smart financial decisions to share the assets is crucial for a secure future
Here 3 of biggest mistakes couples can make during a divorce:
1. Forgetting the pension
A huge mistake you can make in a divorce is forgetting the pension and splitting it, often because this is the last thing on your mind.
If both of you have a pension, it still applies. If you have children, one parent may have taken time out to care for them or worked part-time throughout their childhood. This means that one pension pot could be smaller than the other.
As a result, splitting the pension fifty-fifty can sometimes not be entirely fair.
It is common to split your partner’s total pension pot in half. However, in many cases you may need more than half to receive the same level of income in retirement. If you don’t have the earnings or the time to grow your share, it is relevant. Women on average live longer than men, so may need a bigger pension pot. It’s important that the pension split reflects this difference. This Guardian article comments on the rising working age of women, and mentions the effects of career breaks and pension gaps.
The options available when sharing a pension are:
- a pension sharing order, where the other party receives a share of the pension
- offsetting the value of the pension against other assets
- an attachment order, where all or part of the pension is earmarked to be paid to the ex-spouse
Women can no longer claim the new state pension using their husband’s National Insurance record (it is still possible if the spouse is in receipt of the older basic state pension). Pensions are a regulated and complex area and you should seek advice from a qualified person.
Taking the house over the pension
Many people agree to take the family home instead of the pension fund. A common reason is if they have children, they don’t want to uproot. However, pension pots can be worth more than you think. It could be more valuable than your family home. Getting a valuation is crucial when making this decision, to avoid leaving yourself short in retirement.
It’s important to understand a £1m house is not equal to a £1m pension pot.
- Firstly, tax may be due on pension income, whereas a main residence is tax-free on sale.
- The cost of maintaining a home is higher than the cost of maintaining a pension.
- A home typically increases in value at a lower rate than a pension.
- A pension could generate a tax-free cash sum of 25% of its value. Without downsizing or engaging in equity release, a house can’t do that.
- A pension can generate a flexible income that is variable. Unless you want a lodger, a family home can’t do that.
When you divide your assets, consider your future income brackets, taxes, costs and lifestyle needs. You need to plan ahead in detail.
2. Accepting asset valuations at face value
Disclosing the value of your assets is a legal requirement. Some assets such as businesses or pension values can be disguised. It’s important to ensure that your partner declares all their assets. You can get a second valuation from an accountant or financial adviser.
There may be secret bank accounts in the UK or overseas, and the same goes for holdings in companies or even properties unknown to you. If your ex-partner is secretive, there may be significant hidden debt you need to be aware of.
Ask to see your ex-partner’s tax returns because they may reveal a lot of information. According to the Co-op Legal Services, more than 50% of people would consider lying about their wealth to deprive a spouse during a divorce.
Be careful not to break the law yourself. Hacking your partner’s computer, intercepting mail, breaking into property or locked cabinets, or taking away paperwork could get you into trouble. If in doubt, appoint a specialist law firm to help you trace the assets.
3. Failing to identify and take account of all debts
You can be held jointly responsible for all debts, even if they are in your partner’s name. It is important to know the extent of debts and how they could impact your credit score. In a divorce, all financial ties should be cut to avoid the risk if your partner misses repayments. Likewise, you should close any joint savings accounts and split the assets.
If you don’t have any joint debts, you can get a ‘notice of disassociation’. This removes any financial link with your ex-partner on your credit file. Should you want to do so, contact one of the credit reference agencies who can remove this link.
Divorce help and advice
Divorce Aid are independent and can provide divorce advice to anyone in the UK.
Are you the only adult in your property? Tell your local council, as you’ll be entitled to a 25% discount on your council tax.
Nobody plans for a divorce. It can mean a substantial change in future plans, prosperity and lifestyle. If you are in this situation, it’s important to plan your financial future as a single person. If you would like to speak to a Chartered Financial Planner about planning your new future, contact us today.
At Capital, we believe in preparing for a brighter future.