Divorce day: What divorce means for your money
From mortgages to pensions, a divorce can have a big impact on your financial health.
With the start of a new year, many people across the UK are looking to make a fresh start with their lives, which could mean moving jobs, finding a new home or a divorce.
As a result, the first working Monday of any new year is flagged as ‘divorce day’ by lawyers, such is the flurry of interest they tend to get from those considering their options.
Divorce is obviously not something anyone goes through lightly, particularly given the financial implications it can have. So what would a divorce mean for elements of your money, such as your mortgage and pension? And what impact is the cost of living crisis likely to have?
Are divorce numbers likely to increase?
There has been speculation that the number of divorces taking place in 2023 is likely to go up, due to the introduction last year of no-fault divorces.
Back in April, no-fault divorces were introduced to England, meaning that couples no longer had to provide a specific reason for the split. Before this, one partner would have to accuse the other of something like adultery, unreasonable behaviour or desertion in order to go through with a divorce, or else separate for a specific period before proceedings could really begin.
No fault divorces were already in place in Scotland.
The thinking is that no-fault divorces make the process of breaking up with your partner easier, and therefore may lead to an increase in divorces.
There have been suggestions, for example by legal firm Family Lawyers, that these numbers will be further boosted by the cost of living crisis. Financial concerns are often a factor in divorces, and with money stretched ever further by rising inflation, it’s possible that more relationships are coming to an end over arguments around money.
However, this may not necessarily be the case. Indeed, the additional costs that can come from living alone ‒ for example having to handle the household bills on your own rather than splitting them with your partner ‒ may put some people off going ahead with a divorce at all.
What divorce means for your mortgage
One of the big decisions that will need to be made when getting divorced is what happens to the family home.
If you’re just looking for a completely clean break, then you might opt to sell the property and then split the proceeds between you. The exact split may vary based on who paid more towards the deposit or the monthly mortgage payments.
But, that level of upheaval can be difficult if there are children involved, and it can take some time to be resolved.
Alternatively, you might decide that one partner should remain in the home, and buy out the other partner. It’s a good idea to speak to your lender and solicitor about how to proceed here. Lenders are generally quite understanding when it comes to divorce and the financial pressures involved ‒ in some cases they may agree to a payment holiday, or reduced payments for a period, to allow you to get back on your feet.
First and foremost, the property will need to be valued so that you have an idea of how much the partner remaining in the property will need to pay. As well as paying that, you will also need to demonstrate to your mortgage lender that you can afford the monthly repayments on your own.
If this is likely to be an issue, then it may be that the outgoing partner agrees to continue to contribute towards the mortgage repayments for a set period, for example until the children reach the age of 18.
It’s worth bearing in mind that if you have a joint mortgage, you are both legally responsible for making repayments towards the mortgage until a settlement has been concluded. Failing to make those repayments will have repercussions for your credit scores, as well as incur further costs from your mortgage lender.
What divorce means for your pension
According to Hargreaves Lansdown, focusing on the division of assets like the family home tends to be prioritised during divorce negotiations, but overlooking pensions can leave one partner in a financially vulnerable position.
The firm’s own research found that more than one in four (27%) do not believe they could financially cope in retirement without their partner’s pension, and it’s women that are more likely to be impacted in this way than men.
In fact, in some cases, the pension is not even touched on during the discussions around divorce. Research from Interactive Investor found that a whopping 65% of divorcees had not discussed pensions at all during the proceedings, potentially leaving one partner severely out of pocket.
Obviously, the effect this will have on the pension planning for each partner will vary based on their age and how close they are to retirement. It’s one thing to give your pension saving a boost if you split while still in your 30s, but quite another if you are approaching retirement and so have little time in which to build up a decent pension pot of your own.
There are a few different options open to you when it comes to handling pensions when a divorce occurs.
The first is pension offsetting, where the value of the pension pot is offset against the value of another asset involved in the settlement. An example might be that one person keeps the pension, in return for the other partner getting a larger share of the proceeds from the sale of the family home.
Alternatively, there is pension sharing. This is where some or even all of one person’s pension savings are transferred to a pension account belonging to the other partner. It means that the recipient has some control over exactly where the money is being invested, and how to access it.
Finally, there are attachment orders. This is where one partner agrees to pay a portion of their pension income to the other partner once the pension starts paying out. There are slightly different rules in place in Scotland, where this is called pension earmarking, and the recipient can only receive some of the lump sum available to those taking money from their pension for the first time, rather than an ongoing income.
What divorce means for your savings and investments
Savings and investments are the sort of assets that are more commonly considered early on when going through the divorce process.
Unlike with a property, and a pension for that matter, dividing savings and investments between the two partners is more straightforward.
For example, you will be able to move money from savings accounts held in one partner’s name to another if that is part of the divorce settlement, while with investments you will need to get a statement from the investment company detailing precisely what they are worth.
With shares, you can transfer them into the name of your partner, but it’s worth remembering that with other assets ‒ such as an investment property ‒ there may be additional fees and taxes involved with selling them before dividing the proceeds.
Reducing the cost of getting divorced
The financial implications of getting divorced stretch beyond the division of assets though ‒ the actual process can be expensive too as a result of the involvement of lawyers.
Ultimately, the longer the process takes ‒ and the more difficult the negotiations are ‒ the more it is going to cost.
Filing for the divorce itself involves a fee of £593, though you can get help paying that fee if you’re on a low income or receive benefits. There is a separate fee of £232 to consider if you need to get a child arrangement in place too.
If you end up going through the courts, then the cost of your divorce will be much higher on account of the lawyer fees. The Ministry of Justice points out that the fees for divorce lawyers can range from £110 to £410 an hour depending on your location and their level of experience. Fees can quickly add up to eye-watering sums.
A cheaper and faster option could be going to mediation, which is essentially where the two partners try to come to an arrangement without going through the courts. What’s more, you could get a voucher from the government worth up to £500 to devote towards mediation costs, making it even more cost-effective. You can find a mediator through the Family Mediation Council.
Another budget-friendlier option than the courts is utilising an arbitrator. This is an independent person who will hear from both parties, and then make a decision on the division of assets and maintenance payments that are binding on both partners.
Your finances after a divorce
There are certain steps you will need to follow after a divorce in order to get your finances in the best possible shape.
First of all, you’ll need to take a look at your credit score. While your credit report doesn’t detail your marital status, any joint accounts held with your former partner will still be on there.
As a result, their financial status will have an impact on your own credit score and therefore how attractive you are to any lenders. That’s why it’s a good idea to get those accounts closed and move on so that you and only you impact your credit score.
Next, it’s worth revisiting your will. A will is a really good idea anyway since it allows you to set out exactly how your estate will be divided once you pass away, but it will likely be out of date given the change to your relationship status. Updating the will to reflect your new situation is therefore worthwhile.
John Fitzsimons has been writing about finance since 2007, and is a former editor of Mortgage Solutions and loveMONEY. Since going freelance in 2016 he has written for publications including The Sunday Times, The Mirror, The Sun, The Daily Mail and Forbes, and is committed to helping readers make more informed decisions about their money.
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