The introduction of “no-fault” divorce in England and Wales this week is likely to make the legal process easier for some couples by reducing animosity. That does not mean emotional blame is no longer apportioned. Divorce is rarely easy and the biggest challenge is often splitting assets fairly. The new legislation does little to change the mechanics of that process, but it might help to make difficult conversations less fraught.
Once you have agreed to part ways, it is worth trying to start adjusting to your new financial realities as soon as possible. If you have been dependent on your partner, either for money or to make major financial decisions, this can be scary. Taking time to review your own financial objectives is an important early step.
A key part of this process is understanding what those objectives look like, including where you want to – or can afford to – live and how much you can spend. Look at your household and individual expenditure and how that may change.
Take time bringing yourself up to speed on financial terms. It is not uncommon for one partner to oversee finances for the duration of the marriage, meaning the other might be at a disadvantage when it is time to look at the balance sheet. Even if both spouses are financially literate, you might not fully understand the value of more esoteric investments. An understanding of the basics can help you to appreciate what would be fair to walk away with – and what you are happy to leave behind.
It is natural to want to jump straight to the “who gets what” question. But before you can start dividing assets, you need to understand what those assets actually are, how much risk they carry, how flexible they are, how they are taxed and how easily they can be accessed.
Unfortunately, dividing wealth is never as nothing as splitting a chunk of money in half. For many assets, value can be subjective – and volatile. If you own a business, whether individually or jointly, how do you value it? What if it is an early-stage investment with a low relatively value, but forecast to do well in five or 10 years? Are you placing an emotional value on an asset as well as a financial value?
Consider illiquidity issues. How easily can you sell certain holdings? And for how much? An example I regularly see are enterprise investment scheme holdings that have been passed on. These are not easily sold and some will fail before that happens. You can understand the frustrations if these investments later have to be written down to zero and the partner who took them on had not understood the risk involved.
Ensure all pensions are on the table, even the smaller, forgotten pots from jobs many years ago. What position are the pensions currently in? Has any tax-free cash already been taken, are there any restrictions on the pension or benefits built into them? Do not overlook state pensions; if you have not built up the necessary credits to be eligible for the state pension, this should be considered. If your spouse has made those contributions, they could be looking at about an extra £ 10,000 a year secure income in retirement.
Tax implications will differ between various assets. There are time constraints for assets to be transferred tax efficiently so as not to trigger capital gains tax, and that potential liability is usually passed to the receiving party. Make sure you know the tax considerations of the assets you are taking on when agreeing to the settlement.
Your relationship with your spouse might be amicable now, but you can not predict how friendly it will be in the future. Include in your settlement an agreement on potential future financial obligations, to avoid further acrimony or disagreements.
Most often, these obligations concern children. Although immediate educational costs will usually be taken into account, what about discussions on future promises of help to get on the property ladder? Consider how you will meet these bonds. You might need to take them into account in the process or reset your children’s expectations.
A financial planner can play a valuable role in your divorce process, working alongside your solicitor early on and during the negotiations on the financial split of assets to ensure a fair outcome, helping you understand the details and implications of decisions. And they can help you plan for your new future – showing you what you can afford, and not.
There may be many difficult discussions ahead. If the new legislation removes just a little of the friction from these discussions, it is to be welcomed.
Gareth Jenkins is a senior financial planner at wealth manager James Hambro & Partners