Deciding to end your marriage and get a divorce is extremely difficult and this can be made even more difficult because of the financial impact of the divorce. A financial settlement?
Pre Divorce
Any financial settlement in a divorce is based on a number of different factors, namely the s25 factors, which will be taken into account. Each case is different, and this is why the Family Courts are allowed such wide discretion in making financial awards as the cases and their outcomes are not usually straightforward and very rarely are two cases ever the same.
When making a decision, the factors that the Court take into account include the length of your marriage, the age of you and your ex-spouse, the earning capacity of you and your ex-spouse, the other financial resources of you and your ex-spouse and the list goes on.
The “other financial resources” can include pensions. This is a very important feature that many seem to forget about when factoring in a financial settlement and could be a large sum of money. The biggest asset after the family home is often someone’s pension.
During Discussions
Do Not Leave It Too Late
It is important to obtain good quality advice from both a Solicitor and a Financial Adviser even during the early discussions relating to the settlement to protect your position as there are very often, many options available to you,
For example, if you are financially reliant on your spouse, you may start to receive maintenance payments; which would leave you in potentially severe financial difficulties if your spouse were to have a serious illness, be made redundant, or even pass away whilst those payments are being made.
You could in such circumstances, for example, take out accident sickness and unemployment cover, critical illness cover, or even a life insurance policy on your ex-spouse to protect you and your children This can even be negotiated to form part of your settlement.
So You Now Have Solicitors – Then What?
You need to be very careful and obtain the correct advice when discussing a settlement with your ex-spouse, particularly, for example if you have been a stay at home parent whilst your ex-spouse has been working full time. This situation would result in you having limited earning ability and probably no, or very little, pension. Equally, the earning spouse with the pension would naturally wish to retain as much pension as possible.
There was a particular client I acted for, who I will call “Mr P”, who began discussions with his ex-spouse prior to obtaining legal advice. Mr P and Mrs P had been married for a considerably long time. Mr P had said that it had been agreed that there would be a pension share in favour of Mrs P… When asked how they had come to this conclusion, Mr P said that he “thinks” that he has the larger pension pot and, of course, Mrs P would not say no to a pension share in her favour.
We persevered and on exchanging financial disclosure, it turned out that Mrs P had nearly double the pension pot of Mr P. What did that mean? Well, it was Mrs P who had to give Mr P part of her pension to ensure an equalisation. Had Mr P not received this legal advice and had we not deepened our enquiries, he would only have boosted Mrs P already large pension pot and left himself with a relatively modest pension pot.
To optimise Mr P’s position, we strongly recommended that he instruct an independent financial advisor to maximise his options and reduce the incidence of costs on transfer in relation to his pension but also to give holistic financial advice on his new circumstances.
That has proved to be a godsend for Mr P and many others like him and his financial position was adjusted and stabilised following on from that divorce.
So Now I Have An Agreement or Order – What is Next?
Even if you agree that the pension should be shared in some form, there are various types of orders available relating to pensions, for example, a pension sharing order and pension attachment order.
You may also be concerned if you have a lack of pension available to you and wonder if it is worth giving some of your pension up or whether it is better to give away other assets to offset that shortfall?
This requires some serious financial consideration and is worth taking a collaborative approach between your Solicitor and Financial Adviser. Solicitors can NOT give you financial advice. You will need to think about your situation both in the short and long term. Giving away assets now and keeping your pension may sound good for your retirement and could be a good course of action, but what if you are approaching or have exceeded your Lifetime Allowance? (This stands at £1,073,100 in 2020/21 tax year).
Giving away some of your pension could be tax efficient for you either now or in the future compared to other assets owned. But, will you survive financially in the meantime until retirement? Clearly, there needs to be a balance.
A more bold approach could be that you retain your pension and your only other asset is the home? Could equity release allow you to keep yourself in the family home and also keep hold of your pension for retirement?
There are many options available however each family is different, and it is very important that you take advice from both your lawyer and Financial Adviser to come to the best financial settlement for you.
What If I Do Nothing? I Do Not Have Any Assets…
Some may be thinking, “well, I haven’t got much to my name right now so I’ll be okay as long as I am divorced and have my Decree Absolute.” Wrong. Completely.
Whether or not you want to make a financial claim against your ex-spouse, you must dismiss any claims that you have against each other. If you do not do this, one of you could bring a financial claim against the other many years after the divorce is finalised. There is no time limit to that financial claim.
An extreme example is Nigel Page who won £56m in the Euro Millions Lottery ten years after his divorce. At the time of his divorce, he had relatively modest assets and did not deal with the financial aspect of his divorce. Due to this, his ex-spouse capitalised on this omission and negotiated a reported settlement of £2m.
The fact that you might not have any assets or income now does not mean that you cannot gain assets or income in the future. If that should happen and you have not dismissed the ability to make a financial claim, then your ex-spouse will be able to make a claim against you at a later date, even on your estate when you pass away.
Post Divorce
Your Options are
So, you have agreed your financial settlement and the divorce is finalised. Your new life begins, but, what now?
You may have received a significant sum of money either from assets, or from your ex-spouse’s pension, but what does this mean for your future? Could you retire earlier? Could you afford to work less and maintain your current lifestyle?
A lump sum could provide you with an income to support your existing income, meaning you could work part-time and still enjoy your current lifestyle. It goes without saying, that it is important the lump sum is sustainable to meet your financial needs for both the short and long term, which requires careful planning and may tie in with your pension provisions, whether these are your own, or from a pension sharing order. A thorough financial plan could see you able to retire earlier and maintain your lifestyle.
Alternatively, you may have given away half your pension…does this mean you will have to work longer? How will you rebuild your wealth?
Your circumstances will be very individual, but the change could mean contributing more to your pension and also change your attitude to risk. You may have been in a fortunate position to take greater risks with some of your investments or pension before, but this may no longer be a suitable course of action. Big losses in your investments/pension could result in you having to work even longer than you want to.
What is you have given away assets and you want to rebuild some accessible investments? If you have not already, it would be prudent to utilise any allowances available to you, such as investing in an ISA. Some people think an ISA is a product from the bank and offers a low rate of interest, but it is possible to have an Investment ISA whereby your money is invested, and any growth is tax-free. When you come to use the money, withdrawals are also tax-free. An Investment ISA could see greater gains than you see in a cash ISA. *investments can go up and down, and your capital is at risk.
Pension
Under current legislation, if you are aged 55+ you can access your pension (due to increase to 57 in 2028). This includes any existing pensions you have, along with the new pension share you may have received. 25% can be accessed tax-free and some clients will use this money to put a deposit on a new home. This is particularly useful if the main source of an asset from the divorce is pension sharing.
You could also start to draw down on the pension, i.e. receive an income. This does require careful planning with your financial adviser to go through your options on whether an annuity is suitable, accessing the money in a flexible manner, or a hybrid approach. If you are to access your money flexibly, you have to remember that it is not a bottomless pit of money, and your financial adviser will assist you to ensure your pot is sustainable through your lifetime. Remember too, once you have utilised your 25% tax-free cash, any money drawn from the pension is taxable at your marginal rate of tax, therefore, taking big chunks of money may be unsuitable and unsustainable once the tax is charged.
If you are currently going through a relationship breakdown, or you are considering the same, or you may have already begun that process, it is very important that you take legal advice before signing the dotted line. Do not assume that what works for someone else will work for you. If you have any questions or queries, contact Emma Aslett on emma.aslett@pennchambers.co.uk to answer your questions.
You should also contact a qualified independent financial advisor. If you have any questions on financial matters then contact Andrew Clissold on andrew.clissold@austinchapel.co.uk to answer your questions.
Pro Tip
Have you ‘lost’ a pension? Contact Andrew on andrew.clissold@austinchapel.co.uk and find out where you can find forgotten or ‘lost’ pensions. Who knows, there could be a little pot of gold waiting for you!
The information provided in this article is not intended to constitute legal advice and you should take full and comprehensive legal advice on your individual circumstances by a fully qualified Solicitor before you embark on any course of action.
Emma & Andrew
Emma Aslett - emma.aslett@pennchambers.co.uk
Andrew Clissold - andrew.clissold@austinchapel.co.uk